NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Tabular data in thousands, except share and per share
amounts)
Note
1.
Organization
The Company
MEDITE
Cancer Diagnostics, Inc. (“MDIT”, “MEDITE”,
“we”, “us” or the “Company”)
was incorporated in Delaware in December 1998.
These statements include the accounts of MEDITE
Cancer Diagnostics, Inc. and its wholly owned subsidiaries, which
consists of MEDITE Enterprise, Inc., MEDITE GmbH, Burgdorf,
Germany, MEDITE Lab Solutions Inc., Orlando, USA
.
In 2017 the Company made the decision
to integrate CytoGlobe into Medite GmbH. CytoGlobe had been
operating as a separate company focused on cytology products
(equipment and consumables) with separate personnel and financial
reporting that was consolidated into Medite GmbH. As the
CytoGlobe brand became less important over time and customers
purchased both cytology and histology products from Medite, it no
longer made sense to keep CytoGlobe as a separate company.
Therefore, it was integrated from a financial, operational and
product portfolio perspective into Medite GmbH.
MEDITE
is a medical technology company specialized in the development,
manufacturing, and marketing of premium medical devices,
consumables and molecular biomarkers for detection, risk assessment
and diagnosis of cancerous and precancerous conditions and related
diseases. The Company has 57 employees in two countries, a
distribution network to about 80 countries and a wide range of
products for anatomic pathology, histology and cytology
laboratories is available for sale.
Note
2.
Summary of
Significant Accounting Policies
Consolidation, Basis of Presentation and Significant
Estimates
The
accompanying condensed consolidated financial statements for the
periods ended March 31, 2018 and 2017 included herein are unaudited
and have been prepared in accordance with accounting principles
generally accepted in the United States of America
(“GAAP”) and include the accounts of the Company and
its wholly-owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation. Such
consolidated financial statements reflect, in the opinion of
management, all adjustments necessary to present fairly the
financial position and results of operations as of and for the
periods indicated. All such adjustments are of a normal recurring
nature. These interim results are not necessarily indicative of the
results to be expected for the fiscal year ending December 31, 2018
or for any other period. Certain information and footnote
disclosures normally included in the consolidated financial
statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or
omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. The Company believes that the disclosures are
adequate to make the interim information presented not misleading.
These condensed consolidated financial statements should be read in
conjunction with the Company’s audited consolidated financial
statements disclosed in the Report on Form 10-K for the year ended
December 31, 2017 filed on May 17, 2018 and other filings with the
Securities and Exchange Commission.
In
preparing the accompanying condensed consolidated accompanying
financial statements, management has made certain estimates and
assumptions that affect reported amounts in the condensed
consolidated financial statements and disclosures of contingencies.
Changes in facts and circumstances may result in revised estimates
and actual results may differ from these estimates.
Going Concern
The
accompanying condensed consolidated financial statements have been
prepared in conformity with GAAP, which contemplate continuation of
the Company as a going concern. This contemplates the
realization of assets and the liquidation of liabilities in the
normal course of business. At March 31, 2018, the
Company’s cash balance was $153,000 and its operating losses
for the year ended December 31, 2017 and for the three months March
31, 2018 have used most of the Company’s liquid assets. These
factors raise substantial doubt about the Company’s ability
to continue as a going concern. However, the Company has
approximately $78,000 in working capital as of March 31, 2018
compared to negative working capital of approximately $318,000 on
December 31, 2017. The Company raised additional cash of
$1.5 million from the issuance of convertible notes payable
starting in the first quarter of 2018 (see Note 4).
Management
continues to expand its product offerings and has also expanded its
sales and distribution channels during 2018.
