Attached files
UNITED
STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
☑
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the
fiscal year ended December 31, 2016
OR
☐
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the
transition period from __________ to _________
Commission file number ____
MEDITE CANCER DIAGNOSTICS,
INC.
(Exact name of registrant as specified in its charter)
Delaware
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36-4296006
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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4203 SW 34th Street,
Orlando, FL
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32811
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(Address of principal executive offices)
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(Zip Code)
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(407) 996-9630
(Registrant’s telephone number, including area
code)
Securities registered pursuant to Section 12(b) of the
Act:
Title of each class
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Name of each exchange on which registered
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None
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Not
Applicable
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Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $0.001 par value
(Title
of class)
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. Yes
☐ No ☑
Indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes
☐ No ☑
Indicate by check
mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
90 days. Yes ☑ No ☐
Indicate by check
mark whether the registrant has submitted electronically and posted
on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files). Yes ☑ No ☐
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ☐
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated
filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer ☐
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Accelerated
filer
☐
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Non-accelerated
filer ☐
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Smaller
reporting company ☑
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Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ☐ No
☑
The
aggregate market value of the common stock held by non-affiliates
of the Company was $2,747,056, based upon the closing price of
shares of the Company’s common stock, $0.001 par value per
share, of $0.57 as reported on the OTC Bulletin Board on June 30,
2016, the last day of the Company’s most recently completed
second fiscal quarter. Shares of common stock held by each current
executive officer and director and by each person who is known by
the Company to own 5% or more of the outstanding common stock have
been excluded from this computation in that such persons may be
deemed to be affiliates of the Company. This determination of
affiliate status is not a conclusive determination for other
purposes.
The
number of shares of common stock outstanding as of April 7, 2017
was 22,421,987
DOCUMENTS INCORPORATED BY REFERENCE
None.
MEDITE CANCER DIAGNOSTICS, INC.
Annual Report on Form 10-K
December 31, 2016
TABLE OF CONTENTS
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Cautionary Statement Regarding Forward-Looking
Statements
This
document contains “forward-looking statements” –
that is, statements related to future, not past, events. In this
context, forward-looking statements often address our expected
future business and financial performance and financial condition,
and often contain words such as “expect,”
“anticipate,” “intend,” “plan,”
“believe,” “seek,” “see,” or
“will.” Forward-looking statements by their nature
address matters that are, to different degrees, uncertain. For us,
particular uncertainties that could cause our actual results to be
materially different than those expressed in our forward-looking
statements include, but are not limited to: our ability to raise
capital; our ability to retain key employees; our ability to engage
third party distributors to sell our products; economic conditions;
technological advances in the medical field; demand and market
acceptance risks for new and existing products, technologies, and
healthcare services; the impact of competitive products and
pricing; U.S. and international regulatory, trade, and tax
policies; product development risks, including technological
difficulties; ability to enforce patents; and numerous other
matters of national, regional and global scale, including those of
a political, economic, business and competitive nature.
These uncertainties may cause our actual future results to be
materially different than those expressed in our forward-looking
statements. All subsequent written and oral forward-looking
statements attributable to us, or persons acting on our behalf, are
expressly qualified in their entirety by the foregoing. We do not
undertake to update our forward-looking statements.
Item 1.
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Business
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Overview
Overview of MEDITE Cancer Diagnostics, Inc.
MEDITE
Cancer Diagnostics, Inc. (the “Company”,
“it”, “we”, or “us”), formerly
CytoCore, Inc., specializes
in the marketing and selling of MEDITE core products (instruments
and consumables), manufacturing, development of new solutions in
histology and cytology and marketing of molecular biomarkers. 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 Cancer Diagnostics is well received and remains a
professional description of the Company’s business. The
Company’s trading symbol is “MDIT”.
In 2016
we focused on implementation of several growth opportunities
including enhanced distribution of core products through focused
sales and distribution channel(s), newly developed and patent
pending assays, new laboratory devices and several marketing
projects like the Chinese standardization projects for histology
and cytology. The Company is optimistic about recent
marketing efforts focusing on larger laboratory chains and other
important strategic relationships. The Company has 75
employees in four countries, a distribution network to about 80
countries and a wide range of products for anatomic pathology,
histology and cytology laboratories available for
sale.
The
Company successfully sold more internally developed and
manufactured devices in 2016 compared to 2015.
After
the successful market entrance into China in 2014, the
Company’s revenues in this market are approximately $897,000
in 2015 compared to $1 million in 2016. The Company’s delayed
financing during 2015 and 2016 has impacted the delivery of sales
due to availability of raw materials, parts, and work in progress
inventory and the needed investment in that inventory. The Company
originally anticipated sales in 2016 of approximately $2 million
with the assumption that the timing of the scheduled capital raise
would happen earlier in the year. Due to the delay in the capital
raise, the Company revised its target to $1.3 million. Total sales
for the year ended December 31, 2016 were approximately $1 million
compared to $897,000 for the same period in 2015. The
Chinese market is growing quickly, and the Company expects it will
be one of two largest markets for its products. By working with its
Chinese distributor, UNIC Medical, the Company has successfully
received China Food and Drug Administration (“CFDA”)
approval for all MEDITE histology laboratory devices at the end of
2014, and for the Cytology device in 2015. The UNIC Medical sales
team is selling MEDITE products in China with slightly increasing
volumes. Also, together with UNIC, we are part of a
government supported project to standardize the histology
laboratory process in China. UNIC Medical is using MEDITE equipment
and consumables for processing, and launching new assays. UNIC has
taken an active role in branding MEDITE Cancer Diagnostics in
China. Medite is working through certain product rollout issues
which have impacted its anticipated increase in sales.
On May 31, 2016, UNIC received CFDA approval as a Class I in
vitro diagnostic reagent for MEDITE's "SureThin" cell preservation
solution. As China adopts Cytopathology standards across
the country, the Company expects 'Liquid Based Cytology Tests
(LBC)' will be used for the majority of Pap collections for
cervical cancer screening. We are prepared to sell the complete
SureThin product line, including the already approved Processor to
this potential market of 485 million women between the ages of 16
and 64 years of age. Management anticipates launching the product
in China by the third quarter of 2017 and in the U.S. by the fourth
quarter of 2017.
The Company’s cytology product line, revenue declined
in Europe (non-Gyn and Gyn applications) during 2016 related to a
competitive threat that management believes has been alleviated.
The Company is in the process of moving forward the submission of
an application to the U.S. Food and Drug Administration
(“FDA”) for SureThin Gyn applications. Once approved we
can compete with some of 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 and China
market will drive significant new revenue and gross margin
improvement opportunities in 2017.
The
developed and U.S. patented self-collection device SoftKit is
targeting the growing POC & POP (point of care or point of
people care) market. Growth in this area is due to consumer driven
health care requirements and the necessity to support and address
incremental patient population needs for screening and on-going
diagnostic tests. SoftKit serves as just such a product, addressing
this market requirement. SoftKit is planned to be sold through
various marketing channels that serve the gynecology physician
consumer health and emerging post-acute care as the influence of
clinical labs are expanded. Initially the SoftKit is targeted at
the uterine cancer/HPV screening market. The next phase of testing
will include cervical screening.
Management
believes that 2017 developments, allows us to more fully leverage
the excellent products and biomarker solutions from CytoCore
component of MEDITE. The first entry will be the introduction of
SureCyte+ (fluorogenic) instant staining, offering tremendous lab
efficiencies and enhanced patient care through the use of
SureCyte+. SureCyte+ is the first of many new offering under the
SureCyte brand.
MEDITE’s
Breast Cancer Risk Assessment Product is non-invasive, easy,
gentle, and highly sensitive, enabling young women between 20 and
45 years of age to obtain their individual breast cancer risk
assessment. An automatic and gentle collection device for breast
cells together with a newly developed assay is used to determine a
woman’s risk to develop breast cancer. Knowing the
individual breast cancer risk will provide relief to a majority of
young women who have no elevated risk of developing breast cancer.
For those who have a higher risk, it enables them to monitor that
risk closer for earlier treatment, if needed. The earlier a
precancerous or cancerous situation is detected, the greater the
chance for reducing the fatality rate for these
conditions. Product development of BreastPap continued
in 2016, reflecting feedback from doctors’ test use of
prototype units’ and doctor’s office feedback to
continuously improve the product prior to launching. During the
third quarter, the Company initiated a co-operation with Leibnitz
University of Hannover, Germany, on the final design and usability
of the BreastPap. The project is scheduled to begin on February 15,
2017. The delay in market introduction by management is due to
additional quality assurance measures being performed by the
Company as well as insuring that US feedback from providers are
considered. The Company’s BreastPap product is a risk
assessment tool planned to evaluate the breast cancer risk on
certain results based on the treatment. Upon
receiving the results, women, based upon their physicians’
advice may be candidates for further diagnostic testing. The
BreatPap will undergo further customer testing in the US and EU
markets.
The
Company brought several other innovative products closer to
marketability during 2015, and continued during 2016 as listed
above. Also, in early 2015, the German priority patent
for a fully automated system used in the histology lab, a
“Lab-In-One” unit, was granted. This technology, if
successfully accepted by the market, has the ability to change the
competitive landscape within the industry.
During
the first quarter of 2016, the Company opened a second German
manufacturing facility with approximately 4,000 square
feet in Nussloch. This facility is utilizing the local
workforce and their experience for the specialized skills required
for manufacturing of the newly developed and updated Microtomes
product line and the newly developed Cryostat (instruments used for
sectioning tissue biopsies). During 2016, the Company
manufactured and delivered from order backlog 70 units. The Company
began manufacturing the new Cryostat line during the first quarter
of 2017 and anticipates the first pre serial series to be available
before the end of the second quarter.
The
Company authorized and completed a reverse split of its common
stock of 1:100 to support its present capital needs and future
anticipated growth. This reverse split was effective March 12,
2015. As a result of the reverse split, the Company’s issued
and outstanding common stock was reduced to 19,427,331 from
1,942,733,100.
In
November 2016 MEDITE initiated a $3,000,000 capital raise to
support reduction of outstanding liabilities and working capital
and to increase infrastructure for innovation and growth. This
offering was closed prior to December 31, 2016. In March 2017 the
Company initiated a new offering of up to $4,250,000.
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, we acquired 100% of the outstanding
stock of AccuMed International, Inc., by means of a merger of
AccuMed into our 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 (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 shall 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
issues less than $2,500,000 at a price $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
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. 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.
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.
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
will 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. 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 approximately $7,000 of expense related to
stock based compensation expense during the year ended December 31,
2016.
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.
Information about Industry Segments
The
Company operates in one industry segment for cancer diagnostics
instruments and consumables for histology and cytology
laboratories.
Definition:
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Histology
- Cancer diagnostics based on the structures of cells in
tissues
Cytology
- Cancer diagnostics based on the structures of individual
cells
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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, while also looking for cost effective
solutions. In the US the Patient Protection and Affordable Care Act
(the “Act”) is a national example for the industry.
More people have health insurance and therefore can afford early
cancer screening, while at the same time the payers for health care
continue looking for cost reductions. Management continues to
assess the viability of the Act and future regulations regarding
the insurability of US citizens and providing lower cost
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 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 management teams
reporting directly to our Chief Executive Officer. Further during
this 2016 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. Therefore,
most devices and some consumables are manufactured at its German
facility. 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, Poland and the U.S,
approximately 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 often 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. The
facility in Poland functioned as a research and development
facility and light manufacturing through mid-2016 and recently
began selling the Company’s products as our national direct
sales facility,
For
sales, MEDITE is targeting three major areas; U.S., Europe and
China. While the U.S. is currently the largest potential market for
MEDITE products, it is expected that China will experience
continued growth through 2017 due to much higher growth rates than
Europe and the U.S. are currently experiencing, and the Company
expects that trend to continue.
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 additionally to its direct sales. It also
successfully achieved and renewed contracts with three of the
largest Hospital Group Purchasing Organizations: HealthTrust
Purchasing Group, Brentwood, MA (“HealthTrust”), which
oversees approximately 1,400 hospitals and 2,600 other sites,
Premier, Charlotte, NC, which oversees 2,500 hospitals, and another
70,000 other healthcare sites and Mid-Atlantic Group Network of
Shared Services (“Magnet”) with over 600 hospitals and
approximately 4,000 other healthcare sites.
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 end of 2017. 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 6 to
12 weeks. This is considered acceptable. Final assembly of our many
products usually begin after the order is confirmed.
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. The USE33 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 run automatically by the laboratory overnight with no
human supervision. MEDITE’s instrument, the TPC15 Duo or Trio,
offers a very high capacity of 440 or 660 biopsies per run and also
offers two or three independent protocols. Therefore, depending on
the size and kind of tissue, it can process simultaneously the
different steps, and therefore replacing 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
Isoproanol, 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 TES99 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. While originally all microtome manufacturers
were located in Europe (Germany or UK), today only MEDITE still
manufactures its microtomes in Germany. For a microtome, the most
critical functionality is extremely precise mechanics able to cut
slices of 1 or 2 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 – which the first production of these
units were sold in August 2015. Since 2016, the microtomy
manufacturing was setup in a second German facility in Nussloch
where the roots of worldwide microtomy was 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 perfectly match
their usage. As part of tissue sectioning, the freezing microtome,
called “cryostat”, is 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 and the manufacturing of the first set of this big
instrument started in 2016 and is expected to be finished for
delivery before end of the fourth quarter of 2017. 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 20 to 30% of the market (1,500 to 2,500 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, TST44, 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 has gone
through an updating and modernization project during 2016 with an
expected completion of the project by the end of 2017. It will get
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 COT20 linear
staining system using a kind of conveyor technology to realize a
capacity of over 1,000 slides per hour. Also this high throughput
staining equipment will undergo a revision to increase its capacity
by 50% to 1,500 slides per hour for the higher demand from larger
laboratories until the end of 2017.
Currently,
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 therefore offers the
RCM9000,
the latest version of a stand-alone robotic coverslipper using
glass coverslips. Another option MEDITE developed is the
ACS720
glass coverslipper which can be connected directly to the TST44
multi-stainer creating a higher level of automation by bridging the
former manual step between two separate instruments. This
instrument combination 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. The
first production of 10 units of this new development are partially
sold, and the remaining are to be used for customer demonstrations.
The regular serial production is scheduled for the fourth quarter of 2017.
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.
For
2016, MEDITE added to its product portfolio and its 2016 catalogs
some equipment to support environmentally friendly laboratories,
for example recycling machines for alcohol and xylene as well as a
machine for formalin neutralization and dispensing. The Company
added a slide printer in 2015 and has added a cassette printer for
2016, offering a further step to digitalization using barcode
writing on microscope slides and embedding cassettes. Also
stainless steel furniture like grossing stations – used in
every anatomic pathology and histology lab - with the option of
automatic height adjustment and a very competitive price now can be
offered to complete the product portfolio.
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. Others 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.
For
collecting the cervical cells the Company developed the
SoftPAP device for the
collection of cervical cell samples that are used in the detection
of cervical dysplasia, cancer and human papillomavirus
(“HPV”) infections. We believe that SoftPAP, which has
been cleared by the Food and Drug Administration
(‘FDA”) for sale in the U.S., and is CE Marked for
international distribution is positioned as a premium value-added
alternative to the spatula, broom and brush-style devices that have
traditionally been used for these purposes. Unlike these
traditional devices, SoftPAP collects only exfoliated cells and
does not scrape, cut or abrade the cervix. This unique sample
collection method has been shown in clinical trials to reduce the
frequency of false negative and false positive results when the
sample is evaluated by cytological methods to detect the presence
of dysplasia and cancer. In addition, women have reported that
having a cervical sample taken using SoftPAP is more comfortable than when a
traditional device is used.
