NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
April
30, 2018
The
following (a) condensed consolidated balance sheet as of April 30, 2018, which has been derived from audited financial statements,
and (b) the unaudited condensed consolidated interim financial statements included herein have been prepared by Non-Invasive Monitoring
Systems, Inc. (together with its consolidated subsidiaries, the “Company” or “NIMS”) in accordance with
accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions
to the quarterly report on Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by GAAP for complete financial statements. These statements reflect adjustments, all of which are of a
normal, recurring nature, and which are, in the opinion of management, necessary to present fairly the Company’s financial
position as of April 30, 2018, and results of operations and cash flows for the interim periods ended April 30, 2018 and 2017.
The results of operations for the three and nine months ended April 30, 2018, are not necessarily indicative of the results for
a full year. Certain information and footnote disclosure normally included in financial statements prepared in accordance with
GAAP have been condensed or omitted. The Company’s accounting policies continue unchanged from July 31, 2017. These financial
statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s
annual report on Form 10-K for the year ended July 31, 2017.
1.
ORGANIZATION AND BUSINESS
Organization.
Non-Invasive Monitoring Systems, Inc., a Florida corporation (together with its consolidated subsidiaries, the “Company”
or “NIMS”), began business as a medical diagnostic monitoring company to develop computer-aided continuous monitoring
devices to detect abnormal respiratory and cardiac events using sensors on the human body’s surface. It has ceased to operate
in this market and has licensed the rights to its technology. The Company is now focused on developing and marketing its Exer-Rest
®
line of acceleration therapeutic platforms based upon unique, patented whole body periodic acceleration (“WBPA”)
technology. The Exer-Rest line of acceleration therapeutic platforms currently includes the Exer-Rest AT, AT3800 and AT4700 models.
Business.
The Company is developing and marketing its Exer-Rest
®
line of acceleration therapeutic platforms based
upon unique, patented whole body periodic acceleration (“WBPA”) technology. The Exer-Rest line of acceleration therapeutic
platforms currently includes the Exer-Rest AT, AT3800 and AT4700 models.
During
the calendar years 2005 to 2007, the Company designed, developed and manufactured the first Exer-Rest platform (now the Exer-Rest
AT), a second generation acceleration therapeutics platform, and updated its operations to promote the Exer-Rest AT overseas as
an aid to improve circulation and joint mobility and to relieve minor aches and pains.
The
Company has developed a third generation of Exer-Rest acceleration therapeutic platforms (designated the Exer-Rest AT3800 and
the Exer-Rest AT4700) that has been manufactured by Sing Lin Technologies Co. Ltd. (“Sing Lin”) based in Taichung,
Taiwan (see Note 10).
The
Company’s condensed financial statements have been prepared and presented on a basis assuming it will continue as a going
concern. As reflected in the accompanying unaudited condensed consolidated financial statements, the Company had net losses of
$338,000 and $412,000 for the nine month periods ended April 30, 2018 and 2017, respectively, and has experienced cash outflows
from operating activities. The Company also has an accumulated deficit of $26.4 million as of April 30, 2018 and has potential
purchase obligations at April 30, 2018 (see note 10). The Company had $157,000 of cash at April 30, 2018 and negative working
capital of approximately $3,571,000. These matters raise substantial doubt about the Company’s ability to continue as a
going concern.
The
Company is continuing its business activities without any significant revenues from product sales. Absent any significant revenues
from product sales, the Company is seeking debt or equity financing or a strategic collaboration. There is no assurance that the
Company will be successful in this regard, and, if not successful, that it will be able to continue its business activities. The
accompanying condensed consolidated financial statements do not include any adjustments that might be necessary from the outcome
of this uncertainty.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation.
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries,
Non-Invasive Monitoring Systems of Florida, Inc., which has no current operations, and NIMS of Canada, Inc., a Canadian corporation,
which has no current operations. All material inter-company accounts and transactions have been eliminated in consolidation.
Use
of Estimates.
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America (“GAAP”) requires management to make estimates and assumptions, such as accounts receivable,
warranty accrual, deferred taxes, and the input variables for stock based compensation as estimates, that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated
financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ materially
from these estimates.
Cash
and Cash Equivalents.