In the
future, we may require sources of capital in addition to cash on
hand to continue operations and to implement our strategy. If our
operations do not become cash flow positive, we may be forced to
seek equity investments or debt arrangements. No assurances can be
given that we will be successful in obtaining such additional
financing on reasonable terms, or at all. If adequate funds are not
available on acceptable terms, or at all, we may be unable to
adequately fund our business plans and it could have a negative
effect on our business, results of operations and financial
condition. In addition, if funds are available, the issuance of
equity securities or securities convertible into equity could
dilute the value of shares of our common stock and cause the market
price to fall, and the issuance of debt securities could impose
restrictive covenants that could impair our ability to engage in
certain business transactions.
Revenue Recognition
The
Company derives its revenue primarily from the sale of medical
products and supplies for the diagnosis and prevention of
cancer.
The
company recognizes revenue for the transfer of promised goods or
services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those
goods or services.
Consumables
revenues consist of single-use products and are recognized at a
point in time following the transfer of control of such products to
the customer, which generally occurs upon shipment. Instruments
revenues typically consist of longer-lived assets that, for the
substantial majority of sales, are recognized at a point in time in
a manner similar to consumables. The Company exercises judgment in
determining the timing of revenue by analyzing the point in time or
the period over which the customer has the ability to direct the
use of and obtain substantially all of the remaining benefits of
the asset. The Company expenses contract costs that would otherwise
be capitalized and amortized over a period of less than one
year.
Shipping and
handling costs are included in cost of goods sold and charged to
the customers based on the contractual terms.
Payments from
customers for most instruments, consumables and services are
typically due in a fixed number of days after shipment or delivery
of the product. For certain international equipment orders a
prepayment is required. The balance of the customer deposits is
reflected in our accrued liabilities and was $215,088 as of March
31, 2018.
See
Note 8 for revenue disaggregated by type and by geographic region
as well as further information about remaining performance
obligations.
Inventories
Inventories are
stated at the lower of cost or net realizable value. Cost is
determined using the first in first out method (FIFO) and market is
based generally on net realizable value.
Inventories
consists of parts inventory purchased from outside vendors, raw
materials used in the manufacturing of equipment, work in process
and finished goods. Management reviews inventory on a regular basis
and determines if inventory is still useable. A reserve is
established for the estimated decrease in carrying value for
obsolete or excess inventory. Once a reserve is established, it is
considered a permanent adjustment to the cost basis of the obsolete
or excess inventory.
Foreign Currency Translation
The
accounts of the U.S. parent company are maintained in United States
Dollar (“USD”). The functional currency of the
Company’s German subsidiaries is the EURO
(“EURO”). The accounts of the German subsidiaries were
translated into USD in accordance with relevant accounting
guidance. All assets and liabilities are translated at the exchange
rate on the balance sheet dates, stockholders’ equity was
translated at the historical rates and statements of operations
transactions are translated at the average exchange rate for each
period. The resulting translation gains and losses are recorded in
accumulated other comprehensive loss as a component of
stockholders’ equity.
Research and Development
All
research and development costs are expensed as incurred. Research
and development costs consist of engineering, product development,
testing, developing and validating the manufacturing process, and
regulatory related costs.
Acquired In-Process Research and Development
Acquired in-process
research and development (“IPR&D”) that the Company
acquires through business combinations represents the fair value
assigned to incomplete research projects which, at the time of
acquisition, have not reached technological feasibility. The
amounts are capitalized and are accounted for as indefinite-lived
intangible assets, subject to impairment testing until completion
or abandonment of the projects. Upon successful completion of each
project, MEDITE will make a determination as to the then useful
life of the intangible asset, generally determined by the period in
which the substantial majority of the cash flows are expected to be
generated, and begin amortization. The Company tests IPR&D for
impairment at least annually, or more frequently if impairment
indicators exist, by first assessing qualitative factors to
determine whether it is more likely than not that the fair value of
the IPR&D intangible asset is less than its carrying amount. If
the Company concludes it is more likely than not that the fair
value is less than the carrying amount, a quantitative test that
compares the fair value of the IPR&D intangible asset with its
carrying value is performed. If the fair value is less than the
carrying amount, an impairment loss is recognized in operating
results.
