The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
January 31, 2020
The following (a)
condensed consolidated balance sheet at July 31, 2019 was derived from audited annual financial statements, but does not contain
all of the footnote disclosures from the annual 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 January 31, 2020, and results of operations
and cash flows for the interim periods ended January 31, 2020 and 2019. The results of operations for the three and six months
ended January 31, 2020, 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, 2019. 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, 2019.
1. ORGANIZATION AND
BUSINESS
Organization. Non-Invasive Monitoring
Systems, Inc., a Florida corporation, 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. The Company has developed and marketed its Exer-Rest® line of acceleration therapeutic
platforms based upon unique, patented whole body periodic acceleration (“WBPA”) technology of which the Company maintains
patents. The Company currently does not have any operational inventory.
Business. The Company developed
a third generation of Exer-Rest acceleration therapeutic platforms (designated the Exer-Rest AT3800 and the Exer-Rest AT4700).
The Company is currently a shell company (as defined in Rule 12b-2 of the Exchange Act).
Discontinued
Operations. On May 3, 2019 the Company exchanged inventory for forgiveness of accrued unpaid rent. The Company has no inventory,
no immediate plans to replenish inventory and has no current plans to develop or market new products.
Accordingly, the Company
determined that the assets and liabilities met the discontinued operations criteria in Accounting Standards Codification 205-20-45
and were classified as discontinued operations at January 31, 2020 and July 31, 2019 and for the three and six months ended January
31, 2020 and 2019.
Going Concern. The Company’s
consolidated financial statements have been prepared and presented on a basis assuming it will continue as a going concern. As
reflected in the accompanying consolidated financial statements, the Company had net losses from continuing operations of approximately
$99,000 and $1,360,000 for the six months ended January 31, 2020 and 2019,
respectively, and has experienced continuous cash outflows from operating activities. The Company also has an accumulated deficit
of approximately $28,139,000 as of January 31, 2020. The Company had approximately $250,000 of cash at January 31, 2020
and working capital deficit of approximately ($17,000). These matters raise substantial doubt about the Company’s
ability to continue as a going concern.
The Company is seeking potential mergers, acquisitions
and strategic collaborations. 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 consolidated financial statements do not include any
adjustments that might be necessary from the outcome of this uncertainty.
Equity Exchange
Agreement. On December 3, 2018, the Company entered into an Equity Exchange Agreement with IRA Financial Trust Company,
a South Dakota trust corporation, IRA Financial Group LLC, a Florida limited liability company (collectively “IRA Financial”),
and their respective equity holders. The Company, IRA Financial and the equity holders subsequently amended the Exchange Agreement
on three occasions to extend the outside date for consummation of the Exchange, with the last such extension expiring on July 3,
2019.
On August 4, 2019,
IRAFG delivered to the Company notice of termination of the Exchange Agreement pursuant to Section 8.01(b)(i) of that agreement
due to the failure of the Exchange to have closed on or prior to the Outside Date. No termination fees, penalties or other amounts
are payable by the Company in respect of such termination.
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 inter-company accounts and transactions have been eliminated in consolidation.
Discontinued Operations. For
the three and six months ended January 31, 2020 and 2019, results from operations for our Exer-Rest Business are classified as
discontinued operations. The carve out of the discontinued operations (i) were prepared in accordance with the SEC’s carve
out rules under Staff Accounting Bulletin (“SAB”) Topic 1B1 and (ii) are derived from identifying and carving out the
specific assets, liabilities, operating expenses and interest expense associated with the Exer-Rest Business’s operations.
Discontinued operations expense allocations,
consisting of warehouse rent and other inventory related expenses incurred by us, are directly attributed to discontinued operations
(see Note 3).
Reclassifications.
Certain amounts in the condensed consolidated balance sheet as of July 31, 2019 and condensed consolidated cash flows statement
for the six months ended January 31, 2019 have been reclassified to conform to the current presentation.
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. 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 $250,000 and $353,000, on deposit in bank operating
accounts at January 31, 2020 and July 31, 2019, respectively.
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 2016 to 2019 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.
