UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| ANNUAL REPORT PURSUANT TO |
For the fiscal year ended December 31, 2016
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________________ to ________________
Commission file number 001-36763
MEDOVEX CORP.
(Exact nameName of Registrant as specifiedSpecified in its charter)
| Nevada | 46-3312262 | |
(State or | ( | |
| of Incorporation or Organization) | Identification | |
| 201 E Kennedy Blvd Suite 700 | ||
| Tampa, Florida | 33602 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(844) 633-6839
(Registrant’s Telephone Number, Including Area Code)
3060 Royal Boulevard S, Ste. 150, Alpharetta, Georgia 30341
(Address, including zip code,Former name, former address and telephone number, including area code, of Registrant’s principal executive offices)
Securities registered pursuant to Sectionunder section 12(b) of the Exchange Act:
Securities registered pursuant to Sectionunder section 12(g) of the Exchange Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐[ ] No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐[ ] No ☒
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 ☒[X] No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 ☒[X] No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
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.
| Large accelerated filer | Accelerated filer | |||
| Non-accelerated filer [ ] | Smaller Reporting Company [X] | |||
| (Do not check if | [X] | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐[ ] No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based upon the closing price of common stock on the last business day of the most recently completed second fiscal quarter, June 30, 2016,2018, was $17,105,294.$8,909,513. The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based upon the closing price of common stock on March 28, 201718, 2019 was approximately $17,816,836.$40,827,791. Shares of voting stock held by each executive officer, director and 10% stockholders have been excluded from this calculation. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of March 28, 2017, 17,026,68818, 2019, 90,224,860 shares of the registrant’s common stock were outstanding.
Documents incorporated by reference: None.
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FORWARD-LOOKING INFORMATION
This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to future events or our future financial performance. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “expects,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predict,” “should” or “will” or the negative of these terms or other comparable terminology. These statements are only predictions; uncertainties and other factors may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels or activity, performance or achievements expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Our expectations are as of the date this Annual Report is filed, and we do not intend to update any of the forward-looking statements after the date this Annual Report is filed to confirm these statements to actual results, unless required by law.
This Annual Report also contains estimates and other statistical data made by independent parties and by us relating to market size and growth and other industry data. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We have not independently verified the statistical and other industry data generated by independent parties and contained in this Annual Report and, accordingly, we cannot guarantee their accuracy or completeness, though we do generally believe the data to be reliable. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including, but not limited to, the possibility that we may fail to preserve our expertise in search medical device development; that existing and potential distribution partners may opt to work with, or favor the products of, competitors if our competitors offer more favorable products or pricing terms; that we may be unable to maintain or grow sources of revenue; that changes in the distribution network composition may lead to decreases in query volumes; that we may be unable to attain and maintain profitability; that we may be unable to attract and retain key personnel; that we may not be able to effectively manage, or to increase, our relationships with international customers; that we may have unexpected increases in costs and expenses; or that one or more of the other risks described below in the section entitled “Risk Factors” and elsewhere in this Annual Report may occur. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.
MedoveX was incorporated in Nevada on July 30, 2013 as SpinezSpineZ Corp. MedoveX is the parent company of Debride Inc., (“Debride”), which was incorporated under the laws of Florida on October 1, 2012 but did not commence operations until February 1, 2013. SpinezSpineZ Corp. changed its name to MedoveX Corp. and effected a 2-for-1 reverse split of its stock in March 2014.
The goalCompany is in the business of designing and marketing proprietary medical devices for commercial use in the United States and Europe. The Company received CE marking in June 2017 for the DenerveX System and it is now commercially available throughout the European Union and several other countries that accept CE marking. The Company’s first sale of the DenerveX System occurred in July 2017. The Company isstill intends to obtain, develop and commercialize various intellectual property rights (patents, patent applications, knowhow, etc.seek approval for the DenerveX System from the Food & Drug Administration (“FDA”) in the medical technology area,United States.
In October 2018, the Company entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”), and subsequently amended in January 2019 (the “APA Amendment”) with particular focusRegenerative Medicine Solutions, LLC (“RMS”), Lung Institute LLC, RMS Lung Institute Management LLC, Cognitive Health Institute Tampa, LLC, RMS Shareholder, LLC and RMS Acquisition Corp. Pursuant to the terms of the Asset Purchase Agreement, the Company purchased all of the assets of RMS, Cognitive Health Institute Tampa, LLC, Lung Institute LLC and RMS Lung Institute Management LLC. The Company executed the Asset Purchase Agreement 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.
The DenerveX Device
Our first acquisition was the DenerveX device. We believe that the DenerveX device can be developedused to encompass a number ofseveral medical applications, including pain relief.
The Company acquired the DenerveX patent on January 31, 2013 from Scott Haufe, M.D. (“Dr. Haufe”), a former 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 former 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.
We are marketing the product as a disposable, single-use kit which will includeincludes all components of the DenerveX device product. In addition to the DenerveX device itself, we are developinghave developed a dedicated Electro Surgical Generator, the DenerveX Pro-40, generator, to power the DenerveX device. There is currently no finished good product of the DenerveX device in inventory as commercial production is currently on-hold. The Company anticipates the resumption of manufacturing in Q4 2019.
The generator would beis provided to customers agreeing to purchase the DenerveX device and could notcannot be used for any other purpose.
We accepted a proposal from Devicix, a Minneapolis, Minnesota third party design and development firm located in Minneapolis, Minnesota, in November 2013, to develop a prototype device. This proposal included a 5 phase5-phase development plan, culminating in the production of aready prototype that could be used for validation purposes. Currently we are finalizingWe have recently completed the final stages of the build and test phase of the device, culminating in receiving CE marking to market the product in Europe. The DenerveX Kit and Pro-40 generator is now in commercial production. We anticipate very minimal, if any, additional build and test related expenses, which focuses on completionconsists of the product design verification testing, design optimizationactivities, in the future as required, andwe launch the completion of manufacturing transfer.DenerveX System in Europe. Through December 31, 2016,2018, we have incurred expenses of approximately $1,547,000 for product development services provided by$1,950,000 to Devicix.
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In November 2014, we selected Nortech Systems Inc. (“Nortech”), a Minneapolis, Minnesota based U.S. Food and Drug Administration (“FDA”)Minnesota-based FDA registered contract manufacturer, to produce 315test DenerveX devices from the prototype supplied by Devicix for use in final development and non-clinical testing. OurThe agreement with Nortech includes agreed-uponagreed upon per unit prices for delivery of the devices. Actual work on development of the final units began in November 2014. Through December 31, 2016,2018, we have paidincurred expenses of approximately $744,000$997,000 to Nortech.
Also in November 2014, we engaged Bovie Medical Corporation (“Bovie”), a Delaware Corporation, to develop ourthe Electro Surgical Generator the DenerveX Pro-40 generator, and provide post production support services. Per our agreement with Bovie, we are invoiced based on deliverables produced by Bovie, which was originally supposed to amount to $295,000 upon completion of all the deliverables. Through December 31, 2016,2018, we have paidincurred expenses of approximately $389,000$441,000 to Bovie. A
Additional requirements were incurred beyondas the initial agreementresearch and development process progressed and as a result certain prices increased and additional costs were incurred to further customization has been necessary beyond predetermined estimates.
Streamline, Inc.Divestiture.Divestiture
In May 2016, the Board of Directors authorized management to seek buyers for Streamline, Inc., (“Streamline”), the Company’s wholly owned subsidiary acquired in March 2015. The Company sold all Streamline related assets on December 7, 2016 (the “Closing”). This transaction provided funds needed to complete the development and launch of the Company’s primary product, the DenerveX System, and the decision to sell the Streamline assets helped raise part of the necessary funds required for continuing operations of the Company in a non-dilutive manner to existing shareholders.
The transaction resulted in the immediate receipt of $500,000 in cash, and a $150,000 receivable to the Company due on or before January 1, 2018.
The terms of the agreement also required that for each of the calendar years ending December 31, 2018 and December 31, 2019 (each such calendar year, a “Contingent Period”), a contingent payment in cash (each, a “Contingent Payment”) equal to five percent (5%) of the total net sales received by the acquiring party from the sale of “IV suspension system” products in excess of 100 units during each Contingent Period. Each such Contingent Payment is payable to the Company by the acquiring party by no later than March 31stof the subsequent year; provided, however, that the total aggregate amount of all Contingent Payments owed by the acquiring party to the Company for all Contingent Periods will not exceed $850,000.The Company is yet to receive any Contingent Payments and has no reason to expect it will receive any Contingent Payments.
Competition
Developing and commercializing new products is highly competitive. The market is characterized by extensive research and clinical efforts and rapid technological change. We face intense competition worldwide from medical device, biomedical technology and medical products and combination products companies, including major medical products companies. We may be unable to respond to technological advances through the development and introduction of new products. Most of our existing and potential competitors have substantially greater financial, marketing, sales, distribution, manufacturing and technological resources. These competitors may also be in the process of seeking FDA or other regulatory approvals, or patent protection, for new products. Our competitors may commercialize new products in advance of our products. Our products also face competition from numerous existing products and procedures, which currently are considered part of the standard of care. We believe that the principal competitive factors in our markets are:
| ● | the quality of outcomes for medical conditions; |
| ● | acceptance by surgeons and the medical device market generally; |
| ● | ease of use and reliability; |
| ● | technical leadership and superiority; |
| ● | effective marketing and distribution; |
| ● | speed to market; and |
| ● | product price and qualification for coverage and reimbursement. |
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We will also compete in the marketplace to recruit and retain qualified scientific, management and sales personnel, as well as in acquiring technologies and licenses complementary to our products or advantageous to our business.
We are aware of several companies that compete or are developing technologies in our current and future products areas. With regard to the DenerveX System, we believe that our principal competitors include device manufacturers Cosman Medical Inc., Stryker Corporation and Spembly Medical Systems. We may also face competition from developing, but potentially untested technologies such as Zyga’s GLYDER device. In order to compete effectively, our products will have to achieve widespread market acceptance, receive adequate insurance coverage and reimbursement, be cost effective and be simultaneously safe and effective.
Customers
Healthcare providers, physicians and third-party payors in the United States and elsewhere play a primary role in the recommendation and prescription of any products for which we obtain marketing approval.
We anticipate selling the DenerveX System in Europe priorsell to commercialization in the United States. We will utilize the experience of local distributors in the countries where we pursue marketingcurrently sell the DenerveX System once approvalwith the exception of Germany, where we sell directly to hospitals and providers . There is obtained.
Intellectual Property
A key element of our success depends on our ability to identify and create proprietary medical device technologies. In order to proactively protect those proprietary technologies, we intend to continue to develop and enforce our intellectual property rights in patents, trademarks and copyrights, as available through registration in the United States and internationally, as well as through the use of trade secrets, domain names and contractual agreements such as confidentiality agreements and proprietary information agreements.
Currently, our intellectual property rights include the intellectual property acquired from Debride, Inc., which includes the U.S. Patent 8,167,879 B2 (the “Patent”). The Patent was originally filed in 2009 and was issued on May 1, 2012. We intend to leverage the Patent to the fullest extent possible through market development and prosecution of our rights under the Patent.
In addition, we have filed 33 additional US and International patents, of which 21 are pending, 8 are pending published, and 4 have been granted. These patents cover a total of 885 claims both in the United States and Internationally.
The term of individual patents depends upon the legal term of the patents in the countries in which they are obtained. In most countries in which we file, the patent term is 20 years from the earliest date of filing a non-provisional patent application. In the United States, a patent’s term may be shortened if a patent is terminally disclaimed over another patent or as a result of delays in patent prosecution by the patentee, and a patent’s term may be lengthened by patent term adjustment, which compensates a patentee for administrative delays by the U.S. Patent and Trademark Office in granting a patent.
We intend to continually re-assess and refine our intellectual property strategy in order to fortify our position in our market space in the United States and internationally. To that end, we are prepared to file additional patent applications should our intellectual property strategy require such filings and/or where we seek to adapt to competition or seize business opportunities.
Many biotechnology companies and academic institutions are competing with us in the medical device field and filing patent applications potentially relevant to our business. Internally, we have established business procedures designed to maintain the confidentiality of our proprietary information, including the use of confidentiality agreements with employees, independent contractors, consultants and companies with which we conduct business. Also, we generally require employees to assign patents and other intellectual property to us as a condition of employment with us.
In order to contend with the inevitable possibility of third party intellectual property conflicts, we review and assess the third-party intellectual property landscape for competitive and other developments that may inform or impact our intellectual property development and commercialization strategies. We may find it necessary or prudent to obtain licenses from third party intellectual property holders. Where licenses are readily available at reasonable cost, such licenses are considered a normal cost of doing business. In other instances, however, where a third party holds relevant property and is a direct competitor, a license might not be available on commercially reasonable terms or available at all. We will attempt to manage the risk that such third party intellectual property may pose by conducting, among other measures, freedom-to-operate studies to guide our early-stage research away from areas where we are likely to encounter obstacles in the form of third party intellectual property.
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Government Regulations
Government authorities in the United States, at the federal, state and local level, and in other countries extensively regulate, among other things, the research, development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, post-approval monitoring and reporting, marketing and export and import of products such as those we are developing. Any product that we develop must be approved by the FDA before they may be legally marketed in the United States and by the appropriate foreign regulatory agency before they may be legally marketed in foreign countries.
European Union and Other Country Approvals
The Company received CE marking in June 2017 for the DenerveX System. It can now be sold throughout the European Union and countries that accept CE Mark.
Aside from the European Union, we may seek regulatory approval for commercialization of the DenerveX System from Columbia, Peru, Argentina, Mexico, Turkey, Israel, New Zealand, Australia and other countries where the management of the Company deems it to be suitable for commercialization. The documentation required to accompany the CE Mark to obtain regulatory approval in the aforementioned countries may include copies of the ISO 13485 certification, the SGS certificate of approval and a statement of Good Manufacturing Practices (“GMP”).
FDA Regulation
The DenerveX System and any other product we may develop must be approved or cleared by the FDA before it is marketed in the United States. Before and after approval or clearance in the United States, our products are subject to extensive regulation by the FDA under the Federal Food, Drug, and Cosmetic Act and/or the Public Health Service Act, as well as by other regulatory bodies.
FDA regulations govern, among other things, the development, testing, manufacturing, labeling, safety, storage, record-keeping, market clearance or approval, advertising and promotion, import and export, marketing and sales, and distribution of medical devices and products.
In the United States, the FDA subjects medical products to rigorous review. If we do not comply with applicable requirements, we may be fined, the government may refuse to approve our marketing applications or to allow us to manufacture or market our products, and we may be criminally prosecuted. Failure to comply with the law could result in, among other things, warning letters, civil penalties, delays in approving or refusal to approve a product, product recall, product seizure, interruption of production, operating restrictions, suspension or withdrawal of product approval, injunctions, or criminal prosecution.