Impairment of Indefinite Lived Intangible Assets Other Than
Goodwill
The
Company has the option first to assess qualitative factors to
determine whether the existence of events and circumstances
indicates that it is more likely than not that the indefinite-lived
intangible asset is impaired. If, after assessing the totality of
events and circumstances, the Company concludes that it is not more
likely than not that the indefinite-lived intangible asset is
impaired, then the entity is not required to take further action.
However, if the Company concludes otherwise, then it is required to
determine the fair value of the indefinite-lived intangible asset
and perform the quantitative impairment test by comparing the fair
value with the carrying amount in accordance with relevant
accounting guidance.
Goodwill
Goodwill is
recognized for the excess of cost of an acquired entity over the
amounts assigned to assets acquired and liabilities assumed in a
business combination. Goodwill is tested for impairment at
the reporting unit level (operating segment or one level below an
operating segment) on an annual basis (December 31 for us) and
between annual tests if an event occurs or circumstances change
that would more likely than not reduce the fair value of a
reporting unit below its carrying value. These events or
circumstances could include a significant change in the business
climate, legal factors, operating performance indicators,
competition, or sale or disposition of a significant portion of a
reporting unit.
Application of the
goodwill impairment test requires judgment, including the
identification of reporting units, assignment of assets and
liabilities to reporting units, assignment of goodwill to reporting
units, and determination of the fair value of each reporting unit
using a discounted cash flow methodology. This analysis requires
significant judgments, including estimation of future cash flows,
which is dependent on internal forecasts, estimation of the
long-term rate of growth for our business, estimation of the useful
life over which cash flows will occur, and determination of our
weighted average cost of capital.
The
estimates used to calculate the fair value of a reporting unit
change from year to year based on operating results, market
conditions, and other factors. Changes in these estimates and
assumptions could materially affect the determination of fair value
and goodwill impairment for each reporting unit.
Net Loss Per Share
Basic
loss per share is calculated based on the weighted-average number
of outstanding common shares. Diluted loss per share is calculated
based on the weighted-average number of outstanding common shares
plus the effect of dilutive potential common shares, using the
treasury stock method and the if-converted method. MEDITE’s
calculation of diluted net loss per share excludes potential common
shares as of March 31, 2018 and 2017 as the effect would be
anti-dilutive (i.e. would reduce the loss per share).
The
Company computes its loss applicable to common stock holders by
subtracting dividends on preferred stock, including undeclared or
unpaid dividends if cumulative, from its reported net loss and
reports the same on the face of the condensed consolidated
statement of operations.
Recent Accounting Pronouncements
In May
2014, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) 2014-09,
“Revenue with Contracts from Customers.” ASU 2014-09
supersedes the current revenue recognition guidance, including
industry-specific guidance. The ASU introduces a five-step model to
achieve its core principal of the entity recognizing revenue to
depict the transfer of goods or services to customers at an amount
that reflects the consideration to which the entity expects to be
entitled in exchange for those goods and services. The updated
guidance is effective for public entities for interim and annual
periods beginning after December 15, 2017 with early adoption
permitted for annual reporting periods beginning after December 15,
2016. The Company adopted the modified retrospective transition
method of ASU 2014-09 effective January 1, 2018 and there was no
material change to its current business practices upon
implementation.