SoftKit 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 patent applications in multiple
countries. The Company currently is going to
finish the final design of SoftKit 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 a number of market
niches and segments that are not supported effectively by SoftPAP
or 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, makes it particularly attractive for use
in large scale public health screening programs. We are also
investigating the use of SoftKit in an internet-based,
fee-for-service testing program outside of the U.S. A
Commercialization Officer was brought in the 4th quarter 2016 to
manage its market introduction in the U.S. and worldwide for this
innovative product such as SoftKit and other high value
solutions.
Cervical
cytology specimens are traditionally 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 developing several proprietary stains for
use in cervical cytology and other screening 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 each other and with our proprietary stains,
and may be evaluated using our automated slide imaging and analysis
system. An added benefit of our proprietary stains is that after
the specimen has been evaluated using these stains, it can be
counterstained with Pap stain for conventional confirmation and
archiving. Internal laboratory test are showing 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.
When
“reading” the cytology specimen, a cytologist
traditionally examines the specimen by eye through a conventional
optical microscope to detect, classify, record, mark, and report
abnormal cells. While performing this examination, the cytologist
is also referring to the patient’s medical history, assessing
specimen adequacy, and capturing a variety of metrics and other
information needed for regulatory compliance and operational
purposes. Despite the widespread deployment of computers in the
laboratory, many of these operations are still largely paper-based.
Even in laboratories where medical histories are available to the
cytologists in electronic form and reports are prepared on a
computer, it is not uncommon for the data, and sometimes even draft
reports, to be initially captured on paper and then transcribed.
Over
the last few years, the MEDITE developed software for an imaging
system for computer aided diagnosis of slides including its new
stain SURECYTE and its revolutionary new biomarker-based SURECYTE+
asssays. The intent of a medical screening system like this is to
differentiate between patients who show no evidence of the target
disease state (“normals”) and those who do
(“abnormals”). 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. In order
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
Software and SURECYTE stain is also expected to work in Non-GYN
applications (e.g. lung, bladder, thyroid and other cancers) and
being used for Non-GYN imaging together with the SURETHIN
consumables and processing units.
This
new software will provide a computer aided evaluation on all
Non-GYN slides. Currently we are not aware of any other systems
available anywhere in the world that can work together with the
Company’s new SURECYTE+ assays which provides an assessment
of the immune microenvironment.
This
new software also adds ploidy analysis to routine morphology-based
cytological tests. The utility of ploidy measurement in cytological
testing is presently limited by the lack of consistency of
conventional morphological stains. This limitation is addressed by
our SURECYTE stain in combination with our new software and is
expected to be a significant product differentiator. Ploidy will
also be a component of many of the SURECYTE+ -based assays that the
Company will be using for other cytology’s
products.
Although
the evaluation of cervical cytology specimens by automated image
analysis can be traced back to the 1940s and a number of capable
systems have been developed, the FDA has not to date approved any
automated image analysis system to “diagnose”, or
classify as normal or abnormal, cervical cytology specimens without
human intervention. The FDA has, however, approved or cleared
several systems including the AccuMed (a corporate predecessor to
CytoCore) TracCell™ for use in “mapping” or
“location-guided screening”. In these systems, image
analysis is used to identify potentially abnormal cells which are
then presented to a cytologist for classification. This approach,
which has been shown to reduce the time required to differentiate
between normal and abnormal specimens, has been increasingly
adopted by high volume laboratories, but is presently too expensive
for most laboratories. The Company believes that its imager and
associated software will be marketable at a price that will be
affordable for most laboratories.
The
Imager will be optimized for use with the described proprietary
stains and assays. As these stains and assays are designed to be
more effective in highlighting the cellular abnormalities
associated with cancer and precancerous conditions than the
traditional Pap and Thionin stains used in conjunction with other
automated cytology screening instruments, our imager is expected to
deliver superior performance when used in cytological screening
applications. The Company has been developing imaging-based
automated cytology systems since 1994 and has applied this
expertise to the development of the latest generations of Medite
software. Present efforts are directed at porting this software to
the automated image capture and digitization systems developed by
our joint venture with UNIC Medical for sale in the Chinese market
and to automated image capture and digitization systems developed
by selected other manufacturers for sale in other
markets.
Current
methods for breast cancer screening primarily comprise manual
palpitation of the breast and radiographic methods, including
classical radiography and mammography. Regular manual
self-examination is recommended for all women, and periodic breast
cancer screening using radiography or mammography is recommended
for all women over the age of 40 to 45. These methods, however, are
widely recognized as not providing the sensitivity needed in order
to detect small early stage lesions, and are adversely affected by
the presence of high density breast tissue. The high error rates
associated with the use of imaging modalities, such as mammography
on women having dense breasts (dense breasts being common in women
under the age of 40), has led to medical societies and health
authorities recommending against the use of these imaging methods
when screening a woman under the age of 40 for breast cancer. Since
the early 1990’s, it has been known that nipple aspirate
fluid (NAF) can be used as a sample in the assessment of a
woman’s risk of developing breast cancer, and that this
method is applicable to the screening of women who have dense
breasts. In our opinion, currently available collection devices for
that application offered by the competition lack either usability
or market orientation and are much too expensive. Based on the
researched market needs the Company started the development of the
breast cancer risk assessment device BreastPap. After the
acquisition of MEDITE, their engineering team advanced the project
and are close to completing the prototype. The goal is to sell to
cytology labs, physicians and clinics which then can be forwarded
to their gynecologist clients. The gynecologist offices then will
offer this test to its female patients in the age of 20 and up.
MEDITE therefore will offer the collection device, the consumable
set (including hygienic barrier) and also the necessary cancer
assay. The newly developed final version of the device is expected
to be ready by the end of 2017 for market introduction, starting in
Europe. Several cytology laboratories as well as gynecologists have
already showed interest in this new product and expect a very good
business with it.
Product Development and Research
With
the acquisition of MEDITE, the Company currently employs 13
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 certificate.
The
main focus of the developing team during 2016 was working on
innovative and new products like the cryostat M630, the manual
microtome M380, the film coverslipper TWISTER, a cytology
processor, the BreastPap 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 some countries it sell directly to these
laboratories, while in other countries it sell indirectly to them
through its international network of distributors. Several of the
products currently developing 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 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.
The
Company also uses advertisings in segment-specific journals like
the “The Journal of Histotechnology” in the U.S. or
“Der Pathologe” or “Cyto-Info” in Germany
to both offer specific products and to increase the overall brand
recognition. Its international distributors usually do the same in
their specific country.
MEDITE
is also attending 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 70 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 the three 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 contacted the Company to sell MEDITE
products as a priority offering versus other products lines.
.
In the
U.S., as it is currently the potentially biggest market, sales and
distribution is more diversified. MEDITE has managed to become an
approved vendor for three of the largest hospital group purchasing
groups, Premier, HealthTrust and Magnet, with a total of over 5,000
member hospitals and health care providers. The contracts with
Premier, HealthTrust and Magnet were successfully renewed in 2015.
About 98 % of health care providers are members of one or more
group purchasing companies, and therefore it is very important in
the US to be a registered vendor to realize sales with their
members. Being a registered vendor means usually being just one out
of two or three vendors in that segment for the member hospitals,
and also being released from individual purchase contracts with
each customer in using the general term of the hospital group
purchasing organization.
Coupled
with these purchasing group opportunities 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 publically 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. Thirdly MEDITE will use a direct sales approach,
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. A similar approach will be implemented by
the second quarter of 2017 in Germany, Europe and the rest of the
world.
In
Europe, the Company is selling direct in Germany and Poland with
employed regional sales representatives and through a network of
independent distributors in all other countries. Some of its sales
partners are working with MEDITE for more than a decade. Also
MEDITE is scheduling 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 is using 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
with sales of about $1 million for 2016. 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. MEDITE is approved and authorized by the AEO to manage
several customs issues directly.
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 system in the EU. In particular, 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; 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.
The
e2 Collector, which is the
predecessor to the SoftPAP
collector, was cleared for marketing by the FDA on May 31, 2002,
and the SoftPAP collector received FDA clearance on January 31,
2008. Although most future Company products are expected to qualify
for premarket clearance via the 510(k) process, some future
products may require PMA approval.
In
2010, the FDA began a major review of the 510(k) process, which has
to date resulted in the announcement of a number of changes
including some that will directly impact our future products.
Additional changes, some of which have the potential to
substantially increase the time and cost involved in obtaining
marketing clearance via the 510(k) process, are under
consideration.
In the
U.S., we are subject to various federal and state laws pertaining
to healthcare fraud and abuse, including federal and state
anti-kickback laws and the federal Foreign Corrupt Practices Act,
which make it illegal for an entity to solicit, offer, receive or
pay remuneration or anything of value in exchange for, or to
induce, the referral of business or the purchasing, leasing or
ordering of any item or service paid for by Medicare, Medicaid or
certain other federal healthcare programs. These statutes have been
broadly defined to prohibit a wide array of practices, and our
activities may subject us and our partners to scrutiny under such
laws. Violations may be punishable by criminal and/or civil
sanctions, including fines, as well as the exclusion from
participation in government-funded healthcare programs. Laws
pertaining to these and related matters also exist in other
countries.
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. In order 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
expect that our quality system will be registered to ISO 13485 by
December 31, 2017
The CE
Mark for a product must be renewed every five years and will
generally also require renewal if the requirements imposed by these
Directives and standards change. This renewal increases the cost of
regulatory compliance. In addition, the specific quality system
requirements imposed upon a product are determined by the risk
category into which the product is assigned by the applicable
Directives. All of our current and planned products are presently
considered to be low risk devices and are assigned to Class I which
imposes the lowest level of quality system requirements. If a new
Company product falls within or a current product is reclassified
into a higher risk category, we will incur higher regulatory costs
in order to maintain the CE Mark on the affected
product(s).
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. In
addition, certain provisions of the Affordable Care Act are
expected to significantly affect the reimbursements for many tests
and diagnostic procedures. These changes are expected to be
introduced over the next years. Certain of the changes that have
been proposed under the Affordable Care Act (ACA) would require
that the cost effectiveness of novel new products be demonstrated
in actual clinical use before Centers for Medicare and Medical
Services (“CMS”), the agency that manages Medicare and
Medicaid is allowed to provide reimbursement for such products.
Historically, however, the medical community has generally been
reluctant to adopt, or in some cases even to evaluate, novel
products unless reimbursement is available. If these proposed ACA
rules go into effect in their present form, it is anticipated that
the cost and time required to introduce a novel product into the US
market will be substantially increased. The ACA is currently being
evaluated for a repeal and replace of the current law. Management
is watching closely the impact of some of these
changes.
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 will depend, 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
histology, the Company’s recently patented fully automated
system “Histo-Revolution” will become the only system
worldwide which can provide a fully automated lab-in-one solution
in histology. Due to the Company’s patent protection for this
technology, it is protected from replication until 2032 and no
other company can duplicate this.
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 Biomarker SureCyte+ newly
developed 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 primarily
on the basis 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 end of 2017.
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
aggressive 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.
Prior
to filing a utility application in the U.S., the Company reviews
the application to determine the country or countries in which
patent coverage is necessary or desirable to support our business
model. If so, a utility patent application is filed through a
Patent Cooperation Treaty (“PCT”) receiving office.
This approach allows it to select the most appropriate receiving
office to perform the initial patentability assessments while
providing a single entry point into over 120 national patent
offices worldwide. Depending upon the nature of the invention and
business considerations, it typically nationalize PCT applications
in some number of countries, the number depending upon anticipated
market size and the locations of potential
competitors.
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.
Patent
applications filed in the U.S. prior to November 29, 2000, are
maintained in secrecy until any resulting patents are issued. As
there have been examples of U.S. patent applications that have
remained “in prosecution” and, therefore, secret for
decades, it is not possible to know with certainty that any U.S.
patent that we may own, file for or have issued to us will not be
pre-empted or impaired by patents filed before ours and that
subsequently are issued to others. Utility patent applications
filed in the U.S. after November 29, 2000, are published 18
months after the earliest applicable filing date. This revised
standard reduces the chances that such a “submarine”
patent will impair our intellectual property portfolio. Foreign
patent applications are automatically published 18 months after
filing. As the time required to prosecute a foreign utility patent
application generally exceeds 18 months and the foreign patents use
a “first to file” rather than a “first to
invent” standard, the Company does not consider submarine
patents to be a significant consideration in its patent protection
outside of the U.S.
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 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
Most of
the materials used in Company products are readily available from
multiple diversified sources. As these raw materials typically
account for less than 10 % of the cost of 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 $1.355 million from the sale of
equity subsequent to December 31, 2016 through the date of this
filing. Stock subscriptions totaled $25,000 for January 2017,
$405,000 for February 2017, $775,000 for March 2017 and $150,000
through April 10, 2017, a total of $1.355 million to issue
2,710,000 shares of common stock at $0.50. Working capital has
improved by approximately $1 million as of the date of this filing.
Management
continues to expand its product offerings and has also expanded its
sales and distribution channels during 2017.
The
Company has settled three of the five employee notes for $330,000
and warrants. The Company has extended the term of the secured
promissory notes and has paid $183,000 of the balance outstanding
as of the date of this filing and received notice that one
noteholder will convert $50,000 into 100,000 shares of common stock
at $0.50. Management believes that the remainder of the balance
will be settled in some combination of cash and stock.
Management
is actively seeking additional equity financing contemplated in the
$4.25 million stock purchase agreement. The Company has
negotiated with certain parties whose obligations are due in the
next twelve months to extend payment terms beyond one year. One
lender with an outstanding balance of $789,000 has stated that they
will not be able to refinance the debt. The default rate of
interest will increase three percent.
At
December 31, 2016, the Company’s cash balance was $108,000
and its operating losses for the year ended December 31, 2016 and
2015, have used most of the Company’s liquid assets and the
negative working capital has grown by approximately $1.5 million
from December 31, 2015 to December 31, 2016.
Accrued
salaries, vacation and related expenses at December 31, 2016,
includes amounts owed the former CFO approximately $1.1 million and
amounts owed to both the Michaela and Michael Ott totaling
approximately $156,000. Included in advances – related
parties are amounts owed to the Company’s former CFO of
$50,000 at December 31, 2016 and 20,000 Euros, ($21,040 as December
31, 2016) and $75,000 related to two short term bridge loans made
to the Company by its former CEO and current COO of the Company.
The Company is working with the current executives to establish a
payment plan. See further discussion regarding the legal
proceedings with the Company’s former Chief Financial
Officer.
The
Company’s security agreement with its lender has provided
borrowings of 35% of our collateralized assets. The
Company continues to look for opportunities to refinance this debt
to provide additional liquidity.
If
management is unsuccessful in completing its equity financing, they
will begin negotiating with some of their major vendors and lenders
to extend the terms of their debt and also evaluate certain
expenses that have been implemented for the Company’s growth
strategy. However, there can be no assurance that
the Company will be successful in these efforts. The consolidated
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Employees
As of
December 31, 2016, the Company employed a total of 75 employees
including 5 trainees, one employee on disability and 5 part time
employees which represents 69 full-time-equivalent. 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, 2016, the Company had direct
foreign operations in Germany, Poland and Austria and distributed
to approximately 80 countries in total.