The Company considers all highly liquid short-term investments purchased with an original maturity
date of three months or less to be cash equivalents. The Company had approximately $157,000 and $11,000, on deposit in bank operating
accounts at April 30, 2018 and July 31, 2017, respectively.
Allowances
for Doubtful Accounts.
Royalties and other receivables are recorded at the stated amount of the transactions. The Company
provides an allowance for royalties and other receivables it believes it may not collect in full. Receivables are written off
when they are deemed to be uncollectible and all collection attempts have ceased. The amount of bad debt recorded each period
and the resulting adequacy of the allowance at the end of each period are determined using a combination of the Company’s
historical loss experience, customer-by-customer analysis of the Company’s accounts receivable each period and subjective
assessments of the Company’s future bad debt exposure.
Inventories.
Inventories are stated at lower of cost or net realizable value using the first-in, first-out method, and are evaluated
at least annually for impairment. Inventories at July 31, 2017 primarily consist of finished Exer-Rest units, spare parts and
accessories. Provisions for potentially obsolete or slow-moving inventory are made based on management’s analysis of inventory
levels, historical obsolescence and future sales forecasts. The Company had fully written down its inventory during the six
months ended January 31, 2017 and had no inventory value at April 30, 2018.
Tooling
and Equipment.
These assets are stated at cost and depreciated or amortized using the straight-line method, over their
estimated useful lives.
Long-lived
Assets.
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. In performing the review for recoverability, the Company estimates the future
undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected
future cash flows is less than the carrying amount of the assets, an impairment loss is recognized as the difference between the
fair value and the carrying amount of the asset.
Taxes
Assessed on Revenue-Producing Transactions.
The Company presents sales taxes assessed on revenue-producing transactions
between a seller and customer using the net presentation; thus, sales and cost of revenues are not affected by such taxes.
Income
Taxes.
The Company provides for income taxes using an asset and liability based approach. Deferred income tax assets and
liabilities are recorded to reflect the tax consequences in future years of temporary differences between the carrying amounts
of assets and liabilities for financial statement and income tax purposes. The deferred tax asset for loss carryforwards and other
potential future tax benefits has been fully offset by a valuation allowance since it is uncertain whether any future benefit
will be realized. The utilization of the loss carryforward is limited to future taxable earnings of the Company and may be subject
to severe limitations if the Company undergoes an ownership change pursuant to the Internal Revenue Code Section 382.
The
Company files its tax returns as prescribed by the laws of the jurisdictions in which it operates. Tax years ranging from 2014
to 2017 remain open to examination by various taxing jurisdictions as the statute of limitations has not expired. It is the Company’s
policy to include income tax interest and penalty expense in its tax provision.
As
a result of the valuation allowance, the enactment of the Tax Cuts and Jobs Act of 2017 had no effect on the statement of operations.
Due to the timing of the enactment and complexity involved in applying the provisions of the Tax Act, the Company based our provisions
on reasonable estimates of the Act’s effects in our financial statements as of December 31, 2017. The Company will complete
its accounting for the Act after it has considered additional guidance issued by the U.S. Treasury Department, the IRS, state
tax authorities and other standard-setting bodies, and have gathered and analyzed additional data relative to the Company’s
calculations. This may result in adjustments to the provisional amounts, which would impact the provision for income taxes and
effective tax rate in the period the adjustments are made.
Revenue
Recognition.
Revenue from product sales is recognized when persuasive evidence of an arrangement exists, the goods are
shipped and title has transferred, the price is fixed or determinable, and the collection of the sales proceeds is reasonably
assured. The Company recognizes royalties as they are earned, based on reports from licensees. Research and consulting revenue
and revenue from sales of extended warranties on therapeutic platforms are recognized over the term of the respective agreements.
Advertising
Costs.
The Company expenses all costs of advertising and promotions as incurred. There were no advertising and promotional
costs incurred for the three and nine months ended April 30, 2018 and 2017.
Research
and Development Costs.
Research and development costs are expensed as incurred, and primarily consist of payments to third
parties for research and development of the Exer-Rest
®
device and regulatory testing and other costs to obtain
FDA approval. There were no research and development costs incurred for the nine months ended April 30, 2018 and year ended July
31, 2017.
Warranties.
The Company’s warranties are two years on all Exer-Rest
®
products sold domestically and one year
for products sold outside of the U.S. and are accrued based on management’s estimates and the history of warranty costs
incurred. There were no material warranty costs incurred during the three and nine months ended April 30, 2018 and 2017, and management
estimates that the Company’s accrued warranty expense at April 30, 2018 will be sufficient to offset claims made for units
under warranty.