In
February 2016, the FASB issued ASU No. 2016-02,
“Leases” (“ASU 2016-02”). The core
principle of ASU 2016-02 is that an entity should recognize on its
balance sheet assets and liabilities arising from a lease. In
accordance with that principle, ASU 2016-02 requires that a lessee
recognize a liability to make lease payments (the lease liability)
and a right-of-use asset representing its right to use the
underlying leased asset for the lease term. The recognition,
measurement, and presentation of expenses and cash flows arising
from a lease by a lessee will depend on the lease classification as
a finance or operating lease. This new accounting guidance is
effective for public companies for fiscal years beginning after
December 15, 2018 (i.e., calendar years beginning on January 1,
2019), including interim periods within those fiscal years. Early
adoption is permitted. The Company is currently evaluating the
impact the adoption of ASU 2016-02 will have on the Company’s
consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, “Statement of
Cash Flows - Restricted Cash (Topic 230)”. This new standard
requires companies to include amounts generally described as
restricted cash and restricted cash equivalents in cash and cash
equivalents when reconciling beginning-of-period and end-of-period
total amounts shown on the statement of cash flows. This guidance
is effective for annual and interim reporting periods beginning
after December 15, 2017 and requires retrospective application. The
Company adopted this standard in the first quarter of 2018 by using
the retrospective method, which required the following disclosures
and changes to the presentation of its consolidated financial
statements: cash and restricted cash reported on the consolidated
statements of cash flows now includes restricted cash of $417,000
as of December 31, 2017, as well as previously reported
cash.
In January 2017, the FASB issued ASU 2017-01, “Business
Combinations (Topic 805): Clarifying the definition of a
business”
.
The
amendments in this Update clarify the definition of a business with
the objective of adding guidance to assist entities with evaluating
whether transactions should be accounted for as acquisitions (or
disposals) of businesses. The guidance in this update is effective
for fiscal years beginning after December 15, 2017, and interim
periods within those years. The implementation had no material
impact on the Company’s consolidated financial
statements.
|
Note
3.
Inventories
|
|
|
|
|
|
|
|
|
|
The following is a summary of the components of inventories (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
$
1,445
|
$
1,220
|
|
Work
in process
|
48
|
44
|
|
Finished
goods
|
1,164
|
1,139
|
|
|
$
2,657
|
$
2,403
|
Note
4.
Debt
The
Company’s outstanding debt was as follows as of (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
promissory note
|
50
|
50
|
|
Subordinated
convertible notes payable
|
1,085
|
932
|
|
GPB
Debt Holdings II, LLC convertible note payable
|
5,356
|
5,356
|
|
2018
Convertible notes payable
|
1,425
|
-
|
|
Total
|
7,916
|
6,338
|
|
Discounts
on convertible notes payable
|
(2,709
)
|
(1,419
)
|
|
Less
current portion of long-term debt
|
(50
)
|
(50
)
|
|
Long-term
debt
|
$
5,157
|
$
4,869
|
GPB Debt Holdings II, LLC (“GPB”) Convertible Note
Payable
On September 26,
2017, the Company entered into the Purchase Agreement with GPB,
pursuant to which the Company issued to GPB (i) a secured
convertible promissory note in the aggregate principal amount of
$5,356,400 (the “GPB Note”) at a purchase price equal
to 97.5% of the face value of the of the original $5 million GPB
Note and an additional discount of 300,000 Euro ($356,400 at
September 26, 2017) considered an additional purchase discount,
with the Company receiving net proceeds of $4.7 million and (ii) a
warrant to purchase an aggregate of 4,120,308 shares of common
stock of the Company (the “Warrant”). The Company
allocated the proceeds received to the GPB Note and the warrants on
a relative fair value basis at the time of issuance. The total debt
discount will be amortized over the life of the GPB Note to
interest expense. The estimated relative fair value of the warrants
was $520,052. Amortization expense of the debt discount, which
includes original issue discount, loan fees and the warrant value,
during the year ended December 31, 2017 and the three months ended
March 31, 2018 was $131,822 and $114,438, respectively. The GPB
Note matures on the 36th month anniversary date following the
Closing Date, as defined in the GPB Note (the “Maturity
Date”). The GPB Note is secured by a senior secured first
priority security interest on all of the assets of the Company and
its subsidiaries evidenced by a security agreement (the
“Security Agreement”). Each subsidiary also entered
into a guaranty agreement pursuant to which the subsidiaries have
guaranteed all obligations of the Company to the GPB. The GPB Note
bears interest at a rate of 13.25% per annum (which interest is
increased to 18.25% upon an Event of Default). The GPB Note is
initially convertible at a price of $0.65 (the “Conversion
Price”) into 8,240,615 shares of common stock. There was no
discount relate to the conversion feature. The exercise price of
the Warrant is subject to a ratchet downside protection with a
$0.30 per share floor price in the event the Company issues
additional equity securities, and subject to adjustments for stock
splits, dividends, combinations, recapitalizations and the like.