Item 1A.
|
Risk Factors
|
Not
applicable as Small Business Filer
Item 2.
|
Properties
|
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, we occupy a leased neighborhood building with an
additional 11,302 square feet in space for manufacturing. This
contract has a three month termination clause. 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 30th, 2018.
The facility for R&D and some manufacturing in Poland has 5,597
square feet at the address of ul. Zabia 2, 65-158 Zielona Gora,
Poland is leased through August 2017, with a six month termination
clause. 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 and 6 month notice for the
Poland facility 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. The previous down town Chicago facility
lease terminated on October 30, 2016, with a monthly lease of
$4,526 and this facility is subleased for $3,948 per month through
the end of the lease.
Item 3.
|
Legal Proceedings
|
On
November 13, 2016, the Company’s former Chief Financial
Officer 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 Chief Financial Officer at December 31, 2016.
The Company believes that $836,000 was to be converted into common
stock as a condition of the merger agreement at $2.00 a
share.
Item 4.
|
Mine Safety Disclosures
|
Not
Applicable.
PART II
Item 5.
|
Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
|
Market Information
MEDITE
common stock is quoted under the symbol “MDIT” on the
OTCQB. The OTCQB is the middle tier of the three marketplaces for
trading over-the-counter stocks provided and operated by the OTC
Markets Group.
The
following table lists the high and low bid information for our
common stock for the periods indicated, as reported on the OTCQB.
These quotations reflect inter-dealer prices, may not include
retail mark-ups, mark-downs, or commissions, and may not reflect
actual transactions (share price adjusted due to the reverse split
of 1:100).
Year Ended December
31, 2016
|
High
|
Low
|
1st
Quarter
|
$0.71
|
$0.26
|
2nd
Quarter
|
$0.89
|
$0.39
|
3rd
Quarter
|
$0.89
|
$0.48
|
4th
Quarter
|
$1.15
|
$0.55
|
|
|
|
Year Ended December
31, 2015
|
|
|
1st
Quarter
|
$9.00
|
$1.89
|
2nd
Quarter
|
$2.40
|
$1.60
|
3rd
Quarter
|
$2.40
|
$1.60
|
4th
Quarter
|
$1.38
|
$0.65
|
Holders
As of
April 10, 2017, the Company had approximately 427 record holders of shares of our
common stock.
Dividends
The
Company has not paid a cash dividend on shares of MEDITE common
stock, and our Board of Directors is not contemplating paying
dividends at any time in the foreseeable future. The terms of
certain of our securities, including our Series B, C, and E
preferred stock, prohibit the Company from declaring any dividends
on our common stock (or any other stock junior to such security)
except for dividends payable in shares of stock of the Company of
any class junior to such security, or redeem or purchase or permit
any subsidiary to purchase any shares of common stock or such
junior stock, or make any distributions of cash or property among
the holders of the common stock or any junior stock by the
reduction of capital stock or otherwise, if any dividends on the
security are then in arrears.
The
Company has a contingent obligation to pay cumulative dividends on
various series of our convertible preferred stock in the aggregate
amount of approximately $1,411,946 at December 31, 2016 and
$1,320,638 at December 31, 2015, which we intend to settle through
the issuance of shares of our common stock, if and when the holders
of the preferred shares elect to convert their shares into common
stock.
Stock Transfer Agent
MEDITE’s
stock transfer agent is Computershare Shareowner Services, 199
Water Street, 26th Floor, New
York, New York, 10038 and its telephone number is (212)
805-7100.
Recent Sales of Unregistered Securities
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. 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.
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
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.
During
2015, the Company issued 240,625 shares at $1.60 for proceeds of
$385,000. On February 23, 2015, Ventana Medical Systems agreed to
convert the Series “D” Preferred Stock, Stated and
Liquidation value, $525,000 and accrued dividends of $656,250 into
12,100 shares of the Company’s unregistered common
stock.
During
2015, the Company issued 1,086,250 shares of common stock at $1.60
for proceeds of $1,739,400 to the President of UNIC Medical of
China. UNIC is the Company’s distributor in China and other
Asian countries. In addition, the Company issued Michaela Ott and
Michael Ott the remaining shares of 156,250 each, total of 312,500
shares, to complete the 15,000,000 shares required in conjunction
with a 2014 purchase agreement.
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)”). 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. The Warrants have an initial exercise
price of $1.60 per share, which are subject to adjustment, and are
exercisable for a period of five years. 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. On March 15, 2016, the Board of
Directors approved the renegotiated terms to increase the warrants
issued to the Purchasers from a total of 250,000 warrants to
500,000 for certain considerations. The Notes are secured by the
Company’s accounts receivable and inventories held in the
United States. In January2017 the Company extended the term of the
Notes in default on April 1, 2016 to June 30, 2017, reduced the
price on the warrants issued from $0.80 to 0.50.
On
March 15, 2016, the Board of Directors approved the renegotiated
terms with the warrant holders to remove the anti-dilution feature
in the Warrants for the warrants received increasing from 250,000
to 500,000 with a fixed exercise price of $0.80 from $1.60 per
share. During January 2017, these warrants were amended with a
fixed exercise price of $0.50.
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)”). On
August 25, 2016, these Notes matured and were not
repaid. Therefore the Notes were in default on August
26, 2016. 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. In January 2017 the Company extended the term of the
Notes in default on April 1, 2016 to June 30, 2017, reduced the
price on the warrants issued from $0.80 to 0.50. The secured
promissory notes issued December 31, 2015 as discussed above
matured on March 31, 2016 and were not
repaid. Therefore, the secured promissory notes were in
default as of the April 1, 2016. The Company agreed to
pay the Purchasers 10% of the $500,000 principal balance in
warrants for the months of April 2016 until December
2016. Therefore, for these months, the Company issued an
aggregate 600,000 warrants. The Company continues to be in
default and anticipates issuing additional warrants attributed to
this default until such time as the Company can repay the debt or
complete the contemplated offering discussed within.
The
Company issued the foregoing securities in reliance on the safe
harbor and exemptions from registration provided by Section 4(2) of
the Securities Act of 1933, as amended, for sales to a limited
number of accredited investors, employees, service providers, or
creditors with whom It had prior relationships, without engaging in
any general solicitation, and without payment of underwriter
discounts or commissions to any person.
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
|
None.
Item 6.
|
Selected Financial Data
|
Not
applicable.
Item 7.
|
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
|
Overview
MEDITE
Cancer Diagnostics, Inc. (the “Company”,
“it”, “we”, or “us”), formerly
CytoCore, Inc., specializes
in the marketing and selling of MEDITE core products (instruments
and consumables), manufacturing, development of new solutions in
histology and cytology and marketing of molecular biomarkers. 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 Cancer Diagnostics is well received and remains a
professional description of the Company’s business. The
Company’s trading symbol is “MDIT”.
In 2016
we focused on implementation of several growth opportunities
including enhanced distribution of core products through focused
sales and distribution channel(s), newly developed and patent
pending assays, new laboratory devices and several marketing
projects like the Chinese standardization projects for histology
and cytology. The Company is optimistic about recent
marketing efforts focusing on larger laboratory chains and other
important strategic relationships. The Company has 75
employees in four countries, a distribution network to about 70
countries and a wide range of products for anatomic pathology,
histology and cytology laboratories available for
sale.
The
Company successfully sold more internally developed and
manufactured devices in 2016 compared to 2015.
After
the successful market entrance into China in 2014, the
Company’s revenues in this market are approximately $897,000
in 2015 compared to $1 million in 2016. The Company’s delayed
financing during 2015 and 2016 has impacted the delivery of sales
due to availability of raw materials, parts, and work in progress
inventory and the needed investment in that inventory. The Company
originally anticipated sales in 2016 of approximately $2 million
with the assumption that the timing of the scheduled capital raise
would happen earlier in the year. Due to the delay in the capital
raise, the Company revised its target to $1.3 million. Total sales
for the year ended December 31, 2016 were approximately $1 million
compared to $897,000 for the same period in 2015. The
Chinese market is growing quickly, and the Company expects it will
be one of two largest markets for its products. By working with its
Chinese distributor, UNIC Medical, the Company has successfully
received China Food and Drug Administration (“CFDA”)
approval for all MEDITE histology laboratory devices at the end of
2014, and for the Cytology device in 2015. The UNIC Medical sales
team is selling MEDITE products in China with slightly increasing
volumes. Also, together with UNIC, we are part of a
government supported project to standardize the histology
laboratory process in China. UNIC Medical is using MEDITE equipment
and consumables for processing, and launching new assays. UNIC has
taken an active role in branding MEDITE Cancer Diagnostics in
China. Medite is working through certain product rollout issues
which have impacted its anticipated increase in sales.
On May 31, 2016, UNIC received CFDA approval as a
Class I in vitro diagnostic reagent for MEDITE's "SureThin" cell
preservation solution. As China adopts Cytopathology
standards across the country, the Company expects 'Liquid Based
Cytology Tests (LBC)' will be used for the majority of Pap
collections for cervical cancer screening. We are prepared to sell
the complete SureThin product line, including the already approved
Processor to this potential market of 485 million women between the
ages of 16 and 64 years of age. Management anticipates launching
the product in China by the third quarter of 2017 and in the U.S.
by the fourth quarter of 2017.
The
Company’s cytology product line, revenue declined in Europe
(non-Gyn and Gyn applications) during 2016 related to a competitive
threat that management believes has been alleviated. The Company is
in the process of moving forward the submission of an application
to the U.S. Food and Drug Administration (“FDA”) for
SureThin Gyn applications. Once approved we can compete with some
of 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 and China market will drive significant
new revenue and gross margin improvement opportunities in
2017.
The
developed and U.S. patented self-collection device SoftKit is
targeting the growing POC & POP (point of care or point of
people care) market. Growth in this area is due to consumer driven
health care requirements and the necessity to support and address
incremental patient population needs for screening and on-going
diagnostic tests. SoftKit serves as just such a product, addressing
this market requirement. SoftKit is planned to be sold through
various marketing channels that serve the gynecology physician
consumer health and emerging post-acute care as the influence of
clinical labs are expanded. Initially the SoftKit is targeted at
the uterine cancer/HPV screening market. The next phase of testing
will include cervical screening.
Management
believes that 2017 developments, allows us to more fully leverage
the excellent products and biomarker solutions from CytoCore
component of MEDITE. The first entry will be the introduction of
SureCyte+ (fluorogenic) instant staining, offering tremendous lab
efficiencies and enhanced patient care through the use of
SureCyte+. SureCyte+ is the first of many new offering under the
SureCyte brand.
MEDITE’s
Breast Cancer Risk Assessment Product is non-invasive, easy,
gentle, and highly sensitive, enabling young women between 20 and
45 years of age to obtain their individual breast cancer risk
assessment. An automatic and gentle collection device for breast
cells together with a newly developed assay is used to determine a
woman’s risk to develop breast cancer. Knowing the
individual breast cancer risk will provide relief to a majority of
young women who have no elevated risk of developing breast cancer.
For those who have a higher risk, it enables them to monitor that
risk closer for earlier treatment, if needed. The earlier a
precancerous or cancerous situation is detected, the greater the
chance for reducing the fatality rate for these
conditions. Product development of BreastPap continued
in 2016, reflecting feedback from doctors’ test use of
prototype units’ and doctor’s office feedback to
continuously improve the product prior to launching. During the
third quarter, the Company initiated a co-operation with Leibnitz
University of Hannover, Germany, on the final design and usability
of the BreastPap. The project is scheduled to begin on February 15,
2017. The delay in market introduction by management is due to
additional quality assurance measures being performed by the
Company as well as insuring that US feedback from providers are
considered. The Company’s BreastPap product is a risk
assessment tool planned to evaluate the breast cancer risk on
certain results based on the treatment. Upon
receiving the results, women, based upon their physicians’
advice may be candidates for further diagnostic testing. The
BreatPap will undergo further customer testing in the US and EU
markets.
The
Company brought several other innovative products closer to
marketability during 2015, and continued during 2016 as listed
above. Also, in early 2015, the German priority patent
for a fully automated system used in the histology lab, a
“Lab-In-One” unit, was granted. This technology, if
successfully accepted by the market, has the ability to change the
competitive landscape within the industry.
During
the first quarter of 2016, the Company opened a second German
manufacturing facility with approximately 4,000 square
feet in Nussloch. This facility is utilizing the local
workforce and their experience for the specialized skills required
for manufacturing of the newly developed and updated Microtome
product line and the newly developed Cryostat (instruments used for
sectioning tissue biopsies). During 2016, the Company
manufactured and delivered from order backlog 70 units. The Company
began manufacturing the new Cryostat line during the first quarter
of 2017 and anticipates the first pre serial series to be available
before the end of the second quarter.
The
Company operates in one industry segment for cancer diagnostics
instruments and consumables for histology and cytology
laboratories.
Definition:
|
Histology
- Cancer diagnostics based on the structures of cells in
tissues
Cytology
- Cancer diagnostics based on the structures of individual
cells
|
|
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, while also looking for cost effective
solutions. In the US the Patient Protection and Affordable Care Act
is a national example for the industry. More people have health
insurance and therefore can afford early cancer screening, while at
the same time the payers for health care continue looking for cost
reductions.
MEDITE
acts as a one-stop-shop for histology (also known as anatomic
pathology) laboratories either as part of a hospital, as part of a
chain of laboratories or individually. It is one out of only four
companies offering all equipment and consumables for these
laboratories worldwide. The MEDITE brand stands for innovative and
high quality products – most equipment made in Germany
– and competitive pricing.
For the
cytology market, MEDITE offers a wide range of consumable products
and equipment; in particular for liquid-based-cytology which is an
important tool in cancer screening and detection in the field of
cervical, bladder, breast, lung and other cancer types. 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 management teams
reporting directly to our Chief Executive Office. 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. Further during this 2016
period we 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 distributions contracts executed in the last
years, management believes the profitability and cash-flow of the
business will grow and improve. However, significant on-going
operating expenditures may be necessary to manufacture and market
new and existing products to achieve the accelerated sales growth
targets outlined in the Company’s business plan. To realize
the planned growth potential, management will focus its efforts on
1.) Finishing and gaining approval for the products currently under
development and 2.) Increase direct sales in the U.S. and continue
to expand Chinese market sales by broadening the Company’s
collaborations with the local distributor UNIC. We also will work
on continuously optimizing manufacturing capacity to increase our
gross margin. Implementation of our plans will be contingent upon
securing substantial additional debt and/or equity financing. 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 primarily are generated in Euro currency.
While in 2015 the average USD/Euro exchange rate was approximately
1.1097, it has remained steady to 1.10682 in 2016, a decrease of
0.003, however the end of year conversion rate was 1.05204.
MEDITE’s sales in USD were lower on a year over year basis as
approximately 80% of our sales currently occurs in Euros. The
Company is working to lessen the impact of the Euro’s decline
versus the dollar by increasing the percentage of overall product
sales in the U.S. and other countries such as China whose currency
is not pegged to the Euro.
The
Company believes the combination of MEDITE Enterprise, Inc. with
CytoCore, Inc. will expedite the development and marketability of
CytoCore’s cytology products which include collection
devices, image analysis software, special stains and immuno-assays.