FDA Approval or Clearance of Medical Devices
In the United States, medical devices are subject to varying degrees of regulatory control and are classified in one of three classes depending on the extent of controls the FDA determines are necessary to reasonably ensure their safety and efficacy:
| ● | Class I: general controls, such as labeling and adherence to quality system regulations; |
| ● | Class II: special controls, pre-market notification (often referred to as a 510(k) application), specific controls such as performance standards, patient registries, post market surveillance, additional controls such as labeling and adherence to quality system regulations; and |
| ● | Class III: special controls and approval of a pre-market approval (“PMA”) application. |
In general, the higher the classification, the greater the time and cost to obtain approval to market. There are no “standardized” requirements for approval, even within each class. For example, the FDA could grant 510(k) status, but require a human clinical trial, a typical requirement of a PMA. They could also initially assign a device Class III status, but end up approving a device as a 510(k) device if certain requirements are met. The range of the number and expense of the various requirements is significant. The quickest and least expensive pathway would be 510(k) approvalclearance with a just a review of existing data. The longest and most expensive path would be a PMA with extensive randomized human clinical trials. We cannot predict how the FDA will classify the DenerveX device, nor predict what requirements will be placed upon us to obtain market approval or clearance, or even if they will approveallow marketing of the DenerveX device at all. However, we believe the pathway that will be required by the FDA will be somewhere between the two extremes described above.
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We still intend to apply to the FDA for 510(k) clearance for our DenerveX device. However, it is very possible the FDA will deny this request and require the more expensive de novo classification process or possibly the PMA process. It is possible that the company may choose to directly pursue the de novo classification process without filing a 510K which could reduce the overall FDA review time. The Company has budgeted based on the assumption that the PMA process will be required.
To request marketing authorization by means of a 510(k) clearance, we must submit a pre-market notification demonstrating that the proposed device is substantially equivalent to another currently legally marketed medical device, has the same intended use, and is as safe and effective as a currently legally marketed device and does not raise different questions of safety and effectiveness than does a currently legally marketed device.
510(k) submissions generally include, among other things, a description of the device and its manufacturing, device labeling, medical devices to which the device is substantially equivalent, safety and biocompatibility information, and the results of performance testing.
In some cases, a 510(k) submission must include data from human clinical studies. We believe that other medical devices which have been approved by the FDA have many aspects that are substantially similar to the DenerveX device, which may make obtaining 510(k) clearance possible. Marketing may commence only when the FDA issues a clearance letter finding substantial equivalence.
After a device receives 510(k) clearance, any product modification that could significantly affect the safety or effectiveness of the product, or that would constitute a significant change in intended use, requires a new 510(k) clearance or, if the device would no longer be substantially equivalent, would require PMA. In addition, any additional claims the Company wished to make at a later date, such as the permanent relief of pain, may require a PMA. If the FDA determines that the product does not qualify for 510(k) clearance, they will issue a Not Substantially Equivalent letter, at which point the Company must submit and the FDA must approve a PMA or a de Novo classification before marketing can begin.
During the review of a 510(k) submission, the FDA may request more information or additional studies and may decide that the indications for which we seek approval or clearance should be limited. In addition, laws and regulations and the interpretation of those laws and regulations by the FDA may change in the future. We cannot foresee what effect, if any, such changes may have on us.
Clinical Trials of Medical Devices
One or more clinical trials are becomingmay be necessary to support an FDA submission. Clinical studies of unapproved or un-cleared medical devices or devices being studied for uses for which they are not approved or cleared (investigational devices) must be conducted in compliance with FDA requirements. If an investigational device could pose a significant risk to patients, the sponsor company must submit an Investigational Device Exemption, or "IDE"“IDE” application to the FDA prior to initiation of the clinical study. An IDE application must be supported by appropriate data, such as animal and laboratory test results, showing that it is safe to test the device on humans and that the testing protocol is scientifically sound. The IDE will automatically become effective 30 days after receipt by the FDA unless the FDA notifies the company that the investigation may not begin. Clinical studies of investigational devices may not begin until an institutional review board ("IRB"(“IRB”) has approved the study.
During any study, the sponsor must comply with the FDA’s IDE requirements. These requirements include investigator selection, trial monitoring, adverse event reporting, and record keeping. The investigators must obtain patient informed consent, rigorously follow the investigational plan and study protocol, control the disposition of investigational devices, and comply with reporting and record keeping requirements. We, the FDA, or the IRB at each institution at which a clinical trial is being conducted, may suspend a clinical trial at any time for various reasons, including a belief that the subjects are being exposed to an unacceptable risk. During the approval or clearance process, the FDA typically inspects the records relating to the conduct of one or more investigational sites participating in the study supporting the application.
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Post-Approval Regulation of Medical Devices
After a device is cleared or approved for marketing, numerous and pervasive regulatory requirements continue to apply. These include:
| ● | the FDA Quality Systems Regulation |
| ● | labeling and claims regulations, which prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions on labeling; and |
| ● | the Medical Device Reporting regulation, which requires reporting to the FDA of certain adverse experiences associated with use of the product. |
We will continue to be subject to inspection by the FDA to determine our compliance with regulatory requirements.
Manufacturing cGMP Requirements
Manufacturers of medical devices are required to comply with FDA manufacturing requirements contained in the FDA’s current Good Manufacturing Practices ("cGMP"(“cGMP”) set forth in the quality system regulations promulgated under section 520 of the Food, Drug and Cosmetic Act. cGMP regulations require, among other things, quality control and quality assurance as well as the corresponding maintenance of records and documentation. Failure to comply with statutory and regulatory requirements subjects a manufacturer to possible legal or regulatory action, including the seizure or recall of products, injunctions, consent decrees placing significant restrictions on or suspending manufacturing operations, and civil and criminal penalties. Adverse experiences with the product must be reported to the FDA and could result in the imposition of marketing restrictions through labeling changes or in product withdrawal. Product approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problems concerning safety or efficacy of the product occur following the approval.
International Regulation
We are subject to regulations and product registration requirements in many foreign countries in which we may seek to sell our products, including in the areas of product standards, packaging requirements, labeling requirements, import and export restrictions and tariff regulations, duties and tax requirements. The time required to obtain clearance required by foreign countries may be longer or shorter than that required for FDA clearance, and requirements for licensing a product in a foreign country may differ significantly from FDA requirements.
European Good Manufacturing Practices
In the European Union, the manufacture of medical devices is subject to good manufacturing practice ("GMP"(“GMP”), as set forth in the relevant laws and guidelines of the European Union and its member states. Compliance with GMP is generally assessed by the competent regulatory authorities. Typically, quality system evaluation is performed by a Notified Body, which also recommends to the relevant competent authority for the European Community CE Marking of a device. The Competent Authority may conduct inspections of relevant facilities, and review manufacturing procedures, operating systems and personnel qualifications. In addition to obtaining approval for each product, in many cases each device manufacturing facility must be audited on a periodic basis by the Notified Body. Further inspections may occur over the life of the product.
Our third party manufacturer hasthird-party manufacturers have ISO certification which is generally one of the requirements for approval under the guidelines established in the European Union.
United States Anti-Kickback and False Claims Laws
In the United States, there are Federal and state anti-kickback laws that prohibit the payment or receipt of kickbacks, bribes or other remuneration intended to induce the purchase or recommendation of healthcare products and services. Violations of these laws can lead to civil and criminal penalties, including exclusion from participation in Federal healthcare programs. These laws are potentially applicable to manufacturers of products regulated by the FDA as medical devices, and hospitals, physicians and other potential purchasers of such products. Other provisions of Federal and state laws provide civil and criminal penalties for presenting, or causing to be presented, to third-party payers for reimbursement, claims that are false or fraudulent, or which are for items or services that were not provided as claimed. In addition, certain states have implemented regulations requiring medical device and pharmaceutical companies to report all gifts and payments of over $50 to medical practitioners. This does not apply to instances involving clinical trials.
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Although we intend to structure our future business relationships with clinical investigators and purchasers of our products to comply with these and other applicable laws, it is possible that some of our business practices in the future could be subject to scrutiny and challenge by Federal or state enforcement officials under these laws.
Research, Product Development and Technical Operations Expense
Research and development costs and expenses consist primarily of fees paid to external service providers, laboratory testing, 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 for activities through communications with the service providers to reflect the actual amount expended.
Employees
As of December 31, 2016,2018, we had 116 total employees, 10 of which were full-time employees. None of our employees isare represented by a union and we believe our employee relations to beare good.
Available Information
Our website,www.MedoveX.com,provides access, without charge, to our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (“SEC”). The information provided on our website is not part of this report and is therefore not incorporated by reference unless such information is otherwise specifically referenced elsewhere in this report.
Materials filed by the Company with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website atwww.sec.govthat contains reports, proxy and information statements, and other information regarding our company that we file electronically with the SEC.
| ITEM 2. | PROPERTIES |
The Company has a commercial building lease agreement with Sugar Oak Kimball Royal,International Realty, LLC. The thirty-sixtwenty-eight month lease, having commenced on AugustSeptember 1, 2015,2018, 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$3,095 per month.
We believe our existing facilities are suitable for Companythe Company’s operations.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not Applicable.
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| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
The following table sets forth the range of high and low sales prices of the common stock on the NASDAQ Capital MarketOTCQB for each period indicated:
Market and Market Prices of Common Stock (per common share)
2016 | ||
| By Quarter | High | Low |
| First | $1.51 | $0.85 |
| Second | 2.25 | 1.01 |
| Third | 1.70 | 1.25 |
| Fourth | 1.73 | 1.33 |
| 2018 | ||||||||
| By Quarter | High | Low | ||||||
| First | $ | 0.65 | $ | 0.36 | ||||
| Second | 0.58 | 0.37 | ||||||
| Third | 0.51 | 0.32 | ||||||
| Fourth | 0.51 | 0.27 | ||||||
| 2017 | ||||||||
| By Quarter | High | Low | ||||||
| First | $ | 1.58 | $ | 1.04 | ||||
| Second | 1.48 | 0.84 | ||||||
| Third | 1.26 | 0.84 | ||||||
| Fourth | 1.19 | 0.47 | ||||||
On March 28, 2017,18, 2019, the price per share of the Company’s common stock had a high of $1.44$0.55 per share, and a low of $1.35$0.51 per share. The Company had approximately 185226 holders of record of common stock as of March 28, 2017.
Dividends
We have not declared or paid any cash dividends on our common stock and presently intend to retain our future earnings, if any, to fund the development and growth of our business and, therefore, do not anticipate paying any cash dividends in the foreseeable future.
Securities Authorized for Issuance under Equity Compensation Plans
As of December 31, 2016,2018, we have granted an outstanding aggregate of 1,124,900557,282 options to purchase common stock under the Plan at a weighted average price of $2.15$2.78 per share to certain employees, consultants and our outside directors.
Recent Sales of Unregistered Securities; Uses of Proceeds from Registered Securities
As previously disclosed on a current report on form 8-k dated October 15, 2018, in August and committedSeptember 2018, the Company sold an aggregate of 15 Units (as defined below) and issued to issueits investors an aggregate of $750,000 in principal amount of convertible notes (the “Notes”) and 1,875,000 warrants (the “Warrants”) to purchase the common stock, resulting in total gross proceeds of $750,000 to the Company. The Notes sold therein are convertible into an aggregate of 1,875,000 shares of the common stock. Each Unit consists of (i) a 12% senior secured convertible Note, initially convertible into shares of the Company’s common stock, as partial consideration for this company. The closingpar value $0.001 per share at a conversion price equal to the lesser of (y) $0.40 or (z) ninety percent (90%) of the per share purchase price of ourany shares of the common stock on this date was $4.50.
As previously disclosed on a secondcurrent report on form 8-k dated October 18, 2018, on October 18, 2018, we entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”), and subsequently an amendment to the Modification Agreement. The date for makingAsset Purchase Agreement in January 2019 (the “APA Amendment”), with Regenerative Medicine Solutions, LLC (“RMS”), Lung Institute LLC, RMS Lung Institute Management LLC, Cognitive Health Institute Tampa, LLC, RMS Shareholder, LLC and RMS Acquisition Corp. (“Buyer”) (collectively, the second installment of $1,000,000 was moved to November 1, 2016.“Parties”).
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Pursuant to the fourth amendment, Mr. Gorlin assigned a portionterms of the obligationAsset Purchase Agreement, as amended, Buyer shall purchase all of the assets of Regenerative Medicine Solutions LLC, Cognitive Health Institute Tampa, LLC, Lung Institute LLC and RMS Lung Institute Management LLC (collectively the “Sellers”). As consideration, Buyer shall issue to purchaseSellers 39,772 shares of Series C Preferred Stock of the additional 571,429Company (“Series C Preferred Stock”), where each share of Series C Preferred Stock will convert into 1,000 shares of the Company at $1.75 per share. The obligationcommon stock and shall combine to purchase 142,857 shares for $250,000 was assigned to an outside non related party.
As reported in Current Reports on Form 8-K filed by the Company, by Mr. Gorlin andincluding those filed in the two outside parties was completed in December 2016. Thefirst quarter of 2019, the Company receivedhas sold an aggregate of $1,000,000 in exchange for$6,625,000 of 12% convertible notes and 16,562,500 warrants exercisable at $0.75 per share (the “Recent Financing”) of such convertible notes, $5,375,000 of the issuance ofconvertible notes have already been converted into an aggregate of 571,42913,437,500 shares at a price of $1.75 per share.
As previously disclosed on Form 8-K filed on April 5, 2019, the Company entered into SPA’s with additional investors which raised an additional $575,000 and brought the aggregate principal amount of capital raised in all the offerings since January 8, 2019 to $7,200,000.
| ITEM 6. | SELECTED FINANCIAL DATA |
Not required for smaller reporting company.
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
ITEM 7. MANAGEMOverviewENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
MedoveX Corp. (the “Company” or “MedoveX”), was incorporated in Nevada on July 30, 2013 as SpinezSpineZ 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.
In May 2016, the Board of Directors authorized management to seek buyers for Streamline, Inc., (“Streamline”), the Company’s wholly owned subsidiary acquired in March 2015. In December 2016,October 2018, the Company sold, underentered into an asset purchaseAsset Purchase Agreement (the “Asset Purchase Agreement”), and subsequently an amendment to the Asset Purchase agreement in January 2019 (the “APA Amendment”), with Regenerative Medicine Solutions, LLC (“RMS”), Lung Institute LLC, RMS Lung Institute Management LLC, Cognitive Health Institute Tampa, LLC, RMS Shareholder, LLC and RMS Acquisition Corp. Pursuant to the terms of the Asset Purchase Agreement, the Company purchased all related Streamline assets.
The DenerveX Device
Our first acquisition was the DenerveX device. We believe that the DenerveX device can be developedused to encompass a number ofseveral medical applications, including pain relief.
The Company acquired the DenerveX patent on January 31, 2013 from Scott Haufe, M.D. (“Dr. Haufe”), a former 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.
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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.
We are marketing the product as a disposable, single-use kit which will includeincludes all components of the DenerveX device product. In addition to the DenerveX device itself, we are developinghave developed a dedicated Electro Surgical Generator, the DenerveX Pro-40, to power the DenerveX device.