The GPB Note is being amortized quarterly at a rate of 10% of the
face value of the Note beginning on month 24, with the remaining
60% due at the Maturity Date. There is a flat 3% success fee which
allows for the prepayment of the GPB Note and applies to the
payment of principal during the Term through the Maturity Date. The
GPB Note contains customary events of default. The GPB Note
contains certain covenants, such as restrictions on the incurrence
of indebtedness, the existence of liens, the payment of restricted
payments, default, redemptions, and the payment of cash dividends
and the transfer of assets. GPB also has a right of participation
for any Company offering, financing, debt purchase or assignment
for 36 months after the closing date. The Company is required to
maintain a 6-month interest reserve of $417,000 in restricted cash.
The shares underlying the GPB Note and the Warrants are to be
registered by the Company through a registration rights agreement
within 60 days and the registration statement is to be declared
effective within 180 days. Failure to file, or to meet other
criteria defined as the event date will required the Company to pay
2% of the registrable securities times the price at the event date
per month, up to 12% in cash payments. On February 5, 2018,
the Company entered into a Forbearance Agreement with GBP that
provides relief until July 1, 2018 of the Company’s
requirement to maintain an interest reserve and to complete a
registration rights agreement and provides relief until April 1,
2018 of the Company’s requirement to make interest
payments. According to the Forbearance Agreement, interest
payments must be current by December 31, 2018.
Securities Purchase Agreement
The
Company has an outstanding note payable with a principal and
accrued interest balance of $63,250 that is not considered in
default as the Company received notification to freeze this
account.
2018 Convertible Notes
On
February 6, 2018, the Company established a private placement of
convertible notes and common stock to raise approximately
$1,500,000, with an over-allotment option for an additional
$750,000. The convertible notes have a conversion price of $0.075
per share. The investors received shares of common stock of the
Company based on an assumed purchase price of $0.075 per share and
the investor is not required to pay any additional consideration
for the shares of common stock. As of March 31, 2018 the Company
had received $1,325,000 and converted $100,000 of accrued
liabilities and issued 19,000,000 shares of common stock. The
convertible notes mature five years from the closing date, have an
interest rate of 12%, are secured obligations of the Company,
senior to other outstanding indebtedness and are expressly
subordinate to the Company’s indebtedness with GPB Debt
Holdings II, LLC.
Of the total $1,425,000 received and converted, the Company
received $950,000 and converted $100,000 of accrued liabilities
from related parties, including Board members, and issued
14,000,000 shares of common stock.
In
order to account for this instrument, we had to determine if it had
an embedded beneficial conversion feature (“BCF”),
which is measured at the commitment date by allocating a portion of
the proceeds equal to the intrinsic value of that feature (not the
fair value) to APIC. This allocation will result in a discount on
the convertible instrument. The intrinsic value is calculated as
the difference between the effective conversion price and the fair
value of the common stock into which the security is convertible,
multiplied by the number of shares into which the security is
convertible.
If the
intrinsic value of the BCF is greater than the proceeds allocated
to the convertible instrument, the amount of the discount assigned
to the BCF is limited to the amount of proceeds allocated to the
convertible instrument. The net carrying amount should be accreted
from zero to its face value over the term of the convertible
debt.
