Attached files
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UNITED STATES
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SECURITIES AND EXCHANGE COMMISSION
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Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
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For the quarterly period ended March 31, 2016
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or
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For the transition period from ___________ to ____________
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Commission file number: 001-36763
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MEDOVEX CORP.
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(Exact Name of Registrant as Specified in Its Charter)
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) ☒Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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(Do not check if smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒No
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As of May 13, 2016, 11,316,764 shares of the registrant’s common stock were outstanding.
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4
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This Quarterly Report on Form 10-Q contains “forward-looking statements” as defined under United States federal securities laws. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:
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In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these words. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. You should also refer to the section of our Annual report on Form 10-K entitled “Risk Factors” for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We do not undertake to update any of the forward-looking statements after the date of this Quarterly Report, except to the extent required by applicable securities laws.
CONSOLIDATED BALANCE SHEETS
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March 31, 2016
(unaudited)
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December 31, 2015
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Assets
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Current Assets
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Cash
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$ | 471,224 | $ | 1,570,167 | ||||
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Accounts receivable, Net
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-- | 33,045 | ||||||
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Prepaid expenses
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155,622 | 169,839 | ||||||
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Inventory
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1,878 | 1,878 | ||||||
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Total Current Assets
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628,724 | 1,774,929 | ||||||
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Property and Equipment, Net
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26,023 | 24,838 | ||||||
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Deposits
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2,751 | 2,751 | ||||||
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Developed Technology, Net
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2,571,429 | 2,678,571 | ||||||
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Trademark, Net
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560,000 | 595,000 | ||||||
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Goodwill
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6,455,645 | 6,455,645 | ||||||
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Total Assets
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$ | 10,244,572 | $ | 11,531,734 | ||||
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Liabilities and Stockholders' Equity
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Current Liabilities
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Accounts payable
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$ | 210,812 | $ | 278,309 | ||||
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Accrued liabilities
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149,072 | 100,317 | ||||||
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Interest payable
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69,222 | 76,712 | ||||||
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Notes payable
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109,269 | 134,540 | ||||||
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Total Current Liabilities
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538,375 | 589,878 | ||||||
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Long-Term Liabilities
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Convertible debt
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-- | 753,914 | ||||||
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Notes Payable, net of current portion
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149,748 | 164,726 | ||||||
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Deferred Rent
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786 | 491 | ||||||
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Total Long-Term Liabilities
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150,534 | 919,131 | ||||||
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Total Liabilities
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688,909 | 1,509,009 | ||||||
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Stockholders' Equity
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Preferred stock - $.001 par value: 500,000 shares
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authorized, no shares outstanding
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-- | -- | ||||||
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Common stock - $.001 par value: 49,500,000 shares
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authorized, 11,808,216 and 11,256,175 shares issued at March 31, 2016 and December 31, 2015, respectively,
11,606,593 and 11,048,203 shares outstanding at March 31, 2016 (unaudited) and December 31, 2015, respectively
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11,808 | 11,256 | ||||||
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Additional paid-in capital
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21,524,583 | 20,164,911 | ||||||
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Due from Stockholder
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(15,000 | ) | (20,000 | ) | ||||
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Accumulated deficit
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(11,965,728 | ) | (10,133,442 | ) | ||||
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Total Stockholders' Equity
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9,555,663 | 10,022,725 | ||||||
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Total Liabilities and Stockholders' Equity
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$ | 10,244,572 | $ | 11,531,734 | ||||
See notes to consolidated financial statements
MEDOVEX CORP. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
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Three Months Ended March 31,
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2016
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2015
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Revenues
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$ | -- | $ | -- | ||||
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Operating Expenses
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General and administrative
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1,130,711 | 1,149,723 | ||||||
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Sales and marketing
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21,272 | -- | ||||||
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Research and development
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189,283 | 304,719 | ||||||
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Depreciation and amortization
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144,170 | -- | ||||||
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Total Operating Expenses
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1,485,436 | 1,454,442 | ||||||
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Operating Loss
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(1,485,436 | ) | (1,454,442 | ) | ||||
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Other Expenses
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Interest Expense
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346,850 | -- | ||||||
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Total Other Expenses
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346,850 | -- | ||||||
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Net Loss
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$ | (1,832,286 | ) | $ | (1,454,442 | ) | ||
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Basic and diluted net loss per common share
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$ | (0.16 | ) | $ | (0.16 | ) | ||
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Shares used in computing basic and diluted net loss per share
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11,624,202 | 9,381,175 | ||||||
See notes to consolidated financial statements
MEDOVEX CORP. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the three months ended March 31, 2016
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Common Stock
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Additional
Paid-in
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Due From
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Accumulated
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Stockholders'
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Shares
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Amount
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Capital
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Stockholder
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Deficit
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Equity
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Balance - December 31, 2015
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11,256,175 | $ | 11,256 | $ | 20,164,911 | $ | (20,000 | ) | $ | (10,133,442 | ) | $ | 10,022,725 | |||||||||||
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Conversion of promissory note on January 25, 2016
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552,041 | 552 | 1,071,961 | -- | -- | 1,072,513 | ||||||||||||||||||
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Warrant price modification on January 25, 2016
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-- | -- | 18,050 | -- | -- | 18,050 | ||||||||||||||||||
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Warrant price modification on February 16, 2016
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-- | -- | 7,670 | -- | -- | 7,670 | ||||||||||||||||||
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Repayment of due from stockholder through forgone director fees
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-- | -- | -- | 5,000 | -- | 5,000 | ||||||||||||||||||
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Stock based compensation
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-- | -- | 261,991 | -- | -- | 261,991 | ||||||||||||||||||
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Net loss
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-- | -- | -- | -- | (1,832,286 | ) | (1,832,286 | ) | ||||||||||||||||
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Balance - March 31, 2016
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11,808,216 | $ | 11,808 | $ | 21,524,583 | $ | (15,000 | ) | $ | (11,965,728 | ) | $ | 9,555,663 | |||||||||||
See notes to consolidated financial statements
MEDOVEX CORP. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
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Three Months Ended March 31,
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2016
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2015
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Cash Flows from Operating Activities
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Net loss
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$ | (1,832,286 | ) | $ | (1,454,442 | ) | ||
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation
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2,028 | 1,485 | ||||||
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Amortization of intangible assets
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142,142 | -- | ||||||
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Amortization of debt discount
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246,086 | -- | ||||||
| Debt conversion expense | 68,694 | -- | ||||||
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Stock based compensation
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261,991 | 47,377 | ||||||
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Straight-line rent adjustment
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295 | -- | ||||||
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Non-cash directors fees
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5,000 | -- | ||||||
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Adjustment of fair value of warrant modification
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25,720 | -- | ||||||
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Changes in operating assets and liabilities, net of effects of acquisition:
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Accounts receivable
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33,045 | -- | ||||||
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Prepaid expenses
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14,217 | 34,133 | ||||||
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Accounts payable
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(67,497 | ) | 118,655 | |||||
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Interest payable
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(3,671 | ) | -- | |||||
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Accrued liabilities
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48,755 | 13,691 | ||||||
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Net Cash Used in Operating Activities
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(1,055,481 | ) | (1,239,101 | ) | ||||
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Cash Flows from Investing Activities
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Acquisition of Streamline, Inc., net of cash received
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-- | (1,496,478 | ) | |||||
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Expenditures for property and equipment
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(3,213 | ) | (4,022 | ) | ||||
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Net Cash Used in Investing Activities
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(3,213 | ) | (1,500,500 | ) | ||||
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Cash Flows from Financing Activities
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Principal payments under note payable obligation
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(40,249 | ) | -- | |||||
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Proceeds from issuance of common stock from underwriter’s overallotment
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-- | 1,084,136 | ||||||
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Net Cash (Used in) Provided by Financing Activities
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(40,249 | ) | 1,084,136 | |||||
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Net Decrease in Cash
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(1,098,943 | ) | (1,655,465 | ) | ||||
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Cash - Beginning of period
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1,570,167 | 6,684,576 | ||||||
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Cash - End of period
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$ | 471,224 | $ | 5,029,111 | ||||
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Non-cash investing and financing activities
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Issuance of common stock for acquisition of Streamline
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$ | -- | $ | 8,437,500 | ||||
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Repayment of due from stockholder through forgone director fees
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5,000 | -- | ||||||
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Conversion of note and accrued interest to common stock
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1,072,513 | -- | ||||||
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Non-cash investing and financing activities
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$ | 1,077,513 | $ | 8,437,500 | ||||
See notes to consolidated financial statements
Description of Business
MedoveX Corp. (the “Company” or “MedoveX”), was incorporated in Nevada on July 30, 2013 as SpineZ Corp. (“SpineZ”) and changed its name to MedoveX Corp. on March 20, 2014. MedoveX is the parent company of Debride Inc. (“Debride”), which was incorporated under the laws of the State of Florida on October 1, 2012.