The generator would beis provided to customers agreeing to purchase the DenerveX device and could notcannot 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 phase5-phase development plan, culminating in the production of aready prototype that could be used for validation purposes. Currently we are inWe have recently completed the final statesstages of the build and test phase of the device, culminating in receiving CE marking to market the product in Europe. The DenerveX Kit and Pro-40 generator is now in commercial production.
We anticipate very minimal, if any, additional build and test related expenses, which focuses on completing theconsists of product design verification testing, design optimizationactivities, in the future as required, andwe launch the completion of manufacturing transfer.DenerveX System in Europe. Through December 31, 2016,2018, we have paidincurred expenses of approximately $1,547,000$1,950,000 to Devicix.
In November 2014, we selected Nortech Systems Inc. (“Nortech”), a Minneapolis, Minnesota based FDA registered contract manufacturer, to produce 315test DenerveX devices from the prototype supplied by Devicix for use in final development and non-clinical trials.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 December 31, 2016,2018, we have paidincurred expenses of approximately $744,000$997,000 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 was originally supposed to amount to $295,000 upon completion of all the deliverables. Through December 31, 2016,2018, we have paidincurred expenses of approximately $389,000$441,000 to Bovie for production services.
The Company has entered into some ofcompleted the final stages of the development and verification of the DenerveX Device and the DenerveX Pro-40 power generator as a system. Final development, testingsystem, and verification to set standards is the main focus for these final stages. Additionally, the company has be tested the DenerveX System is presently being manufactured and sold.
Regulatory Approval
The Company received CE marking in an extensive living tissue model under very strict Good Laboratory Practice Standards to measure, verify, and establish its’ effectivenessJune 2017 for performance as a system. Other testing will include device sterilization, shelf life verification and shipping and performance testing to very specific standards.
Aside from the European Union, for a CE Mark for commercialization of the DenerveX System throughout the EU.
In November 2016, the Company hired Jill Schweiger as its new Senior Vice President of Regulatory, Clinical and Quality. Mrs. Jill Schweiger is a highly qualified and accomplished leader with a highly demonstrable track record of success in the areas of clinical studies and regulatory affairs.
In May 2016, the Board of Directors authorized management to seek buyers for Streamline, Inc., (“Streamline”), the Company’s wholly owned subsidiary acquired in March 2015. The Company sold all Streamline related assets on December 7, 2016 (the “Closing”).
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The transaction resulted in the immediate receipt of $500,000 in cash, and a $150,000 note receivable to the Company due on or before January 1, 2018.
The terms of the agreement also required that for each of the calendar years ending December 31, 2018 and December 31, 2019 (each such calendar year, a “Contingent Period”), a contingent payment in cash (each, a “Contingent Payment”) equal to five percent (5%) of the total net sales received by the acquiring party from the sale of “IV suspension system” products in excess of 100 units during each Contingent Period.
Each such Contingent Payment is payable to the Company by the acquiring party by no later than March 31stof the subsequent year; provided, however, that the total aggregate amount of all Contingent Payments owed by the acquiring party to the Company for all Contingent Periods will not exceed $850,000.The Company is yet to receive any Contingent Payments and has no reason to expect it will receive any Contingent Payments.
Critical Accounting Policies and Estimates
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. 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.
While our significant accounting policies are described in more detail in the notes to our consolidated financial statements included elsewhere in this report, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our financial condition and results of operations.
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 long-lived assets and 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:
| ● | Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities; |
| ● | 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. |
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.
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Although we believe that the recorded fair value of our financial instruments is appropriate at December 31, 2017, these fair values may not be indicative of net realizable value or reflective of future fair values.
Income Taxes
The Company uses the liability method of accounting for income taxes, which requires recognition of temporary differences between financial statement and income tax bases of assets and liabilities, measured by enacted tax rates.
A valuation allowance is recorded to reduce deferred tax assets when necessary.We file income tax returns in the U.S. federal jurisdiction and certain state jurisdictions. The tax years that could be subject to federal audit are 2013, 20142015, 2016 and 2015.2017.
Revenue Recognition and Sales Returns, Discounts and Allowances
We recognize revenue in accordance with generally accepted accounting principles as outlined in the Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue From Contracts with Customers, which requires that five basic criteria be met before revenue can be recognized: (i) identify the contract with the customer; (ii) identity the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price; and (v) recognize revenue when or as the entity satisfied a performance obligation.
The Company sells the DenerveX System through a combination of direct sales and independent distributors in international markets. 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. We only record revenue when collectability is reasonably assured.
Revenue recognition occurs at the time product is shipped to customers from the third-party distribution warehouse located in Berlin, Germany. Our stocking distributors, who sell the products to their customers or sub-distributors, contractually take title to the products and assume all risks of ownership at the time of shipment. Our stocking distributors are obligated to pay us the contractually agreed upon invoice price within specified terms regardless of when, if ever, they sell the products.
Our direct customers do not have any contractual rights of return or exchange other than for defective product. A portion of the Company’s revenue is generated from inventory maintained at hospitals or physician’s offices.
The Company records estimated sales returns, discounts and allowances as a reduction of net sales in the same period revenue is recognized. The company does not have any estimated sales returns or allowances as of December 31, 2018. The Company recorded $9,484 in sales discounts for the year ended December 31, 2018.
Foreign Currency Transactions
The Company transacts some of its operating activities in foreign currencies, most notably the Euro. The Company also has certain assets and liabilities denominated in foreign currencies that are translated to US Dollars for reporting purposes as of and for the year ended December 31, 2018. These amounts are immaterial and are included in other income or expense for the years ended December 31, 2018 and 2017. Because of the immaterial effect noted above, we did not present a separate statement of other comprehensive income.
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Stock-Based Compensation
A summary of significant assumptions used to estimate the fair value of the equity awards granted in 20162018 and 20152017 follows:
Stock-based compensation expense for the years ended December 31, 20162018 and 20152017 includes both common stock and stock options granted to certain employees, consultants, and directors and has been recorded as general and administrative expenses. We follow the provisions of the ASC Topic 718,Compensation- Stock Compensationwhich requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees and non-employee directors, including employee stock options.
Stock compensation expense based on the fair value on the grant date estimated in accordance with the provisions of ASC 718 is generally recognized as an expense over the requisite service period.
The stock grant prices and the option prices were set at the estimated fair value of the common stock on the date of grant using the market approach. Under the market approach, the fair value of the common stock was determined to be the value of the stock on the date of the grant.
We utilize the Black-Scholes valuation method to recognize compensation expense over the vesting period for stock options. The expected life represents the period that our stock option-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 anThe Company uses, and will continue to use in the future, the historic volatility of similar biotech companies until we have either a sufficient amount of historical information regarding the volatility of our own share price or other traded financial instruments are available to derive an implied volatility to support an estimate of expected volatility. 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.
Grant date | January 6 | August 17 | November 10 |
| Weighted fair value of options granted as of December 31, 2016 | $0.67 | $0.91 | $1.06 |
| Expected term (years) | 6 | 6 | 6 |
| Risk-free interest rate | 1.82% | 1.28% | 1.74% |
| Volatility | 83% | 75.55% | 76.67% |
| Dividend yield | None | None | None |
During 2016, the Company granted options to purchase 744,900 shares of common stock, and 180,5002018, 1,243,956 shares of common stock were granted. Total equity awards granted in 2016 was 925,400.The Company did not grant any options to purchase shares of common stock during 2018.
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RESULTS OF OPERATIONS
Overview
We started operations late in 2013. We anticipate that our quarterly and annual results of operations will be impacted for the foreseeable future by several factors, including successful developmentthe ramp-up in sales of aour prototype product in Europe, approval of the product by regulatory agenciesthe Food & Drug Administration (“FDA”) in the United States, and abroad, and the rate of adoption of our product by medical professionals. On December 7, 2016, we sold Streamline afterThe Company received CE marking in June 2017 for the Board authorized management to find a buyerDenerveX System and it is now commercially available throughout the European Union and several other countries that accept CE marking. The Company’s first sale of the DenerveX System occurred in May 2016.July 2017. Due to these factors, we believe that period to period comparisons of our results of operations are not a good indication of our future performance.
The following table sets forth our results of operation for the years ended December 31, 20162018 and 2015:2017:
| 2018 | 2017 | |||||||
| Revenues, net of discount of $9,484 and $52, respectively | $ | 818,211 | $ | 207,344 | ||||
| Cost of Goods Sold | (502,789 | ) | (162,837 | ) | ||||
| Gross Profit | 315,422 | 44,507 | ||||||
| Operating Expenses: | ||||||||
| General and administrative | 3,972,446 | 4,721,893 | ||||||
| Sales and marketing | 808,223 | 865,377 | ||||||
| Research and development | 204,690 | 491,076 | ||||||
| Loss on asset disposal | 32,865 | — | ||||||
| Depreciation and amortization | 23,915 | 27,100 | ||||||
| Total operating expenses | 5,042,139 | 6,105,446 | ||||||
| Operating Loss | (4,726,717 | ) | (6,060,939 | ) | ||||
| Other Income | — | 957 | ||||||
| Other Expenses: | ||||||||
| Interest expense | 162,200 | 395,332 | ||||||
| Foreign currency transaction loss | 19,727 | — | ||||||
| Total Other Expenses | 181,927 | 395,332 | ||||||
| Loss from Continuing Operations | (4,908,644 | ) | (6,455,314 | ) | ||||
| Discontinued Operations | ||||||||
| Loss from discontinued operations | — | 1,163 | ||||||
| Total Loss from Discontinued Operations | — | (1,163 | ) | |||||
| Net Loss | $ | (4,908,644 | ) | $ | (6,456,477 | ) | ||
| Dividend on outstanding Series B Preferred Stock | $ | (57,813 | ) | — | ||||
| Deemed dividend on adjustment to exercise price on certain warrants | (107,697 | ) | — | |||||
| Deemed dividend on beneficial conversion features | (403,719 | ) | — | |||||
| Net Loss Attributable to Common Shareholders | $ | (5,477,873 | ) | — | ||||
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| Operating Expenses: | 2016 | 2015 |
| General and administrative | $4,872,626 | $4,561,470 |
| Sales and marketing | 391,698 | 101,772 |
| Research and development | 1,126,535 | 867,822 |
| Depreciation and amortization | 11,267 | 6,498 |
| Impairment of goodwill | 6,455,645 | -- |
| Total operating expenses | 12,857,771 | 5,537,562 |
| Operating Loss | (12,857,771) | (5,537,562) |
| Other Expenses: | ||
| Interest expense | 455,304 | 46,259 |
| Total Other Expenses | 455,304 | 46,259 |
| Loss from Continuing Operations | (13,313,075) | (5,583,821) |
| Discontinued Operations | ||
| Loss from discontinued operations | 477,497 | 939,256 |
| Impairment loss | 1,584,048 | -- |
| Disposal loss | 852,864 | -- |
| Total Loss from Discontinued Operations | (2,914,409) | (939,256) |
| Net Loss | $(16,227,484) | $(6,523,077) |
Revenue; Cost of Revenue
The Company’s first sale of the DenerveX System. Prior to the divestiture of Streamline in December 2016, we had only nominal sales of the Streamline ISS poles thatSystem occurred in December 2015 which are included in the loss from discontinued operationsJuly 2017. The Company recorded revenue for the year ended December 31, 2015.
The Company sells the DenerveX System through a combination of direct sales and independent distributors in international markets. The Company recognizes revenue at the time product is shipped to customers from the third-party distribution warehouse in Berlin, Germany. We believe this action satisfies the performance obligation as outlined in new revenue recognition standards.
The DenerveX Device is manufactured by Nortech in Minneapolis, MN and subsequently shipped to the third-party warehouse in packages of five units per one package. Our independent distributors then order the DenerveX Devices as single units at specified prices as outlined in their distribution agreements. The international distribution agreements also specify the pricing for which the independent distributor is to sell the DenerveX Device to their end-user customers.
The Pro-40 Generator is manufactured in Bulgaria and shipped to the third-party warehouse as single units. The generators are typically provided for use to customers at no cost, however, demo units can be purchased by customers for which the Company records revenue.
Our independent distribution customers place initial purchase orders for minimum stocking quantities of both the DenerveX Devices and Pro-40 Generators as agreed upon per their signed international distribution agreements. Subsequent stocking orders are required to be placed initially at specified dates and quantities based upon projected end-user sales volumes. Stocking orders thereafter are required to be placed quarterly based off actual end-user sales volumes.
Cost of sales as a percentage of revenue in 2018 was approximately 61% resulting in a gross profit margin of approximately 39%. Cost of sales as a percentage of revenue in 2017 was approximately 79% resulting in a gross profit margin of approximately 21 %.
Operating Expenses
We classify our operating expenses into fourfive categories: research & development, sales & marketing, general & administrative expense, loss on asset disposal, and depreciation and amortization expense.
Research and Development Costs and Expenses
Research and development costs and 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 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.
Advertising
During 2016,2018, the Company incurred approximately $1,780,000$149,000 in advertising expenses compared to approximately $332,000 in 2017. Advertising expenses consists primarily of fees paid to vendors for tradeshows and consultants in correlation with the launch of the DenerveX in Europe.
General and Administrative Expenses
During 2018, the Company incurred approximately $2,162,000 in personnel costs, compared to approximately $1,390,000$1,850,000 in 2015.2017. Professional fees were approximately $1,453,000$1,668,000 in 20162018 and $2,552,000$1,651,000 in 20152017 which consisted primarily of professional costs related to the development of the DenerveX device and the acquisition of Streamline in 2015.System. Travel expenses were approximately $226,000$144,000 during 20162018 and $295,000$299,000 in 2015.2017.
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We anticipate thatan overall increase in our general and administrative expenses will continuedue to increases in wage expense with the addition of the Company’s new CEO, Bill Horne. We anticipate that other general and administrative expenses to remain at a comparable raterates in the future to support clinical trials, commercialization of our product candidate and continued costs of operating as a public company.
Depreciation & Amortization
Depreciation and amortization expense are recorded in the period in which they are incurred. During 2016,2018, the Company recognized approximately $11,300$23,900 in depreciation expense, compared to approximately $6,700$27,100 in 2015. During 2016, the Company recognized approximately $190,000 in amortization expense compared to approximately $427,000 in 2015. Amortization expense is a result of amortizing the intangible assets acquired in the Streamline acquisition and the significant decrease in amortization expense in 2016 compared to 2015 is a result of having ceased amortization of the intangible assets upon Streamline being classified as held for sale in May 2016. Amortization expense is included in the total loss from discontinued operations at December 31, 2016 and 2015.
Liquidity and Capital Resources
Since our inception, we have incurred losses and anticipate that we will continue to incur losses in the foreseeable future.
Through March 31, 2019, the Company has entered into SPA’s with investors which has brought the aggregate principal amount of capital raised in all the offerings since January 8, 2019 to $7,200,000.
While we expect our research and development costs for the DenerveX System to dissipate,diminish, we also anticipate increased expenditures for clinical trials to obtain FDA approval of the DenerveX System as well as expenses related to the commercial launch of the DenerveX system. We will need additional cash to fully fund these activities.
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 as of and for the years ended December 31, 20162018 and 2015.