For
this instrument the BCF was greater than the proceeds so therefore
the convertible notes of $1,425,000 had an initial debt discount of
$1,425,000. Amortization expense of the debt discount during the
three month period ended March 31, 2018 was $45,417.
Subordinated Convertible Notes
On
September 27, 2017, the Company received $425,000 and issued
$435,897 subordinated convertible debt with an original issue debt
discount of $10,897 and with similar terms as the GPB Note. The
Company issued 335,306 warrants to purchase shares of common stock
with a term of 5 years and an exercise price of $0.60 per share,
with a ratchet down side protection of $0.30. The Company allocated
the value of these notes and the warrants on a relative fair value
basis at the time of issuance. The total debt discount will be
amortized over the life of these notes to interest expense. The
estimated relative fair value of the warrants was $42,321.
Amortization expense of the debt discount, which includes original
issue discount and the warrant value, during the year ended
December 31, 2017 and the three months ended March 31, 2018 was
$1,351 and $8,975, respectively.
In
December 2017, the Company received $350,000 and issued $358,974
subordinated convertible debt with an original issue debt discount
of $8,974 and with similar terms as the GPB Note. The Company
issued 276,135 warrants to purchase shares of common stock with a
term of 5 years and an exercise price of $0.60 per share, with a
ratchet down side protection of $0.30. The Company allocated the
value of these notes and the warrants on a relative fair value
basis at the time of issuance. The total debt discount will be
amortized over the life of these notes to interest expense. The
estimated relative fair value of the warrants was $28,531.
Amortization expense of the debt discount, which includes original
issue discount and the warrant value, during the year ended
December 31, 2017 and the three month period ending March 31, 2018
was $0 and $5,511 respectively.
In
January 2018, the Company received $150,000 and issued
$153,847 subordinated convertible debt with an original issue debt
discount of $3,847 and with similar terms as the GPB Note. The
Company issued 118,343 warrants to purchase shares of common stock
with a term of 5 years and an exercise price of $0.60 per share,
with a ratchet downside protection of $0.30. The Company allocated
the value of these notes and the warrants on a relative fair value
basis at the time of issuance. The total debt discount will be
amortized over the life of these notes to interest expense. The
estimated relative fair value of the warrants was approximately
$28,000. Amortization expense of the debt discount, which includes
original issue discount and the warrant value, during the three
months ended March 31, 2018 was $2,600.
Employee Notes Payable
On March 30, 2017, the Company agreed to pay certain employees
approximately $330,000 in connection with a settlement of
outstanding promissory notes and accrued vacations. The Company
issued 1,029,734 warrants to purchase common stock at $0.50 a share
with a term of 5 years. The fair value of the warrants of $389,000
was amortized in full during 2017. Per the terms of the agreement,
the first payment of $94,000 was paid in April 2017, the second
payment of $94,000 was due 30 days from signing the agreement and
the final payment of $142,000 was due 60 days from signing the
agreements, however the remaining payments remained due at March
31, 2018.
In November 2017, the
employees agreed to renegotiate the March 30, 2017 agreement in
good faith with the Company as to a future payment plan mutually
agreeable by all parties. This negotiation was put on hold in
2018 until the Company’s cash situation improved, and
discussions resumed in June. It is expected that a new
agreement will be completed and implemented during
2018.
Note
5.
Related Party
Transactions
Included in
advances – related parties are amounts to the
Company’s former CFO and Chairman of the Board of
$50,000 at March 31, 2018 and December 31, 2017. Also included
in advances – related parties are amounts of 49,162 Euros,
($60,573 as March 31, 2018) to Ms. Ott related to two short term
bridge loans. The Company has made arrangements to settle these
obligations evenly over a 24 month period, starting on October 31,
2017. In addition, the Company settled obligations related to
accrued salaries, vacation and related expenses totaling $152,000
owed to Mr. and Ms. Ott. The Company will make an upfront payment
to each Mr. and Ms. Ott of $6,750 and will pay the remaining amount
owed over a period of 18 months starting in October
2017. The Company signed additional agreements to settle
the debt owed from the US entity when the wages earned versus the
German entity. The Company has paid Michaela Ott $13,978 for the
three months ended March 31, 2018 related to the amount owed. The
balance due to Michaela Ott at March 31, 2018 is $60,573 related to
the wages owed. During the three months ended March 31, 2018, the
Company has paid Michael Ott $9,544 and the remaining balance
outstanding at March 31, 2018 was $41,356.