Fair Value of Financial Instruments.
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management
as of January 31, 2020 and July 31, 2019. The respective carrying value of certain on-balance-sheet financial instruments such
as cash, prepaid expenses, deposits, other current assets, accounts payable and accrued expenses approximate fair values because
they are short term in nature or they bear current market interest rates.
Loss Contingencies. We recognize
contingent losses that are both probable and estimable. In this context, we define probability as circumstances under which events
are likely to occur. In regard to legal costs, we record such costs as incurred.
Recent Accounting Pronouncements.
The Company considers the applicability and impact of all Accounting Standard Updates (“ASU’s”). ASU’s
not discussed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated
balance sheets or consolidated comprehensive statement of operations.
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 implemented this ASU
on August 1, 2018. The adoption of this update did not have an impact on the Company’s 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
was 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
currently has no long-term leases. However, in the event that the Company should enter any long-term leases it would then evaluate
the effect that the new guidance would have on its consolidated financial statements and related disclosures
3. DISCONTINUED OPERATIONS
On May 3, 2019 the Company exchanged its inventory
for forgiveness of accrued unpaid rent. Concurrent with the exchange management with the appropriate level of authority determined
to discontinue the operations of the product segment. The Company wrote off accounts payable and liabilities of approximately
$4,000 primarily as a result of discontinued operations and other factors.
The detail of the consolidated balance sheets,
the consolidated statement of operations and consolidated cash flows for the discontinued operations is as stated below:
|
|
|
As of
January 31, 2020
|
|
|
As of
July 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Current assets – discontinued operations
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
-
|
|
|
$
|
3
|
|
|
Total current assets – discontinued operations
|
|
|
-
|
|
|
|
3
|
|
|
Total assets – discontinued operations
|
|
$
|
-
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities – discontinued operations
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
51
|
|
|
$
|
55
|
|
|
Total current liabilities – discontinued operations
|
|
|
51
|
|
|
|
55
|
|
|
Total liabilities – discontinued operations
|
|
$
|
51
|
|
|
$
|
55
|
|
|
|
|
For
the three
months ended
January 31, 2020
|
|
|
For
the three
months ended
January 31, 2019
|
|
|
For
the six
months ended
January 31, 2020
|
|
|
For
the six
months ended
January 31, 2019
|
|
|
Selling, general and administrative expenses
|
|
$
|
-
|
|
|
$
|
(12
|
)
|
|
$
|
(3
|
)
|
|
$
|
(25
|
)
|
|
Gain on write off of accounts payable
|
|
|
4
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
Gain (loss) from discontinued operations
|
|
$
|
4
|
|
|
$
|
(12
|
)
|
|
$
|
1
|
|
|
$
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per common share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
For
the three
months ended
January 31, 2020
|
|
|
For
the three
months ended
January 31, 2019
|
|
|
For
the six
months ended
January 31, 2020
|
|
|
For
the six
months ended
January 31, 2019
|
|
|
Cash used in operations for discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from discontinued operations
|
|
$
|
4
|
|
|
$
|
(12
|
)
|
|
|
1
|
|
|
$
|
(25
|
)
|
|
Gain on write off of accounts payable
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
Prepaid expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
Cash used in discontinued operations
|
|
$
|
-
|
|
|
$
|
(12
|
)
|
|
|
-
|
|
|
$
|
(25
|
)
|
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 did not record stock-based compensation for the three and six months ended January 31, 2020 and 2019.
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 January 31, 2020.
As
of January 31, 2020, there were no outstanding stock options and there were no unrecognized costs related to outstanding stock
options. The Company did not grant any stock options during the three and six months ended January 31, 2020 or 2019.
5.
NOTES PAYABLE
The
Company entered into various notes payable with related parties from 2010 to 2018 with an aggregate principal total of $2,175,000
and with an unrelated third party for $50,000 for total principal amount of $2,225,000. The interest rate was 11% and the maturity
date was July 31, 2020. The Company could prepay these notes in advance of the maturity date without premium or penalty.