On March 9, 2015, the Board of Directors of MedoveX and Streamline, Inc., a Minnesota corporation (“Streamline”), approved an Agreement and Plan of Merger (the “Merger Agreement”). On March 24, 2015, Streamline shareholders approved the Merger Agreement and the transaction closed immediately thereafter. Under the Merger Agreement, STML Merger Sub, Inc. a wholly-owned subsidiary of MedoveX, merged with Streamline, and thus Streamline became a wholly-owned subsidiary of MedoveX. Streamline is in the business of designing, developing, manufacturing and marketing 510(k) and 510(k) exempt products for use in the medical field.
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
These consolidated financial statements include the accounts of MedoveX Corp. and its wholly-owned subsidiary, Streamline. All intercompany accounts and transactions have been eliminated in consolidation.
Unaudited interim results
The accompanying consolidated balance sheet as of March 31, 2016, consolidated statements of operations for the three months ended March 31, 2016 and 2015, statement of changes in stockholders’ equity for the three months ended March 31, 2016 and the statements of cash flows for the three months ended March 31, 2016 and 2015 are unaudited. The unaudited interim consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments which included only normal recurring adjustments, necessary to present fairly the Company’s financial position as of March 31, 2016 and results of operations and cash flows for the three months ended March 31, 2016 and 2015. The financial data and other information disclosed in the notes to the consolidated financial statements related to the three month periods are unaudited. The results for the three months ended March 31, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016 or for any other interim period or for any future year.
The accompanying unaudited consolidated financial statements have been prepared based upon SEC rules that permit reduced disclosure for interim periods. For a more complete discussion of significant accounting policies and certain other information, please refer to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015. These financial statements reflect all adjustments that are necessary for a fair presentation of results of operations and financial condition for the interim periods shown, including normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of results for the full year.
Use of Estimates
In preparing the financial statements, generally accepted accounting principles in the United States (U.S. GAAP) requires disclosure regarding estimates and assumptions used by management that affect the amounts reported in financial statements and accompanying notes. The Company’s significant estimates include the fair value, useful life and carrying amount of its patented technology, the deferred income tax asset and the related valuation allowance, and the fair value of its share based payment arrangements.
For those estimates that are sensitive to the outcome of future events, actual results could differ from those estimates.
Cash
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company’s cash balances at March 31, 2016 and December 31, 2015 consists of funds deposited in checking accounts with commercial banks.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist solely of cash. At times throughout the year, the Company may maintain certain bank account balances in excess of FDIC insured limits. At December 31, 2015 and March 31, 2016, the Company had cash deposits that exceeded federally insured deposit limits.
The Company believes that its funds are deposited in high credit quality financial institutions. The Company has not experienced any losses in such accounts to date and believes it is not exposed to any significant credit risk associated with its cash deposits.
Accounts Receivable & Allowance for Doubtful Accounts
Accounts receivable represent amounts due from customers for which revenue has been recognized. Generally, the Company does not require collateral or any other security to support its receivables.
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. This allowance is regularly evaluated by the Company for adequacy by taking into consideration factors such as past experience, credit quality of the customer base, age of the receivable balances, both individually and in the aggregate, and current economic conditions that may affect a customer’s ability to pay. Accounts receivable over 60 days past due are considered past due. The Company does not accrue interest on past due accounts receivable.
Receivables are written off only after all collection attempts have failed and are based on individual credit evaluation and the specific circumstances of the customer. The Company did not have any bad debt expense for the three months ended March 31, 2016 and 2015.
Inventory
Inventory consists of a finished goods unit of the Streamline IV Suspension System (IV Poles). Inventory is valued at the lower of cost or market, using the first–in, first-out (FIFO) method. The Company does not believe any inventory reserve is required as of March 31, 2016.
Goodwill And Purchased Intangible Assets
Goodwill is reviewed for impairment annually on December 31st or more frequently if changes in circumstances or the occurrence of events suggest impairment exists using a two-step process. In step 1, the fair value of each reporting unit is compared to its carrying value, including goodwill. If the fair value exceeds the carrying value, no further work is required and no impairment loss is recognized. If the carrying value exceeds the fair value, the goodwill of the reporting unit is potentially impaired and the Company would then complete step 2 in order to measure the impairment loss. In step 2, the Company would calculate the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets (including unrecognized intangible assets) of the reporting unit from the fair value of the reporting unit. If the implied fair value of goodwill is less than the carrying value of goodwill, the Company would recognize an impairment loss, in the period identified, equal to the difference.
Other intangible assets consist of developed technology and a trademark. The Company reviewed intangible assets for impairment as changes in circumstances or the occurrence of events suggested the remaining value was not recoverable. Amortization on the intangibles is provided on a straight-line basis over the estimated useful lives of the assets as follows:
Trademark 5 years
Developed technology 7 years
Fair Value Measurements
We measure certain non-financial assets at fair value on a non-recurring basis. These non-recurring valuations include evaluating assets such as non-amortizing intangible assets for impairment; allocating value to assets in an acquired asset group; and applying accounting for business combinations. We use the fair value measurement framework to value these assets and report the fair values in the periods in which they are recorded or written down.
The fair value measurement framework includes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair values in their broad levels. These levels from highest to lowest priority are as follows:
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• Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities;
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• Level 2: Quoted prices in active markets for similar assets or liabilities or observable prices that are based on inputs not quoted on active markets, but corroborated by market data; and
• Level 3: Unobservable inputs or valuation techniques that are used when little or no market data is available.
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The determination of fair value and the assessment of a measurement’s placement within the hierarchy requires judgment. Level 3 valuations often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost, market, or income valuation methodologies applied to unobservable management estimates and assumptions. Management’s assumptions could vary depending on the asset or liability valued and the valuation method used.
Such assumptions could include: estimates of prices, earnings, costs, actions of market participants, market factors, or the weighting of various valuation methods. We may also engage external advisors to assist us in determining fair value, as appropriate.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the related assets, generally three to five years. Repairs and maintenance are expensed as incurred. Improvements and betterments, which extend the lives of the assets, are capitalized.
Leases
The Company recognizes rent expense on a straight-line basis over the lease term. The lease term commences on the date that the Company takes possession of or controls the physical use of the property. Deferred rent is included in non-current liabilities on the consolidated balance sheet.
Revenue Recognition
We recognize revenue in accordance with generally accepted accounting principles as outlined in the Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification (“ASC”) 605-10-S99, Revenue Recognition, which requires that four basic criteria be met before revenue can be recognized: (i) persuasive evidence of an arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is reasonably assured; and (iv) product delivery has occurred or services have been rendered. The Company sells its products primarily through direct sales. The Company recognizes revenue when title to the goods and risk of loss transfers to customers, provided there are no material remaining performance obligations required of the Company or any matters of customer acceptance. The Company records estimated sales returns, discounts and allowances as a reduction of net sales in the same period revenue is recognized.
Research and Development
Research and development costs are expensed as incurred.
Advertising
The Company expenses all advertising costs as incurred. For the three months ended March 31, 2016 and 2015, advertising costs were approximately $21,000 and $0, respectively.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with the ASC 718, Stock Compensation. ASC 718 addresses all forms of share-based payment (“SBP”) awards including shares issued under employee stock purchase plans and stock incentive shares. Under ASC 718, awards result in a cost that is measured at fair value on the awards’ grant date, based on the estimated number of awards that are expected to vest and will result in a charge to operations
Income Taxes
The Company accounts for income taxes under ASC 740, Income Taxes, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.
Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the asset will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The standard addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements.
Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
ASC 740 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of December 31, 2015, and March 31, 2016 the Company does not have a liability for unrecognized tax uncertainties.
The Company’s policy is to record interest and penalties on uncertain tax positions as a component of income tax expense. As of March 31, 2016, the Company has not incurred any interest or penalties relating to uncertain tax positions.