The presence of the going concern explanatory paragraph suggests that we may not have sufficient liquidity or minimum cash levels to operate the business.
Sources of Liquidity
Equity
Common Stock /Preferred Series A Stock
On November 9, 2015, we issued a convertible promissory note to Steve Gorlin, a related party, for $2,000,000, the principal to be advanced in two installments. We received $970,000 in cash and the elimination of $30,000 in directors’ fees payable on November 9, 2015. This 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. After a further extension was granted, on December 1, 2016, we received the second installment of $1,000,000 from Mr. Gorlin and associates.
On February 26, 2018, the Company entered into a securities purchase agreement with selected accredited investors whereby the Company had the rightsold an aggregate of 770,000 shares of common stock and 385,000 warrants to sell in a private placement a minimum of $1,000,000 and up to a maximum of $2,000,000 of units.purchase common stock. The offering resulted in $308,000 in gross proceeds to the Company. The warrants have a five-year term commencing six months from issuance with an exercise price of $1,398,034.
On February 9, 2017, 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 $250,000$3,000,000 and up to a maximum of $1,300,000$5,000,000 of units. Units. Each Unit had a purchase price of $100,000 and consisted of (i) 96,154 shares of the Company’s common stock, par value $0.001 per share at a purchase price of $1.04 per share, and (ii) a warrant to purchase 48,077 shares of common stock. Each warrant has an initial exercise price of $1.50 per share and is exercisable for a period of five (5) years from the date of issuance. Investors had the option to request shares of the Company’s Series A Convertible Preferred Stock (the “Series A Preferred Stock”) in lieu of common stock, on a basis of one share of preferred stock for every one hundred shares of common stock.
The offering resulted in gross proceeds of $1,300,000.
Each share of Series A Preferred Stock may be converted into shares of fully paid and non-assessable shares of common stock at a rate of one hundred shares of the Company’s common stock for every share of Series A Preferred Stock.
Preferred Series B Stock
On May 1, 2018, the Company entered into a securities purchase agreement with selected accredited investors whereby the Company offered up to $1,000,000 in units. Each unit had a purchase price of $100,000 and consisted of (i) 1,000 shares of the Company’s 5% Series B Convertible Preferred Stock (the “Series B Shares”) and (ii) warrants to purchase 250,000 shares of the Company’s common stock, par value $0.001 per share. Each Series B Share is convertible at a conversion price of $0.40 per share. The conversion price has a feature that would adjust the conversion price downward if the company issues any common stock or common stock equivalents at a price less than $0.40 per share while the Series B shares are outstanding. The market value of the common stock on the date of the agreement was $0.44. The Series B Shares initially entitled the holders to a 5% adjustable annual dividend. The Series B Shares also have a feature that provides the holder the ability to adopt more favorable terms of subsequent financings while the Series B Shares are outstanding.
The Warrants are exercisable for a period of three (3) years from the date of issuance at an initial exercise price of $0.75 per share subject to downward adjustment if the Company issues any common stock or common stock equivalents at a price less than $0.75 per share while the warrants are outstanding.
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As a result of the offering, the Company sold an aggregate of 8.25 Units and issued to the Investors an aggregate of 8,250 Series B Shares and 2,062,500 warrants to purchase common stock, resulting in total $825,000 gross proceeds to the Company. The Company is exploring other fundraising options for 2017, however, since we believe thatincurred $5,000 in legal fees related to the likelihood of obtaining traditional debt financing at our stage of development is low, our source of fundsoffering, which resulted in $820,000 net cash received from the offering. The 8,250 Series B Shares sold in the foreseeableOffering are initially convertible into an aggregate of 2,062,500 shares of Common Stock.
Of the net proceeds in the offering of $820,000, approximately $288,000 was first allocated to the warrants issued to investors based on their relative fair value. The Company recognized a beneficial conversion feature related to the Series B Shares of approximately $373,000, which was credited to additional paid-in capital, and the residual amount of approximately $159,000 was allocated to the Series B Shares. Because the Series B Shares can immediately be converted by the holder, the discount recognized by the allocation of proceeds to the beneficial conversion feature was immediately accreted and recognized as a deemed dividend to the preferred shareholders.
On August 1, 2018 the annual dividend rate on the Series B Shares was adjusted to 12%, which is equal to the same rate as the convertible debt issued in August and September 2018, pursuant to an adjustment provision in the Series B Shares which entitles the holders to receive a more beneficial annual dividend rate offered in any subsequent financings. The Company had accrued unpaid dividends in the amount of approximately $58,000 as of December 31, 2018, related to the Series B Shares.
On August 8, 2018, the Company completed the issuance of convertible debt at an initial conversion price of $0.40. Accordingly the exercise price on all of the warrants issued with the Series B Shares were adjusted downward to $0.40. In conjunction with the downward adjustment, the Company recorded a deemed dividend of approximately $108,000 representing the difference in the fair value of the warrants immediately before and after the adjustment to the exercise price.
Debt
Convertible Debenture
On January 31, 2018, the Company issued a 5% convertible debenture in exchange for $100,000. The debenture accrued interest at 5% per annum. Principal and interest were due on January 30, 2019. The debenture was convertible at the option of the holder into shares of the Company’s common stock at a conversion rate equivalent to 85% of the average closing price of the Company’s common stock for the 20 days preceding the conversion.
On April 26, 2018, the convertible debenture and unpaid accrued interest was converted into an aggregate of 266,301 shares of common stock, eliminating the Company’s debt obligation. Prior to the conversion, the Company recognized approximately $1,200 in interest expense related to the convertible debenture during the year ended December 31, 2018. The market value of the common stock on the date of the conversion was $0.40. This difference lead to an immaterial amount related to a beneficial conversion feature.
Convertible Notes
In August and September 2018, the Company entered into a securities purchase agreement with select accredited investors, whereby the Company offered up to $1,000,000 in units at a purchase price of $50,000 per unit. Each Unit consists of (i) a 12% senior secured convertible note, initially convertible into shares of the Company’s common stock, par value $0.001 per share, at a conversion price equal to the lesser of $0.40 or ninety percent (90%) of the per share purchase price of any shares of common stock or common stock equivalents issued in future private placements of equity and/or debt securities completed by the Company following this offering, and (ii) a three-year warrant to purchase such number of shares of the Company’s common stock equal to one hundred percent (100%) of the number of shares of common stock issuable upon conversion of the notes at $0.40. The Warrants are exercisable at a price equal to the lesser of $0.75 or ninety percent (90%) of the per share purchase price of any shares of common stock or common stock equivalents issued in future private placements of the debt and/or equity securities completed by the Company following the issuance of warrants. The notes are secured by all of the assets of the Company.
ASU2017-11, Earnings per share (Topic 260), provided that when determining whether certain financial instruments should be classified as liability or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. If a down round feature on the conversion option embedded in the note is triggered, the Company will likely beevaluate whether a beneficial conversion feature exists, the Company will record the amount as a debt discount and will amortize it over the remaining term of the debt.
If the down round feature in the warrants is triggered, the Company will recognize the effect of the down round as a deemed dividend which will reduce the income available to common stockholders.
| 17 |
In the offering, the Company sold an aggregate of 15 units and issued to investors an aggregate of $750,000 in principal amount of convertible notes and 1,875,000 warrants to purchase common stock, resulting in total gross proceeds of $750,000 to the Company. If converted at $0.40 the convertible notes sold in the offering are convertible into an aggregate of 1,875,000 shares of common stock. The Company recorded the proceeds from the salenotes and the accompanying warrants, which accrete over the period the notes are outstanding, on a relative fair value basis of capital stock or some typeapproximately $505,000 and $245,000, respectively. Accretion expense related to the discount on these convertible notes for the year ended December 31, 2018 was approximately $93,000. The Company recognized $33,700 in unpaid accrued interest expense related to the notes as of structured capital arrangement involving either equity or a combination of debt with an equity component.
Cash Flows
Net cash used in operating activities was approximately $5,427,000$2,341,000 during the year ended December 31, 2016,2018, compared to approximately $5,982,000$5,590,000 in 2015.2017. Net cash provided by investing activities was approximately $415,000$150,000 during the year ended December 31, 2016,2018, compared to approximately $1,159,000net cash used in 2015.investing activities of approximately $17,000 during the year ended December 31, 2017. Net cash provided by financing activities was approximately $4,335,000$1,993,000 during the year ended December 31, 2016,2018, compared to approximately $2,027,000$4,959,000 in 2015.
The Company had approximately $893,000$47,000 and $1,570,000$245,000 of cash on hand at December 31, 20162018 and 2015,2017, respectively.
Results of DiscontinuedContinued Operations
Year Ended December 31, 20162018 Compared to the Year Ended December 31, 2015
The Company recorded $827,695 and $502,789, respectively, in revenue and cost of goods sold for the year ended December 31, 2016, as compared to approximately $5,538,0002018. The Company recorded $207,396 and $162,837, respectively, in revenue and cost of goods sold for the year ended December 31, 2015.
Total operating expenses decreased approximately $1,063,000, or 18%, to approximately $5,042,000 for the current year ended December 31, 2016 include2018, as compared to approximately $6,105,000 for the year ended December 31, 2017.
The Company experienced hardships in 2018 raising additional funds to maintain a write downsufficient level of $6,455,645working capital which is the primary reason for the decrease in goodwill recordedoperating expenses in connection with the purchase of Streamline Inc. in March 2015.
Funding Requirements
We anticipate our cash expenditures will remain consistent as we continuediminishing research and development costs will be offset by the cost of clinical trials to operate as a publicly traded entityobtain FDA approval and as we movemoving forward fromwith the final development stagesrecent commercialization of the DenerveX System onto clinical trial studies.System. We expect future cash flow expenditures to increase if the FDA requires a de novo regulatory path, instead of a 510(k) approval.
Subsequent to year-end, on January 8, 2019, the Company executed the Asset Purchase Agreement with RMS, as amended, by which the Company entered into a securities purchase agreement (the “SPA”) with select accredited investors and raised an aggregate amount of $2,000,000, with $1,800,000 received in cash and $200,000 by cancellation of debt.
Subsequent to the consummation of the Asset Purchase Agreement with RMS, the Company has raised an additional $5,200,000 with select accredited investors under the same SPA. Through March 31, 2019 the Company has raised an aggregate of $7,200,000 in convertible note financings.
The sale of additional equity or convertible debt securities would likely result in dilution to our current stockholders.
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.
| 18 |
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 ofNotes from 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 principal and interest payments of $5,661 through Augustinto the third quarter of 2019.
The Company rents commercial office space in Alpharetta, GA. Base annual rent is initiallycurrently set at $2,750$3,095 per month and the lease term ends December 31, 2018.
The Company has a consulting agreement with Lifeline Industries Inc.,Jesse Crowne, a related party, atformer Director and Co-Chairman of the Board of the Company, to provide business development consulting services for a monthly fee of $10,000$13,333 per month through February 9, 2018.
The Company has a consultingdistribution center agreement with a sales managerlogistics service provider in EuropeBerlin, Germany pursuant to provide sales, marketing,which they shall manage and distribution consulting services atcoordinate the DenerveX System products which the Company exports to the EU through June 2019.
The Company pays a fixed monthly fee of €10,000 through August 1, 2017.
The Company also has employment agreements withissued to investors an aggregate of $750,000 in 12% senior secured convertible notes in August and September 2018. The notes are secured by all of the executive officers that commit the Company to a six month severance and benefits package if those employees separate under certain conditions, including a change in controlassets of the Company.
Changes in Board of Directors
On August 11, 2016October 9, 2018, William E. Horne, pursuant to agreement and subsequent modification, began serving as the Company receivedCompany’s President and Chief Executive Officer. The Employment Agreement is for a resignation letter fromterm of five (5) years subject to additional one year renewals. Mr. Thomas Hills from his positionJarrett Gorlin resigned as a memberPresident and Chief Executive Officer upon the effectiveness of the Board of Directors of the Company.Employment Agreement. There were no disagreementsagreements between Mr. HillsGorlin and the Company.
On August 17, 2016,October 15, 2018, Directors Jarrett Gorlin, James R. Lawson, Randal R. Betz, John C. Thomas, Jr., James R. Andrews, Clyde A. Hennies, Jon Mogford, Scott Haufe and Jesse W. Crowne, this being all Board members except for Larry W. Papasan, tendered their resignations to Mr. Papasan, Co-Chairman of the Board. Mr. Papasan then invited newly appointed President and Chief Executive Officer, William E. Horne, to join the Board as Chairman. Mr. Horne accepted, and Mr. Papasan tendered his resignation to Mr. Horne, leaving Mr. Horne as the sole director of the Company.
On January 8, 2019, the Company appointed Ron Lawson to fill Mr. Hills’ vacancyRaymond Monteleone and Michael Yurkowsky to serve as a membermembers of the Company’s Board. In connection with his appointment, Mr. Lawson
On February 4, 2019, Jeremy Daniel was granted 300,000 stock options underappointed as the Company’s 2013 Stock Option Incentive Plan. Each stock option has an exercise price of $1.20new CFO and is exercisable pursuant to the terms of the stock option award. The closing price of the Company’s stock on August 17, 2016, the day the shares were issued, was $1.28 per share. 150,000 of the options vest immediately and 150,000 vest in one year.
Indemnification
We have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is or was serving, at our request, in such capacity, to the maximum extent permitted under the laws of the State of Nevada.
The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. However, we maintain directors and officers insurance coverage that may contribute, up to certain limits, a portion of any future amounts paid for indemnification of directors and officers. We believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal. Historically, we have not incurred any losses or recorded any liabilities related to performance under these types of indemnities.
| 19 |
Additionally, in the normal course of business, we have made certain guarantees, indemnities and commitments under which we may be required to make payments in relation to certain transactions. These indemnities include intellectual property and other indemnities to our customers and distribution network partners in connection with the sales of our products, and indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease.
It is not possible to determine the maximum potential loss under these guarantees, indemnities and commitment due to our limited history of prior indemnification claims and the unique facts and circumstances involved in each particular provision.
Recently Adopted Accounting Standards
In August 2014,February 2016, FASB issued ASU 2014-15, DisclosureNo. 2016-02, Leases (Topic 842). The core principle of Uncertainties about an Entity’s Ability to Continue asTopic 842 is that a Going Concern, orlessee should recognize the assets and liabilities that arise from leases. ASU 2014-15. ASU 2014-15 explicitly requires a company’s management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. The new standard will be2016-02 is effective in the firstfor public companies for annual period endingreporting periods beginning after December 15, 2016, although2018, and interim periods within those fiscal years. The guidance may be adopted prospectively or retrospectively and early applicationadoption is permitted. We adopted this standard on January 1, 2017. We do not expectThe Company is currently assessing the impact the adoption of this standard toASU 2016-02 will have a material impact on ourits consolidated statements of financial position, results of operations or cash flows.
Jumpstart Our Business Startups Act of 2012
The JOBS Act permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies.