On
December 21, 2018, the Company issued 50,584,413 shares of Common Stock in exchange for the extinguishment of debt and related
accrued interest totaling approximately $3,541,000. The Company incurred interest expense related to the Credit Facility and notes
payable of $0 for the three and six months ended January 31, 2020, and $33,715 and $93,000 for the three and six months ended
January 31, 2019.
The
Company maintains a 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 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. The Company is permitted to borrow and reborrow from time to time under the
Credit Facility until July 31, 2020 (the “Credit Facility Maturity Date”). The balance of the principal due under
the Credit Facility was $0 at January 31, 2020 and July 31, 2019.
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. In February
2019, all outstanding shares of Series C Preferred Stock were redeemed by the Company following 30 days written notice. The redemption
amount for the 62,048 Series C Preferred Stock was approximately $25,000 at a rate of $0.40 per share of which approximately $15,000
was paid and approximately $10,000 is included in accrued expenses at January 31, 2020. The redeemed Series C Preferred Stock
were then cancelled following the redemption.
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. In February 2019, all holders of the 2,782 outstanding shares of Series D Preferred Stock converted their shares
to common stock. As a result, the Company issued 13,910,000 common shares.
No
preferred stock dividends were declared for the three and six months ended January 31, 2020 and 2019.
The
Company did not issue any shares of the Company’s common stock during the three and six months ended January 31, 2020 and
2019.
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 six months ended January 31, 2020 and 2019, 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. There are no options or warrants outstanding as of January 31, 2020 and 2019.
Potential
common shares not included in calculating diluted net loss per share are as follows:
|
|
|
January 31, 2020
|
|
|
January 31, 2019
|
|
|
Series C Preferred Stock
|
|
|
-
|
|
|
|
1,551,200
|
|
|
Series D Preferred Stock
|
|
|
-
|
|
|
|
13,910,000
|
|
|
Total
|
|
|
-
|
|
|
|
15,461,200
|
|
8.
RELATED PARTY TRANSACTIONS
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 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. The Chief Financial Officer continues
to serve as the Chief Financial Officer of Cocrystal Pharma, Inc., a clinical stage biotechnology company, and in which Steve
Rubin and Jane Hsiao, serve on the Board. Since December 2009, the Company’s Chief Legal Officer has served under a similar
cost sharing arrangement as the Chief Legal Officer of TransEnterix.
The
Company signed a five year lease for office space in Miami, Florida with a company controlled 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 then continued on a month-to-month
basis. In February 2016 the rent was reduced to $0 per month. For the three and six months ended January 31, 2020 and 2019, the
Company did not record any rent expense related to the Miami lease. At January 31, 2020 and July 31, 2019, approximately $0 and
$0 in rent was payable, respectively.
The
Company 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. (“OPKO”) and the Company are under common control
and OPKO has a one percent ownership interest in the Company that OPKO has accounted for as an equity method investment due to
the ability to significantly influence the Company.
9.
COMMITMENTS AND CONTINGENCIES
Leases.
The
Company was 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
housed 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 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. On May 3, 2019 the Company exchanged
inventory for forgiveness of $15,000 of accrued unpaid rent. The Company had previously written off the value of this inventory
resulting in a gain on the forgiveness of approximately $15,000. The Company no longer leases this Pembroke Park warehouse following
the sale of inventory.
COVID-19.
Current
economic conditions with COVID-19 have been, and continue to be, volatile and continued instability in these market conditions
may limit our ability to access the capital necessary to fund and grow our business and to replace, in a timely manner, maturing
liabilities or to successfully examine strategic alternatives. Quarantines would make our ability to look for strategic alternatives
more difficult and prospects of borrowing or equity raises would be more challenging. Additionally, the sales of equity or convertible
debt securities may result in dilution to our stockholders.
Product
Development and Supply Agreement.
In
September 2007, the Company entered into a Product Development and Supply Agreement under Singapore law (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 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. Sing Lin has not followed up
on its July 2010 demand as of this filing and the Company does not anticipate that they will in the future. The
Company has opinion from counsel that an adversarial process by Sing Lin is time-barred under the
Limitation Act under Singapore law where the agreement was bound.