Conclusion of a final agreement to transfer 100% shares in Medi-Lynx Cardiac Monitoring LLC and conclusion of Support Agreement between React Health Holdings LLC and the Company
Current Report No 52/2022
Legal basis: Article 17.1 MAR – confidential information
Management Board of Medicalgorithmics S.A. with its seat in Warsaw (hereinafter the “Company“) with reference to the Company’s report no. 47/2022, announces that on July 28th, 2022, in execution of a preliminary agreement for sale of 1 000 shares in Medi-Lynx Cardiac Monitoring, LLC (hereinafter “Medi-Lynx”) representing 100% of the company’s units (hereinafter respectively “Shares”, “Preliminary Agreement”), Medicalgorithmics US Holding Corporation (hereinafter “Seller”) has entered into a promised Share transfer agreement with Medi-Lynx Holdings, LCC (hereinafter “Buyer”).
The total price for the Shares, paid in cash was USD 1,750,000. This price will be increased by the variable components of the Share selling price, which were described in detail in the Company’s report No. 47/2022. Moreover, pursuant to the provisions of the Preliminary Agreement, the Company concluded a support agreement with Medi-Lynx and React Health Holdings, LLC (“React Health”) regulating the principles of economic cooperation of the parties (“Support Agreement”), starting from July 1st, 2022. As part of the Support Agreement, the Company undertook to:
- provide Medi-Lynx with the Company’s products, including in particular the PocketECG system (hereinafter “Products”);
- repair and service of the Products;
- provide support services consisting, inter alia, on reporting, monitoring, updating and providing software support for the Products;
- providing technical support and monitoring services (hereinafter “Support”).
The Support Agreement provides for a different revenuemodel for the provision of Support services in 2022 and 2023. In 2022, in July it will amount to USD 600,000, and from August to December, the revenueis payable at the fixed rates of USD 666,000 per month.
From 2023, the revenuewill be calculated based on the number of tests carried out according to the rates for each type of test (i.e., Holter, Extended Holter made with the PocketECG IV device, Extended Holter made with the QPatch device, Event, MCT). In addition, the agreement reserves the right to increase, through renegotiation, the revenuefor the MCT test carried out after the implementation of Medi-Lynx solutions developed by the Company: a new generation of ECG analysis algorithm (the so-called DRAI) and a new generation of PocketECG system. These contractual rates, if applied to the average number of claims to insurers for February, March, April 2022, amounting to 5.8 thousand per month would allow the Company to achieve an average monthly income from Support services at the level of USD 400,000. Revenue will depend on the number of actual monthly test Medi-Lynx would be performing from January 2023 on.
In addition, the Support Agreement provides for the minimum levels of the Company’s revenue from the Support services, amounting to respectively:
- USD 500,000 for Support in January 2023;
- USD 400,000 for Support in February 2023,
- USD 300,000 for Support in March 2023
- USD 175,000 for Support starting from April 2023.
If the actual value of the Support services, calculated according to the unit rates specified in the Support Agreement, exceeds the above-mentioned monthly minimum rates, such an amount will constitute an additional revenue for the Company.
The revenue due under the Support Agreement also includes the revenue for the delivery of Products – calculated as a product of the delivered Products and the price of their delivery provided for in the Support Agreement, and revenue for the repair and service of the Products – calculated according to the rates provided for in the Support Agreement, depending on the amount of repair and services performed.
Payments in the Support Agreement were secured with a payment guarantee provided by React Health.
As part of the Support Agreement, the Company granted Medi-Lynx the exclusive right to sell, market and distribute the Company’s Products and services in the USA, subject to the exceptions provided for in the agreement. These exceptions include, inter alia, the Company’s ability to search for new customers in the USA and sell Products and services to them, provided that Medi-Lynx has been notified of this intention 180 days before. The above-mentioned the exclusivity is no longer binding when the revenue due to the Company for the Monitoring services is lower than USD 300,000 for two consecutive months.
The Support Agreement was concluded for an indefinite period, but it may be terminated by either party with a 6-month notice period. In addition, the Support Agreement provides for the possibility of termination by Medi-Lynx with a 60-day notice in the event of a material breach of the agreement by the Company and failure to remedy the breach within the prescribed period. Or by the Company after a material breach of the agreement by Medi-Lynx or React Health, subject to 30-day notice period and failure to remedy the breach within the prescribed period. The Support Agreement was concluded under the laws of the State of Delaware, USA.
The Company granted Medi-Lynx and React Health an exclusive, free license to use the intellectual property necessary to provide remote heart monitoring services and all related services in the USA (i.e. to the extent necessary for Medi-Lynx and React Health to implement the Support Agreement).
Payments under the license agreement have been guaranteed by React Health. The intellectual property license necessary to provide remote heart monitoring services remains exclusive as long as exclusivity is maintained under the Support Agreement. The license agreement expires upon the occurrence of the certain events indicated in the agreement on the part of the Company (e.g. cessation of activity, inability to perform the license agreement due to the fault of the Company). In addition, the license agreement provides for the possibility of termination by the Company with a 6 month notice period or with a 30-day notice period in the event of a material breach of the agreement and failure to remedy the breach within the prescribed period.
Moreover, the Company granted Medi-Lynx and React Health a license for a period of 2 years from the occurrence of the termination event. For granting the license referred to in the preceding sentence, the Company will receive a monthly fee of 20% of the last monthly IT support fee invoiced in accordance with the provisions of the Support Agreement for the month immediately preceding the occurrence of such resolving event. The license agreement is entered into under the laws of the state of Delaware, USA.
At the same time, with reference to the report No. 51/2022, the Management Board of the Company informs that the application of DRAI and the new generation PocketECG system in diagnosing arrhythmias is not part of the Support Agreement, and offering this solution for sale in the USA will require expansion, including renegotiation the Company’s fees of MCT tests based on this system.
In performance of the Preliminary Agreement, as a condition precedent to the transaction, the Company concluded an agreement with the Seller for the sale of receivables due to it from Medi-Lynx in the total amount of approximately USD 14,000,000 (“Receivables”) for the sale price of USD 1,300,000. Subsequently, the Seller concluded a debt relief agreement with Medi-Lynx, under which the Receivables were forgiven in full (of which all receivables existing as of March 31st, 2022 were covered by write-offs in the first quarter of 2022).
In the opinion of the Management Board, the transaction allows the Company to return to the business model in the USA before the acquisition of Medi-Lynx (i.e. same as the provision of services and supply of technologies successfully developed today in markets outside the USA, recording sales growth at a rate of approximately 30% annually).
In the opinion of the Management Board, the implementation of the described transaction may bring benefits to the Company, resulting in securing its liquidity, assuming that the obligations of the Buyer, React Health and Medi-Lynx are met, as well as assuming the implementation of other assumptions of the financial plan.
At the same time, with reference to the current report No. 31/2021 and 35/2021 on the commencement of the review of strategic options by the Company, the Management Board informs that the implementation of the above transaction does not complete the process and the Management Board will continue to look for financing options and development opportunities for the Company’s capital group.
pH Partners, LLC, with its seat in Austin, Texas, USA served as financial advisor to MEDICALgorithmics S.A. and Medi-Lynx Cardiac Monitoring, LLC.