We are choosing to "opt out"“opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not Applicable.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
| 20 |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| F-2 | |
| Consolidated Balance Sheets as of December 31, | F-3 |
| F-4 | |
| F-5 | |
| F-6 | |
| F-7 |
| F-1 |
To the Shareholders and Board of Directors
MedoveX Corp. and Shareholders of
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of MedoveX CorporationCorp and SubsidiarySubsidiaries (the “Company”) as of December 31, 20162018 and 2015,2017, and the related consolidated statements of operations, changes in stockholders’ equity (deficit) and cash flows for the years then ended. ended (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of their operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 12 to the consolidated financial statements, the Company has an accumulated deficit and has incurred significant operating losses and has a working capital deficit. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to this matter are also discussed in Note 12. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesethe Company’s consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. OurAs part of our audits included considerationwe are required to obtain an understanding of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Frazier & Deeter, LLC
Atlanta, Georgia
April 10, 2019
We have served as the Company’s auditor since 2015.
| F-2 |
MEDOVEX CORP. AND SUBSIDIARY | ||
CONSOLIDATED BALANCE SHEETS | ||
December 31, 2016 | December 31, 2015 | |
| Assets | ||
| Current Assets | ||
| Cash | $892,814 | $1,570,167 |
| Prepaid expenses | 364,822 | 169,253 |
| Current assets held for sale | -- | 35,509 |
| Total Current Assets | 1,257,636 | 1,774,929 |
| Long Term Receivable | 150,000 | -- |
| Property and Equipment, net of accumulated depreciation | 97,590 | 23,724 |
| Deposits | 2,751 | 2,751 |
| Goodwill | -- | 6,455,645 |
| Noncurrent assets held for sale | -- | 3,274,685 |
| Total Assets | $1,507,977 | $11,531,734 |
| Liabilities and Stockholders' Equity | ||
| Current Liabilities | ||
| Interest payable | $69,222 | $76,712 |
| Accounts payable | 225,725 | 278,309 |
| Accrued liabilities | 459,800 | 100,317 |
| Notes payable, current portion | 126,086 | 134,540 |
| Short-term note payable, net of debt discount | 970,240 | -- |
| Total Current Liabilities | 1,851,073 | 589,878 |
| Long-Term Liabilities | ||
Convertible debt | -- | 753,914 |
| Notes payable, net of current portion | 103,742 | 164,726 |
| Deferred rent | 1,179 | 491 |
| Total Long-Term Liabilities | 104,921 | 919,131 |
| Total Liabilities | 1,955,994 | 1,509,009 |
| Stockholders' (Deficit) Equity | ||
| Preferred stock - $.001 par value: 500,000 shares | ||
| authorized, no shares outstanding | -- | -- |
| Common stock - $.001 par value: 49,500,000 shares authorized, | ||
14,855,181 and 11,256,175 shares issued at December 31, 2016 and December 31, 2015, respectively, 14,855,181 and 11,048,203 shares outstanding at December 31, 2016 and December 31, 2015, respectively | 14,855 | 11,256 |
| Additional paid-in capital | 25,898,054 | 20,164,911 |
| Due from stockholder | -- | (20,000) |
| Accumulated deficit | (26,360,926) | (10,133,442) |
| Total Stockholders' (Deficit) Equity | (448,017) | 10,022,725 |
| Total Liabilities and Stockholders' (Deficit) Equity | $1,507,977 | $11,531,734 |
CONSOLIDATED BALANCE SHEETS
| December 31, 2018 | December 31, 2017 | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | 47,290 | $ | 245,026 | ||||
| Accounts receivable | 145,757 | 157,069 | ||||||
| Other receivables | — | 86,888 | ||||||
| Inventory | 131,455 | 294,714 | ||||||
| Prepaid expenses | 46,153 | 204,532 | ||||||
| Short-term receivable | — | 150,000 | ||||||
| Total Current Assets | 370,655 | 1,138,229 | ||||||
| Property and Equipment, net of accumulated depreciation | 30,393 | 87,173 | ||||||
| Deposits | 2,751 | 2,751 | ||||||
| Total Assets | $ | 403,799 | $ | 1,228,153 | ||||
| Liabilities and Stockholders’ (Deficit) Equity | ||||||||
| Current Liabilities | ||||||||
| Interest payable | $ | 103,709 | $ | 69,222 | ||||
| Accounts payable | 750,958 | 196,171 | ||||||
| Other payables | 37,377 | — | ||||||
| Accounts payable to related parties | 91,302 | 12,319 | ||||||
| Accrued payroll | 451,207 | — | ||||||
| Accrued liabilities | 210,846 | 64,000 | ||||||
| Notes payable, current portion | 99,017 | 132,294 | ||||||
| Short-term note payable, net of debt discount | 598,119 | — | ||||||
| Dividend payable | 57,813 | — | ||||||
| Unearned revenue | — | 1,048 | ||||||
| Total Current Liabilities | 2,400,348 | 475,054 | ||||||
| Long-Term Liabilities | ||||||||
| Notes payable, net of current portion | — | 38,990 | ||||||
| Deferred rent | 267 | 688 | ||||||
| Total Long-Term Liabilities | 267 | 39,678 | ||||||
| Total Liabilities | 2,400,615 | 514,732 | ||||||
| Stockholders’ (Deficit) Equity | ||||||||
| Series A Preferred stock - $.001 par value: 500,000 shares authorized, 0 and 12,740 shares issued and outstanding at December 31,2018 and December 31, 2017, respectively | — | 13 | ||||||
| Series B Preferred stock - $.001 par value: 10,000 shares authorized, 9,250 shares issued and outstanding at December 31, 2018, no shares issued and outstanding at December 31, 2017 | 9 | — | ||||||
| Common stock - $.001 par value: 49,500,000 shares authorized, 24,717,270 and 21,163,013 shares issued and outstanding at December 31, 2018 and December 31, 2017, respectively | 24,717 | 21,163 | ||||||
| Additional paid-in capital | 35,812,202 | 33,509,648 | ||||||
| Accumulated deficit | (37,833,744 | ) | (32,817,403 | ) | ||||
| Total Stockholders’ (Deficit) Equity | (1,996,816 | ) | 713,421 | |||||
| Total Liabilities and Stockholders’ Equity (Deficit) | $ | 403,799 | $ | 1,228,153 | ||||
See notes to consolidated financial statements
| F-3 |
CONSOLIDATED STATEMENTS OF OPERATIONSOPERATIONS
For the year ended December 31, | ||
2016 | 2015 | |
| Operating Expenses | ||
| General and administrative | $4,872,626 | $4,561,470 |
| Sales & Marketing | 391,698 | 101,772 |
| Research and development | 1,126,535 | 867,822 |
| Depreciation and amortization | 11,267 | 6,498 |
| Impairment of goodwill | 6,455,645 | -- |
| Total Operating Expenses | 12,857,771 | 5,537,562 |
| Operating Loss | (12,857,771) | (5,537,562) |
| Other Expenses | ||
| Interest expense | 455,304 | 46,259 |
| Total Other Expenses | 455,304 | 46,259 |
| Loss from Continuing Operations | (13,313,075) | (5,583,821) |
| Discontinued Operations | ||
| Loss from discontinued operations | 477,497 | 939,256 |
| Impairment loss | 1,584,048 | -- |
| Disposal loss | 852,864 | -- |
| Total Loss from Discontinued Operations | (2,914,409) | (939,256) |
| Net Loss | $(16,227,484) | $(6,523,077) |
| Basic and diluted net loss per common share from continuing operations | $(1.00) | $(0.51) |
| Basic and diluted net loss per common share from discontinued operations | (0.22) | (0.09) |
| Basic and diluted net loss per common share | $(1.22) | $(0.60) |
| Basic and diluted weighted average common shares outstanding | 13,250,789 | 10,943,675 |
For the year ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Revenues, net of discount of $9,484 and $52, respectively | $ | 818,211 | $ | 207,344 | ||||
| Cost of Goods Sold | (502,789 | ) | (162,837 | ) | ||||
| Gross Profit | 315,422 | 44,507 | ||||||
| Operating Expenses | ||||||||
| General and administrative | 3,972,446 | 4,721,893 | ||||||
| Sales & Marketing | 808,223 | 865,377 | ||||||
| Research and development | 204,690 | 491,076 | ||||||
| Loss on asset disposal | 32,865 | — | ||||||
| Depreciation and amortization | 23,915 | 27,100 | ||||||
| Total Operating Expenses | 5,042,139 | 6,105,446 | ||||||
| Operating Loss | (4,726,717 | ) | (6,060,939 | ) | ||||
| Other Income | — | 957 | ||||||
| Other Expenses | ||||||||
| Foreign currency transaction loss | 19,727 | — | ||||||
| Interest expense | 162,200 | 395,332 | ||||||
| Total Other Expenses | 181,927 | 395,322 | ||||||
| Loss from Continuing Operations | (4,908,644 | ) | (6,455,314 | ) | ||||
| Discontinued Operations | ||||||||
| Loss from discontinued operations | — | 1,163 | ||||||
| Total Loss from Discontinued Operations | — | (1,163 | ) | |||||
| Net Loss | (4,908,644 | ) | $ | (6,456,477 | ) | |||
| Deemed dividend on outstanding Series B Preferred Stock | (57,813 | ) | — | |||||
| Deemed dividend on adjustment to exercise price on certain warrants | (107,697 | ) | — | |||||
| Deemed dividend on beneficial conversion features | (403,719 | ) | — | |||||
| Net loss attributable to common shareholders | (5,477,873 | ) | — | |||||
| Loss per share – Basic and Diluted | ||||||||
| Continued Operations | $ | (0.23 | ) | $ | (0.34 | ) | ||
| Discontinued Operations | — | — | ||||||
| Net Loss per share | $ | (0.23 | ) | $ | (0.34 | ) | ||
| Weighted average outstanding shares used to compute basic and diluted net loss per share | 23,458,305 | 19,142,795 | ||||||
See notes to consolidated financial statements
| F-4 |
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITYEQUITY (DEFICIT)
For the year ended December 31, 20162018 and 2015
Common Stock | Additional | Due From | Accumulated | Total Stockholders' | ||
Shares | Amount | Paid-in Capital | Stockholder | Deficit | Equity | |
Balance – December 31, 2014 | 9,172,480 | $9,173 | $10,106,841 | $-- | $(3,610,365) | $6,505,649 |
| Issuance of common stock to underwriters in January 2015 | 208,695 | 208 | 1,083,928 | -- | -- | 1,084,136 |
| Value of common stock to acquire Streamline on date of closing at $4.50 per share | 1,875,000 | 1,875 | 8,435,625 | -- | -- | 8,437,500 |
| Stock based compensation | -- | -- | 253,659 | -- | -- | 253,659 |
| Issuance of warrant to Steve | ||||||
| Gorlin on November 9 2015 | -- | -- | 284,858 | -- | -- | 284,858 |
| Receivable portion of Note | ||||||
| of convertible debt | -- | -- | -- | (20,000) | -- | (20,000) |
| Net loss | -- | -- | -- | -- | (6,523,077) | (6,523,077) |
Balance – December 31, 2015 | 11,256,175 | $11,256 | $20,164,911 | $(20,000) | $(10,133,442) | $10,022,725 |
| Conversion of promissory note on January 25, 2016 | 552,041 | 552 | 1,071,961 | -- | -- | 1,072,513 |
| Warrant price modification on January 25, 2016 | -- | -- | 18,050 | -- | -- | 18,050 |
| Warrant price modification on February 16, 2016 | -- | -- | 7,670 | -- | -- | 7,670 |
| Issuance of common stock pursuant to private placement completed in April 2016 | 1,211,703 | 1,212 | 800,435 | -- | -- | 801,647 |
| Issuance of warrants pursuant to private placement completed in April 2016 | -- | -- | 374,623 | -- | -- | 374,623 |
| Issuance of common stock in exchange for consulting services in May 2016 | 37,500 | 38 | 47,962 | -- | -- | 48,000 |
| Issuance of common stock pursuant to private placement completed in August 2016 | 1,083,333 | 1,083 | 975,526 | -- | -- | 976,609 |
| Issuance of warrants pursuant to private placement completed in August 2016 | -- | -- | 323,391 | -- | -- | 323,391 |
| Issuance of common stock in exchange for consulting services in August 2016 | 60,000 | 60 | 76,740 | -- | -- | 76,800 |
| Issuance of warrants pursuant to loan completed in September 2016 | -- | -- | 135,971 | -- | -- | 135,971 |
| Issuance of common stock in exchange for consulting services in September 2016 | 83,000 | 83 | 124,417 | -- | -- | 124,500 |
| Issuance of common stock in December 2016 pursuant to conversion of promissory note in January 2016 | 571,429 | 571 | 999,429 | -- | -- | 1,000,000 |
| Repayment of stockholder receivable | -- | -- | -- | 20,000 | -- | 20,000 |
| Stock based compensation | -- | -- | 776,968 | -- | -- | 776,968 |
| Net loss | -- | -- | -- | -- | (16,227,484) | (16,227,484) |
Balance – December 31, 2016 | 14,855,181 | $14,855 | $25,898,054 | $-- | $(26,360,926) | $(448,017) |
| Common Stock | Preferred Stock | Additional | Total Stockholder’ | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Paid-in Capital | Accumulated Deficit | Equity (Deficit) | ||||||||||||||||||||||
| Balance – December 31, 2016 | 14,855,181 | $ | 14,855 | — | $ | — | $ | 25,898,054 | $ | (26,360,926 | ) | $ | (448,017 | ) | ||||||||||||||
| Issuance of common stock in exchange for board of director fees in January 2017 | 173,912 | 174 | — | — | 239,826 | — | 240,000 | |||||||||||||||||||||
| Issuance of common stock pursuant to a private placement completed in February 2017 | 1,631,730 | 1,632 | — | — | 1,207,032 | — | 1,208,664 | |||||||||||||||||||||
| Issuance of preferred stock pursuant to a private placement completed in February 2017 | — | — | 12,740 | 13 | 943,673 | — | 943,686 | |||||||||||||||||||||
| Issuance of warrants pursuant to a private placement completed in February 2017 | — | — | — | — | 465,709 | — | 465,709 | |||||||||||||||||||||
| Issuance of common stock pursuant to the conversion of a short term note in February 2017 | 165,865 | 166 | — | — | 145,753 | — | 145,919 | |||||||||||||||||||||
| Issuance of preferred stock pursuant to the conversion of a short term note in February 2017 | — | — | 9,399 | 9 | 826,865 | — | 826,874 | |||||||||||||||||||||
| Issuance of warrants pursuant to the conversion of a short term note in February 2017 | — | — | — | — | 177,207 | — | 177,207 | |||||||||||||||||||||
| Issuance of common stock pursuant to warrant cancellations in February 2017 | 200,000 | 200 | — | — | 207,800 | — | 208,000 | |||||||||||||||||||||
| Issuance of common stock pursuant to preferred stock conversion in March 2017 | 414,663 | 415 | (4,147 | ) | (4 | ) | (411 | ) | — | — | ||||||||||||||||||
| Issuance of common stock pursuant to preferred stock conversion in April 2017 | 525,240 | 525 | (5,252 | ) | (5 | ) | (520 | ) | — | — | ||||||||||||||||||
| Issuance of common stock pursuant to a private placement completed in July 2017 | 2,956,043 | 2,956 | — | — | 2,019,670 | — | 2,022,626 | |||||||||||||||||||||
| Issuance of warrants pursuant to a private placement completed in July 2017 | — | — | — | — | 446,561 | — | 446,561 | |||||||||||||||||||||
| Issuance of common stock in exchange for board of director fees in October 2017 | 115,389 | 115 | — | — | 134,885 | — | 135,000 | |||||||||||||||||||||
| Issuance of common stock in exchange for consulting services in October 2017 | 74,990 | 75 | — | — | 80,925 | — | 81,000 | |||||||||||||||||||||