Currently, the recent launch of new products, the positive impact
from several new initiatives, and some recently executed
distribution contracts in the U.S., Europe and China are some
primary positive factors assisting growth.
Critical Accounting Policies and Significant Judgments and
Estimates
The
preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the U.S. requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those
estimates.
The
Company believes that the critical accounting policies
affect our more significant estimates and judgments used in the
preparation of our consolidated financial statements under Note 2:
Revenue recognition, allowance for doubtful accounts, use of
estimates and impairments.
Results of Operations
Fiscal Year Ended December 31, 2016 as compared to Fiscal Year
Ended December 31, 2015 (Dollars in thousands)
Revenue
Total
revenues of $9,238 for the year ended December 31, 2016, compared
$9,887 for the year ended December 31, 2015, represented a decrease
in revenues of $649 or 6.56%. The Company’s own manufactured
instruments increased $168, an increase of 3.8% in 2016, as
compared to 2015 revenues. The related histology consumables
revenue declined by $355, or 9.9% in 2016 from 2015 level. Cytology
products revenue decline by $466, or 24.4% in 2016 compared to
2015. Cash constraints impacted the delivery of owned manufactured
equipment, demo equipment and related lower margin consumable
supplies from outside suppliers. Specifically, the Company had
a backlog as of December 31, 2016 of approximately $1
million. Cytology products were impacted by a competitive threat in
Europe which Management believes has been alleviated however
impacted sales for the 2016 period.
Costs and Expenses
Cost of Revenues
Cost of
revenues represents the cost of the product sold, freight, and
other costs of selling our products. Cost of revenues totaled
$5,608 (61% of revenue) for the year ended December 31, 2016,
compared to $6,084 (62% of revenue) for the year ended December 31,
2015. This mainly resulted from a higher share of sales of own
manufactured equipment with slightly higher margins versus
merchandise supply goods in 2016 compared to 2015.
Research and Development
Research
and development expenses are an important part of the
Company’s business to keep our existing products competitive
and to develop new innovative solutions with interesting market
potential that will help us grow future revenues. These expenses
include research work for cancer marker consumables and developing
work, including engineering and industrial design, for histology
and cytology laboratories worldwide. Major parts of these expenses
are payroll-related costs for in-house scientific research,
mechanical and electrical engineering, instrument related software
development staff, prototype expenses and material purchased for
R&D.
For the
2016 fiscal year, research and development expenses increased to
$1,477 compared $1,278 for 2015. The Company continues to expend
resources necessary to continue to grow our product
offerings. The costs increased during 2016 associated
with $206 expensed prototypes for the 2016 period.
Selling, General and Administrative
For the
year ended December 31, 2016, SG&A expenses were $3,600
compared to $2,947 in 2015, an increase of $653. Professional fees
increased approximately $435 associated with audit and quarterly
fees, professional fees for accounting and administrative
oversight. Salary, wages, commissions and related payroll taxes
increased $168 for the 2016 period.
Operating Loss
The
operating loss of $1,661 for 2016 compared to $599 in
2015 is due to the lower sales due to significant backlogs at
December 31, 2016, lower contribution on sales and higher selling,
general and administrative, and research and development expenses
for the year ended December 31, 2016 as discussed
above.
Interest Expense, net
Interest
expense was $694 for 2016 compared to $204 in 2015, an increase of
$490 related to the interest expense of promissory
notes issued in December 2015 and May 2016 totaling $231, including
debt discount amortization. The year ended December 31, 2015 did
not have any related interest expense, loan fees or penalty
warrants for secured promissory notes or employee
notes.
Income Tax
The
income tax expense in 2015 was primarily the result of recording a
reduced tax asset for the German Subsidiary MEDITE GmbH for its
profit in 2015. Overall the Company is recording income tax
(benefit) expense of $(132) for 2016,
compared to $78 for the year ended December 31, 2015.
Net Loss
The net
loss for the year ended December 31, 2016, was $2,163
compared to the year ended December 31, 2015, of $859 is due to the
lower net contribution on sales and higher selling, general and
administrative and interest expense for the year ended December 31,
2016, as discussed
above.
Liquidity and Capital Resources
For the
year ended December 31, 2016, we used net cash in
operations of approximately $1.1 million compared to $388 for the
same period in 2015. During 2016, cash used in operations consisted
of loss from operations, offset by non-cash transactions for
warrants issued related to secured promissory notes. Collections
for accounts receivable, higher accounts payable and accrued
expense balances offset by increased balances in inventory
contributed to the use of funds for the 2016 period. During 2015,
cash used in operations consisted of the loss for the period offset
by operations comprised of collections on accounts receivable for
the period, reductions in inventories offset by higher payments on
accounts payable and accrued expenses.
For the
year ended December 31, 2016, net cash used in investing activities
were $115 compared to $354 for the same period in
2015. The improvement in this activity relates to lower
purchases of equipment in 2016 compared to 2015.
For the
year ended December 31, 2016, financing activities provided
$700 compared $1,712 for the same period in 2015. The
Company sold 873,830 shares of common stock for $406 during the
fourth quarter of 2016, net of $31 of issuance costs. In May 2016,
the Company issued $150 of additional secured promissory notes. In
2015, the Company raised $385 in a second offering. The Company
issued 1,086,250 shares of common stock at $1.60 for proceeds of
$1,739 to the President of UNIC Medical of China is the
Company’s distributor in China and other Asian countries. On
December 31, 2015, the Company received $500 for secured promissory
notes.
In
2016, the Company’s lines of credit and term notes funded
$135 and in 2015 repaid $802. During 2015,
MEDITE GmbH reduced its outstanding indebtedness under its master
credit line with Hannoversche Volksbank from Euro 1.8 million ($1.9
million as of December 31, 2016) to Euro 1.3 million ($1.4 million
as of December 31, 2016). The remaining line of credit of Euro 1.1
million ($1.2 million as of December 31, 2016) has no maturity date
and the Company believes that the bank will continue working with
the Company as it attempts to raise additional capital resources
through debt or equity. Should the bank look for additional
reductions to the Company’s line of credit, the Company
believes that it can obtain bank financing elsewhere at equivalent
terms or if necessary raise the funds needed through operations.
The balance at December 31, 2016 of this master credit line is $46
below the required balance.
The
Company must contemplate continuation as a going concern. This
contemplates the realization of assets and the liquidation of
liabilities in the normal course of business. At
December 31, 2016, the Company’s cash balance was $108,000
and its operating losses for the year ended December 31, 2016 and
2015, have used most of the Company’s liquid assets and the
negative working capital has grown by approximately $1.5 million
from December 31, 2015 to December 31, 2016. These factors raise
substantial doubt about the Company’s ability to continue as
a going concern. The Company raised additional cash of $1.355
million from the sale of equity subsequent to December 31, 2016
through the date of this filing. Stock subscriptions totaled
$25,000 for January 2017, $405,000 for February 2017, $775,000 for
March 2017 and $150,000 through the April 10, 2017, a total of
$1.355 million to issue 2,710,000 shares of common stock at $0.50.
Working capital has improved by approximately $1 million as of the
date of this filing.
The
Company has settled three of the five employee notes for $330,000
and warrants. The Company has extended the term of the secured
promissory notes and has paid $183,000 of the balance outstanding
as of the date of this filing and received notice that one
noteholder will convert $50,000 into 100,000 shares of common stock
at $0.50. Management believes that the remainder of the balance
will be settled in some combination of cash and stock.
Management
is actively seeking additional equity financing contemplated in the
$4.25 million stock purchase agreement. The Company has
negotiated with certain parties whose obligations are due in the
next twelve months to extend payment terms beyond one year. One
lender with an outstanding balance of $789,000 has stated that they
will not be able to refinance the debt. The default rate of
interest will increase three percent.
Accrued
salaries, vacation and related expenses at December 31, 2016,
includes amounts owed to the former CFO approximately $1.1 million
and amounts owed to both the Michaela and Michael Ott totaling
approximately $156,000. Included in advances – related
parties are amounts owed to the Company’s former CFO and
former CEO and Chairman of the Board of $50,000 at December 31,
2016, and 20,000 Euros, ($21,040 as December 31, 2016) and $75,000
related to two short term bridge loans made to the Company by its
former CEO and current COO of the Company. The Company is working
with the current executives to establish a payment plan. See
further discussion regarding the legal proceedings with the
Company’s former Chief Financial Officer.
The
Company’s security agreement with its lender has provided
borrowings of 35% of our collateralized assets. The
Company continues to refinance this debt to provide additional
liquidity.
Management
continues to expand its product offerings and has also expanded its
sales and distribution channels during 2017.
If
management is unsuccessful in completing its equity financing, they
will begin negotiating with some of their major vendors and lenders
to extend the terms of their debt and also evaluate certain
expenses that have been implemented for the Company’s growth
strategy. However, there can be no assurance that
the Company will be successful in these efforts. The consolidated
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Item
8.
Financial Statements and
Supplementary Data
Our
consolidated financial statements and notes thereto for the years
ended December 31, 2016 and 2015, together with the reports
of our Independent Registered Public Accounting Firms are
filed as part of this Annual Report on Form 10-K commencing on page
F-1 and are incorporated herein by reference.
Item
9.
Changes in and Disagreements With
Accountants on Accounting and Financial
Disclosure
On January 5, 2017, upon the recommendation of the Company’s
Audit Committee, the Board of Directors of the Company dismissed
WithumSmith+Brown, PC (“Withum”) as the Company’s
independent registered public accounting firm.
The
report of Withum on the
Company’s consolidated financial statements for the
fiscal year ended December 31, 2015, did not contain an adverse
opinion or a disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope or accounting
principles. In connection with the audit of the Company’s consolidated financial
statements for the fiscal year ended December 31, 2015, (1) there
were no disagreements with Withum on any matter of accounting
principles or practices, financial statement disclosure or auditing
scope and procedure which, if not resolved to the satisfaction of
Withum, would have caused Withum to make reference to the matter in
its report and (2) there were no “reportable events” as that
term is defined in Item 304 of Regulation S-K promulgated under the
Securities Exchange Act of 1934 (“Item 304”).
On January 11, 2017 (the “Engagement Date”), upon the
recommendation of the Company’s Audit Committee, the Board of
Directors of the Company engaged KMJ Corbin & Company
LLP (“KMJ”) as the
Company’s independent registered public accounting firm,
beginning with the period ended December 31,
2016.
During the Company's two most recent fiscal years, the subsequent
interim periods thereto, and through the Engagement Date, neither
the Company nor anyone on its behalf consulted KMJ regarding either
(1) the application of
accounting principles to a specified transaction, either completed
or proposed, or the type of audit opinion that might be rendered on
the Company's consolidated financial statements; or (2) any matter
regarding the Company that was either the subject of a disagreement
(as defined in Item 304(a)(1)(iv) of Regulation S-K and related
instructions to Item 304 of Regulation S-K)
or
a reportable event (as defined in Item 304(a)(1)(v) of Regulation
S-K).
Item
9A.
Controls and Procedures
Evaluation of Disclosure Controls and
Procedures
We
maintain disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the
“Exchange Act”), that are designed to ensure that
information required to be disclosed in our Exchange Act reports
are recorded, processed, summarized, and reported within the time
periods specified in rules and forms of the Securities and Exchange
Commission, and that such information is accumulated and
communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosures.
As of
December 31, 2016, our management carried out an assessment,
under the supervision of and with the participation of our Chief
Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act
Rules 13a-15(b) and 15d-15(b). As a result of this
assessment, the Chief Executive Officer and the Chief Financial
Officer concluded that our disclosure controls and procedures were
not effective as of December 31, 2016 because of
the material weakness described in “Management’s Report
on Internal Control Over Financial Reporting”
below.
Management's Annual Report on Internal Control Over Financial
Reporting
The
Company’s management is responsible for establishing and
maintaining adequate internal control over financial reporting (as
defined in Rule 13a-15(f) under the Exchange Act). Under the
supervision and with the participation of its management, including
its Chief Executive Officer, who serves as our principal executive
officer, and its Chief Financial Officer, who serves as our
principal financial officer, we conducted an assessment of the
effectiveness of our internal control over financial reporting. In
making this assessment, we used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(‘‘COSO’’) in Internal Control —
Integrated Framework. Based on management’s assessment based
on the criteria of the COSO, it concluded that, as of December 31,
2016, its internal control over financial reporting is not
effective at the reasonable assurance level.
The
Company’s internal control system was designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles in the U.S. Our internal control over financial
reporting includes those policies and procedures that:
|
(i)
|
pertain
to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
the assets of the Company;
|
|
(ii)
|
provide
reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with
accounting principles generally accepted in the U.S., and that
receipts and expenditures of the Company are being made only in
accordance with authorization of our management and directors;
and
|
|
(iii)
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that
could have a material effect on our consolidated financial
statements.
|
This
annual report does not include an attestation report of our
registered public accounting firm regarding internal control over
financial reporting. Management’s report was not
subject to attestation by our registered public accounting firm
pursuant to the Dodd-Frank Wall Street Reform and Consumer
Protection Act, which permits us to provide only management’s
report in this annual report.
Changes in Internal Control over Financial Reporting
Background
Item 9B
|
Other Information
|
On October 26, 2016, the Board of Directors (the
“Board”) of the Company held a meeting whereby it
accepted the resignation of Michaela Ott as Chief Executive Officer
of the Company, effective immediately. Michaela Ott was then
appointed by a unanimous vote of the Board to the position of Chief
Operating Officer of the Company upon the same terms and conditions
as her current employment, to serve until her resignation or
removal.
Further,
the Board also accepted the resignation of Michael Ott as Chief
Operating Officer of the Company, effective immediately. Mr. Ott
shall remain the Chief Executive Officer of the Company’s
wholly owned subsidiaries, MEDITE Enterprises, Inc., and MEDITE
GmbH, and CytoGlobe, GmbH.
The
Board further accepted the resignation of Robert F. McCullough, Jr.
as Chairman of the Board and unanimously elected Michael Ott to the
position of Chairman of the Board to serve until such time as his
resignation or removal.
On
November 5, 2016, The Board of the Company held a special meeting
and dismissed Robert F. McCullough, Jr. from his position as Chief
Financial Officer, Secretary and Treasurer. On December 5, 2016,
the Company issued and Information Statement, to holders of the
Company’s outstanding common stock, as of the close of
business on November 22, 2016, pursuant to Rule 14c−2 under
the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). The purpose of the Information
Statement was to inform the common stockholders that we have
obtained the written consent of the holders of the majority of the
issued and outstanding shares of our Common Stock, to remove Robert
F. McCullough, Jr., effective immediately, from the position of
Director of the Company.
The
Board, by unanimous consent, appointed David E. Patterson to the
position of Chief Executive Officer and Director of the Company to
serve until such time as his removal or resignation. The
Board further unanimously voted to appoint David E. Patterson to
the position of Director of the Company to serve until his
resignation or removal.
On
November 12, 2016, the Board of the Company held a meeting whereby
it appointed our Chief Executive Officer, David E, Patterson, to
the position of Chief Financial Officer/Treasurer/Secretary to
serve on an interim basis until a suitable permanent replacement is
appointed.
PART III
To be
incorporated with amended filing by April 30, 2017.
PART IV
Item 15.
|
Exhibits and Financial Statement Schedules
|
Documents filed as part of this Annual Report
The following items are filed as part of this report.
|
|
(*)
Denotes an exhibit filed herewith.