The Company’s evaluation was performed for the tax years ending December 31, 2015, 2014 and 2013, which remain subject to examination by major tax jurisdictions as of March 31, 2016. The Company does not have any tax years that are no longer subject to U.S. federal, state, and local, or non-US income tax examinations.
Loss per Share
Basic loss per share is computed on the basis of the weighted average number of shares outstanding for the reporting period. Diluted loss per share is computed on the basis of the weighted average number of common shares plus dilutive potential common shares outstanding using the treasury stock method. Any potentially dilutive securities are anti- dilutive due to the Company’s net losses. There is no difference between the basic and diluted net loss per share. 1,974,783 warrants and 594,900 common stock options outstanding were considered anti-dilutive at March 31, 2016. 185,000 stock options were considered anti-dilutive at March 31, 2015.
Business combinations
The Company completed an acquisition on March 25, 2015. This transaction was recorded using guidelines provided by ASC 805, Business Combinations. Following these guidelines, the consideration paid by MedoveX for Streamline was measured on the date of acquisition. An independent valuation of Streamline was performed using the discounted cash flow method. Based on the estimated value of Streamline, the consideration paid by MedoveX and the tangible assets of Streamline, Management determined the intangible portion of the purchase price should be assigned between developed technology, trademark, and goodwill. Refer to Note 4 for the summary of the purchase price allocation based on the completion of the valuation of the assets and liabilities assumed.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board issued ASU 2014-09, “Revenue Recognition - Revenue from Contracts with Customers” (ASU 2014-09) that requires companies to recognize revenue when a customer obtains control rather than when companies have transferred substantially all risks and rewards of a good or service. This update is effective for annual reporting periods beginning on or after December 15, 2017 and interim periods therein and requires expanded disclosures. The Company is currently assessing the impact the adoption of ASU 2014-09 will have on its consolidated financial statements.
In November 2015, FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. ASU 2015-17 simplifies the presentation of deferred taxes by requiring deferred tax assets and liabilities be classified as noncurrent on the balance sheet.
ASU 2015-17 is effective for public companies for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years. The guidance may be adopted prospectively or retrospectively and early adoption is permitted. The Company is currently assessing the impact the adoption of ASU 2015-17 will have on its consolidated financial statements.
In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842). The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. ASU 2016-02 is effective for public companies for annual reporting periods beginning after December 15, 2018, and interim periods within those fiscal years. The guidance may be adopted prospectively or retrospectively and early adoption is permitted. The Company is currently assessing the impact the adoption of ASU 2016-02 will have on its consolidated financial statements.
Note 3 - Property and Equipment
Property and equipment, net, consists of the following:
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Useful Life
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March 31,
2016
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December 31,
2015
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Furniture and fixtures
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5 years
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$ | 19,636 | $ | 18,385 | ||||
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Computers and software
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3 years
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18,237 | 16,275 | ||||||
| 37,873 | 34,660 | ||||||||
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Less accumulated depreciation
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(11,850 | ) | (9,822 | ) | |||||
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Total
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$ | 26,023 | $ | 24,838 | |||||
Depreciation expense amounted to $2,028 and $1,485, for the three months ended March 31, 2016 and 2015, respectively.
Note 4 - Acquisition
On March 25, 2015, the Company acquired Streamline Inc. pursuant to an Agreement and Plan of Merger dated March 9, 2015. As a result of this transaction, Streamline, Inc. is now a wholly owned subsidiary of the Company. Under the terms of the Agreement and Plan of Merger, the Company paid $1,397,466 cash and 1,875,000 shares of common stock. The Company incurred approximately $344,000 in acquisition related legal fees.
Per the approved Agreement and Plan of Merger with Streamline, the Company was to issue an aggregate of 1,875,000 shares of MedoveX common stock upon receipt of a transmittal letter from each Streamline shareholder. As of March 31, 2016, the Company had received transmittal letters from Streamline shareholders representing 1,673,377 shares of MedoveX common stock. While the assumption is the remaining shareholders will return a letter, the agreement is structured such that if a shareholder does not return a letter, no shares are issued. Additionally, 200,000 shares of MedoveX common stock are being held in escrow until September 25, 2016 to secure Streamline’s indemnification obligations under the Merger Agreement. The terms of the Merger Agreement also require a commitment by MedoveX to supply a minimum of $750,000 in working capital to the Streamline subsidiary, to fund the operations and product development of the Company as needed. Of the $750,000 working capital commitment, approximately $129,000 and $11,000, has been funded for the three month periods ended March 31, 2016 and 2015, respectively. Of the $750,000 working capital commitment, approximately $641,000 has been funded through March 31, 2016.
The closing price of the common stock on March 25, 2015 was $4.50 per share. Based on this price and cash consideration, the acquisition of Streamline was valued at $9,834,966.
The following is a summary of the allocation of the fair value of Streamline.
|
Assets acquired
|
||||
|
Cash
|
$ | 245,174 | ||
|
Inventory
|
1,878 | |||
|
Other assets
|
165 | |||
|
Developed technology
|
3,000,000 | |||
|
Trademark
|
700,000 | |||
|
Goodwill
|
6,455,645 | |||
|
Total assets acquired
|
10,402,862 | |||
|
Liabilities assumed
|
||||
|
Accounts payable
|
301,940 | |||
|
Accrued liabilities
|
6,018 | |||
|
Notes Payable
|
259,938 | |||
|
Total
|
567,896 | |||
|
Net assets acquired
|
$ | 9,834,966 | ||
Note 5 - Equity Transactions
Public Placement
On December 19, 2014, the Company completed its Initial Public Offering (“IPO”) of common stock by selling 1,391,305 units pursuant to SEC rule 424(b)(4). Each unit consists of one share of common stock and one warrant. The unit sold for $5.75, and the exercise price of the warrant is $6.90 per share. The units traded on the NASDAQ exchange under the ticker symbol MDVXU. On February 2, 2015, the unit ceased trading and the common stock (MDVX) and warrant (MDVXW) began trading separately. Net of transaction costs, the Company raised $6,731,783 in the IPO. On January 16, 2015, the underwriter exercised its entire 15% overallotment of shares, resulting in the issuance of an additional 208,695 shares of common stock and proceeds of $1,084,136, net of transaction costs.
Stock-Based Compensation Plan
2013 Stock Option Incentive Plan
On October 14, 2013, the MedoveX Corp. Board of Directors approved the MedoveX Corp. 2013 Stock Incentive Plan (the “Plan”). The Company may grant incentive stock options to employees and non-statutory stock options to employees, consultants, and directors for up to 1,150,000 shares of common stock.
The stock options are exercisable at a price equal to the market value of the common stock on the date of the grant. The Plan gives full authority for granting options, determining the type of options granted, and determining the fair market value of the options to the Plan Administrator.
The Company has the right, but not obligation, to repurchase any shares obtained through exercise of an option from terminated Plan participants. The Company has 90 days from the date of termination to exercise its repurchase right. The Company must pay the Fair Market Value (“FMV”) of the shares if the termination was for any reason other than for cause, or the option price (if less than FMV of the shares) if the termination is for cause. The FMV is determined by the Plan Administrator on the date of termination.
On January 6, 2016, the Board of Directors authorized the Company to issue options to purchase an aggregate of 214,900 shares of common stock to certain employees and consultants. The stock options vest as follows: 25% on date of grant and 25% on each of the next three years after the grant date. The options issued are exercisable at a price of $0.95, which is equal to the market value of the common stock on the date of the grant.
We utilize the Black-Scholes valuation method to recognize compensation expense over the vesting period. The expected life represents the period that our stock-based compensation awards are expected to be outstanding.
We use a simplified method provided in Securities and Exchange Commission release, Staff Accounting Bulletin No. 110, which averages an award's weighted average vesting period and contractual term for "plain vanilla" share options. The expected volatility was estimated by analyzing the historic volatility of similar public biotech companies in an early stage of development. No dividend payouts were assumed as we have not historically paid, and do not anticipate paying, dividends in the foreseeable future. The risk-free rate of return reflects the weighted average interest rate offered for US treasury rates over the expected term of the options.
The significant assumptions used to estimate the fair value of the equity awards granted are;
|
Grant date
|
January 6,
2016
|
|||
|
Weighted Fair value of options granted
|
$ | 0.67 | ||
|
Expected term (years)
|
6 | |||
|
Risk-free interest rate
|
1.82 | % | ||
|
Volatility
|
83 | % | ||
|
Dividend yield
|
None
|
|||
For the three months ended March 31, 2016 and 2015, the Company recognized approximately $262,000 and $47,000, respectively, as compensation expense with respect to the stock options.