Accrued
salaries, vacation and related expenses at March 31, 2018 and
December 31, 2017, includes amounts for the former CFO of
approximately $1.1 million, which is included in accounts payable
and accrued expenses in the accompanying condensed consolidated
balance sheets. See Note 7 for further discussion regarding the
legal proceedings with the Company’s former CFO.
T
he Company received $950,000 and converted
$100,000 of accrued liabilities from related parties, including
Board members, and issued 14,000,000 shares of common stock (see
Note 4).
Note
6.
Stockholders’
Equity
Common
stock during the three months ended March 31, 2018, the Company
issued a private placement of convertible notes and common stock to
raise approximately $1,500,000, with an over-allotment option for
an additional $750,000 (see Note 4). As of March 31, 2018, the
Company had received $1,325,000 and converted $100,000 of accrued
liabilities and issued 19,000,000 shares of common
stock.
Of
the total $1,425,000 received and converted, the Company received
$950,000 and converted $100,000 of accrued liabilities from board
members, and issued 14,000,000 shares of common stock.
Warrants
During
the three month period ended March 31, 2018, the Company issued
118,343 warrants related to the January 2018 subordinated loan with
a relative fair value of approximately $28,000. The value of
the warrants were determined using the Black-Scholes model, at an
interest free rate of 1.33%, volatility of 402% and a remaining
term of 5 years and a market price of $0.30 during the three months
ended March 31, 2018 (see Note 4).
On
March 2, 2018, the Company granted 1,062,500 warrants at an
exercise price of $0.075 to TriPoint Global Equities LLC for
services related to the issuance of a private placement of
convertible notes (see Note 4). The estimated fair value is
included in the debt discount of the 2018 convertible notes (see
Note 4).
Note 7.
Commitments and Contingencies
Legal Proceedings
On
November 13, 2016, the Company’s former CFO filed a complaint
against the Company and certain officers and directors of the
Company in the United States District Court for the Northern
District of Illinois, Eastern Division, Case No. 1:16-cv-10554,
whereby he is alleging (i) breach of the Illinois Wage and
Protection Act, (ii) breach of employment contract and (iii) breach
of loan agreement. He is seeking monetary damages up to
approximately $1,665,972. The Company has denied the substantive
allegations in the complaint and is vigorously defending the suit.
Management believes that the claims set forth in the complaint
against the Company are without merit. The Company has accrued
wages and vacation of approximately $1.1 million and a $50,000 note
payable to the former CFO at September 30, 2017 and December 31,
2017. The presiding Federal Judge has referred the lawsuit to
mediation. No settlement was reach during the April 2017
meditation. The Company has proactively initiated settlement offer.
In August 2017, the parties reached a Settlement Term Sheet whereby
a final forbearance and settlement agreement must be filed with the
magistrate judge. On November 8, 2017 the Plaintiff filed a motion
to compel settlement with a meeting before a magistrate judge on
November 14, 2017.
On
February 20, 2018, the magistrate judge denied Plaintiff’s
motion. On March 8, 2018, Plaintiff again filed a Motion to Enforce
Settlement Agreement which has been opposed by the Company. On
April 22, the judge ruled in favor of the Company and denied
plaintiff’s motion to compel.