Exhibit No.
|
|
Description
|
|
|
|
2.1
|
|
Stock
Purchase Agreement by and among CytoCore, Inc., MEDITE Enterprises,
Inc., MEDITE GMBH, Michael Ott and Michaela Ott dated January 11,
2014 (incorporated herein by reference to Exhibit 2.1 to the
Company’s Current Report on Form 8-K dated January 11,
2014.)
|
|
|
|
2.2
|
|
Amendment
No. 1 to Stock Purchase Agreement by and among CytoCore, Inc.,
MEDITE Enterprises, Inc., MEDITE GMBH, Michael Ott and Michaela Ott
dated March 15, 2014 (incorporated herein by reference to Exhibit
2.1 to the Company’s Current Report on Form 8-K dated March
15, 2014.)
|
|
|
|
2.3
|
|
Amendment
No. 2 to Stock Purchase Agreement by and among CytoCore, Inc.,
MEDITE Enterprises, Inc., MEDITE GMBH, Michael Ott and Michaela Ott
dated March 15, 2014 (incorporated herein by reference to Exhibit
2.1 to the Company’s Current Report on Form 8-K dated April
1, 2014.)
|
|
|
|
3.1
|
|
Certificate
of Incorporation of the Company (incorporated herein by reference
to Exhibit 3.1 to the Company’s Current Report on Form 8-K
dated September 26, 2001.)
|
|
|
|
3.2
|
|
By-laws
of the Company (incorporated herein by reference to Appendix E
to the 1999 Proxy Statement.)
|
|
|
|
3.3
|
|
Certificate
of Designation, Preferences and Rights of Series A Convertible
Preferred Stock of the Company (incorporated herein by reference to
Exhibit 3.5 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 2000, as filed
with the SEC on March 29, 2001)
|
|
|
|
3.5
|
|
Section 6
of Article VII of the By-laws of the Company, as amended.
(incorporated herein by reference to Exhibit 3.3 to the
Company’s registration statement on Form S-4 (Reg. #
333-61666), as filed with the SEC on May 25, 2000)
|
|
|
|
3.6
|
|
Certificate
of Designation, Preferences and Rights of Series A Convertible
Preferred Stock (incorporated herein by reference to
Exhibit 3.4 to the Company’s registration statement on
Form S-2 (Reg. # 333-83578), as filed with the SEC on
February 28, 2002)
|
|
|
|
3.7
|
|
Certificate
of Amendment of Certificate of Designation, Preferences and Rights
of Series B Convertible Preferred Stock (incorporated herein
by reference to Exhibit 3.5 to the Company’s
registration statement on Form S-2 (Reg. # 333-83578), as
filed with the SEC on February 28, 2002)
|
|
|
|
3.8
|
|
Certificate
of Amendment of Amended Certificate of Designation, Preferences and
Rights of Series C Convertible Preferred Stock (incorporated
herein by reference to Exhibit 3.6 to the Company’s
registration statement on Form S-2 (Reg. # 333-83578), as
filed with the SEC on February 28, 2002)
|
|
|
|
3.9
|
|
Certificate
of Designations, Preferences and Rights of Series D
Convertible Preferred Stock (incorporated herein by reference to
Exhibit 3.7 to the Company’s registration statement on
Form S-2 (Reg. # 333-83578), as filed with the SEC on
February 28, 2002)
|
|
|
|
3.10
|
|
Certificate
of Designation, Preferences and Rights of Series E Convertible
Preferred Stock (incorporated herein by reference to
Exhibit 3.8 to the Company’s registration statement on
Form S-2 (Reg. # 333-83578), as filed with the SEC on
February 28, 2002)
|
|
|
|
3.11
|
|
Certificate of
Amendment to Certificate of Incorporation of the Company, dated
August 5, 2004 (incorporated herein by reference to Exhibit
3.1 to the Company’s Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2004, as filed with the SEC on August 16,
2004)
|
|
|
|
3.12
|
|
Certificate of
Amendment to Certificate of Incorporation, dated June 22, 2006
(incorporated by reference to Exhibit 3.1 to the Company’s
Quarterly Report on Form 10-QSB for the quarter ended June 30,
2006, as filed with the SEC on August 21, 2006)
|
|
|
|
3.13
|
|
Certificate of
Amendment to Certificate of Incorporation of the Company, dated
June 22, 2007 (incorporated by reference to Exhibit 3.1 to the
Company’s Quarterly Report on Form 10-QSB for the quarter
ended June 30, 2007, as filed with the SEC on August 17,
2007)
|
|
|
|
3.14
|
|
Certificate of
Amendment to Certificate of Incorporation of the Company, dated
November 19, 2007 (incorporated herein by reference to
Exhibit 3.14 to the Company’s Annual Report on Form 10-KSB
for the year ended December 31, 2007, as filed with the SEC on
April 2, 2008)
|
3.15*
|
|
Certificate of
Amendment to Certificate of Incorporation of the Company, dated
February 18, 2016, and filed with the State of Delaware on February
19, 2016.
|
|
|
|
10.1
|
|
Form
of Securities Purchase Agreement dated May 25, 2016 (incorporated
herein by reference to Exhibit 10.1 to the Company’s Form 8-K
filed on May 27, 2016)
|
|
|
|
10.2*
|
|
Form
of Securities Purchase Agreement dated December 7,
2016
|
|
|
|
14.1
|
|
Code
of Ethics and Business Conduct of Officers, Directors and Employees
of CytoCore, Inc. (incorporated herein by reference to
Exhibit 99.1 to the Company’s Annual Report on Form 10-KSB
for the year ended December 31, 2003, filed with the SEC on April
14, 2004)
|
|
|
|
31.1*
|
|
Certification of
the Chief Executive Officer of the Company pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2*
|
|
Certification of
the Chief Financial Officer of the Company pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1*
|
|
Certification of
the Chief Executive Officer of the Company pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
32.2*
|
|
Certification of
the Chief Financial Officer of the Company pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
101.INS
|
|
XBRL
Instance Document
|
|
|
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema Document
|
|
|
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
|
|
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
|
|
|
101.LAB
|
|
XBRL
Taxonomy Extension Label Linkbase Document
|
|
|
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
* Filed herewith
** To be filed by amendment
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
|
MEDITE Cancer Diagnostics, Inc.
|
|
|
|
|
|
By:
|
/s/ David
Patterson
|
|
|
David
Patterson
|
|
|
Chief
Executive Officer
Principal
Executive Officer
|
|
|
|
|
Date:
|
April
14, 2017
|
|
By:
|
/s/ David
Patterson.
|
|
|
David
Patterson.
|
|
|
Chief
Financial Officer
|
|
|
Principal
Financial Officer
|
|
|
|
|
Date:
|
April
14, 2017
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates
indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ David
Patterson
|
|
Chief
Executive Officer
|
|
April
14, 2017
|
David
Patterson
|
|
(Principal
Executive Officer)
|
|
|
|
|
and
Director
|
|
|
|
|
|
|
|
/s/ Michaela Ott
|
|
Chief
Operating Officer and
|
|
April
14, 2017
|
Michaela Ott
|
|
Director
|
|
|
|
|
|
|
|
/s/ David
Patterson.
|
|
Chief
Financial Officer
|
|
April
14, 2017
|
David
Patterson
|
|
(Principal
Financial Officer) and
|
|
|
|
|
Director
|
|
|
/s/ Michael Ott
|
|
Chairman of the
Board and
|
|
April
14, 2017
|
Michael Ott
|
|
Director
|
|
|
|
|
|
|
|
/s/ W. Austin
Lewis IV
|
|
Director
|
|
April
14, 2017
|
W.
Austin Lewis IV
|
|
|
|
|
|
|
|
|
|
/s/ John Abeles,
M.D.
|
|
Director
|
|
April
14, 2017
|
John
Abeles, M.D.
|
|
|
|
|
|
|
|
|
|
/s/ Augusto Ocana
M.D., J.D.
|
|
Director
|
|
April
14, 2017
|
Augusto
Ocana
|
|
|
|
|
/s/ Eric
Goehausen
|
|
Director
|
|
April
14, 2017
|
Eric
Goehausen
|
|
|
|
|
MEDITE CANCER DIAGNOSTICS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
|
Page
|
|
|
Reports
of Independent Registered Public Accounting Firms
|
F-2
|
|
|
Consolidated
Balance Sheets
|
F-4
|
|
|
Consolidated
Statements of Operations and Comprehensive Loss
|
F-5
|
|
|
Consolidated
Statements of Stockholders’ Equity
|
F-6
|
|
|
Consolidated
Statements of Cash Flows
|
F-7
|
|
|
Notes
to Consolidated Financial Statements
|
F-8
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Board of Directors and Stockholders of
MEDITE
Cancer Diagnostics, Inc. and Subsidiaries
We have
audited the accompanying consolidated balance sheet of MEDITE
Cancer Diagnostics, Inc. and Subsidiaries (the
“Company”) as of December 31, 2016, and the
related consolidated statements of operations and comprehensive
loss, stockholders’ equity and cash flows for the year then
ended. These consolidated financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are
free of material misstatement. The Company is not required to have,
nor were we engaged to perform, an audit on its internal control
over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
MEDITE Cancer Diagnostics, Inc. and Subsidiaries as of
December 31, 2016, and the results of their operations and
their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of
America.
The
accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 1 to the consolidated financial statements, the
Company has experienced recurring losses from operations, negative
working capital has increased during the year ended December 31,
2016 and has a cash balance of approximately $108,000 as of
December 31, 2016. These factors raise substantial doubt about the
Company’s ability to continue as a going concern.
Management's plans in regard to these factors are also described in
Note 1. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
/s/ KMJ
Corbin & Company LLP
Costa
Mesa, California
April
14, 2017
REPORT OF INDEPENDENT REGISTRERED PUBLIC ACCOUNTING
FIRM
Board
of Directors and Stockholders
MEDITE
Cancer Diagnostics, Inc. and Subsidiaries
We have
audited the accompanying consolidated balance sheet of MEDITE
Cancer Diagnostics, Inc. and Subsidiaries (the Company) as of
December 31, 2015, and the related consolidated statements of
operations and comprehensive loss, stockholders’ equity and
cash flows for the year then ended. These consolidated financial
statements are the responsibility of the entity’s management.
Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
MEDITE Cancer Diagnostics, Inc. and Subsidiaries as of December 31,
2015, and the results of their operations and their cash flows for
the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/
WithumSmith+Brown, PC
Orlando,
Florida
April 14,
2016
MEDITE CANCER DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share
amounts)
|
December 31,
|
|
|
2016
|
2015
|
Assets
|
|
|
Current
Assets:
|
|
|
Cash
|
$108
|
$587
|
Accounts
receivable, net of allowance for doubtful accounts of $123 and
$83
|
1,346
|
1,798
|
Inventories
|
3,811
|
3,075
|
Prepaid expenses
and other current assets
|
79
|
186
|
Total current
assets
|
5,344
|
5,646
|
|
|
|
Property and
equipment, net
|
1,557
|
1,941
|
Acquired In-process
research and development
|
4,620
|
4,620
|
Trademarks, trade
names
|
1,240
|
1,240
|
Goodwill
|
4,658
|
4,658
|
Other
assets
|
351
|
273
|
Total
assets
|
$17,770
|
$18,378
|
|
|
|
Liabilities and
Stockholders’ Equity
|
|
|
Current
Liabilities:
|
|
|
Accounts payable
and accrued expenses
|
$3,306
|
$3,032
|
Secured lines of
credit and current portion of long-term debt
|
3,214
|
2,857
|
Notes due to
employees, current portion
|
681
|
202
|
Advances –
related parties
|
146
|
70
|
Total current
liabilities
|
7,347
|
6,161
|
|
|
|
Long term debt, net
of current portion
|
60
|
121
|
Notes due to
employees, net of current portion
|
135
|
725
|
Deferred tax
liability – long-term
|
2,205
|
2,205
|
Total
Liabilities
|
9,747
|
9,212
|
|
|
|
Commitments and
Contingencies
|
|
|
|
|
|
Stockholders’
Equity :
|
|
|
Preferred stock,
$0.001 par value; 10,000,000 shares authorized; 198,355 shares
issued and outstanding as of December 31, 2016 and 2015
(liquidation value of all classes of preferred stock $2,533 and
$2,442 as of December 31, 2016 and 2015, respectively)
|
962
|
962
|
Common stock,
$0.001 par value; 35,000,000 shares authorized, 22,421,987 and
21,055,990 issued and outstanding as of December 31, 2016 and
2015, respectively
|
23
|
21
|
Additional paid-in
capital
|
9,366
|
8,340
|
Stock
subscription
|
25
|
|
Treasury
stock
|
(327)
|
(327)
|
Accumulated other
comprehensive loss
|
(642)
|
(609)
|
(Accumulated
deficit) retained earnings
|
(1,384)
|
779
|
Total
stockholders’ equity
|
8,023
|
9,166
|
|
|
|
Total liabilities
and stockholders’ equity
|
$17,770
|
$18,378
|
The
accompanying notes are an integral part of these consolidated
financial statements.
MEDITE CANCER DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS
(Dollars in thousands, except share and per share
amounts)
|
Years Ended December 31,
|
|
|
2016
|
2015
|
|
|
|
Net
sales
|
$9,238
|
$9,887
|
Cost of
revenues
|
5,608
|
6,084
|
Gross
profit
|
3,630
|
3,803
|
|
|
|
Operating
Expenses:
|
|
|
Depreciation and
amortization expense
|
214
|
177
|
Research and
development
|
1,477
|
1,278
|
Selling, general
and administrative
|
3,600
|
2,947
|
Total operating
expenses
|
5,291
|
4,402
|
Operating
loss
|
(1,661)
|
(599)
|
|
|
|
Other
Expenses:
|
|
|
Interest expense,
net
|
(694)
|
(204)
|
Other
income
|
60
|
22
|
Total other
expenses, net
|
(634)
|
(182)
|
|
|
|
Loss before income
tax(benefit) expense
|
(2,295)
|
(781)
|
|
|
|
Income
tax(benefit)expense
|
(132)
|
78
|
Net
loss
|
(2,163)
|
(859)
|
Preferred
dividend
|
(91)
|
(78)
|
Net loss available
to common stockholders
|
$ (2,254)
|
$(937)
|
|
|
|
Consolidated
Statements of Comprehensive Loss
|
|
|
Net
loss
|
$ (2,163)
|
$ (859)
|
Other comprehensive
loss
|
|
|
Foreign currency
translation adjustments
|
(33)
|
(460)
|
Comprehensive
loss
|
$ (2,196)
|
$(1,319)
|
|
|
|
Loss Per
Share
|
|
|
Net loss available
to common stockholders
|
$(2,254)
|
$(937)
|
Basic and diluted
loss per share
|
$(0.11)
|
$(0.05)
|
Weighted average
basic and diluted shares outstanding
|
21,423,535
|
20,194,732
|
The
accompanying notes are an integral part of these consolidated
financial statements.