Stock Option Activity
As of March 31, 2016, there were 384,925 shares of time-based, non-vested stock options. As of March 31, 2016 there was approximately $561,864 of total unrecognized stock-based compensation related to these non-vested stock options. That expense is expected to be recognized on a straight-line basis over a weighted average period of 2.51 years.
The following is a summary of stock option activity at March 31, 2016:
|
Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining Term
(Years)
|
Aggregate
Intrinsic Value
|
|||||||||||||
|
Outstanding at 12/31/2015
|
380,000 | $ | 3.95 | 9.1 | $ | -- | ||||||||||
|
Granted
|
214,900 | $ | 0.95 | 9.8 | $ | -- | ||||||||||
|
Exercised
|
-- | -- | -- | $ | -- | |||||||||||
|
Cancelled
|
-- | -- | -- | $ | -- | |||||||||||
|
Outstanding at 3/31/2016
|
594,900 | $ | 2.87 | 9.2 | $ | -- | ||||||||||
|
Exercisable at 3/31/2016
|
209,975 | $ | 3.28 | 9.2 | $ | -- | ||||||||||
Note 6 - Commitments
Operating Leases
Office Space
The Company pays TAG Aviation, a company owned by its Chief Executive Officer, Jarrett Gorlin (“Mr. Gorlin”) for office space that is currently being used as the Company’s principal business location plus utilities cost (see “Related Party Transactions”) on a monthly basis. Rent expense and utilities cost paid to TAG Aviation amounted to approximately $7,500 and $7,900 for the three months ended March 31, 2016 and 2015, respectively.
On July 8, 2015, the Company entered into a commercial building lease agreement with Sugar Oak Kimball Royal, LLC. The thirty-six month lease, having commenced on August 1, 2015, provides for the lease by the Company of approximately 2,358 square feet of space in Alpharetta, GA. Base annual rent is initially set at approximately $2,750 per month.
Total lease expense for the three months ended March 31, 2016 was approximately $8,250 related to this lease. Future minimum lease payments under this rental agreement are approximately as follows:
For the year ended:
|
December 31, 2016
|
$ | 25,000 | ||
|
December 31, 2017
|
35,000 | |||
|
December 31, 2018
|
21,000 | |||
| $ | 81,000 |
Equipment
The Company entered into a non-cancelable 36 month operating lease agreement for equipment on April 22, 2015. The agreement is renewable at the end of the term and requires the Company to maintain comprehensive liability insurance. Total lease expense for the three month period ended March 31, 2016 was approximately $700. Future minimum lease payments under this operating lease agreement are approximately as follows:
For the year ended:
|
December 31, 2016
|
$ | 2,000 | ||
|
December 31, 2017
|
2,600 | |||
|
December 31, 2018
|
800 | |||
| $ | 5,400 |
Purchase Orders
For the three months ended March 31, 2016 and 2015, the Company had approximately $514,000 and $409,000 respectively, in outstanding purchase order obligations related to the build of the DenerveX device to Nortech and Bovie Inc.
Consulting Agreements
On December 2, 2013, the Company engaged one of its founding stockholders to provide business development consulting services over a one-year period at a fee of $10,000 per month. The agreement was subsequently extended and increased to $35,000 per month in 2015. Effective January 1, 2016, the fee was modified to $5,000 per month through June 2016. Either party can cancel this agreement upon 30 days’ written notice.
On July 1, 2015, the Company engaged Dirk Kemmstedt to provide sales, marketing and distribution consulting services over a six-month period for $55,000. Effective January 1, 2016, this consulting agreement was modified to decrease the monthly compensation to $5,000 through June 30, 2016.
Employment Agreements
The Company entered into Employment Agreements with each of its four executive officers for aggregate compensation amounting to approximately $834,000 per annum, plus customary benefits. These employment agreements are for terms of three years and provide for the Company to pay six months of severance in the event of (i) the Company’s termination of an executive’s employment without cause, (ii) the resignation by an executive for good reason, (iii) a change in control of the Company, (iv) a material reduction in an executive’s duties, or (v) a requirement that an executive move their primary work location more than 50 miles.
Co-Development Agreement
In September 2013, the Company executed a Co-Development Agreement with James R. Andrews, M.D. (“Dr. Andrews”) to further evaluate, test and advise on the development of products incorporating the use of the patented technology. In exchange for these services the Company is obligated to pay Dr. Andrews a royalty of 2% of revenues earned from applicable product sales over a period of 5 years. If Dr. Andrews is listed as inventor of any Improvement Patent on the DenerveX device during the 5 year term, he would continue to receive a 1% royalty after the 2% royalty expires for the duration of the effectiveness of the Improvement Patent.
ComDel Manufacturing, Development and Services Contract
On July 8, 2015, the Company entered into a manufacturing agreement with ComDel Innovation, Inc. (“ComDel”). The terms of the service contract state ComDel is to manufacture, assemble and test the Company’s Streamline IV Suspension System (IV Poles), the patented product acquired in the Streamline acquisition, and to develop future product line extensions of the IV Suspension System.
Generator development agreement
In November 2014, the Company executed an agreement with Bovie, Inc. to develop an electrocautery generator that would be used exclusively with the DenerveX System.
The Company is obligated to reimburse Bovie up to $295,000 under this agreement for development of the generator. For the three months ended March 31, 2016 and 2015, the Company paid approximately $0 and $19,000, respectively, under this agreement.
Note 7 – Long Term Liabilities
Finance Agreement
The Company entered into a commercial insurance premium finance and security agreement in December 2015. The agreement finances the Company’s annual D&O insurance premium. Payments are due in quarterly installments of approximately $26,033 and carry an annual percentage interest rate of 4.65%.
The Company had an outstanding balance of approximately $51,000 at March 31, 2016 related to the agreement.
Promissory Notes
In conjunction with the consummation of the Streamline acquisition on March 25, 2015, the Company assumed two promissory notes for approximately $135,000 and $125,000 to the Bank of North Dakota New Venture Capital Program and North Dakota Development Fund, both outside non-related parties. Payments on both of the notes are due in aggregate monthly installments of approximately $5,700 and carry an interest rate of 5%. Both of the notes have a maturity date of August 1, 2019. The promissory notes had outstanding balances of approximately $208,000 and $223,000 at March 31, 2016 and December 31, 2015, respectively.
Expected future payments related to the promissory notes as of March 31, 2016, are approximately as follows:
For the year ended:
|
2016
|
$ | 53,000 | ||
|
2017
|
68,000 | |||
|
2018
|
68,000 | |||
|
2019
|
19,000 | |||
| $ | 208,000 |
The Company paid interest expense related to the promissory notes for the three months ended March 31, 2016 in the amount of approximately $2,800. The Company did not pay any interest expense related to the promissory notes for the three months ended March 31, 2015. The Company had unpaid accrued interest in the amount of approximately $69,000 at March 31, 2016 and December 31, 2015 related to the promissory notes.
Convertible Debt
On November 9, 2015, the Company issued a convertible promissory note to Steve Gorlin, a director and the father of Jarrett Gorlin, the Company’s CEO, for the principal amount of up to $2,000,000. The loan principal was to be advanced in two installments of $1,000,000 each, the first installment being made upon execution of the promissory note and the second installment to be made by March 1, 2016.
The Convertible Note provided that the principal and accrued but unpaid interest could be converted into common stock at $2 per share. The outstanding principal was to earn interest at a rate of 5.5% per annum and was to be paid quarterly. The Company also issued a 3 year warrant to Mr. Steve Gorlin to purchase 500,000 shares of common stock at $2.20 per share (see Note 8).
On January 25, 2016, the Company entered into a modification agreement (the “Modification Agreement”) with Mr. Steve Gorlin. Mr. Gorlin agreed to immediately convert the promissory note into an aggregate of 571,429 shares of its Common Stock, eliminating the Company’s $1,000,000 debt obligation and any accrued interest in exchange for amending the conversion price of the promissory note from $2.00 per share to $1.75 per share. The closing price of the Common Stock was $1.32 on January 25, 2016. The fair value of the difference between the shares Mr. Gorlin received (552,041) and the shares he would have received under the original conversion terms (500,000) amounts to approximately $69,000, which has been recorded as additional interest expense.