Stock-based
compensation.
The Company recognizes all share-based payments, including grants of stock options, as operating costs and
expenses, based on their grant date fair values. Stock-based compensation expense is recognized over the vesting life of the underlying
stock options and is included in selling, general and administrative costs and expenses in the condensed consolidated comprehensive
statements of operations for all periods presented.
Fair
Value of Financial Instruments.
Fair value estimates discussed herein are based upon certain market assumptions and pertinent
information available to management as of April 30, 2018 and July 31, 2017. The respective carrying value of certain on-balance-sheet
financial instruments such as cash and cash equivalents, royalties and other receivables, accounts payable and accrued expenses
approximate fair values because they are short term in nature or they bear current market interest rates. As of April 30, 2018,
the respective carrying value of the notes payable – related party and notes payable – other approximate our current
borrowing rate for similar debt instruments of comparable maturity and are considered Level 3 measurements within the fair value
hierarchy.
Loss
Contingencies.
We recognize contingent losses that are probable and estimable. In this context, we define probability
as circumstances under which events are likely to occur. In regards to legal costs, we record such costs as incurred.
Recent
Accounting Pronouncements.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230)
.
This standard addresses the classification of eight specific cash flow issues with the objective of reducing the existing diversity
in practice. ASU 2016-15 will be effective for fiscal years beginning after December 15, 2017, including interim periods within
those fiscal years, with early adoption permitted. The Company does not expect that the adoption of this new standard will have
a material impact on its Condensed Consolidated Financial Statements.
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-02,
Leases
(Topic 842). ASU 2016-02 impacts any entity that enters into a lease with some specified scope exceptions.
This new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on
the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with
classification affecting the pattern of expense recognition in the statement of operations. The guidance updates and supersedes
Topic 840,
Leases
. For public entities, ASU 2016-02 is effective for fiscal years, and interim periods with those years,
beginning after December 15, 2018, and early adoption is permitted. A modified retrospective transition approach is required for
leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements,
with certain practical expedients available. The Company has not yet implemented this guidance. We are currently evaluating the
impact of this new guidance on our Condensed Consolidated Financial Statements.
In
May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers.”
ASU 2014-09, as amended, clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP that
removes inconsistencies and weaknesses in revenue requirements, provides a more robust framework for addressing revenue issues,
improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, provides
more useful information to users of financial statements through improved disclosure requirements and simplifies the preparation
of financial statements by reducing the number of requirements to which an entity must refer. ASU 2014-09 is effective for fiscal
years, and interim periods within those years, beginning after December 15, 2017. Companies can choose to apply the ASU using
either the full retrospective approach or a modified retrospective approach. We are currently evaluating the impact of this new
guidance on our Condensed Consolidated Financial Statements.
3.
INVENTORIES
The
Company recorded inventory valuation adjustments of $99,000 and $327,000 for the years ended July 31, 2017 and 2016, respectively.
The $99,000 and $327,000 inventory valuation adjustment for the year ended July 31, 2017 and 2016, respectively, resulted from
management’s business review and related assessment of the net realizable value of the Exer-Rest units. Factors in this
determination included the age of inventory, recent historical sales, and the uncertainty of when the Company would have a sales
team, either internal or through an alliance or collaboration, for the Exer-Rest. In light of the change in circumstances in connection
with management’s business review which included a decision to not pursue re-hiring a sales force or such other alternatives
in the foreseeable future, management reassessed its inventory valuation and recorded a provision on inventory.
4.
STOCK-BASED COMPENSATION
The
Company measures the cost of employee, officer and director services received in exchange for an award of equity instruments based
on the grant-date fair value of the award. The fair value of the Company’s stock option awards is expensed over the vesting
life of the underlying stock options using the graded vesting method, with each tranche of vesting options valued separately.
The Company recorded stock-based compensation of $0 for the nine months ended April 30, 2018 and 2017.