On May
15, 2018, a complaint was filed in the United States District Court
of Northern California against the individual directors of the
Company by Robert McCullough, Jr, and Dr. Zhongxi Zheng. The
Company was named as a Nominal Defendant. The complaint alleges
various claims including Breach of Fiduciary Obligations, Abuse of
Control, Unjust Enrichment, Fraud, Intentional Misrepresentation
and Negligent Representation. The suit seeks certain declaratory
relief, injunctive relief and an accounting. Management believes
these claims are frivolous and without any merit whatsoever, and
are being filed for the sole purpose of harassing the named
Defendants and to leverage a more beneficial settlement in the suit
discussed in the paragraph above. Further, management believes that
the suit was filed in a court having no personal jurisdiction over
any of the named Defendants, The Company and individual directors
will vigorously defend against this suit and seek to have it
immediately dismissed. If successful, Defendants will seek
attorneys’ fees and appropriate sanctions.
Note
8.
Segment
Information
The
Company operates in one operating segment. However, the Company has
assets and operations in the United States, Germany and Poland. The
following tables show the breakdown of the Company’s
operations and assets by region (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
31, 2017
|
2018
|
31, 2017
|
2018
|
31, 2017
|
|
|
$
10,858
|
$
11,179
|
$
5,550
|
$
4,777
|
$
16,408
|
$
15,956
|
Property & equipment, net
|
99
|
108
|
1,660
|
1,670
|
1,759
|
1,778
|
|
|
10,518
|
10,518
|
-
|
-
|
10,518
|
10,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
2017
|
2018
|
2017
|
2018
|
2017
|
|
|
|
|
|
|
|
|
|
|
$
28
|
$
146
|
$
688
|
$
768
|
$
716
|
$
914
|
|
|
92
|
104
|
588
|
573
|
680
|
677
|
|
|
-
|
-
|
109
|
300
|
109
|
300
|
|
|
$
120
|
$
250
|
$
1,385
|
$
1,641
|
$
1,505
|
$
1,891
|
|
|
$
(949
)
|
$
(570
)
|
$
(453
)
|
$
(385
)
|
$
(1,402
)
|
$
(955
)
|
Note
9.
Subsequent
Events
On April 26, 2018, the Company consummated the closing of
Securities Purchase Agreements (the “Purchase
Agreements”) with two accredited investors, both of whom are
directors of the Company (“Purchasers”), pursuant to
which the Company issued to the Purchasers secured promissory notes
in the aggregate principal amount of $610,000 (the
“Notes”) in consideration of an aggregate of $580,000
in cash, and $30,000 of which constitutes the conversion of accrued
liabilities owed by the Company to one of the Purchasers. The Notes
mature on the 60th month anniversary date following the Closing
Date, as defined in the Notes (the “Maturity Date”).
Accrued interest shall be paid in restricted common stock of the
Company
calculated at a value of $0.075 per share and
on the basis of a 360-day year and shall accrue and compound
monthly
. The Notes are secured by
security agreements (the “Security Agreements”) and
shall represent perfected senior liens on all of the assets of the
Company and its subsidiaries and will be subordinate to the
obligation entered into with GPB Debt Holdings II, LLC and the
affiliated subordinate investors on September 26, 2017. The Notes
shall bear interest at a rate of 12% per annum. In addition, and in
accordance with the terms of the Purchase Agreements, the
Purchasers are to be issued 8,133,334 shares of the Company’s
restricted common stock based on an assumed purchase price at
$0.075 per share (the “Shares”). The Purchasers shall
have piggy-back registration rights with respect to the
Shares.
Under the same terms as described above, on May 9, 2018, the
Company consummated the closing of Securities Purchase Agreements
(the “Purchase Agreements”) with two accredited
investors, pursuant to which the Company issued to the Purchasers
secured promissory notes in the aggregate principal amount of
$250,000 (the “Notes”) in consideration of an aggregate
of $250,000 in cash, and the Purchasers are to be issued an
aggregate of 3,333,333 shares of restricted common stock based upon
an assumed purchase price at $0.075 per share.