Additionally, Mr. Gorlin also agreed to acquire 571,429 additional shares of Common Stock at a price of $1.75 per share for a total purchase price of $1,000,000 within two months from the date of the agreement. The January 25, 2016 modification agreement also amended the exercise price of the warrant issued to Mr. Gorlin on November 9, 2015 from $2.20 per share to $2.00 per share (see note 8).
On February 16, 2016, the Company and Steve Gorlin entered into an Amendment to the Modification Agreement in order to reduce the amount of shares of Common Stock that Mr. Gorlin was to receive upon the conversion of the $1,000,000 promissory note from 571,429 ($1.75 per share) shares to 552,041 ($1.81 per share) shares. In consideration for reducing the amount of shares of common stock that he was to receive, the Company agreed to reduce the exercise price of Steven Gorlin’s 500,000 share warrant from $2.00 per share to $1.825 per share (see Note 8). This amendment to the Modification Agreement was made to address certain concerns of the NASDAQ.
On March 15th, the Board of Directors approved a second amendment to the Modification Agreement. The date for making the second installment of $1,000,000 was extended to November 1, 2016. Additionally, the language in the Note was changed to clarify that the consideration received by the Company on the first installment was in the form of $970,000 cash and $30,000 in directors’ fees due to Mr. Steve Gorlin. The $30,000 in directors’ fees was recorded as a reduction in equity and expensed as earned. $10,000 of directors fees were earned in 2015 after issuance of the note. For the three months ended March 31, 2016, $5,000 of directors’ fees were earned by Mr. Gorlin to reduce the balance outstanding to $15,000.
The Company originally recorded both the convertible debt and the accompanying warrant on a relative fair value basis of approximately $715,000 and $285,000, respectively. The closing price of the Company’s stock on the day prior to issuing the convertible debt was $1.75 per share. See Note 8 for the inputs used to value the warrant as of the respective issue date. Steve Gorlin was also granted piggyback registration rights with respect to the shares of common stock issuable upon conversion of the Note and upon exercise of the warrants.
Note 8 – Common Stock Warrant
As described in Note 7, on November 9, 2015, the Company issued a warrant to Steve Gorlin to purchase 500,000 shares of common stock at an exercise price of $2.20 as additional incentive for making the loan. The warrant is exercisable for up to three years from the date of issuance. The fair value of the warrant at the date of issuance was determined to be approximately $398,000 using the Black-Scholes-Merton valuation technique and, based on the relative fair value of both the convertible debt and the warrant, was recorded at approximately $715,000 and $285,000, respectively. Fair value measurement valuation techniques, to the extent possible, should maximize the use of observable inputs and minimize the use of unobservable inputs. The Company’s fair value measurements of the warrant are designated as Level 1 since all of the significant inputs were observable, and quoted prices were available for the four comparative companies in an active market.
The inputs used to value the warrant as of the respective issue date are as follows:
|
●
|
The market price of the Company’s stock on November 9, 2015 of $1.71
|
|
●
|
Exercise price of the warrant: $2.20
|
|
●
|
Life of the warrant: 3 years
|
|
●
|
Risk free return rate: 1.27%
|
|
●
|
Annualized volatility rate of four comparative companies: 81%
|
As more fully described in Note 7, the Company entered into two modification agreements with Steve Gorlin related to the convertible debt. Both of the modification agreements amended the exercise price of the warrant issued to Mr. Gorlin. For both modifications, the Company calculated the fair value of the warrants immediately before and after the modification and recorded the difference as an increase to additional paid in capital and interest expense.
The inputs used to value the warrants as of the January 25, 2016 modification dates are as follows:
|
●
|
The market price of the Company’s stock of $1.32
|
|
●
|
Life of the warrant: 3 years
|
|
●
|
Risk free return rate: 1.11%
|
|
●
|
Annualized volatility rate of four comparative companies: 99.66%
|
The inputs used to value the warrants as of the February 16, 2016 modification dates are as follows:
| ● |
The market price of the Company’s stock of $1.43
|
| ● |
Life of warrant: 3 years
|
| ● |
Risk free return rate: 0.93%
|
| ● |
Annualized volatility rate of four comparative companies: 100.34%
|
The Company recognized approximately $26,000 in expenses related to the changes in the fair value of the warrant for the three months ended March 31, 2016.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Note 9 – Intangible Assets
Intangible assets are summarized as follows:
|
Amortized
|
Amortization Lives
|
March 31, 2016
Cost |
December 31, 2015
Cost |
|||||||||
|
Developed Technology
|
7 | $ | 3,000,000 | $ | 3,000,000 | |||||||
|
Trademark
|
5 | 700,000 | 700,000 | |||||||||
|
Total
|
3,700,000 | 3,700,000 | ||||||||||
|
Less Accumulated Amortization
|
(568,572 | ) | (426,429 | ) | ||||||||
|
Net
|
3,131,428 | 3,273,571 | ||||||||||
|
Non Amortized
|
||||||||||||
|
Goodwill
|
6,455,645 | 6,455,645 | ||||||||||
|
Total
|
$ | 9,587,073 | $ | 9,729,216 | ||||||||
Amortization expense related to intangible assets for the three months ended March 31, 2016 and 2015 was $142,143 and $0, respectively.
Expected future amortization of intangible assets as of March 31, 2016, is as follows:
|
Year ending December 31,
|
Estimated Amortization Expense
|
|||
|
2016
|
$ | 427,000 | ||
|
2017
|
569,000 | |||
|
2018
|
569,000 | |||
|
2019
|
569,000 | |||
|
2020
|
464,000 | |||
|
Thereafter
|
534,000 | |||
| $ | 3,132,000 | |||
Note 10 - Income Taxes
For the period from February 1, 2013 (inception) to March 31, 2016, the Company has incurred net losses and, therefore, has no current income tax liability. The net deferred tax asset generated by these losses, which principally consist of start-up costs deferred for income tax purposes, is fully reserved as of December 31, 2015 and March 31, 2016, since it is currently more likely than not that the benefit will not be realized in future periods.
The Company is required to file federal income tax returns and state income tax returns in the states of Florida, Georgia and Minnesota. There are no uncertain tax positions at December 31, 2015 or March 31, 2016. The Company has not undergone any tax examinations since inception.
Note 11 - Related-Party Transactions
Aviation Expense
Periodically the Company may charter general aviation aircraft from TAG Aviation LLC (“TAG”), a company owned by Mr. Jarrett Gorlin. The Company believes that such aircraft charter is on terms no less favorable then it would receive from a third party. No general aviation expenses were paid to TAG for the three months ended March 31, 2016, and March 31, 2015.
Operating Lease
As described in Note 6, the Company pays TAG Aviation LLC, (“TAG”), a company owned by Mr. Gorlin, for month to month rental of office space at Dekalb-Peachtree Airport in Atlanta Georgia plus cost of utilities. Rent payments under this arrangement are $1,800 per month.
Rent expense and utilities cost paid to TAG Aviation amounted to approximately $7,500 and $7,900 for the three months ended March 31, 2016 and 2015, respectively.
Consulting Expense
On December 2, 2013, the Company engaged a founding stockholder who owns 375,000 shares of its common stock to provide the Company with business development advisory services. Fees under this arrangement included a $45,000 up-front payment that was non-refundable and $10,000 per month for each month of services provided to the Company under this arrangement. On January 1, 2015, this consulting agreement was modified to increase the monthly compensation to $35,000 through December 2015. Effective January 1, 2016, the fee was modified again to $5,000 per month through June 2016. Either party can cancel this agreement upon 30 days’ written notice. The Company paid $15,000 and $105,000, respectively, for the three months ended March 31, 2016 and 2015, under this new arrangement.
Convertible Debt
As more fully described in Note 7, on November 9, 2015, the Company issued a convertible promissory note to Steve Gorlin, a related party, for the principal amount of up to $2,000,000.
Note 12 - Research and Development
Devicix Prototype Manufacturing Agreement
In November 2013, the Company accepted a proposal from Devicix, a Minneapolis, Minnesota based FDA registered contract designer and developer, to develop a commercially viable prototype of its product that could be used to receive regulatory approval from the FDA and other international agencies for use on humans to relieve pain associated with Facet Joint Syndrome. Through March 31, 2016, we have paid approximately $1,183,000 to Devicix.