MEDITE
CANCER DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Dollars in thousands, except share and per share
amounts)
|
Preferred
Stock
|
Common
Stock
|
|
|
Additional
|
|
Retained
Earnings
|
Accumulated
Other Comprehensive
|
Total
|
||
|
Par Value $0.001
|
Par Value
$0.001
|
Treasury Stock
|
Paid-In
|
Stock
|
(Accumulated
|
Income
|
Stockholders'
|
|||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Subscription
|
Deficit)
|
(Loss)
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2014
|
373,355
|
$1,487
|
19,427,331
|
$19
|
(19,209)
|
$(327)
|
$ 5,763
|
$-
|
$ 1,638
|
$ (149)
|
$8,431
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of Preferred Shares – Series D
|
(175,000)
|
(525)
|
12,100
|
-
|
-
|
-
|
525
|
-
|
-
|
-
|
-
|
Sale
of Common Stock
|
-
|
-
|
1,326,875
|
2
|
-
|
-
|
2,052
|
-
|
-
|
-
|
2,054
|
Issuance
of remaining shares Relating to merger
|
-
|
-
|
312,500
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Adjustment
|
-
|
-
|
(22,816)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Other
comprehensive loss
|
-
|
-
|
|
-
|
-
|
-
|
-
|
-
|
-
|
(460)
|
(460)
|
Net
loss
|
-
|
-
|
|
-
|
-
|
-
|
-
|
-
|
(859)
|
-
|
(859)
|
December
31, 2015
|
198,355
|
962
|
21,055,990
|
21
|
(19,209)
|
(327)
|
8,340
|
-
|
779
|
(609)
|
9,166
|
Reclassification
of warrant liability
|
-
|
-
|
-
|
-
|
-
|
-
|
90
|
-
|
-
|
-
|
90
|
Issuance
of warrants on secured promissory notes for debt discount and
penalties
|
-
|
-
|
-
|
-
|
-
|
-
|
278
|
-
|
-
|
-
|
278
|
Issuance
of common stock for compensation based awards
|
-
|
-
|
250,000
|
-
|
-
|
-
|
7
|
-
|
-
|
-
|
7
|
Sale
of common stock, net
|
-
|
-
|
823,830
|
1
|
-
|
-
|
380
|
-
|
-
|
-
|
381
|
Common
stock subscription
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
25
|
|
|
25
|
Issuance
of common stock for services
|
-
|
-
|
292,167
|
1
|
-
|
-
|
271
|
-
|
-
|
-
|
272
|
Other
comprehensive income
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(33)
|
(33)
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
$ (2,163)
|
-
|
(2,163)
|
December
31, 2016
|
198,355
|
$962
|
22,421,987
|
$23
|
(19,209)
|
$(327)
|
$ 9,366
|
$25
|
$ (1,384)
|
$ (642)
|
$ 8,023
|
The
accompanying notes are an integral part of these consolidated
financial statements.
MEDITE CANCER DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
|
Years Ended December 31,
|
|
|
2016
|
2015
|
Cash flows from
operating activities:
|
|
|
Net
loss
|
$ (2,163)
|
$(859)
|
Adjustments to
reconcile net loss to cash used in operating
activities
|
|
|
Depreciation and
amortization
|
214
|
177
|
Allowance for bad
debt
|
100
|
80
|
Expensed
development costs
|
234
|
-
|
Deferred tax
expense
|
-
|
78
|
Estimated fair
value of warrants issued in connection with debt
|
368
|
--
|
Amortization of
debt issuance costs
|
20
|
--
|
Stock-based
compensation
|
7
|
-
|
Changes in
operating assets and liabilities:
|
|
|
Accounts
receivables
|
314
|
113
|
Inventories
|
(841)
|
340
|
Prepaid expenses
and other assets
|
99
|
(32)
|
Accounts payable
and accrued expenses
|
557
|
(285)
|
Net cash used in
operating activities
|
(1,091)
|
(388)
|
|
|
|
Cash flows from
investing activities:
|
|
|
Purchase of other
assets
|
-
|
(146)
|
Purchases of
equipment
|
(115)
|
(208)
|
Net cash used in
investing activities
|
(115)
|
(354)
|
|
|
|
Cash flows from
financing activities:
|
|
|
Net advances
(repayments) on secured lines of credit
|
135
|
(802)
|
Proceeds from sales
of common stock, net
|
381
|
2,054
|
Proceeds from stock
subscription
|
25
|
-
|
Proceeds from
secured promissory notes
|
150
|
500
|
Net advances
(repayments) of related party advance
|
81
|
(40)
|
Repayment of notes
to employees
|
(72)
|
-
|
Net cash provided
by financing activities
|
700
|
1,712
|
|
|
|
Effect of exchange
rates on cash
|
27
|
(613)
|
Net increase
(decrease) in cash
|
(479)
|
357
|
Cash at
beginning of year
|
587
|
230
|
|
|
|
Cash at
end of the year
|
$108
|
$587
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
Cash paid for
interest
|
$179
|
$197
|
Cash paid for
income taxes
|
$8
|
$77
|
Supplemental
disclosure of non-cash investing and financing
activities:
|
|
|
Settlement of
liabilities through issuance of common stock
|
$ 272
|
$-
|
Issuance of
warrants related to secured promissory notes classified as warrant
liability and discount on secured promissory notes
|
$-
|
$90
|
Reclassification of
warrant liability
|
$90
|
$-
|
Debt issuance costs
included in accounts payable and accrued expenses
|
$-
|
$20
|
Conversion of
accrued wages into notes to employees
|
$-
|
$927
|
Conversion of
preferred stock to common stock
|
$-
|
$525
|
Reclassification
of notes to employees to accrued expenses
|
$ 39
|
$ -
|
The
accompanying notes are an integral part of these consolidated
financial statements.
MEDITE
CANCER DIAGNOSTICS, INC. AND SUBSIDIARIES
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.
(former CytoCore, Inc.) and its wholly owned subsidiaries, which
consists of MEDITE Enterprise, Inc., MEDITE GmbH, Burgdorf,
Germany, MEDITE GmbH, Salzburg, Austria, MEDITE Lab Solutions Inc.
(formerly MEDITE Inc.), Orlando, USA, MEDITE sp. z o.o.,
Zilona-Gora, Poland and CytoGlobe, GmbH, Burgdorf,
Germany.
In
April 2014, the stockholders of the Company consummated a
transaction in which 100% of the issued and outstanding shares of
MEDITE Enterprise, Inc. were acquired by CytoCore, Inc. in exchange
for the issuance by CytoCore, Inc. of 14,687,500 shares of its
common stock to the stockholders of the Company. The result of this
transaction was for the Company and its wholly owned subsidiaries
to become wholly owned subsidiaries of CytoCore, Inc., a
U.S. public company.
In addition, the stockholders of the Company became the majority
owners of CytoCore, Inc., which resulted in the transaction being
accounted for as a reverse merger, in which the financial
statements of MEDITE Enterprise, Inc. and its subsidiaries became
those of CytoCore, Inc., now MEDITE Cancer Diagnostics, Inc.
MEDITE
is a medical technology company specializing in the development,
engineering, manufacturing and marketing of premium medical devices
and consumables for detection, risk assessment and diagnosis of
cancer and related diseases. By acquiring MEDITE the Company
changed from solely research operations to an operating company
with 75 employees in four countries, a distribution network to
about 80 countries worldwide, a well-known and established brand
name, a wide range of selling products and the established
infrastructure necessary for a company acting in the medical
industry.
Going Concern
The
accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States
of America, which contemplate continuation of the Company as a
going concern. This contemplates the realization of assets and
the liquidation of liabilities in the normal course of
business. At December 31, 2016, the Company’s cash
balance was $108,000 and its operating losses for the year ended
December 31, 2016 and 2015 have used most of the Company’s
liquid assets and the negative working capital has grown by
approximately $1.5 million from December 31, 2015 to December 31,
2016. These factors raise substantial doubt about the
Company’s ability to continue as a going concern. The Company
raised additional cash of $1.355 million from the sale of equity
subsequent to December 31, 2016 through the date of this filing.
Stock subscriptions totaled $25,000 for January 2017, $405,000 for
February 2017, $775,000 for March 2017 and $150,000 through April
10, 2017, a total of $1.355 million to issue 2,710,000 shares of
common stock at $0.50. Working capital has improved by
approximately $1 million as of the date of this filing.
The
Company has settled three of the five employee notes for $330,000
and warrants. The Company has extended the term of the secured
promissory notes and has paid $183,000 of the balance outstanding
as of the date of this filing and received notice that one
noteholder will convert $50,000 into 100,000 shares of common stock
at $0.50. Management believes that the remainder of the balance
will be settled in some combination of cash and stock.
Management
is actively seeking additional equity financing contemplated in the
$4.25 million stock purchase agreement. The Company has
negotiated with certain parties whose obligations are due in the
next twelve months to extend payment terms beyond one year. One
lender with an outstanding balance of $789,000 has stated that they
will not be able to refinance the debt. The default rate of
interest will increase three percent.
Accrued
salaries, vacation and related expenses at December 31, 2016,
includes amounts owed the former CFO of approximately
$1.1 million and amounts owed to both the Michaela and Michael Ott
totaling approximately $156,000. Included in advances –
related parties are amounts owed to the Company’s former
CFO of $50,000 at December 31, 2016 and 20,000 Euros, ($21,040 as
December 31, 2016) and $75,000 related to two short term bridge
loans made to the Company by its former CEO and current COO of the
Company. The Company is working with the current executives to
establish a payment plan. See further discussion regarding the
legal proceedings with the Company’s former Chief Financial
Officer.
The
Company’s security agreement with its lender has provided
borrowings of 35% of our collateralized assets. The
Company continues to refinance this debt to provide additional
liquidity.
Management
continues to expand its product offerings and has also expanded its
sales and distribution channels during 2017.
If
management is unsuccessful in completing its equity financing,
management will begin negotiating with some of
the Company's major vendors and lenders to extend the
terms of their debt and also evaluate certain expenses that have
been implemented for the Company’s growth strategy.
However, there can be no assurance that the
Company will be successful in these efforts. The consolidated
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
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,
derivative instruments and 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.
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 generally
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 revenue 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 $27,000 and $49,000 as of
December 31, 2016 and 2015, 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. The Company recognized $3,000 of net
losses related to foreign currency exchange transactions for the
years ended December 31, 2016.
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, 2016 and 2015 was $54,000 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 make a determination as to
the then useful life of the intangible asset, generally determined
by the period in which the substantial majority of the cash flows
are expected to be generated, and begin amortization. The Company
tests IPR&D for impairment at least annually, or more
frequently if impairment indicators exist, by first assessing
qualitative factors to determine whether it is more likely than not
that the fair value of the IPR&D intangible asset is less than
its carrying amount. If the Company concludes it is more likely
than not that the fair value is less than the carrying amount, a
quantitative test that compares the fair value of the IPR&D
intangible asset with its carrying value is performed. If the fair
value is less than the carrying amount, an impairment loss is
recognized in operating results. At December 31, 2016 and 2015 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
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, and accounts payable and accrued expenses, secured
lines of credit and long-term debt, notes due to employees,
advances to related party and warrant and derivative liabilities.
The carrying value for all such instruments except notes due to
employees, advances to related party and derivative liabilities
approximates fair value due to the short-term nature of the
instruments. The Company cannot determine the fair value of its
notes due to employees and advances to related party due to the
related party nature of such instruments and because instruments
similar to these instruments could not be found. The
Company’s warrant and derivative liabilities are recorded at
fair value (see Notes 5 and 8).
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.
Derivative Instruments
The
Company accounts for free-standing derivative instruments and
hybrid instruments that contain embedded derivative features as
either assets or liabilities in the consolidated balance sheets and
are measured at fair value with gains or losses recognized in
earnings. Embedded derivatives that are not clearly and closely
related to the host contract are bifurcated and are recognized at
fair value with changes in fair value recognized as either a gain
or loss in earnings. The Company determines the fair value of
derivative instruments and hybrid instruments based on available
market data using appropriate valuation models, giving
consideration to all of the rights and obligations of each
instrument.
The
Company estimates the fair value of derivative instruments and
hybrid instruments using various techniques (and combinations
thereof) that are considered to be consistent with the objective of
measuring fair value. In selecting the appropriate technique, the
Company considers, among other factors, the nature of the
instrument, the market risks that it embodies and the expected
means of settlement. The Company generally uses the
Black-Scholes-Merton option pricing model, adjusted for the effect
of dilution, because it embodies all of the requisite assumptions
(including trading volatility, estimated terms, dilution and
risk-free rates) necessary to fair value these instruments.
Estimating the fair value of derivative financial instruments
requires the development of significant and subjective estimates
that may, and are likely to, change over the duration of the
instrument with related changes in internal and external market
factors. Increases in the trading price of the Company’s
common stock and increases in fair value during a given financial
quarter result in the application of non-cash derivative expense.
Conversely, decreases in the trading price of the Company’s
common stock and decreases in fair value during a given financial
quarter would result in the application of non-cash derivative
income.
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, 2016 and 2015 as the effect would be
anti-dilutive (i.e. would reduce the loss per
share).
In
accordance with SEC Accounting Series Release 280, the Company
computes its income or loss applicable to common stock holders by
subtracting dividends on preferred stock, including undeclared or
unpaid dividends if cumulative, from its reported net loss and
reports the same on the face of its consolidated statements of
operations.
Income Taxes
Income
taxes are provided for the tax effects of transactions reported in
the financial statements and consist of currently due plus deferred
taxes. Deferred tax assets and liabilities are determined based on
differences between financial reporting carrying amounts and the
respective tax bases of assets and liabilities, and are measured
using tax rates and laws that are expected to be in effect when the
differences are expected to be recovered or settled. Valuation
allowances are provided against deferred tax assets if it is more
likely than not that the deferred tax assets will not be
realized.
The
Company follows the guidance of FASB ASC 740-10 which relates to
the Accounting for Uncertainty in Income Taxes, which seeks to
reduce the diversity in practice associated with the accounting and
reporting for uncertainty in income tax positions. This guidance
prescribes a comprehensive model for financial statement
recognition, measurement, presentation and disclosure of uncertain
tax positions taken or expected to be taken in income tax
returns.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the
current period presentation, including presenting cost of revenues
outside of operating expenses and including gross profit in the
consolidated statement of operations and combining stock issuance
costs with proceeds from sales of common stock in the consolidated
statement of cash flows.
Recent Accounting Pronouncements
In May
2014, the FASB issued ASU 2014-09, “Revenue with Contracts
from Customers.” ASU 2014-09 supersedes the current revenue
recognition guidance, including industry-specific guidance. The ASU
introduces a five-step model to achieve its core principal of the
entity recognizing revenue to depict the transfer of goods or
services to customers at an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those
goods and services. The updated guidance is effective for public
entities for interim and annual periods beginning after December
15, 2017 with early adoption permitted for annual reporting periods
beginning after December 15, 2016. The Company has not yet selected
a transition method and is currently evaluating the impact of the
updated guidance for the Company’s consolidated financial
statements.
In May
2016, the FASB issued ASU 2016-12, “Revenue from Contracts
with Customers (Topic 606), Narrow Scope Improvements and Practical
Expedients.” The amendments in ASU 2016-12 affect only the
narrow aspects of Topic 606 that are outlined in ASU 2016-12. The
effective date and transition requirements for the amendments in
this ASU are the same as the effective date and transition
requirements of ASU 2014-09, which is discussed above. The Company
is currently evaluating the impact of the updated guidance on its
consolidated financial statements
In
April 2016, the FASB issued ASU 2016-10 “Revenue from
Contracts with Customers: Identifying Performance Obligations and
Licensing.” The amendments in this Update affect entities
with transactions included within the scope of Topic 606. The scope
of that Topic includes entities that enter into contracts with
customers to transfer goods or services (that are an output of the
entity’s ordinary activities) in exchange for consideration.