In
November 2010, the Company’s Board and Compensation Committee approved the Non-Invasive Monitoring Systems, Inc. 2011 Stock
Incentive Plan (the “2011 Plan”). Awards granted under the 2011 Plan may consist of incentive stock options, stock
appreciation rights (SAR), restricted stock grants, restricted stock units (RSU) performance shares, performance units or cash
awards. Subject to adjustment in certain circumstances, the 2011 Plan authorizes up to 4,000,000 shares of the Company’s
common stock for issuance pursuant to the terms of the 2011 Plan. The 2011 Plan was approved by our shareholders in March 2012
and no awards have been granted under the 2011 Plan as of April 30, 2018.
As
of April 30, 2018, there were no outstanding stock options. The Company did not grant any stock options during the nine months
ended April 30, 2018 or 2017.
5.
NOTES PAYABLE
2010
Credit Facility.
On March 31, 2010, the Company entered into a new Note and Security Agreement with Frost Gamma Investments
Trust, a trust controlled by Dr. Phillip Frost, which beneficially owns in excess of 10% of the Company’s common stock (“Frost
Gamma”), and Hsu Gamma Investments, LP, an entity controlled by the Company’s Chairman and Interim CEO (“Hsu
Gamma” and together with Frost Gamma, the “Lenders”), pursuant to which the Lenders have provided a revolving
credit line (the “Credit Facility”) in the aggregate principal amount of up to $1.0 million, secured by all of the
Company’s personal property. The Company is permitted to borrow and reborrow from time to time under the Credit Facility
until July 31, 2018 (the “Credit Facility Maturity Date”). The interest rate payable on amounts outstanding under
the Credit Facility is 11% per annum and increases to 16% per annum after the Credit Facility Maturity Date or after an event
of default. All amounts owing under the Credit Facility are required to be repaid by the Credit Facility Maturity Date and amounts
outstanding are prepayable at any time without premium or penalty. As of April 30, 2018, the Company had drawn an aggregate of
$1,000,000 under the Credit Facility and there is no available balance remaining.
2011
Promissory Notes.
On September 12, 2011, the Company entered into two promissory notes in the principal amount of $50,000
each with Frost Gamma, a trust controlled by Dr. Phillip Frost, which beneficially owns in excess of 10% of the Company’s
common stock, and with an unrelated third party for a total of $100,000. The interest rate payable by NIMS on both the Frost Gamma
Note and the unrelated third party note is 11% per annum, payable on the maturity date of July 31, 2018 (the “Promissory
Notes Maturity Date”). The Company may prepay either or both notes in advance of the Promissory Notes Maturity Date without
premium or penalty.
2012
Promissory Note.
On May 30, 2012, the Company entered into a promissory note in the principal amount of $50,000 with Hsu Gamma,
an entity controlled by NIMS’ Chairman of the Board and Interim Chief Executive Officer, Jane H. Hsiao, (the “Hsu
Gamma Note”). The interest rate payable by NIMS on the Hsu Gamma Note is 11% per annum, payable on the Promissory Notes
Maturity Date. The Hsu Gamma Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
2013
Promissory Note.
On February 22, 2013, the Company entered into a promissory note in the amount of $50,000 with Jane Hsiao,
the Company’s Chairman of the Board and Interim Chief Executive Officer (the “2013 Hsiao Note”). The interest
rate payable by the Company on the 2013 Hsiao Note is 11% per annum, payable on the Promissory Notes Maturity Date. The 2013 Hsiao
Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
2014
Promissory Note.
On September 24, 2014, the Company entered into a promissory note (the “2014 Hsiao Note”) in
the principal amount of $50,000 with Jane Hsiao, NIMS’ Chairman of the Board and Interim Chief Executive Officer. The interest
rate payable by NIMS on the 2014 Hsiao Note is 11% per annum, payable on the Promissory Notes Maturity Date. The 2014 Hsiao Note
may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
2015
Promissory Notes.
On February 2, 2015, the Company entered into a promissory note (the “2015 Hsiao Note”) in the
principal amount of $50,000 with Jane Hsiao, the Company’s Chairman of the Board and Interim Chief Executive Officer. The
interest rate payable by the Company on the 2015 Hsiao Note is 11% per annum, payable on the Promissory Notes Maturity Date. The
2015 Hsiao Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
On
April 16, 2015, the Company entered into a promissory note (“April 2015 Frost Gamma Note”) in the amount of $100,000
with Frost Gamma”), a trust controlled by Dr. Phillip Frost, which beneficially owns in excess of 10% of the Company’s
common stock. The interest rate payable by the Company on the April 2015 Frost Gamma Note is 11% per annum, payable on the Promissory
Notes Maturity Date. The April 2015 Frost Gamma Note may be prepaid in advance of the Promissory Notes Maturity Date without premium
or penalty.