The development work commenced in December 2013. The total estimated cost of this work at contract signing was $960,000; however, the terms of the proposal allow either the Company or the designer and developer to cancel the development work with 10-days’ notice. The Company incurred expenses of approximately $117,000 and $156,000 for the three months ended March 31, 2016 and 2015, respectively, of which approximately $24,000 was included in accounts payable as of March 31, 2016.
Denervex Generator Manufacturing Agreement
The DenerveX device requires a custom electrocautery generator for power. As described in Note 6, in November 2014, the Company contracted with Bovie International to customize one of their existing electrocautery generators for use with DenerveX Device, and then manufacture that unit on a commercial basis once regulatory approval for the DenerveX was obtained. The Bovie agreement requires a base $295,000 development fee to customize the unit, plus additional amounts if further customization is necessary beyond predetermined estimates.
The Company paid approximately $0 and $19,000 for the three months ended March 31, 2016 and 2015, respectively, under this agreement. Through March 31, 2016, we have paid approximately $287,000 to Bovie.
Nortech Manufacturing Agreement
In November 2014, the Company selected Nortech Systems Inc. (“Nortech”), a Minneapolis, Minnesota based FDA registered contract manufacturer, to produce approximately 1,200 DenerveX devices from the prototype supplied by Devicix for use in final development and testing. The agreement with Nortech includes agreed upon per unit prices for delivery of the devices.
Actual work on development of the final units began in November 2014. The Company paid approximately $29,000 and $87,000 to Nortech for the three months ended March 31, 2016 and 2015, respectively. Through March 31, 2016, we have paid approximately $318,000 to Nortech, of which approximately $9,000 was included in accounts payable as of March 31, 2016.
Note 13– Liquidity, Going Concern and Management’s Plans
The Company incurred a net loss of approximately $1,832,000 and $1,454,000 for the three months ended March 31, 2016 and 2015, respectively. The Company will continue to incur losses until such time as it can bring a sufficient number of approved products to market and sell them with margins sufficient to offset expenses.
To date, the Company’s sole source of funds has been from the issuance of debt and equity.
In January 2015, the underwriter for the public offering exercised the overallotment of shares pursuant to the initial public offering, netting another $1,084,000.
As discussed in Note 7, the Company issued a promissory note for up to $2,000,000 of convertible debt on November 9, 2015 to Steve Gorlin, a director and father of Jarrett Gorlin, the Company’s CEO. The Company received $970,000 in cash and the elimination of $30,000 of future directors’ fees upon execution of the agreement. A second installment of $1,000,000 is expected to be made by Mr. Steve Gorlin by November 1, 2016.
As discussed in Note 14, in April 2016, a private placement of common stock raised approximately $1,167,000 in cash for the Company, net of fees.
The Company is exploring additional fundraising options for the remainder of 2016. However, if the Company is unable to raise sufficient financing, it could be required to undertake initiatives to conserve its capital resources, including delaying or suspending the development of its technology. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
The financial statements do not include any adjustments to the carrying amounts of its assets or liabilities that might be necessary should the Company be unable to continue as a going concern.
Note 14 - Subsequent Events
In April 2016, the Company entered into a unit purchase agreement with selected accredited investors whereby the Company had the right to sell in a private placement a minimum of $1,000,000 and up to a maximum of $2,000,000 of units. Each unit had a purchase price of $100,000 and consisted of (i) 86,957 shares of the Company’s common stock, par value $0.001 per share at a purchase price of $1.15 per share, and (ii) a warrant to purchase 43,478 shares of common stock. Each warrant has an initial exercise price of $1.30 per share and is exercisable six months following the date of issuance for a period of five (5) years from the date of issuance.
At the initial closing, the Company issued to the Investors 1,002,195shares of common stock and warrants to purchase 501,097 shares of common stock and received gross proceeds of $1,157,035. In connection with the initial closing of the offering, the Company paid the placement agent a cash fee of $138,845 and will issue five year warrants to purchase up to 150,487 shares to the placement agent with an exercise price of $1.30 per share. In addition, the Company reimbursed the placement agent for its expenses.
At the final closing, the Company issued to the investors an additional 209,565 shares of common stock and warrants to purchase 104,782 shares of Common Stock and received gross proceeds of $240,999. In connection with the final closing of the offering, the Company paid the placement agent a cash fee of $28,920 and will issue five year warrants to purchase up to 20,956 shares to the placement agent with an exercise price of $1.30 per share.
The final closing constituted the completion of the offering, which, in the aggregate, yielded $1,398,034 in gross proceeds to the Company and a total of 1,211,760 shares and warrants to purchase 605,880 shares to be issued to investors. The placement agent collected an aggregate of approximately $222,000 in total fees relating to the offering, and was also issued warrants to purchase an aggregate of 181,992 shares.
In May 2016, the Board of Directors authorized Management to seek buyers for Streamline, Inc., the Company’s wholly owned subsidiary acquired in March 2016. The Company seeks additional funds to complete the development and launch of the Company’s primary product, the DenerveX device. Selling this business unit could raise the necessary funds in a non-dilutive manner to existing shareholders. The Company is presently carrying Streamline related debt of approximately $273,000, and approximately $9,600,000 in intangible assets related to developed technology, trademark and goodwill. Streamline is immediately available for sale in its present condition.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes thereto appearing in Part I, Item 1 of this Quarterly Report. Historical results and trends that might appear in this Quarterly Report should not be interpreted as being indicative of future operations.
Overview
MedoveX Corp. (the “Company”) was incorporated in Nevada on July 30, 2013 as Spinez Corp. MedoveX is the parent company of Debride, which was incorporated under the laws of Florida on October 1, 2012, but did not commence operations until February 1, 2013. Spinez Corp. changed its name to MedoveX Corp. and effected a 1-for-2 reverse split of its stock in March 2014.
The goal of the Company is to obtain, develop and commercialize various intellectual property rights (patents, patent applications, knowhow, etc.) in the medical technology area, with particular focus on the development of medical devices. We intend to leverage the extensive experience of our board of directors and management team in the medical industry to seek out product candidates for licensing, acquisition or development.
DenerveX
Our first acquisition was the DenerveX device. We believe that the DenerveX device can be developed for pain relief.
The Company acquired the DenerveX patent on January 31, 2013 from Scott Haufe, M.D., a director of the Company, in exchange for 750,108 shares of common stock in the Company and a 1% royalty on all sales of any product sold based on the patent. In September 2013, we entered into a Co-Development Agreement with James Andrews, M.D. (“Dr. Andrews”), a director of the Company, whereby Dr. Andrews committed to further evaluate the DenerveX device and to seek to make modifications and improvements to such technology. In exchange for such services, the Company agreed to pay Dr. Andrews a royalty equal to two (2%) percent of the DenerveX net sales during the five (5) year term of the Co-Development Agreement. Upon the termination of the term of the Co-Development Agreement, which has a minimum term of five (5) years, then the royalty payable to Dr. Andrews shall be reduced to one (1%) percent of DenerveX net sales after such termination of products covered by any U.S. patent on which Dr. Andrews is listed as a co-inventor; if any such patents are obtained. Such one (1%) percent royalty shall continue during the effectiveness of such patent. Pursuant to the Co-Development Agreement, Dr. Andrews agreed to assign any modifications or improvements to the DenerveX to the Company subject to the royalty rights described above.
Our intention is to market the product as a disposable, single-use kit which will include all components of the DenerveX product. In addition to the DenerveX device itself, we are developing a dedicated Electro Surgical Generator to power the DenerveX device. The generator would be provided to customers agreeing to purchase the DenerveX device, and could not be used for any other purpose.
We accepted a proposal from Devicix, a Minneapolis, Minnesota third party design and development firm, in November 2013, to develop a prototype device. This proposal included a 5 phase development plan, culminating in the production of a prototype that could be used for validation purposes. Currently we are in the build and test phase of the device, which focuses on completing the product design verification testing, design optimization as required, and the completion of manufacturing transfer. Through March 31, 2016, we have paid approximately $1,183,000 to Devicix.
In November 2014, we selected Nortech Systems Inc. (“Nortech”), a Minneapolis, Minnesota based FDA registered contract manufacturer, to produce approximately 1,200 DenerveX devices from the prototype supplied by Devicix for use in final development and testing. The agreement with Nortech includes agreed upon per unit prices for delivery of the devices. Actual work on development of the final units began in November 2014. Through March 31, 2016, we have paid approximately $318,000 to Nortech.