The effective date and transition requirements for the amendments
in this ASU are the same as the effective date and transition
requirements of ASU 2014-09, which is discussed above. The Company
is currently evaluating the impact of the updated guidance on its
consolidated financial statements.
In
August 2014, the FASB issued ASU No. 2014-15, “Presentation
of Financial Statements - Going Concern (Subtopic 205-40):
Disclosure of Uncertainties about an Entity’s Ability to
Continue as a Going Concern”. The amendments in this update
provide guidance in U.S. GAAP about management's responsibilities
to evaluate whether there is substantial doubt about an entity's
ability to continue as a going concern and to provide related
footnote disclosures. The main provision of the amendments are for
an entity's management, in connection with the preparation of
financial statements, to evaluate whether there are conditions or
events, considered in the aggregate, that raise substantial doubt
about the entity's ability to continue as a going concern within
one year after the date that the financial statements are issued.
Management's evaluation should be based on relevant conditions and
events that are known or reasonably knowable at the date the
consolidated financial statements are issued. When management
identifies conditions or events that raise substantial doubt about
an entity's ability to continue as a going concern, the entity
should disclose information that enables users of the consolidated
financial statements to understand all of the following: (1)
principal conditions or events that raised substantial doubt about
the entity's ability to continue as a going concern (before
consideration of management's plans); (2) management's evaluation
of the significance of those conditions or events in relation to
the entity's ability to meet its obligations; and (3) management's
plans that alleviated substantial doubt about the entity's ability
to continue as a going concern or management's plans that are
intended to mitigate the conditions or events that raise
substantial doubt about the entity's ability to continue as a going
concern. We adopted this pronouncement effective December 31, 2016
and have included disclosure in Note 1 to our consolidated
financial statements based upon ASU No. 2014-15.
In
March 2016, the FASB issued ASU No. 2016-07, “Investments-
Equity Method and Joint Ventures (Topic 323): Simplifying the
Transition to the Equity Method of Accounting” (“ASU
2016-07”). ASU 2016-07 eliminates the requirement to apply
the equity method of accounting retrospectively when a reporting
entity obtains significant influence over a previously held
investment. ASU 2016-07 is effective for years beginning after
December 15, 2016. We are currently evaluating the impact of this
ASU to our consolidated financial statements.
In
March 2016, the FASB issued ASU 2016-09, “Compensation
– Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting.” The areas for
simplification in this Update involve several aspects of the
accounting for share-based payment transactions, including the
income tax consequences, classification of awards as either equity
or liabilities, and classification on the statement of cash flows.
The updated guidance is effective for public entities for fiscal
years beginning after December 15, 2016. The Company is currently
evaluating the impact of the updated guidance, but the Company does
not believe that the adoption of ASU 2016-09 will have a
significant impact on its consolidated financial
statements.
In
February 2016, the FASB issued ASU No. 2016-02,
“Leases” (“ASU 2016-02”). The core
principle of ASU 2016-02 is that an entity should recognize on its
balance sheet assets and liabilities arising from a lease. In
accordance with that principle, ASU 2016-02 requires that a lessee
recognize a liability to make lease payments (the lease liability)
and a right-of-use asset representing its right to use the
underlying leased asset for the lease term. The recognition,
measurement, and presentation of expenses and cash flows arising
from a lease by a lessee will depend on the lease classification as
a finance or operating lease. This new accounting guidance is
effective for public companies for fiscal years beginning after
December 15, 2018 (i.e., calendar years beginning on January 1,
2019), including interim periods within those fiscal years. Early
adoption is permitted. The Company is currently evaluating the
impact the adoption of ASU 2016-02 will have on the Company’s
consolidated financial statements.
In July
2015, the FASB issued ASU 2015-11, Inventory (Topic 330):
“Simplifying the Measurement of Inventory”. The
amendments require an entity to measure in scope inventory at the
lower of cost and net realizable value. Net realizable value is the
estimated selling prices in the ordinary course of business, less
reasonably predictable costs of completion, disposal, and
transportation. Subsequent measurement is unchanged for inventory
measured using LIFO or the retail inventory method. The amendments
do not apply to inventory that is measured using last-in, first-out
(LIFO) or the retail inventory method. The amendments apply to all
other inventory, which includes inventory that is measured using
first-in, first-out (FIFO) or average cost. ASU 2015-11 is
effective for annual and interim periods beginning after December
31, 2016. The Company does not expect this amendment to have a
material impact on its consolidated financial
statements.
NOTE 3: Inventories
The
following is a summary of the components of inventories (in
thousands):
|
December
31,
|
December
31,
|
|
2016
|
2015
|
Raw
materials
|
$1,309
|
$1,170
|
Work in
progress
|
203
|
142
|
Finished
goods
|
2,299
|
1,763
|
|
|
|
|
$3,811
|
$3,075
|
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):
|
December
31,
|
December
31,
|
|
2016
|
2015
|
Land
|
$202
|
$209
|
Building
|
1,120
|
1,158
|
Machinery and
equipment
|
1,198
|
1,196
|
Office furniture
and equipment
|
225
|
232
|
Vehicles
|
62
|
53
|
Computer
equipment
|
87
|
87
|
Construction in
progress
|
-
|
225
|
Less: Accumulated
depreciation
|
(1,337)
|
(1,219)
|
|
$1,557
|
$1,941
|
Depreciation
and amortization expense, including amounts in other assets for the
years ended December 31, 2016 and 2015 were $214,000
and $177,000, respectively.
NOTE 5: Secured Lines of Credit, Long-Term Debt, and Notes Due to
Employees
Our
secured lines of credit and long-term debt were as follows as of
(in thousands):
|
December
31,
|
December
31,
|
|
2016
|
2015
|
Hannoversche
Volksbank credit agreement #1
|
$1,321
|
$1,120
|
Hannoversche
Volksbank credit agreement #2
|
397
|
383
|
Hannoversche
Volksbank term loan #1
|
-
|
61
|
Hannoversche
Volksbank term loan #2
|
-
|
24
|
Hannoversche
Volksbank term loan #3
|
117
|
182
|
Secured Promissory
Notes
|
650
|
500
|
DZ Equity Partners
Participation rights
|
789
|
818
|
Total
|
3,274
|
3,088
|
Discount on secured
promissory notes and debt issuance costs
|
-
|
(110)
|
Less current
portion of long-term debt
|
(3,214)
|
(2,857)
|
Long-term
debt
|
$60
|
$121
|
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 and was later amended in 2015, in which the credit
line availability was reduced to Euro 1.1 million ($1.16 million as
of December 31, 2016). During 2016 the line of credit availability
was increased to Euro 1.3 million ($1.37 million as of December 31,
2016). Borrowings on the master line of credit agreement #1 bears
interest at a variable rate based on Euribor (Euro Interbank
Offered Rate) depending on the type of advance elected by the
Company and defined in the agreement. Interest rates depending on
the type of advance elected ranged from 3.75 – 8.00% during
the year ended December 31, 2016. The line of credit has no stated
maturity date. The line of credit is 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.
In June
2012, CytoGlobe, GmbH, Burgdorf, entered into a line of credit
agreement #2 with Hannoversche Volksbank. The line of credit
granted a maximum borrowing authority of Euro 400,000 ($420,800 as
of December 31, 2016). Borrowings on the master line of credit
agreement #2 bears interest at a variable rate based on Euribor
(Euro Interbank Offered Rate) depending on the type of advance
elected by the Company and defined in the agreement. Interest rates
ranged from 3.90 – 8.00% during the year ended December 31,
2016. The line of credit has no stated maturity date. The line of
credit is collateralized by the accounts receivable and inventory
of CytoGlobe GmbH, Burgdorf and is guaranteed by Michaela Ott and
Michael Ott, stockholders of the Company, and the state of Lower
Saxony (Germany) to support high-tech companies in the
area.
In
December 2006, MEDITE GmbH, Burgdorf, entered into a Euro 500,000
($526,000 as of December 31, 2016) term loan #1 with Hannoversche
Volksbank with an interest rate of 3.4% per annum. The term loan
matured in September 2016 and required semi-annual principal
payments of approximately Euro 27,780 ($29,225 as of December 31,
2016). The term loan was guaranteed by Michaela Ott and Michael
Ott, stockholders of the Company and a mortgage on the building
owned by the Company. This loan matured and was repaid during
the year ended December 31, 2016.
In June
2006, MEDITE GmbH, Burgdorf, entered into a Euro 400,000 ($420,800
as of December 31, 2016) term loan #2 with Hannoversche Volksbank
with an interest rate of 3.6 % per annum. The term loan matured as
of June 2016 and required 18 semi-annual principal repayments of
approximately Euro 22,220 ($23,375 as of December 31, 2016). The
term loan was guaranteed by Michaela Ott and Michael Ott,
stockholders of the Company and was collateralized by subordinated
assignments of all of the receivables and inventories of MEDITE
GmbH, Burgdorf and also had a subordinated pledge of share term
life insurance policies. The loan matured and was repaid during the
year ended December 31, 2016.
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
has a maturity of December 31, 2018, and requires quarterly
principal repayments of Euro 13,890 ($14,612 as of December 31,
2016). The term loan is guaranteed by Michaela Ott and Michael Ott,
stockholders of the Company, and is collateralized by a partial
subordinated pledge of the receivables and inventory of MEDITE
GmbH, Burgdorf.
In
March 2009, the Company entered into a participation rights
agreement with DZ Equity Partners (“DZ”) in the form of
a debenture with a mezzanine lender who advanced the Company up to
Euro 1.5 million, ($1.6 million as of December 31, 2016) in two
tranches of Euro 750,000 each ($789,000 as of December 31, 2016).
The first tranche was paid to the Company at closing with the
second tranche being conditioned on MEDITE GmbH, Burgdorf and its
subsidiaries hitting certain performance targets. Those targets
were not met and the second tranche was never called. The debenture
pays interest at the rate of 12.15% per annum and matured on
December 31, 2016, however the Notes are not considered in default
until May 2017, when the German financial statements are due to be
filed. The Company has initiated discussions with DZ to renegotiate
the terms of the agreement or to convert any part of the balance
into stock. DZ has stated that they will not be able to refinance
the debt. The default rate of interest will increase three
percent.
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 exerciseable 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. The
Notes are secured by the Company’s accounts receivable and
inventories held in the United States. 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. See Note 13.
On
December 31, 2015, the Company recorded a discount related to the
issuance of warrants attributed to the Notes of approximately
$90,000. The discount was amortized to interest expense
over the three month term of the Notes. See Note 8
relating to the warrants issued in conjunction with the
Notes.
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 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. 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. See
Note 13.
The
Company engaged TriPoint Global Equities, LLC (the
“Agent”) as placement agent in connection with the sale
of securities in the offering (the “Offering”) and
agreed to pay the Agent (i) cash commissions equal to three percent
of the gross proceeds ($4,500) received by the Company; and (ii)
warrants to purchase such number of securities equal to three
percent of the aggregate number of shares of common stock issuable
in connection with the Offering (the “Agent
Warrant(s)”). The Agent’s Warrants will have the same
terms and conditions as the May Warrants purchased by the May
Purchasers. At December 31, 2016, a total of 4,500 warrants were
issued to TriPoint (See Note 8 for further discussion on
warrants).
In
November 2015 and February 2016, the Company entered into
promissory notes totaling $927,000 with certain employees to repay
wages earned prior to December 31, 2014 not paid (“Notes Due
to Employees"). The Notes Due to Employees are to be
paid monthly through September 2019, with no interest due on the
outstanding balances. The monthly amounts increase over
the payment term. The amounts due become immediately due and
payable if payments are more than ten days late either one or two
consecutive months as defined in the agreement with the
employee. At 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 sheets. Certain
employees may convert any of the amounts owed during the duration
of the note to equity at a discounted price as defined in the
agreement. The 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
approximately 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. See Note 13 for discussion of the subsequent events for
further discussion on the settlement.
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.
At the
time of the merger, the Company owed its then CEO and Chairman of
the board approximately $121,700.
During
2016 and 2015, the Company paid to its former Chief Financial
Officer, Robert McCullough $20,000 and $40,000, respectively, and
imputed $0 and $1,700, respectively of non-cash interest expense on
this advance.
The
following table summarizes the maturities of the Company’s
outstanding secured lines of credit and long-term debt at December
31, 2016 ($1,503 of secured line of credit have no maturity date
but considered here as due in 2017) and Notes Due to Employees, at
December 31, 2016 (in thousands):
Year
|
Secured Lines of
Credit
and Long-Term
Debt
|
Notes Due to
Employees
|
2017
|
$3,214
|
$681
|
2018
|
60
|
90
|
2019
|
-
|
45
|
Total
|
$3,274
|
$816
|
NOTE 6: Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses include the following at
December 31:
|
2016
|
2015
|
|
(in thousands)
|
|
Accounts
payable
|
$1,093
|
$652
|
Accrued franchise
taxes
|
342
|
342
|
Accrued directors
fees
|
55
|
90
|
Accrued
professional fees
|
135
|
469
|
Warranty
reserve
|
27
|
49
|
Accrued salaries,
vacation and related expenses
|
1,335
|
1,152
|
Warrant
liability
|
-
|
90
|
Other accrued
expenses
|
216
|
188
|
Total accounts
payable and accrued expenses
|
$3,306
|
$3,032
|
Note 7: Related Party Transactions
Included
in advances – related parties are amounts owed to the
Company’s former CFO and former CEO and Chairman of the
Board of $50,000 and $70,000 at December 31, 2016 and 2015,
respectively. The Company paid $20,000 during the year ended
December 31, 2016. Also included in advances –
related parties is 20,000 Euros, ($21,040 as December 31, 2016) and
$75,000 related to two short term bridge loans made to the Company
by its former CEO and current COO of the Company. The
loans noted above are interest-free loans. The Company is working
with the current executives to establish a payment
plan.
The
former CEO and current COO, Michaela Ott together with Michael Ott,
Chairman of the Board and Chief Executive officer of the
Company’s wholly owned subsidiaries Medite Enterprise Inc.
and Medite GmbH, provided an additional $950,000 in a non-interest
bearing short term advance at the end of the first quarter 2015 to
the Company. This advance was made pending the share placement and
was due on demand and repaid in second quarter of
2015.
Accrued
salaries, vacation and related expenses at December 31, 2016 and
2015, includes amounts owed to the former CFO
approximately $1.1 million and $937,000, respectively, which is
included in accounts payable and accrued expenses in the
accompanying consolidated balance sheets. Accrued salaries,
vacation and related expenses at December 31, 2016 and 2015,
also includes amounts owed to both the Michaela and
Michael Ott totaling approximately $156,000 and $90,000,
respectively. See further discussion in Note 11 regarding the legal
proceedings with the Company’s former Chief Financial
Officer.
NOTE 8: Stockholders’ Equity
In
February 2015, the Company received approval for and affected a
1:100 reverse split of its common stock. These financial statements
reflect the reverse split since inception of the
Company.