On
August 12, 2015, the Company entered into a promissory note in the principal amount of $25,000 with Frost Gamma (the “August
2015 Frost Gamma Note”), a trust controlled by Dr. Phillip Frost, which beneficially owns in excess of 10% of the Company’s
common stock. The interest rate payable by the Company on the August 2015 Frost Gamma Note is 11% per annum, payable on the Promissory
Notes Maturity Date. The August 2015 Frost Gamma Note may be prepaid in advance of the Promissory Notes Maturity Date without
premium or penalty.
On
October 27, 2015, the Company entered into a promissory note in the principal amount of $50,000 with Frost Gamma (the “October
2015 Frost Gamma Note”), a trust controlled by Dr. Phillip Frost, which beneficially owns in excess of 10% of the Company’s
common stock. The interest rate payable by the Company on the October 2015 Frost Gamma Note is 11% per annum, payable on the Promissory
Notes Maturity Date. The October 2015 Frost Gamma Note may be prepaid in advance of the Promissory Notes Maturity Date without
premium or penalty.
On
October 27, 2015, the Company entered into a promissory note in the principal amount of $50,000 with Jane Hsiao, the Company’s
Chairman of the Board and Interim Chief Executive Officer (the “October 2015 Hsiao Note”). The interest rate payable
by the Company on the October 2015 Hsiao Note is 11% per annum, payable on the Promissory Notes Maturity Date. The October 2015
Hsiao Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
2016
Promissory Notes.
On June 1, 2016, the Company entered into a promissory note in the principal amount of $100,000 with Frost
Gamma (the “June 2016 Frost Gamma Note”), a trust controlled by Dr. Phillip Frost, which beneficially owns in excess
of 10% of the Company’s common stock. The interest rate payable by the Company on the June 2016 Frost Gamma Note is 11%
per annum, payable on the Promissory Notes Maturity Date. The June 2016 Frost Gamma Note may be prepaid in advance of the Promissory
Notes Maturity Date without premium or penalty.
On
June 1, 2016, the Company entered into a promissory note in the principal amount of $100,000 with Hsu Gamma, an entity controlled
by NIMS’ Chairman of the Board and Interim Chief Executive Officer, Jane H. Hsiao, (the “June 2016 Hsu Gamma Note”).
The interest rate payable by NIMS on the June 2016 Hsu Gamma Note is 11% per annum, payable on the Promissory Notes Maturity Date.
The June 2016 Hsu Gamma Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
2017
Promissory Notes.
On April 6, 2017, the Company entered into a promissory note in the principal amount of $50,000 with Frost
Gamma (the “2017 Frost Gamma Note”), a trust controlled by Dr. Phillip Frost, which beneficially owns in excess of
10% of the Company’s common stock. The interest rate payable by the Company on the 2017 Frost Gamma Note is 11% per annum,
payable on the Promissory Notes Maturity Date. The 2017 Frost Gamma Note may be prepaid in advance of the Promissory Notes Maturity
Date without premium or penalty.
On
April 6, 2017, the Company entered into a promissory note in the principal amount of $50,000 with Hsu Gamma, an entity controlled
by NIMS’ Chairman of the Board and Interim Chief Executive Officer, Jane H. Hsiao, (the “2017 Hsu Gamma Note”).
The interest rate payable by NIMS on the 2017 Hsu Gamma Note is 11% per annum, payable on the Promissory Notes Maturity Date.
The 2017 Hsu Gamma Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
On
September 22, 2017, the Company entered into a promissory note in the principal amount of $50,000 with Frost Gamma (the “September
2017 Frost Gamma Note”), a trust controlled by Dr. Phillip Frost, which beneficially owns in excess of 10% of the Company’s
common stock. The interest rate payable by the Company on the 2017 Frost Gamma Note is 11% per annum, payable on the Promissory
Notes Maturity Date. The 2017 Frost Gamma Note may be prepaid in advance of the Promissory Notes Maturity Date without premium
or penalty.