| Issuance of common stock in exchange for consulting services in December 2017 | 50,000 | 50 | — | — | 33,450 | — | 33,500 | |||||||||||||||||||||
| Stock based compensation | — | — | — | — | 683,169 | — | 683,169 | |||||||||||||||||||||
| Net loss | — | — | — | — | — | (6,456,477 | ) | (6,456,477 | ) | |||||||||||||||||||
| Balance – December 31, 2017 | 21,163,013 | $ | 21,163 | 12,740 | $ | 13 | $ | 33,509,648 | $ | (32,817,403 | ) | $ | 713,421 | |||||||||||||||
| Issuance of common stock pursuant to a private placement completed in February 2018 | 770,000 | 770 | — | — | 241,727 | — | 242,497 | |||||||||||||||||||||
| Issuance of warrants pursuant to a private placement completed in February 2018 | — | — | — | — | 52,003 | — | 52,003 | |||||||||||||||||||||
| Issuance of warrants in connection with short-term debt in March 2018 | — | — | — | — | 25,646 | — | 25,646 | |||||||||||||||||||||
| Issuance of common stock pursuant to preferred series A stock conversion in March 2018 | 1,274,000 | 1,274 | (12,740 | ) | (13 | ) | (1,261 | ) | — | — | ||||||||||||||||||
| Issuance of common stock pursuant to conversion of convertible debt in April 2018 | 266,301 | 266 | — | — | 100,928 | — | 101,194 | |||||||||||||||||||||
| Issuance of preferred series B stock pursuant to a private placement completed in May 2018 | — | — | 8,250 | 8 | 158,565 | — | 158,573 | |||||||||||||||||||||
| Issuance of warrants pursuant to a private placement completed in May 2018 | — | — | — | — | 287,995 | — | 287,995 | |||||||||||||||||||||
| Convertible preferred stock – beneficial conversion feature pursuant to a private placement completed in May 2018 | — | — | — | — | 373,432 | — | 373,432 | |||||||||||||||||||||
| Issuance of preferred stock pursuant to conversion of short-term debt in May 2018 | — | — | 1,000 | 1 | 35,674 | — | 35,674 | |||||||||||||||||||||
| Issuance of warrants in connection with conversion of short-term debt in May 2018 | — | — | — | — | 34,038 | — | 34,038 | |||||||||||||||||||||
| Convertible preferred stock – beneficial conversion feature pursuant to conversion of short-term promissory note in May 2018 | — | — | — | — | 30,287 | — | 30,287 | |||||||||||||||||||||
| Issuance of warrants in connection with convertible debt in August 2018 | — | — | — | — | 192,330 | — | 192,330 | |||||||||||||||||||||
| Issuance of warrants in connection with convertible debt in September 2018 | — | — | — | — | 52,246 | — | 52,246 | |||||||||||||||||||||
| Issuance of common stock in exchange for consulting services in October 2018 | 75,000 | 75 | — | — | 23,925 | — | 24,000 | |||||||||||||||||||||
| Issuance of common stock in exchange for board fees in October 2018 | 320,202 | 320 | — | — | 179,680 | — | 180,000 | |||||||||||||||||||||
| Issuance of common stock pursuant to severance pay to a former office in October 2018 | 323,810 | 324 | — | — | 135,676 | — | 136,000 | |||||||||||||||||||||
| Issuance of common stock pursuant to bonus compensation to certain officers and employees in October 2018 | 524,944 | 525 | — | — | 209,453 | — | 209,978 | |||||||||||||||||||||
| Adjustment of exercise price of certain warrants | — | — | — | — | 107,697 | (107,697 | ) | — | ||||||||||||||||||||
| Stock based compensation | — | — | — | — | 120,326 | — | 120,326 | |||||||||||||||||||||
| Dividends payable | — | — | — | — | (57,813 | ) | — | (57,813 | ) | |||||||||||||||||||
| Net Loss | — | — | — | — | — | (4,908,644 | ) | (4,908,644 | ) | |||||||||||||||||||
| Balance – December 31, 2018 | 24,717,270 | $ | 24,717 | 9,250 | $ | 9 | $ | 35,812,202 | $ | (37,833,744 | ) | $ | (1,996,816 | ) | ||||||||||||||
See notes to consolidated financial statements
| F-5 |
CONSOLIDATED STATEMENTS OF CASH FLOWSFLOWS
Year Ended December 31, | ||
2016 | 2015 | |
| Cash Flows from Operating Activities | ||
| Net loss | $(16,227,484) | $(6,523,077) |
| Adjustments to reconcile net loss to net cash used in operating activities: | ||
| Depreciation | 11,396 | 6,669 |
| Amortization of intangible assets | 189,522 | 426,429 |
| Amortization of debt discount | 357,297 | 38,770 |
| Debt conversion expense | 68,694 | -- |
| Intangible asset impairment loss | 1,584,048 | -- |
| Goodwill impairment loss | 6,455,645 | -- |
| Disposal loss | 852,864 | |
| Stock based compensation | 776,968 | 253,659 |
| Straight-line rent adjustment | 688 | 491 |
| Common stock issued for consulting services | 249,300 | -- |
| Non-cash directors fees | 20,000 | -- |
| Adjustment of fair value of warrant modification | 25,720 | -- |
| Changes in operating assets and liabilities, net of effects of acquisition and disposition: | ||
| Deposits | -- | (2,751) |
| Accounts receivable | 33,045 | (33,045) |
| Prepaid expenses | (128,400) | 63,474 |
| Accounts payable | (52,584) | (164,144) |
| Interest payable | (3,670) | 76,712 |
| Accrued liabilities | 359,483 | (125,130) |
| Net Cash Used in Operating Activities | 5,427,468 | (5,981,943) |
| Cash Flows from Investing Activities | ||
| Acquisition of Streamline, Inc., net of cash received | -- | (1,152,291) |
| Disposition of Streamline Inc. | 500,000 | -- |
| Expenditures for property and equipment | (85,133) | (7,059) |
| Net Cash Provided by (Used in) Investing Activities | 414,867 | (1,159,350) |
| Cash Flows from Financing Activities | ||
| Principal payments under note payable obligation | (136,022) | (37,251) |
| Proceeds from issuance of convertible debt | -- | 695,142 |
| Proceeds from issuance of common stock, net of offering costs | 2,778,256 | -- |
| Proceeds from issuance of warrants, net of offering costs | 833,985 | 284,858 |
| Proceeds from issuance of short term debt | 859,029 | -- |
| Proceeds from issuance of common stock from underwriter’s overallotment | -- | 1,084,136 |
| Net Cash Provided by Financing Activities | 4,335,248 | 2,026,885 |
Net Decrease in Cash | 677,353 | (5,114,409) |
Cash - Beginning of period | 1,570,167 | 6,684,576 |
| Cash - End of period | $892,814 | $1,570,167 |
Supplementary Cash Flow Information | ||
Cash paid for interest | $11,469 | $8,040 |
Non-cash investing and financing activities | ||
| Issuance of common stock for acquisition of Streamline | $-- | $8,437,500 |
| Finance agreement for insurance policy | 66,582 | 76,581 |
| Due from shareholder for issuance of convertible debt | -- | 20,000 |
| Repayment of due from stockholder through forgone director fees | 20,000 | -- |
| Issuance of common stock for consulting services | 249,300 | -- |
| Conversion of note and accrued interest to common stock | 1,072,513 | -- |
| Note receivable from disposition of Streamline | 150,000 | -- |
| Year Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net loss | $ | (4,908,644 | ) | $ | (6,456,477 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 23,915 | 27,100 | ||||||
| Disposal loss | 32,865 | — | ||||||
| Amortization of debt discount | 118,340 | 31,773 | ||||||
| Debt conversion expense | — | 355,985 | ||||||
| Stock based compensation | 120,326 | 683,169 | ||||||
| Straight-line rent adjustment | (421 | ) | (491 | ) | ||||
| Common stock issued for consulting services | 24,000 | 114,500 | ||||||
| Common stock issued for bonuses | 209,978 | — | ||||||
| Equity-based severance payments | 136,000 | — | ||||||
| Equity-based directors fees | 180,000 | — | ||||||
| Changes in operating assets and liabilities, net of effects of disposition: | ||||||||
| Accounts receivable | 11,312 | (157,069 | ) | |||||
| Other receivables | 86,888 | (86,888 | ) | |||||
| Prepaid expenses | 158,379 | 229,632 | ||||||
| Inventory | 163,259 | (294,714 | ) | |||||
| Unearned revenue | (1,048 | ) | 1,048 | |||||
| Accounts payable | 554,787 | (29,554 | ) | |||||
| Other payables | 37,377 | — | ||||||
| Interest payable | 34,487 | — | ||||||
| Accounts payable to related parties | 78,983 | 12,319 | ||||||
| Accrued payroll | 451,207 | — | ||||||
| Accrued liabilities | 146,846 | (20,800 | ) | |||||
| Net Cash Used in Operating Activities | (2,341,164 | ) | (5,590,467 | ) | ||||
| Cash Flows from Investing Activities | ||||||||
| Proceeds from disposition of, net assets of Streamline Inc. | 150,000 | — | ||||||
| Expenditures for property and equipment | — | (16,682 | ) | |||||
| Net Cash (Used in) Provided by Investing Activities | 150,000 | (16,682 | ) | |||||
| Cash Flows from Financing Activities | ||||||||
| Principal payments under note payable obligation | (171,072 | ) | (127,885 | ) | ||||
| Proceeds from issuance of common stock and preferred stock, net of offering costs | 774,502 | 3,838,671 | ||||||
| Proceeds from issuance of warrants, net of offering costs | 610,220 | 1,248,575 | ||||||
| Proceeds from issuance of promissory notes | 174,354 | — | ||||||
| Proceeds from issuance of convertible notes | 605,424 | — | ||||||
| Net Cash Provided by Financing Activities | 1,993,428 | 4,959,361 | ||||||
| Net Decrease in Cash | (197,736 | ) | (647,788 | ) | ||||
| Cash - Beginning of period | 245,026 | 892,814 | ||||||
| Cash - End of period | $ | 47,290 | $ | 245,026 | ||||
| Cash paid for interest | $ | 6,020 | $ | 7,161 | ||||
Non-cash investing and financing activities | ||||||||
| Finance agreement for insurance policy | $ | 74,672 | $ | 69,343 | ||||
| Conversion of note and accrued interest to common stock and preferred stock | 101,194 | 826,874 | ||||||
| Conversion of short-term loan to common stock | — | 145,919 | ||||||
| Issuance of warrants for conversion of note | — | 177,207 | ||||||
| Issuance of common stock for consulting services | 24,000 | 114,500 | ||||||
| Common stock issued for board of director fees | 180,000 | 375,000 | ||||||
| Common stock issued for bonus compensation | 209,978 | — | ||||||
| Common stock issued for severance | 136,000 | — | ||||||
| Issuance of common stock for preferred stock conversion | — | 940 | ||||||
| Issuance of common stock warrants for placement agent fees | — | 153,688 | ||||||
| Issuance of warrants for promissory note | 25,646 | — | ||||||
| Dividends accrued | 57,813 | — | ||||||
See notes to consolidated financial statements
| F-6 |
NoteNotes to consolidated financial statements
Note 1 - Organization
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. The Company is in the business of designing and marketing proprietary medical devices for commercial use in the United States and Europe. The Company received CE marking in June 2017 for the DenerveX System and it is currently seekingnow commercially available throughout the European Union and several other countries that accept CE marking. The Company’s first sale of the DenerveX System occurred in July 2017. The Company plans to seek approval for the DenerveX System from the FDA and CE for DenerveX device.
In March 2015, the Board of Directors of MedoveX and Streamline, Inc., a Minnesota corporation (“Streamline”), approved an Agreement and Plan of Merger (the “Merger Agreement”). Under the Merger Agreement, STML Merger Sub, Inc. a wholly-owned subsidiary of MedoveX, merged into Streamline, after which Streamline became a wholly-owned subsidiary of Medovex.
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation And Principles of Consolidation
The accompanying consolidated financial statements include the accounts of MedovexMedoveX Corp. and, its wholly-owned subsidiary, Streamline.Debride, as well as its wholly owned subsidiary, Streamline Inc. (“Streamline”). All intercompany accounts and transactions have been eliminated in consolidation.
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. 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 December 31, 20162018 and 20152017 consists of funds deposited in checking accounts with commercial banks.
Accounts Receivable,
Accounts receivable primarily 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 long termCompany records estimated sales returns, discounts and allowances as a reduction of net sales in the same period revenue is recognized. The allowance is estimated for trade accounts receivable based on the expected collectability of accounts receivable after considering the Company’s historical collection experience and the length of time an account is outstanding. The adequacy of this allowance is reviewed each reporting period and adjusted as necessary. As the Company only commenced sales in July 2017, all outstanding trade receivables were deemed collectable, thus, no allowance for doubtful accounts was recorded at December 31, 2016 represents the long-term, non-contingent portion of the receivables due from the sale of Streamline which is not due until January 1, 2018. See Note 10. Recording the present value of the receivable at December 31, 20162018 and recognizing the subsequent accretion expense over the one year period led to an immaterial amount.
Inventory
Inventories consist of developed technologyonly finished goods and a trademark. The Company reviews intangible assets for impairment as changes in circumstancesare valued at the lower of cost or net realizable value, using the occurrence of events suggestfirst-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the remaining value may not be recoverable. See Note 11.
Other Payables
Other payables include value added tax (VAT) owed to the German tax authority. As a part conducting business in the European Union (“EU”), the Company’s sales transactions are taxed based on the value of the product. At the end of each reporting period, the Company calculates the value of all taxable sales then subtracts the sum of all taxable purchases and the VAT rate is applied to the difference.
Leases
The Company recognizes rent expense on a straight-line basis over the term of the lease. The lease term commences on the date the Company takes possession of or controls the physical use of the property. Deferred rent is included in non-current liabilities on the balance sheet.
Revenue Recognition
The Company has adopted the new 5-step revenue recognition process as promulgated by ASC 606, Revenue from Contracts with Customers (Topic 606), the core principle of which necessitates 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. The early adoption of ASC 606 was completed as of September 30, 2017, which was in the first year the Company generated revenue. The early adoption did not have any retrospective effect on prior year.
Identify the contract with the customer
Medovex has two types of customers: distributors, and individual customers.