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,
|
|
|
2016
|
2015
|
Basic and
Diluted:
|
|
|
Reported net loss
(in thousands)
|
$(2,163)
|
$(859)
|
Less unpaid and
undeclared preferred stock dividends
|
(91)
|
(78)
|
Net loss applicable
to common stockholder
|
$(2,254)
|
$(937)
|
|
|
|
Weighted average
common shares outstanding
|
21,423,535
|
20,194,732
|
Net loss per common
share
|
$(0.11)
|
$(0.05)
|
Because
the following instruments would be anti-dilutive at all times
presented, the potentially issuable common stock from warrants to
purchase a total of 1,396,161 with an weighted average exercise
price of $1.08 at December 31, 2016 and a total of 400,808 shares
with a weighted average exercise price of $2.29 at December 31,
2015 and preferred stock convertible into shares for the years
ended December 31, 2016 and 2015, of 1,090 and 1,110 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. All calculations reflect the
post-split calculations of 1 share for every 100 common shares
which became effective March 2015 for all common stock and common
stock equivalents.
|
|
Shares Issued and
|
Preferred Stock Dividends
|
||
|
Shares
|
Outstanding
|
Undeclared and Unpaid
|
||
Offering
|
Authorized
|
2016
|
2015
|
2016
|
2015
|
|
|
|
|
|
|
Series A
convertible
|
590,197
|
47,250
|
47,250
|
$—
|
$—
|
Series B
convertible, 10% cumulative
|
1,500,000
|
93,750
|
93,750
|
595,663
|
558,162
|
Series C
convertible, 10% cumulative
|
1,666,666
|
38,333
|
38,333
|
174,413
|
162,913
|
Series D
convertible, 10% cumulative
|
300,000
|
-
|
-
|
-
|
-
|
Series E
convertible, 10% cumulative
|
800,000
|
19,022
|
19,022
|
641,870
|
599,563
|
Undesignated
Preferred Series
|
5,143,137
|
—
|
—
|
—
|
—
|
Total Preferred
Stock
|
10,000,000
|
198,355
|
198,355
|
$1,411,946
|
$1,320,638
|
The
undeclared and unpaid preferred stock dividends were calculated
from the date of the merger through December 31, 2016.
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
|
4970,663
|
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, 2016 were
$595,663
|
Series C Convertible Preferred Stock
Stated
Value:
|
$3.00
per share, $115,000
|
Liquidation
Value
|
$289,413
|
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, 2016 were
$174,413
|
Series D Convertible Preferred Stock
Ventana
Medical Systems, Inc. converted 175,000 Series D preferred stock
with a stated value of $1.75 million and all outstanding accrued
dividends of $656,250 for 12,100 shares of the Company’s
common stock during the year ended December 31, 2015 as part of a
settlement agreement.
Series E Convertible Preferred Stock
Stated
Value:
|
$22.00
per share, $418,488
|
Liquidation
Value
|
$1,060,354
|
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, 2016 were
$641,870
|
Issuance of Common Stock
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
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
will 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. 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 approximately $7,000 of
stock-based compensation expense during the year ended
December 31, 2016.
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.
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
2015, the Company issued 1,626,875 shares for $2,123,000 in equity
proceeds emanating from the sale of unregistered stock at $1.60 per
share including 240,625 shares issued for $385,000 associated with
a private placement in public entity transaction.
At
December 31, 2016, our officers and directors own an aggregate
15,743,249 shares of common stock which is approximately
70.21% of our outstanding common
stock.
The
Company does not have any outstanding stock options.
Warrants outstanding
|
|
|
|
Weighted
|
|
|
Weighted
|
|
Average
|
|
|
Average
|
Aggregate
|
Remaining
|
|
Options and
|
Exercise
|
Intrinsic
|
Contractual
|
|
Warrants
|
Price
|
Value
|
Life (Years)
|
Outstanding at
December 31, 2014
|
143,308
|
$2.64
|
—
|
6.46
|
Granted
|
257,500
|
1.60
|
—
|
5.00
|
Outstanding at
December 31, 2015
|
400,808
|
$2.29
|
|
5.18
|
Granted
|
995,353
|
0.80
|
—
|
5.00
|
Outstanding at
December 31. 2016
|
1,396,161
|
$1.08
|
—
|
4.11
|
In
connection with the 2015 Purchase Agreement, as
discussed in Note 5, the Company issued an aggregate of 250,000
warrants to purchase shares of common stock with a par value of
$0.001 for $1.60 per share. The exercise price and
number of warrants are subject to a change as defined in the
agreement. The warrants are exercisable for a period of
five (5) years. On March 15, 2016, the Board of
Directors approved renegotiated terms with the warrant holders to
increase the total warrants issued from 250,000 to 500,000 upon the
removal of the anti-dilution clause in the warrant agreement and
the exercise price being changed for $1.60 to $0.80. On May 26,
2016, the Company issued 150,000 warrants related to the May
Purchase Agreement with an exercise price of $0.80, with the
same terms and conditions as the notes discussed
above.
The
Company determined the fair value of the warrants using the Black
Scholes model, at an interest free rate of 1.75%, volatility of 50%
and a remaining term of 5 years. Based on information known at
December 31, 2015, the Company priced the warrants with an assumed
stock and exercise price of $0.80. The Company reclassified the
warrant liability to additional paid-in capital upon the
elimination of the anti-dilution clause during 2016 and recorded an
additional $90,000 related to the reduction in the exercise price.
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. 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. 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. The value of the warrants were
determined using the Black-Scholes model, at an
interest free rate of 1.75%, volatility of 50% and a remaining term
of 5 years and a market price of between $0.80 to $0.50 during the
year ended December 31, 2016. See also Notes 5 and
6. The Company also issued 7,500 warrants
during 2015 and 4,500 warrants during 2016 as consideration for
services provided in connection with the issuance of the secured
promissory notes. The warrants have the same terms as
those described above and were determined to have an insignificant
fair value.
During
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 (See Notes 5 and 12), whereby the
warrants are repriced from $0.80 a share to $0.50 a share. 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 is required to reprice the warrants already issued to the
lower strike price of $0.50.
NOTE 9: Leases
The
Company has several operation leases for office, laboratory and
manufacturing space. The Company’s operating lease for one of
its German facilities can be cancelled by either party, with three
months’ notice its Poland facility can be terminated by
either party with a six month notice. Monthly rent payments for the
German and Poland facilities are Euro 6,490 ($7,183 as of December
31, 2016) and PLN 6,240 ($1,625 as of December 31, 2016),
respectively. 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 also subleased its former Chicago laboratory
facility for $3,948 per month. The lease for this facility
terminated on October 31, 2016 and required monthly rent payments
of $4,526. 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 $183,000 and $128,000 for the years ended December 31, 2016 and
2015, respectively.
|
Operating
|
Year
|
Leases
|
2017
|
$77,298
|
2018
|
25,439
|
Total
|
$102,737
|
NOTE 10: Income Taxes
The
provision for income taxes consists of the following for the years
ended December 31 (in thousands).
|
2016
|
2015
|
Federal
|
$—
|
$—
|
State and
local
|
—
|
—
|
Foreign
|
—
|
1
|
|
|
|
Total current
income tax expense
|
$—
|
$1
|
Summary of
Expense
|
2016
|
2015
|
Current
|
—
|
1
|
Deferred
|
(132)
|
77
|
|
|
|
Total Income Tax
Expense (Benefit)
|
$(132)
|
$78
|
For the
years ended December 31, 2016 and 2015, 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:
|
2016
|
2015
|
|
|
|
Statutory U.S.
federal rate
|
(34.0)%
|
(34.0)%
|
Permanent
differences
|
0.00
|
0.03
|
Impact of
differences related to foreign earnings
|
1.05 %
|
(0.01)%
|
Application of
valuation allowance to US deferred tax assets upon
merger
|
—%
|
—%
|
Valuation
allowance
|
27.16 %
|
43.87%
|
Provision for
income tax expense
|
(5.79)%
|
9.89%
|
The
significant components of the Company’s deferred tax assets
and liabilities are as follows:
|
2016
|
2015
|
|
(in thousands)
|
|
Deferred Tax
Assets:
|
|
|
Net operating loss
carryforwards
|
$ 4,535
|
$3,548
|
Accrued
expenses
|
1,160
|
1,152
|
Accounts receivable
timing differences
|
-
|
29
|
Property and
equipment
|
79
|
79
|
Total Deferred Tax
Assets
|
5,774
|
4,808
|
Valuation
Allowance
|
(5,548)
|
(4,732)
|
Net Deferred Tax
Asset
|
226
|
76
|
Deferred Tax
Liability:
|
|
|
In-process research
and development and trademarks
|
(2,205)
|
(2,205)
|
Net Deferred Tax
Liability
|
$ (1,979)
|
$(2,129)
|
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, 2016. The net impact to the
valuation allowance for the reduction of attributes and current
year activity is a decrease of $19.8 million in 2015.
At
December 31, 2016, the Company had net operating loss carry
forwards for U.S. federal income tax of approximately
$12.4 million, which will begin to expire
in 2018. At December 31, 2016, the Company had net
operating loss carry forwards for state income tax of approximately
$3.8 million, which will begin to expire in 2027. At
December 31, 2016, the Company had net operating loss carry
forwards for foreign income tax of approximately $0.4
million, which will begin to expire in 2019 for Poland and 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
derecognition 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, 2016
and 2015. 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, 2016.
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.
NOTE 11: Commitments and Contingencies
Legal Proceedings
On
November 13, 2016, the Company’s former Chief Financial
Officer 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 Chief Financial Officer at December 31, 2016.
The Company believes that $836,000 was to be converted into common
stock as a condition of the merger agreement at $2.00 a
share.
Settled in 2015
During
2015, the Company reached a settlement totaling $15,000 regarding
outstanding litigation with D&D Technology.
The
Company’s subsidiary CytoGlobe GmbH, Germany, was subject to
a court settlement on an alleged breach of the German competition
law with Hologic Deutschland GmbH (“Hologic”) from
August 2013. This matter was decided by the court completely in
favor of the Company and it was determined that the Company did not
improperly infringe on the product design of
Hologic. Hologic has filed a complaint to the Federal
Supreme Court. The Federal Supreme Court must file an
opinion on the lower court ruling which has not been issued at the
time of this filing. The Company is to receive partial
reimbursement of its legal fees. This settlement had no
financial impact to the Company at December 31, 2016 or
2015.
Settled in 2016
The
Company’s former auditor L.J. Soldinger and Associates filed
a claim against the Company in Illinois’ Lake County Superior
Court. The Company believed the claims were without merit and
adequately reserved for costs associated with the claim at December
31, 2015. In February 2016, the Company settled for
$160,000 with its former accountants and upon reaching a
settlement, L. J. Soldinger and Associates filed a dismissal of all
claims with the court. The amount of the settlement is
included in accounts payable and accrued expenses at December 31,
2015.
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):
|
United
States
|
Germany
|
Poland
|
Total
|
||||
|
2016
|
2015
|
2016
|
2015
|
2016
|
2015
|
2016
|
2015
|
Total
Assets
|
$11,268
|
$11,826
|
$6,264
|
$6,357
|
$238
|
$195
|
$17,770
|
$18,378
|
Property and
equipment, net
|
68
|
84
|
1,487
|
1,853
|
2
|
4
|
1,557
|
1,941
|
Intangible
Assets
|
10,518
|
10,518
|
-
|
-
|
-
|
-
|
10,518
|
10,518
|
Revenues
|
894
|
985
|
8,127
|
8,859
|
217
|
43
|
9,238
|
9,887
|
Net income
(loss)
|
$(1,816)
|
$(984)
|
$(306)
|
$167
|
$(41)
|
$(42)
|
$(2,163)
|
$(859)
|
|
United
States
|
Germany
|
Poland
|
Total
|
||||
Revenues:
|
2016
|
2015
|
2016
|
2015
|
2016
|
2015
|
2016
|
2015
|
Histology
Equipment
|
$295
|
$299
|
$4,077
|
$4,078
|
$217
|
$43
|
$4,589
|
$4,420
|
Histology Consumables
|
243
|
239
|
2,967
|
3,323
|
-
|
-
|
3,210
|
3,562
|
Cytology
Consumables
|
356
|
447
|
1,083
|
1,458
|
-
|
-
|
1,439
|
1,905
|
Total
Revenues
|
$894
|
$985
|
$8,127
|
$8,859
|
$217
|
$43
|
$9,238
|
$9,887
|
NOTE 13: Subsequent Events
The
Company has evaluated subsequent events occurring after the balance
sheet. See discussion above in Note 5 regarding secured
promissory notes and Note 8 relating to the warrants issued with
these secured promissory notes.
On January 10, 2017, the Board of Directors agreed to renegotiate
the terms of the 2015 Notes and 2016 Notes (collectively the
“Notes”) with the consent of the 2015 Purchasers and
2016 Purchasers (collectively the “Note Holders”),
which was obtained on January 16, 2017, as follows:
●
The
Note Holders agreed to waive the defaults and extend the Notes for
the earlier of six months or the receipt of a $3,000,000 investment
into the Company pursuant to a future private equity offering,
whichever occurs first (the “Extension”).
●
Upon
the Company’s receipt of the first $1,000,000 invested
(including the capital raised to date in a prior private equity
offering), the Note Holders will be repaid one third of their
principal investment. On March 31, 2017, the Company paid
approximately $189,000 of the outstanding Notes.
●
Upon
the Company’s receipt of the second and
third $1,000,000, respectively, the Note Holders will be
repaid one third of their principal investment on each $1,000,000
raised.
●
The
exercise price on the Warrants were adjusted from $0.80 to
$0.50.
●
If
the Notes are not paid back in full on the six month extension
date, the Note Holders will each receive additional warrants equal
to 50% of their respective investments, exercisable at $0.50, as a
penalty.
●
The
interest payments on the Notes will continue to accrue on the
remaining balance of the unpaid Notes, and the additional warrants
of 10% of the amount of Notes outstanding, previously penalty
warrants, shall continue to accrue pursuant to the
Notes.
●
The
Note Holders will have the option to convert their Notes to equity
either before or at the six month extension end date into units
offered in any future private equity offering of the
Company.
On
March 7, 2017 the Company filed a $4,250,000 Form D to issue up to
8.5 million shares of common stock and approximately 2.2 million
warrants to issue common stock at $0.50 as share. From January
through March 31, 2017 the Company received $1.2 million proceeds
for the sale of 2.4 million shares of common stock at a purchase
price of $0.50, with 50% of the value of the stock in equivalent
warrants to purchase common shares at $0.50, with a term of 5
years. The Company incurred $90,375 of cash commissions and will
issue 90,375 warrants associated with the sale of these
securities.
In
January 2017, the Company modified the agreement with $3,000,000
Form D to include 50% of the value of the stock in equivalent
warrants to purchase common shares at $0.50, with a term of 5
years. An additional 218,458 warrants were issued.
On
March 30, 2017, the Company negotiated a settlement with three
current employees that hold notes, in the amount of $580,000 plus
accrued vacation. The agreement supersedes all prior agreements
with group and was effective December 31, 2016. The Company is to
pay these employees approximately $330,000, the first payment of
$94,000 upon signing the agreement, the second payment of $94,000
30 days from signing the agreement and the final payment of
$142,000 60 days from signing the agreement. The Company will issue
approximately 1 million warrants to purchase common stock at $0.50
a share with a term of 5 years. See discussion under Note
5.
In
March 2017, the Company settled for $135,000 for amounts owed for
December 31, 2016, with its former accountants. The
$135,000 of the settlement is included in accounts payable and
accrued expenses at December 31, 2016.
F-27