On
September 22, 2017, the Company entered into a promissory note in the principal amount of $50,000 with Hsu Gamma, an entity controlled
by NIMS’ Chairman of the Board and Interim Chief Executive Officer, Jane H. Hsiao, (the “September 2017 Hsu Gamma
Note”). The interest rate payable by NIMS on the 2017 Hsu Gamma Note is 11% per annum, payable on the Promissory Notes Maturity
Date. The 2017 Hsu Gamma Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
2018
Promissory Notes.
On
February 15, 2018, the Company entered into a promissory note in the principal amount of $100,000.00 with Frost Gamma Investments
Trust (the “2018 Frost Gamma Note”), a trust controlled by Dr. Phillip Frost, which beneficially owns in excess of
10% of NIMS’ common stock. The interest rate payable by NIMS on the 2018 Frost Gamma Note is 11% per annum, payable on the
Promissory Notes Maturity Date. The 2018 Frost Gamma Note may be prepaid in advance of the Maturity Date without penalty.
On
February 15, 2018, NIMS entered into a promissory note in the principal amount of $100,000.00 with Hsu Gamma Investments, L.P.,
an entity controlled by the Company’s Chairman and Interim CEO, Jane Hsiao (the “2018 Hsu Gamma Note”). The
interest rate payable by NIMS on the 2018 Hsu Gamma Note is 11% per annum, payable on the Promissory Notes Maturity Date. The
2018 Hsu Gamma Note may be prepaid in advance of the Maturity Date without penalty.
At
April 30, 2018, the Company was obligated under the above described Credit Facility and promissory notes to make future principal
payments (excluding interest) as follows:
|
Year
Ending July 31,
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2,125,000
|
|
|
|
|
$
|
2,125,000
|
|
6.
SHAREHOLDERS’ EQUITY
The
Company has three classes of Preferred Stock. Holders of Series B Preferred Stock, Series C Preferred Stock and Series D Preferred
Stock are entitled to vote with the holders of common stock as a single class on all matters.
Series
B Preferred Stock is not redeemable by the Company and has a liquidation value of $100 per share, plus declared and unpaid dividends,
if any. Dividends are non-cumulative, and are at the rate of $10 per share, if declared.
Series
C Preferred Stock is redeemable by the Company at a price of $0.10 per share upon 30 days prior written notice. This series has
a liquidation value of $1.00 per share plus declared and unpaid dividends, if any. Dividends are non-cumulative, and are at the
rate of $0.10 per share, if declared. Each share of Series C Preferred Stock is convertible into 25 shares of the Company’s
common stock upon payment of a conversion premium of $4.20 per share of common stock. The conversion rate and the conversion premium
are subject to adjustments in the event of stock splits, stock dividends, reverse stock splits and certain other events.
Series
D Preferred Stock is not redeemable by the Company. This series has a liquidation value of $1,500 per share, plus declared and
unpaid dividends, if any. Each share of Series D Preferred Stock is convertible into 5,000 shares of the Company’s common
stock. The conversion rate is subject to adjustments in the event of stock splits, stock dividends, reverse stock splits and certain
other events.
The
Company did not issue any shares of the Company’s common stock for the nine months ended April 30, 2018 and 2017.
No
preferred stock dividends were declared for the three and nine months ended April 30, 2018 and 2017.
7.
BASIC AND DILUTED LOSS PER SHARE
Basic
net loss per common share is computed by dividing net loss attributable to common shareholders by the weighted average number
of common shares outstanding during the period. Diluted net loss per common share is computed giving effect to all dilutive potential
common shares that were outstanding during the period. Diluted potential common shares consist of incremental shares issuable
upon exercise of stock options and warrants and conversion of preferred stock. In computing diluted net loss per share for the
three and nine months ended April 30, 2018 and 2017, no dilution adjustment has been made to the weighted average outstanding
common shares because the assumed exercise of outstanding options and warrants and the conversion of preferred stock would be
anti-dilutive.
Potential
common shares not included in calculating diluted net loss per share are as follows:
|
|
|
April
30, 2018
|
|
|
April
30, 2017
|
|
|
Stock
options
|
|
|
-
|
|
|
|
-
|
|
|
Series
C Preferred Stock
|
|
|
1,551,200
|
|
|
|
1,551,200
|
|
|
Series
D Preferred Stock
|
|
|
13,910,000
|
|
|
|
13,910,000
|
|
|
Total
|
|
|
15,461,200
|
|
|
|
15,461,200
|
|
8.