Distributors:
The Company has distribution agreements with distributors located in Italy, Austria, Colombia, Scandinavia, Brazil, Israel, Australia, Turkey, Spain, Switzerland, Chile, Taiwan, Poland, Slovakia, the Czech Republic and the United Kingdom. For each distributor, a standardized distribution agreement is executed and is the definitive contract between the Company and the customer. Each distribution agreement details the pricing, order placement, stocking requirements, terms of payment, and shipping terms under which the DenerveX System will be shipped to the distributor. The distributor places orders for additional product, but all these orders are subject to the terms of the Distribution Agreement.
Direct Customers:
In Germany, all customers are direct hospitals and individual practitioners. Sales in Germany are solicited by and placed with third party contractors on behalf of Medovex. Medovex has sales agreements with each third party sales representative selling the DenerveX System. Each sales agreement details the price at which the DenerveX System must be sold to the customer. A purchase order from the customer is required before the Company will ship product to the customer. This purchase order contains all the terms and conditions of the sale and is considered the definitive contract for this type of sale.
Identify the performance obligation in the contract
Distributors, who sell the DenerveX System to their customers or sub-distributors, contractually take title to the products and assume all risks of ownership at the time of shipment. The Company has no further obligations once the product is shipped. Stocking distributors are obligated to pay the Company the contractually agreed upon invoice price within specified terms regardless of when, if ever, they sell the products. Since no right of return exists, the product is not considered consigned inventory. For direct sales to hospitals and practitioners in Germany, the obligation is met when the product is shipped. Our direct customers do not have any contractual rights of return or exchange other than for defective product or shipping error.
Determine the transaction price
DenerveX Kit:
The DenerveX kit consists of one Denervex handheld device, one K-Wire, one dilator, one tissue stabilizer, one portal tube and one portal driver. The product is marketed as a disposable, single-use kit which includes all of the components packaged together.
The transaction price for the DenerveX Kit is specifically outlined in the standardized distribution agreements for all distributors.
The transaction price for the DenerveX Kit is specifically outlined in the standardized sales rep agreements for all sales contractors.
Pro-40 Generators:
The DenerveX device requires a custom generator for power and cannot be used for any other purpose. For each initial order of the DenerveX Kit, a generator is provided to each customer at no charge. The Company does not recognize any revenue for the no-charge generator units. The units are removed from inventory and recognized as a cost of sales at the time of shipment. Customers may order demo generators, however, the Company charges a set price for these units.
| F-8 |
Allocate the transaction price
In the Company’s case, all of the transaction price is recorded as revenue.
Recognize revenue when or as the entity satisfies a performance obligation
Revenue recognition occurs at the time product is shipped, FOB shipping, to all customers from the third-party distribution warehouse located in Berlin, Germany.
For Medovex, this is considered the point at which the customer gains control of the Denervex device and there are no remaining material performance obligations. If something abnormal were to happen to the product in transit, the matter would be handled with the carrier, however, the sale would remain intact.
Research and Development
Research and development costs are expensed as incurred.
Advertising
The Company expenses all sales and marketing costs as incurred. For the years ended December 31, 2018 and 2017, advertising costs were approximately $149,000 and $332,000, respectively.
Foreign Currency transactions
The Company transacts some of its operating activities in foreign currencies, most notably the Euro. The Company also has certain assets and liabilities denominated in foreign currencies that are translated to US Dollars for reporting purposes as of and for the year ended December 31, 2018. These amounts are immaterial and are included in other income or expense for the years ended December 31, 2018 and 2017. Because of the immaterial effect noted above, we believe thatdid not present a separate statement of other comprehensive income.
Income Taxes
The Company uses the liability method of accounting for income taxes, which requires recognition of temporary differences between financial statement and income tax bases of assets and liabilities, measured by enacted tax rates. A valuation allowance is recorded to reduce deferred tax assets when necessary.
Stock-Based Compensation
The Company maintains a stock option incentive plan and accounts for stock-based compensation in accordance with ASC 718,Compensation - Stock Compensation. The Company recognizes share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award to employees and directors. As required by fair value provisions of ourshare-based compensation, employee and non-employee share-based compensation expense recognized is calculated over the requisite service period of the awards and reduced for estimated forfeitures.
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. For the years presented, there is no difference between the basic and diluted net loss per share: 12,108,743 warrants and 557,282 common stock options outstanding were considered anti-dilutive and excluded for the year ended December 31, 2018. 7,402,910 warrants and 1,314,059 common stock options outstanding were considered anti-dilutive and excluded for the year ended December 31, 2017.
| F-9 |
Discontinued Operations
As more fully described in Note 6, in May 2016, management was authorized to locate a buyer for Streamline Inc., the Company’s wholly owned subsidiary acquired in March 2015, by the Board of Directors. Streamline’s results of operations have been classified as discontinued operations for all periods presented.
Fair Value Measurements
The Company measures certain non-financial assets, is appropriate at December 31, 2016, these fair values may not be indicative of net realizable value or reflective of future fair values.
The Company uses the fair value measurement framework to value these assets and report the fair values in the periods in which they are recorded, adjusted above, 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:
| ● | Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities; |
| ● | 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. |
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. WeThe Company may also engage external advisors to assist us in determining fair value, as appropriate.
Although we believethe Company believes that the recorded fair value of our financial instruments is appropriate, these fair values may not be indicative of net realizable value or reflective of future fair values.
Concentration of Credit Risk
Financial instruments, which potentially subject the straight-line method overCompany to concentrations of credit risk, consist solely of cash. At times throughout the estimated useful livesyear, the Company may maintain certain US bank account balances in excess of FDIC insured limits. The Company may also maintain German bank account balances in excess of Germany’s deposit guarantee regulations within the framework of the related assets, generally three to five years. RepairsGerman Banks’ Compensation Scheme. At December 31, 2018 and maintenance are expensed as incurred. Improvements and betterments, which extend2017, the lives ofCompany did not have cash deposits that exceeded federally insured deposit limits in the assets, are capitalized.
Recently Issued Accounting Pronouncements
The Company considers the applicability and impact of all ASUs issued, both effective and not yet effective.
In AugustMay 2014, the FASB issued ASU 2014-15,Disclosure2014-09, “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 Uncertainties about an Entity’s Ability to Continue as a Going Concern,good or ASU 2014-15. ASU 2014-15 explicitly requires a company’s management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. The new standard will beservice. This update is effective in the firstfor annual period endingreporting periods beginning on or after December 15, 2016, although early application is permitted.We do not expect2017 and interim periods therein and requires expanded disclosures. The Company adopted the amendments of ASU 2014-09 effective quarter ended September 30, 2017. The adoption of this standard todid not have a material impact on our consolidated statements of financial position, results of operations or cash flows.
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.
| F-10 |
Inventories consisted of the following items as of December 31, 2018, and December 31, 2017:
| December 31, 2018 | December 31, 2017 | |||||||
| Split Return Electrodes | $ | — | $ | 1,868 | ||||
| Denervex device | 5,205 | 111,596 | ||||||
| Pro-40 generator | 126,250 | 181,250 | ||||||
| Total | $ | 131,455 | $ | 294,714 | ||||
Note 34 - Property and Equipment
Property and equipment consists of the following:
| Useful Life | December 31, 2016 | December 31, 2015 | |
| Furniture and fixtures | 5 years | $65,987 | $17,100 |
| Computers and software | 3 years | 19,928 | 16,275 |
| Leasehold improvements | 5 years | 32,593 | -- |
118,508 | 33,375 | ||
| Less accumulated depreciation and amortization | (20,918) | (9,651) | |
| Total | $97,590 | $23,724 | |
| Useful Life | December 31, 2018 | December 31, 2017 | ||||||||
| Furniture and fixtures | 5 years | $ | 52,857 | $ | 67,777 | |||||
| Computers and software | 3 years | 12,130 | 31,738 | |||||||
| Leasehold improvements | 5 years | — | 35,676 | |||||||
| 64,987 | 135,191 | |||||||||
| Less accumulated depreciation | (34,594 | ) | (48,018 | ) | ||||||
| Total | $ | 30,393 | $ | 87,173 | ||||||
Depreciation and amortization expense excluding depreciation and amortization from Streamline, Inc., amounted to $11,267$23,915 and $27,100 for the years ended December 31, 2018 and 2017, respectively.
The Company recognized a disposal loss of $32,865 for the year ended December 31, 2016 and $6,498 for2018. The disposal loss was the year ended December 31, 2015.
Note 65 - Equity Transactions
Series B Preferred Stock Preferences
Voting Rights
Preferred Series B Stock holders have the right to sell in a private placement a minimumreceive notice of $1,000,000any meeting of holders of Common Stock or Series B Preferred Stock and upto vote upon any matter submitted to a maximumvote of $2,000,000the holders of units.Common Stock or Series B Preferred Stock. Each unit hadholder of Series B Preferred Stock shall vote on each matter submitted to them with the holders of Common Stock.
LIQUIDATION
Upon the liquidation, dissolution or winding up of the business of the Company, whether voluntary or involuntary, each holder of Series B Preferred Stock shall be entitled to receive, for each share thereof, out of assets of the Company legally available therefor, a purchase pricepreferential amount in cash equal to the stated value plus all accrued and unpaid dividends. All preferential amounts to be paid to the holders of $100,000 and consistedSeries B Preferred Stock in connection with such liquidation, dissolution or winding up shall be paid before the payment or setting apart for payment of (i) 86,957 sharesany amount for, or the distribution of any assets 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 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.
Common stock par value $0.001 per share at a purchase price of $1.20 per share, and (ii) a warrant to purchase 104,167 shares of Common Stock. Each Warrant has an initial exercise price of $1.52 per share, and is initially exercisable six months following the date of issuance for a period of five (5) years from the date of issuance.
In November 10, 2016, the Board authorized the issuance of shares of common stock priced at the average closing price of the Company’s stock during 2016, to all Board members, both current and former, in an amount equivalent to $240,000, representing their accrued but unpaid directors’ fees as of December 31, 2016. In January 2017, the Company issued 173,911an aggregate of 173,912 shares at $1.38 per share, which was the average closing price of the Company’s stock during 2016, to fulfill this obligation. The closing price of the Company’s stock on January 17, 2017, the day the shares were issued, was $1.16 per share.
In August 2017, the Board authorized the issuance of shares of common stock to all Board members, both current and former, in an amount equivalent to $135,000, representing their accrued but unpaid directors’ fees as of September 30, 2017. In October 2017, the Company issued an aggregate of 115,389 shares at $1.17 per share, which was the average closing price of the Company’s stock through September 30, 2017, to fulfill this obligation. The closing price of the Company’s stock on October 30, 2017, the day the shares were issued, was $1.09 per share.
In August 2017, the Board authorized the issuance of up to 125,000 shares of common stock to a certain member of the Board of Directors and up to 175,000 shares of common stock to a certain consultant. At the inception of the agreement, 25% of the shares were issued to both the director and the consultant. In December 2017, 50,000 shares were issued to the consultant. In October 2018, the board member and consultant were issued an additional 75,000 vested shares. The 75,000 shares were valued at the performance completion date, August 16, 2018, at $0.32 per share, which was the closing price on that date. The Company recognized $24,000 and $115,000, respectively, in consulting expense with respect to the vested stock issuance at December 31, 2018 and 2017.
In October 2018, the Board authorized the issuance of shares of common stock to all Board members in an amount equivalent to $180,000, representing their accrued but unpaid directors’ fees as of September 30, 2018. Per Board resolution, the Company issued an aggregate of 320,202 shares at $0.56 per share to settle accrued unpaid director fees. The closing price of the Company’s stock on October 3, 2018, the day the shares were issued, was $0.40 per share.
| F-11 |
In October 2018, the Board authorized the issuance of shares of common stock to Jarrett Gorlin in an amount equivalent to $136,000, representing 6 months’ severance pay. The Company issued an aggregate of 323,810 shares at $0.42 per share. The closing price of the Company’s stock on October 3, 2018, the day the shares were issued, was $0.40.
Stock-Based Compensation Plan
2013 Stock Option Incentive Plan
On October 14, 2013, shareholders approved the MedoveX Corp. 2013 Stock Incentive Plan (the “Plan”). Under 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. On November 10, 2016, shareholders approved a 500,000 share increase in the number of shares available for issuance under the Plan, from 1,150,000 to 1,650,000 shares.
The stock options are exercisable at a price equal to the market value 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 it’s 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.
During 2016,2017, the Company granted options to purchase 294,900189,159 shares of common stock to certain employees and consultants. 274,900 of theemployees. The options vest as follows: 25% on the date of grant and 25% on each of the next three anniversaries. The options granted were at the market value of the common stock on the date of the grant. No stock options were granted in 2018.
The remaining 20,000 options vest as follows: 50% on the date of grant and 50% one year after the grant date and are exercisable at $1.20. The market value of these remaining common stock on the date of grant was $1.28.
The Company uses a simplified method provided in Securities and Exchange Commission release,
Staff Accounting Bulletin No. 110,which averages anNo dividend payouts were assumed as we havethe Company has not historically paid, and dodoes 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.
| Grant date | January 6 | August 17 | November 10 |
| Fair value of options granted during 2016 | $0.67 | $0.91 | $1.06 |
| Exercise price | $0.95 | $1.20 | $1.58 |
| Number of options | 214,900 | 320,000 | 210,000 |
| Expected term (years) | 6 | 6 | 6 |
| Risk-free interest rate | 1.82% | 1.28% | 1.74% |
| Volatility | 83% | 75.55% | 76.67% |
| Dividend yield | None | None | None |
For the years ended December 31, 20162018 and 2015,2017, the Company recognized approximately $777,000$120,000 and $254,000,$683,000, respectively, as compensation expense with respect to stock options.
A summary of the Company’s share-based compensation activity and related information is as follows:
| Shares | Weighted Average Exercise Price | Weighted Term | ||||||||||
| Outstanding at 12/31/2016 | 1,124,900 | $ | 2.15 | 9.0 | ||||||||
| Granted | 189,159 | $ | 1.17 | 9.10 | ||||||||
| Exercised | — | — | — | |||||||||
| Cancelled | �� | — | — | |||||||||
| Outstanding at 12/31/2017 | 1,314,059 | $ | 2.01 | 8.19 | ||||||||
| Granted | — | — | — | |||||||||
| Exercised | — | — | — | |||||||||
| Cancelled | (756,777 | ) | $ | 1.44 | — | |||||||
| Outstanding at 12/31/2018 | 557,282 | $ | 2.78 | 6.99 | ||||||||
| Exercisable at 12/31/2018 | 469,179 | $ | 3.08 | 6.84 | ||||||||
| F-12 |
Shares | Weighted Average Exercise Price | Weighted Average Remaining Term (Years) | |
| Outstanding at 12/31/2014 | 60,000 | $2.50 | 8.8 |
| Granted | 320,000 | $4.22 | 9.3 |
| Exercised | -- | -- | -- |
| Cancelled | -- | -- | -- |
| Outstanding at 12/31/2015 | 380,000 | $3.95 | 9.1 |
| Granted | 744,900 | $1.24 | 9.52 |
| Exercised | -- | -- | -- |
| Cancelled | -- | -- | -- |
| Outstanding at 12/31/2016 | 1,124,900 | $2.15 | 9.0 |
| Exercisable at 12/31/2016 | 523,725 | $2.31 | 9.0 |
As of December 31, 2016,2018, there were 601,17588,103 shares of time-based, non-vestedunvested stock. Unrecognized compensation cost amounts to approximately $596,000$30,000 as of December 31, 20162018 and will be recognized as an expense on a straight-line basis over a remaining weighted average service period of 1.71.28 years. The fair value of vested share-based compensation at December 31, 20162018 and 20152017 was approximately $697,000$188,000 and $138,000,$544,000, respectively.