Also in November 2014, we engaged Bovie Medical Corporation (“Bovie”), a Delaware Corporation, to develop the Electro Surgical Generator and provide post production support services. Per our agreement with Bovie, we are invoiced based on deliverables produced by Bovie, which will amount to $295,000 upon completion of all the deliverables. Through March 31, 2016, we have paid approximately $287,000 to Bovie towards the $295,000 total.
In July 2015, we entered into a non-exclusive distribution center agreement with Technology Consult Berlin GmbH (“TCB”) pursuant to which TCB shall manage and coordinate the DenerveX products which the Company exports to the European Union.
Also in July 2015, we entered into an international distribution agreement with EDGE Medical, a company organized and located in the United Kingdom (the “UK”). EDGE Medical is expected to provide sales, marketing and distribution services for the various country hospitals throughout the UK for the launch of the DenerveX System.
We entered into three more international distribution agreements in August 2015. The first was with German based Aureus Medical for the distribution of its DenerveX System throughout Germany. Aureus Medical distributes spine and pain management solutions in the spine space. The second distribution agreement was with Turkey based MEDS Medikal Ltd. for the distribution of the DenerveX System throughout Turkey. MEDS Medikal Ltd. has been providing sales, marketing and distribution services in the spine surgery market space in Turkey since 1997, representing leading brands of the world. The third distribution agreement entered into in August 2015 was with Sydney based Medical Innovators Pty. Ltd. for the distribution of its DenerveX System throughout Australia and New Zealand. The agreement will expand the market for us by leveraging the Spine industry-leading marketing, sales, support and distribution power of Medical Innovators Pty. Ltd.
Also in August 2015, we entered into two medical advisory board agreements with European leading spine surgeons Dr. Martin Deeg and Dr. Karsten Ritter-Lang. Under the terms of the agreements, both doctors will leverage their expertise, experience and relationships in the spine treatment space, specifically the Facet Joint pain area by advising us on matters related to its technology and the area of Facet Joint pain therapies. They will also provide services to help introduce the DenerveX System to other leading physicians and medical professionals. Through March 31, 2016, we have paid approximately $9,500 to Dr. Martin Deeg.
In April 2016, we entered into an international distribution agreement with Innosurge, a supplier of innovative orthopedic surgery equipment. The agreement covers the distribution of the DenerveX System throughout Scandinavia, including Denmark, Sweden, Norway and Finland.
The Company has entered into some of the final stages of the development and verification of the DenerveX Device and the DenerveX power generator as a system. Final development, testing and verification to set standards is the main focus for these final stages. Additionally, the company will be testing the DenerveX System in an extensive living tissue model under very strict Good Laboratory Practice Standards to measure, verify, and establish its’ effectiveness for performance as a system. Other testing will include device sterilization, shelf life verification, shipping and performance testing to very specific standards. The DenerveX power generator will also be safety tested by a world leader in safety performance testing. SGS, a highly respected testing and verification firm will test the DenerveX System using an extensive set of testing standards.
IV Suspension System
On March 25, 2015, we acquired Streamline, Inc. (“Streamline”) in exchange for the issuance of an aggregate of 1,875,000 shares of our common stock (200,000 shares of which will be held in escrow for 18 months from March 25, 2015) and approximately $1,397,000 of cash, which has been sent to the paying agent for distribution to Streamline shareholders. As of March 31, 2016, the Company had received transmittal letters from Streamline shareholders representing 1,673,377 shares of MedoveX common stock. While the assumption is the remaining shareholders will return a letter, the agreement is structured such that if a shareholder does not return a letter, no shares are delivered. The terms of our agreement with Streamline also required a commitment to supply a minimum of $750,000 in working capital to Streamline, which is in the business of designing, developing, manufacturing and marketing 510(k) and 510(k) exempt products for use in the medical field.
As part of the Company’s acquisition of Streamline, it acquired patent rights to Streamline’s IV Suspension System (“ISS”). The product has already been manufactured at a contract facility in North Dakota and requires no regulatory approval for sale. The ISS is a system designed to allow the transportation of IV poles secured to hospital beds such that one person could move a patient without fear of separating the IV pole from the patient during transport.
While there are several “bed and boom” transfer systems on the market, we are not aware of any that take the Streamline patented approach to addressing IV pole transportation. Nevertheless, other bed transportation products have been on the market longer and have larger organizations marketing their products. The hospital market in general is highly competitive, and introducing any new product is difficult and time consuming.
On July 22, 2015, the Company entered into a Master Manufacturing, Development and Service Agreement with ComDel Innovation, Inc., of Wahpeton, ND. ComDel is a leading developer and manufacturer of medical devices and has an FDA certified ISO 13485 facility. The agreement provides for continued development and manufacturing of the ISS poles, as well as assisting in the development of future product line extensions in the safe patient treatment space.
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which we have prepared in accordance with United States generally accepted accounting principles (“GAAP”).
The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods.
On an ongoing basis, we evaluate our estimates and judgments, including those described in greater detail below.
We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Factors Which May Influence Future Results of Operations
The following is a description of factors that may influence our future results of operations, and that we believe are important to an understanding of our business and results of operations.
Revenue; Cost of Revenue and Gross Profit
The Company’s first sales of the Streamline ISS IV poles occurred in December 2015. Customers place purchase orders for the IV Poles directly with the Company, which the Company subsequently places the order with Comdel to manufacture and assemble the IV Poles. Cost of sales as a percentage of revenue was approximately 75%.
The Company expects cost of sales as a percentage of revenue to decrease as older inventory levels are depleted and sales of the IV Poles increase. The Company did not sell any of the Streamline ISS IV poles during the three months ended March 31, 2016.
Operating Expenses
We classify our operating expenses into four categories: research & development, sales & marketing, general & administrative, and depreciation & amortization.
Research and Development Expenses
Research and development expenses consist primarily of fees paid to external service providers, laboratory supplies, costs for facilities and equipment, and other costs for research and development activities. Research and development expenses are recorded in operating expenses in the period in which they are incurred. Estimates have been used in determining the expense liability of certain costs where services have been performed but not yet invoiced. We monitor levels of performance under each significant contract for external service providers, including the extent of patient enrollment and other activities through communications with the service providers to reflect the actual amount expended.
General and Administrative Expenses
Beginning in October 2013, the Company hired full time management, began sourcing vendors, retained consultants and commenced other activities consistent with a new operation. Prior to that time, most activity focused on the Company’s initial capital raise under Regulation D of the Securities Act of 1933 and in securing its initial product applications. For the three months ended March 31, 2016 and 2015, the Company paid approximately $400,000 and $260,000, respectively, in personnel costs.
For the three months ended March 31, 2016 and 2015, the Company paid approximately $349,000 and $607,000, respectively, in professional fees, of which approximately $20,000 were Streamline professional fees funding the working capital commitment. For the three months ended March 31, 2016 and 2015, the Company paid approximately $22,000 and $64,000, respectively, in travel expenses, of which approximately $5,600 were Streamline travel expenses funding the working capital commitment. We paid less in general and administrative expenses in Q1 2016 versus Q1 2015 primarily due to the fees incurred as part of the consummation of the acquisition of Streamline. We also continued to maintain a concerted effort during the three months ended March 31, 2016 to keep general and administrative expenses down due to lower working capital balances. Outside of acquisition-related costs, general and administrative expenses incurred continue to support research and development activities, commercialization of our product candidate as well as our continued overall costs of operating as a public company. These fees have included increased costs related to the hiring of additional personnel and fees to outside consultants, lawyers and accountants, among other expenses. Additionally, we have continued to incur costs associated with being a public company including expenses related to services associated with maintaining compliance with exchange listing and Securities and Exchange Commission requirements, insurance, and investor relations costs.
Sales & Marketing Expenses
For the three months ended March 31, 2016, the Company paid approximately $21,000 in sales and marketing expenses compared to $0 for the three months ended March 31, 2015. Sales and marketing expense consists primarily of fees paid to vendors for tradeshows and consultants in correlation with the pre-launch of the DenerveX in Europe.
Depreciation & Amortization
Depreciation and amortization expense are recorded in the period in which they are incurred. The Company recognized approximately $2,000 in depreciation expense for the three months ended March 31, 2016 compared to approximately $1,500 for the three months ended March 31, 2015.
For the three months ended March 31, 2016, the Company recognized approximately $142,000 in amortization expense. The Company did not recognize any amortization expense for the three months ended March 31, 2015.