RELATED PARTY TRANSACTIONS
The
Company signed a five year lease for office space in Miami, Florida with a company owned by Dr. Phillip Frost, who is the beneficial
owner of more than 10% of the Company’s Common Stock. The rental payments under the Miami office lease, which commenced
January 1, 2008 and expired on December 31, 2012, were approximately $1,250 per month and continued on a month-to-month basis.
In February 2016, the office space rent was reduced to $0 per month. The Company did not record any rent expense related to the
Miami lease for the three and nine months ended April 30, 2018.
The
Company signed a three year lease for warehouse space in Hialeah, Florida with a company jointly controlled by Dr. Frost and Dr.
Jane Hsiao, the Company’s Chairman and Interim CEO. The rental payments under the Hialeah warehouse lease, which commenced
February 1, 2009 and expired on January 31, 2012, were approximately $5,000 per month for the first year and were subsequently
on a month-to-month basis following the expiration of the lease. As further described in Note 9, the Company vacated the
Hialeah warehouse in September 2014 and entered into a new lease with an unrelated third party. The Company did not record any
rent expense related to the Hialeah warehouse for the three and nine months ended April 30, 2018 and 2017.
Accounts
payable related to the two leases above totaled approximately $191,000 as of April 30, 2018 and July 31, 2017.
The
Company has the Credit Facility and multiple notes payable outstanding to related parties, as more fully described in Note 5 to
these consolidated financial statements.
The
Company incurred interest expense related to the Credit Facility of approximately $27,000 and $83,000 for the three and nine months
ended April 30, 2018 and 2017. The Company also incurred interest expense related to the promissory notes of approximately $29,000
and $78,000 for the three and nine months ended April 30, 2018 and $20,000 and $60,000 for the three and nine months ended April
30, 2017, respectively. Approximately $1,164,000 and $1,003,000 of accrued interest remained outstanding at April 30, 2018
and July 31, 2017, respectively.
Dr.
Hsiao, Dr. Frost and directors Steven Rubin and Rao Uppaluri are each stockholders, current or former officers and/or directors
or former directors of TransEnterix, Inc. (formerly SafeStitch Medical, Inc.) (“TransEnterix”), a publicly-traded
medical device manufacturer, Cogint, Inc. (“Cogint”) (formerly known as IDI, Inc.), a publicly-traded data fusion
company, Red Violet, a publicly-traded software services company spun off from Cogint, Chromadex Corp., a publicly-traded integrated,
global nutraceutical company devoted to improving the way people age., Eloxx Pharmaceuticals, Inc., a publicly-traded clinical-stage
biopharmaceutical company developing novel RNA-modulating drug candidates that are designed to treat rare and ultra-rare premature
stop codon diseases and VBI Vaccines Inc, a vaccine development company.
The
Company’s Chief Financial Officer also served as the Chief Financial Officer of TransEnterix until October 2, 2013. The
Company’s Chief Financial Officer continued as an employee of TransEnterix until March 3, 2014, during which he supervised
the Miami based accounting staff of TransEnterix under a cost sharing arrangement whereby the total salaries of the Miami based
accounting staff was shared by the Company and TransEnterix. Since December 2009, the Company’s Chief Legal Officer has
served under a similar cost sharing arrangement as Corporate Counsel of Cogint and as the Chief Legal Officer of TransEnterix.
The Company recorded additions to selling,
general and administrative costs and expenses to account for the sharing of costs under these arrangements of $9,000 and $27,000,
respectively, for the three and nine months ended April 30, 2018, and $9,000 and $27,000, respectively, for the three and nine
months ended April 30, 2017. Accounts payable to TransEnterix related to these arrangements totaled approximately $1,200 and
$800 respectively, at April 30, 2018 and July 31, 2017.
NIMS
is under common control with multiple entities and the existence of that control could result in operating results or financial
position of each individual entity significantly different from those that would have been obtained if the entities were autonomous.
One of those related parties, OPKO Health, Inc. and NIMS are under common control and OPKO Health, Inc. has a one percent ownership
interest in NIMS that OPKO has accounted for as an equity method investment due to the ability to significantly influence NIMS.
9.
COMMITMENTS AND CONTINGENCIES
Leases.
The
Company is under an operating lease agreement for our corporate office space that expired in 2012. The lease currently continues
on a month to month basis at no cost.
We
house our inventory in approximately 4,000 square feet of warehouse space in Pembroke Park, Florida. The lease commenced September
15, 2014 and originally expired on September 30, 2015 and we have exercised our option to renew the lease and extended the expiration
to September 15, 2017. Following the expiration, we have remained on a month-to-month term.
Generally,
the lease agreements require the payment of base rent plus escalations for increases in building operating costs and real estate
taxes. Rental expense for operating leases amounted to $33,000 and $33,000 for the nine months ended April 30, 2018 and 2017,
respectively.
Product
Development and Supply Agreement.
On
September 4, 2007, the Company entered into a Product Development and Supply Agreement (the “Agreement”) with Sing
Lin Technologies Co. Ltd., a company based in Taichung, Taiwan (“Sing Lin”). Pursuant to the Agreement, the Company
consigned to Sing Lin the development and design of the next generation Exer-Rest and related devices. The Agreement commenced
as of September 3, 2007 and had a term that extended three years from the acceptance by NIMS of the first run of production units.
Thereafter, the Agreement automatically renewed for successive one year terms unless either party sent the other a notice of non-renewal.
Either party was permitted to terminate the Agreement with ninety days prior written notice. Upon termination, each party’s
obligations under the Agreement were to be limited to obligations related to confirm orders placed prior to the termination date.
Pursuant
to the Agreement, Sing Lin designed, developed and manufactured the tooling required to manufacture the acceleration therapeutic
platforms for a total cost to the Company of $471,000. Sing Lin utilized the tooling in the performance of its production obligations
under the Agreement. The Company paid Sing Lin $150,000 of the tooling cost upon execution of the Agreement and $150,000 upon
the Company’s approval of the product prototype concepts and designs. The balance of the final tooling cost became due and
payable in September 2008 upon acceptance of the first units produced using the tooling and was paid in full during the year ended
July 31, 2009.
Under
the now-terminated Agreement, the Company also granted Sing Lin the exclusive distribution rights for the products in certain
countries in the Far East, including Taiwan, China, Japan, South Korea, Malaysia, Indonesia and certain other countries. Sing
Lin agreed not to sell the Products outside its geographic areas in the Far East.
The
Agreement provided for the Company to purchase approximately $2.6 million of Exer-Rest units within one year of the September
2008 acceptance of the final product. The Agreement further provided for the Company to purchase $4.1 million and $8.8 million
of Exer-Rest products in the second and third years following such acceptance, respectively. These minimum purchase amounts were
based upon 2007 product costs multiplied by volume commitments. Through April 30, 2018, the Company had paid Sing Lin $1.7 million
in connection with orders placed through that date. Of this amount, $90,000 was previously included as advances to contract manufacturer.
As of April 30, 2018, the Company has approximately $41,000 of payables due to Sing Lin. As of April 30, 2018, and July 31, 2017,
aggregate minimum future purchases under the Agreement totaled approximately $13.9 million.
As
of April 30, 2018, the Company had not placed orders sufficient to meet the first-year or second-year minimum purchase obligations
under the Agreement. The Company notified Sing Lin in June 2010 that it was terminating the Agreement effective September 2010
and Sing Lin in July 2010 demanded that the Company place orders sufficient to fulfill the three year minimum purchase obligations
in the Agreement. As of June 14, 2018, Sing Lin has not followed up on its July 2010 demand. There can be no assurance
that Sing Lin will not attempt to enforce its remedies under the Agreement or pursue other potential remedies.
10.
RISKS AND UNCERTAINTIES AND CONCENTRATIONS OF RISK
Financial
instruments that potentially subject the Company to risk consist principally of purchases and advances to contract manufacturer.
Purchases
from and Advances to Contract Manufacturer.
Substantially all of the Company’s current inventory has been acquired from
Sing Lin pursuant to the now-terminated Agreement. The Company notified Sing Lin in June 2010 that it was terminating the agreement
effective September 2010 (see note 9). If the Company is unable to establish a contract and obtain a sufficient alternative supply
from Sing Lin or another supplier, it may not be able to procure additional inventory on a timely basis or in the quantities required.
Sing Lin and its subcontractors currently maintain custody of the Company’s specialized tooling, which could adversely impact
the Company’s ability to reallocate production to other vendors.