No amortization expense was incurred during the three month period ended March 31, 2015 as the acquisition of Streamline did not occur until the end of the first quarter.
Total operating expenses increased approximately $31,000, or 3%, to approximately $1,485,000 for the three months ended March 31, 2016, as compared to approximately $1,454,000 for the three months ended March 31, 2015. The increase in expenses is primarily the result of additional stock option expenses in the first quarter of 2016 as compared to the three months ended March 31, 2015. Additionally, the increase is attributable to the amortization of intangible assets acquired from Streamline. The decrease in professional expenses as compared to the prior year is due primarily to expenses we incurred as part of the consummation of the acquisition of Streamline as well as a decrease in certain consulting expenses. We continued to incur similar Product development costs associated with the DenerveX device as well as costs incurred related to being a public entity. We incurred approximately $374,000 in interest expense for the three months ended March 31, 2016, and did not occur any interest expense for the three months ended March 31, 2015. The increase in interest expense is primarily related to debt conversion costs.
Sources of Liquidity
To date our operations have been funded with the issuance of debt and equity. On November 9, 2015, we issued a convertible promissory note to Steve Gorlin, a related party, for up to $2,000,000, the principal to be advanced in two installments. We received $970,000 in cash and the reduction in obligation of $30,000 in directors’ fees on November 9, 2015. This $1,000,000 in debt was subsequently converted into equity in January 2016, ultimately in exchange for 552,041 shares of common stock. On March 1, 2016, the Board of Directors approved extending the date for the second installment of $1,000,000 to November 1, 2016. The debt presented on our March 31, 2016 balance sheet is comprised of two promissory notes issued by Streamline prior to our acquisition of that entity in March 2015 and a finance agreement for the Company’s annual D&O insurance premium. The two notes total approximately $208,000 at March 31, 2016, and the finance agreement totals approximately $51,000 at March 31, 2016. Payments on the finance agreement are due in equal quarterly installments. Our equity funding stems from both the private sale of common stock and an initial public offering of common stock. Net of transaction costs, we raised approximately $6,732,000 in the initial public offering in December 2014, and approximately $1,084,000 from the exercise of the underwriter’s overallotment in January 2015. In April 2016 the Company raised approximately $1,167,000 in net proceeds upon the closing of a private placement of common stock. Since we believe that the likelihood of obtaining traditional debt financing at our stage of development is low, our source of funds in the foreseeable future will likely be from the sale of capital stock or some type of structured capital arrangement involving a combination of debt with an equity component.
Working Capital
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March 31,
2016 |
December 31,
2015 |
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Current Assets
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$
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629,000
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$
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1,775,000
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||||
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Current Liabilities
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538,000
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590,000
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Working Capital
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$
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91,000
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$
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1,185,000
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Cash Flows
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$
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(1,055,000
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)
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$
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(1,239,000
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)
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|||
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(3,000
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)
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(1,500,000
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)
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|||||
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(40,000
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) |
1,084,000
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$
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(1,098,000
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) |
$
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(1,655,000)
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For the three months ended March 31, 2016 and 2015, the Company has used approximately $1,055,000, and $1,239,000, respectively, for operating activities. As of March 31, 2016, the Company had approximately $471,000 of cash on hand.
Funding Requirements
While the DenerveX product is in the final stages of development and testing, we anticipate our cash expenditures will continue to increase as we complete the Device Verification (DV) build and testing of product for the DenerveX device and commencement of the Good Laboratory Practice (GLP) in live tissue testing on our path to submitting for CE mark and eventual FDA approval. Additionally, we anticipate an increase in expenditures of cash to support both a European clinical study to obtain additional clinical data to support marketing goals and to pursue a strategy for an anticipated U.S. clinical trial for eventual U.S. FDA clearance and to support our launch for the product into the European Union.
To the extent our available cash is insufficient to satisfy our long-term operating requirements, we will need to seek additional sources of funds from the sale of equity or debt securities or through a credit facility, or we will need to modify our current business plan. There can be no assurances that we will be able to obtain additional financing on commercially reasonable terms, if at all. The sale of additional equity or convertible debt securities would likely result in dilution to our current stockholders.
Going Concern
Our independent registered public accounting firm has included an explanatory paragraph with respect to our ability to continue as a going concern in its report on our consolidated financial statements for the years ended December 31, 2015 and 2014. The presence of the going concern explanatory paragraph suggests that we may not have sufficient liquidity or minimum cash levels to operate the business. Since our inception, we have incurred losses and anticipate that we will continue to incur losses until such time as our products can generate enough revenue to offset our research and development, general and administrative and sales and marketing expenses. We received approximately $1,167,000 net proceeds in a private placement of common stock in April 2016. We believe these funds will be sufficient to maintain uninterrupted operations while we pursue our near term operational plans and other fund raising initiatives. There can be no assurance we will be successful in our operational plans. If Streamline ISS IV pole sales are less than anticipated, or we incur higher than anticipated expenses preparing for approval and launch of our DenerveX product, we could need additional funding later in 2016.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined in Regulation S-K Item 303(a)(4) during the periods presented, investments in special-purpose entities or undisclosed borrowings or debt. Additionally, we are not a party to any derivative contracts or synthetic leases.
Contractual Obligations and Commercial Commitments
The Company has long term contractual obligations for the two promissory notes issued to the Bank of North Dakota New Venture Capital Program and North Dakota Development Fund. Both of the Bank of North Dakota New Venture Capital Program and North Dakota Development Fund notes were assumed in conjunction with the consummation of the Streamline acquisition on March 25, 2015, and require combined monthly payments of $5,661 into the third quarter of 2019. The Company has a commercial building lease agreement with Sugar Oak Kimball Royal, LLC for rent and utility costs for building space at a cost of approximately $3,000 per month through July 2018.
The Company does not have any other long term contractual obligations. The Company currently reimburses its CEO, Jarrett Gorlin, for the lease of executive office space at a cost of $1,800 per month, which it believes is at fair market value. The Company also has one consulting agreement with a monthly payment of $5,000 which either party can cancel with 30 days’ notice. We have employment agreements with each of our executive officers that commit us to a six month severance and benefits package if those employees separate under certain conditions, including a change in control of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are a smaller reporting company as defined by 17 CFR 229.10(f)(1). Thus, under Item 305(a) of Regulation S-K, we are not required to provide information under this item.
ITEM 4. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
Because of its inherent limitations, the Company’s internal control over financial reporting may not prevent or detect all material misstatements arising from time to time. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of March 31, 2016. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) in Internal Control-Integrated Framework. Based on our assessment, management concluded that a material weakness existed in internal control over financial reporting and our disclosure controls. Specifically, our Chief Financial Officer currently performs almost all of the accounting related functions. In order to obtain proper segregation of accounting related duties, another person will have to be hired and duties allocated so this material weakness can be corrected.
Changes in Internal Control Over Financial Reporting
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PART II – OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS.
We are not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding. None of our directors, officers or affiliates are involved in a proceeding adverse to our business or has a material interest adverse to our business.
ITEM 1A. RISK FACTORS.
We are a smaller reporting company as defined by 17 CFR 229.10(f)(1). Thus, we are not required to provide information under this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
ITEM 4. MINE SAFETY DISCLOSURES.
ITEM 5. OTHER INFORMATION.
The Company deems Manfred Sablowski, our Senior Vice President of Sales & Marketing, to be a named Executive Officer of the Company. As such, Mr. Sablowski is subject to the provisions of Section 16 of the Securities Exchange Act of 1934, as amended
ITEM 6. EXHIBITS.
The exhibits listed in the accompanying Exhibit Index are filed, furnished or incorporated by reference as part of this Quarterly Report on Form 10-Q.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Date: May 16, 2016
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(Principal Executive Officer)
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Principal Accounting Officer)
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EXHIBIT INDEX
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31.1
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Section 302 Certification of Principal Executive Officer*
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31.2
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Section 302 Certification of Principal Financial Officer*
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32.1
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Section 906 Certification of Principal Executive Officer and Principal Financial Officer***
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101.INS
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XBRL Instance Document **
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101.SCH
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XBRL Taxonomy Extension Schema Document **
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101.CAL
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XBRL Taxonomy Calculation Linkbase Document **
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101.LAB
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XBRL Taxonomy Labels Linkbase Document **
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101.PRE
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XBRL Taxonomy Presentation Linkbase Document **
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101.DEF
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XBRL Definition Linkbase Document **
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