Private Placements
On February 9, 2017, 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 $3,000,000 and up to a maximum of $5,000,000 of units. Each Unit had a purchase price of $100,000 and consisted of (i) 96,154 shares of the Company’s common stock, par value $0.001 per share at a purchase price of $1.04 per share, and (ii) a warrant to purchase 48,077 shares of common stock. Each warrant has an initial exercise price of $1.50 per share and is exercisable for a period of five (5) years from the date of issuance. Investors had the option to request shares of the Company’s Series A Convertible Preferred Stock (the “Series A Preferred Stock”) in lieu of common stock, on a basis of one share of preferred stock for every one hundred shares of common stock.
The offering resulted in gross proceeds of $3,022,000 and resulted in the issuance of an aggregate of 1,631,730 shares of common stock,
12,740 shares of Series A Preferred Stock and warrants to purchase 2,005,761 shares of common stock. The placement agent collected an aggregate of approximately $350,000 in fees related to the offering and warrants to purchase an aggregate of 405,577 shares of common stock at a price of $1.50 per share.
Each share of Series A Preferred Stock may be converted into shares of fully paid and non-assessable shares of common stock at a rate of one hundred shares of the Company’s common stock for every share of Series A Preferred Stock.
On July 14, 2017, the Company entered into a Securities Purchase Agreement with selected accredited investors whereby the Company
sold an aggregate of 2,956,043 shares of common stock and 1,478,022 warrants to purchase common stock. The Offering resulted in
$2,690,686 in gross proceeds to the Company. The placement agent collected $188,000 in total fees related to the offering. The common
stock shares were sold at $0.91 per share which was the closing price of the Company’s common stock on July 13, 2017, the day prior to the agreement. Each warrant has an exercise price of $1.15 and is exercisable for a period of five years commencing six months from the date of issuance.
On February 26, 2018, the Company entered into a securities purchase agreement with selected accredited investors whereby the Company sold an aggregate of 770,000 shares of common stock and 385,000 warrants to purchase common stock. The offering resulted in $308,000 in gross proceeds to the Company. The warrants have a five-year term commencing six months from issuance with an exercise price of $0.75. The Company paysallocated $52,003 to the warrants and the remainder to the issuance of the common stock based on each instruments relative fair value. The Company incurred $13,500 in legal expenses related to the offering.
On May 1, 2018, the Company entered into a securities purchase agreement with selected accredited investors whereby the Company offered up to $1,000,000 in units. Each unit had a purchase price of $100,000 and consisted of (i) 1,000 shares of the Company’s 5% Series B Convertible Preferred Stock (the “Series B Shares”) and (ii) warrants to purchase 250,000 shares of the Company’s common stock, par value $0.001 per share. Each Series B Share is convertible at a conversion price of $0.40 per share. The conversion price has a feature that would adjust the conversion price downward if the company issues any common stock or common stock equivalents at a price less than $0.40 per share while the Series B shares are outstanding. The market value of the common stock on the date of the agreement was $0.44. The Series B Shares initially entitled the holders to a 5% adjustable annual dividend. The Series B Shares also have a feature that provides the holder the ability to adopt more favorable terms of subsequent financings while the Series B Shares are outstanding.
The Warrants are exercisable for a period of three (3) years from the date of issuance at an initial exercise price of $0.75 per share subject to downward adjustment if the Company issues any common stock or common stock equivalents at a price less than $0.75 per share while the warrants are outstanding.
As a result of the offering, the Company sold an aggregate of 8.25 Units and issued to the Investors an aggregate of 8,250 Series B Shares and 2,062,500 warrants to purchase common stock, resulting in total $825,000 gross proceeds to the Company. The Company incurred $5,000 in legal fees related to the offering, which resulted in $820,000 net cash received from the offering. The 8,250 Series B Shares sold in the Offering are initially convertible into an aggregate of 2,062,500 shares of Common Stock.
Of the net proceeds in the offering of $820,000, approximately $288,000 was first allocated to the warrants issued to investors based on their relative fair value. The Company recognized a beneficial conversion feature related to the Series B Shares of approximately $373,000, which was credited to additional paid-in capital, and the residual amount of approximately $159,000 was allocated to the Series B Shares. Because the Series B Shares can immediately be converted by the holder, the discount recognized by the allocation of proceeds to the beneficial conversion feature was immediately accreted and recognized as a dividend to the preferred shareholders.
| F-13 |
On August 1, 2018 the annual dividend rate on the Series B Shares was adjusted to 12%, which is equal to the same rate as the convertible debt issued in August and September 2018, pursuant to an adjustment provision in the Series B Shares which entitles the holders to receive a more beneficial annual dividend rate offered in any subsequent financings. The Company had accrued unpaid dividends in the amount of approximately $58,000 as of December 31, 2018, related to the Series B Shares.
On August 8, 2018, the Company completed the issuance of convertible debt at an initial conversion price of $0.40. Accordingly the exercise price on all of the warrants issued with the Series B Shares were adjusted downward to $0.40. In conjunction with the downward adjustment, the Company recorded a deemed dividend of approximately $108,000 representing the difference in the fair value of the warrants immediately before and after the adjustment to the exercise price.
preferred Stock Conversion
On March 28, 2017, 4,147 shares of Series A Preferred Stock were converted into an aggregate of 414,663 restricted shares of authorized common stock, par value $0.001 per share.
On April 21, 2017, 5,252 shares of Series A Preferred Stock were converted into an aggregate of 525,240 restricted shares of authorized common stock, par value $0.001 per share.
On March 30, 2018, 12,740 shares of Series A Preferred Stock were converted into an aggregate of 1,274,000 restricted shares of authorized common stock, par value $0.001 per share.
CONVERTIBLE NOTES
In August and September 2018, the Company entered into a securities purchase agreement with select accredited investors, whereby the Company offered up to $1,000,000 in units at a purchase price of $50,000 per unit. Each Unit consists of (i) a 12% senior secured convertible note, initially convertible into shares of the Company’s common stock, par value $0.001 per share, at a conversion price equal to the lesser of $0.40 or ninety percent (90%) of the per share purchase price of any shares of common stock or common stock equivalents issued in future private placements of equity and/or debt securities completed by the Company following this offering, and (ii) a three-year warrant to purchase such number of shares of the Company’s common stock equal to one hundred percent (100%) of the number of shares of common stock issuable upon conversion of the notes at $0.40. The Warrants are exercisable at a price equal to the lesser of $0.75 or ninety percent (90%) of the per share purchase price of any shares of common stock or common stock equivalents issued in future private placements of the debt and/or equity securities completed by the Company following the issuance of warrants. The notes are secured by all of the assets of the Company.
ASU 2017-11, Earnings per share (Topic 260), provided that when determining whether certain financial instruments should be classified as liability or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. If a down round feature on the conversion option embedded in the note is triggered, the Company will evaluate whether a beneficial conversion feature exists, the Company will record the amount as a debt discount and will amortize it over the remaining term of the debt.
If the down round feature in the warrants is triggered, the Company will recognize the effect of the down round as a deemed dividend,
which will reduce the income available to common stockholders.
In the offering, the Company sold an aggregate of 15 units and issued to investors an aggregate of $750,000 in principal amount of convertible notes and 1,875,000 warrants to purchase common stock, resulting in total gross proceeds of $750,000 to the Company. If converted at $0.40 the convertible notes sold in the offering are convertible into an aggregate of 1,875,000 shares of common stock. The Company recorded the proceeds from the notes and the accompanying warrants, which accrete over the period the notes are outstanding, on a relative fair value basis of approximately $505,000 and $245,000, respectively. Accretion expense related to the discount on these convertible notes for the year ended December 31, 2018 was approximately $93,000. The Company recognized $33,700 in unpaid accrued interest expense related to the notes as of December 31, 2018.
Debt Conversion
Short-Term Note Payable
On February 9, 2017, the Company’s $1,150,000 short-term note payable was converted into an aggregate of 165,865 shares of common stock and 9,399 shares of Series A Preferred Stock and warrants, eliminating the Company’s debt obligation. The debt was converted into shares at $1.04 per share, which was the offering price of the Company’s stock in the February private placement. Each share of Series A Preferred Stock may be converted into shares of fully paid and non-assessable shares of common stock at a rate of one hundred shares of the Company’s common stock for every share of Series A Preferred Stock.
| F-14 |
As consideration for converting the debt, the noteholders’ agreed to receive common stock in lieu of the 200,000 warrants to purchase common stock that were issued in conjunction with the short-term loan. As a result, the 200,000 warrants were cancelled, and the Company issued to the noteholders’ an aggregate of 200,000 shares of common stock. The closing price of the Company’s stock on February 9, 2017, the day the shares were issued, was $1.04 per share. The fair value of the common stock issued was approximately $208,000.
Convertible Debenture
On April 26, 2018, the Company’s $100,000 5% convertible debenture and unpaid accrued interest of $1,194 was converted into an aggregate of 266,301 shares of common stock, eliminating the Company’s debt obligation. The debt was converted into shares at $0.38 per share, which was 85% of the average closing price of the Company’s stock during the twenty trading days immediately preceding the delivery of the notice of conversion. The market value of the common stock on the date of the conversion was $0.40. This difference noted above lead to an immaterial amount related to a beneficial conversion feature.
Promissory Note
On March 26, 2018 the Company issued a promissory note to Steve Gorlin, father of Jarrett Gorlin, the Company’s former CEO, for the principal amount of $200,000, plus interest, at a rate of five percent per year. The outstanding principal and all accrued but unpaid interest was originally due on May 15, 2018. The Company issued warrants to purchase an aggregate of 133,333 shares of common stock par value $.001 per share in conjunction with the promissory note to Mr. Gorlin. Each warrant has an exercise price of $0.75 and is exercisable for a period of five years commencing from the date of issuance. The balance of the loan was initially recorded net of discount for the warrants of approximately $26,000, based on their relative fair value, which was being accreted to its $200,000 face amount over the period the loan was outstanding.
On May 15, 2018, the Company entered into a modification agreement with Steve Gorlin whereby he agreed to convert $100,000 of the $200,000 outstanding promissory note into Series B Preferred Shares. The conversion of $100,000 was converted under the terms of the May 1, 2018 securities purchase agreement. The $100,000 conversion was converted into an aggregate of 1,000 shares of the Company’s Series B Preferred Shares and 250,000 warrants to purchase common stock, eliminating $100,000 of the Company’s $200,000 debt obligation.
Of the converted $100,000, approximately $34,000 was first allocated to the fair value of the warrants issued in conjunction with the conversion based on their relative fair value. The Company recognized a beneficial conversion feature related to the Series B Shares of approximately $30,000, which was credited to additional paid-in capital, and the residual amount of approximately $36,000 was allocated to the Series B Shares. Because the Series B Shares can immediately be converted by the holder, the discount recognized by the allocation of proceeds to the beneficial conversion feature was immediately accreted and recognized as a deemed dividend to the preferred shareholders.
On August 21, 2018, the Company paid back the remaining $100,000 plus unpaid accrued interest in the amount of $2,944, eliminating the Company’s debt obligation.
Note 6 – Commitments & Contingencies
Operating Leases
Office Space
Prior to the resignation of Jarrett Gorlin (“Mr. Gorlin”), the Company’s former Chief Executive Officer, the Company paid TAG Aviation (“TAG”), a company owned by its Chief Executive Officer, JarrettMr. Gorlin, (“Mr. Gorlin”) for office space that is currentlywas being used as the Company’s principal business location plus utilities (see “Related Party Transactions”) on a monthly basis. PaymentsBase rental payments under thisthe arrangement arewas $2,147 per month. Rent expense and utilities cost paid toincurred by TAG Aviation amounted to approximately $30,400$34,555 for the year ended December 31, 2018, of which approximately $6,300 was included in accounts payable at December 31, 2018. Rent expense and $28,400utilities cost incurred by TAG amounted to approximately $34,600 for the years ended December 31, 2016 and 2015, respectively.
On July 8, 2015,September 1, 2018, the Company entered into a 3 yearextended the term of the lease agreement for athe commercial building which originally commenced on August 1, 2015.
Future minimum lease payments under this rental agreement are approximately as follows:
For the year ended:
| December 31, 2019 | 37,510 | |||
| December 31, 2020 | 38,635 | |||
| $ | 76,145 |
Equipment
The Company entered intohad a non-cancelable 36 month36-month operating lease agreement for equipment on April 22, 2015.that was located at Mr. Gorlin’s office. The equipment remained with Mr. Gorlin after his resignation per the terms of his severance agreement. The Company has no further commitments under this operating lease agreement is renewable atas of December 31, 2018.
Total lease expense for equipment was approximately $2,500 and $2,600, respectively, for the endyears ended December 31, 2018 and 2017, respectively.
Consulting Agreements
The Company has a modified agreement with Jesse Crowne, a former Director and Co-Chairman of the term and requiresBoard of the Company, to maintain comprehensive liability insurance.
The Company had approximately $234,000 and $484,000, respectively, in outstanding purchase order obligations related to the research and development build of the DenerveX device to Nortech and Bovie Medical Corporation (“Bovie”).
The Company had consulting agreements with a varying team of sales, marketing, and distribution consultants in Europe who provided consulting services over a one-year period for €10,000 per month through August 1, 2017.
Generator development agreement
The Company is obligated to pay six months of severance inreimburse Bovie up to $295,000 for 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 controldevelopment of the Pro-40 electrocautery generator. For the year ended December 31, 2018, the Company (iv)incurred approximately $19,000 under this agreement, of which $15,000 was included in accounts payable at December 31, 2018. For the year ended December 31, 2017, the Company incurred approximately $33,200 under this agreement. Through December 31, 2018, the Company has incurred approximately $441,000 for production services from Bovie. The original $295,000 agreement was a material reductionbase number along the pathway of development. Additional requirements were incurred as the research and development process progressed and as a result certain prices increased and additional costs were incurred to further customize the DenerveX System. We are currently in an executive’s duties, or (v)production manufacturing of the generator.
Distribution center and logistic services agreement
The Company has a requirement that an executive move their primary work location more than 50 miles.
Total expenses paid for the distribution center and logistics agreement was approximately $142,000 for the year ended December 31, 2018, of which approximately $16,000 was included in accounts payable at December 31, 2018. Total expenses paid for the distribution center and logistics agreement was approximately $75,700 for the year ended December 21, 2017.
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 iswas 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 iswas listed as inventor of any Improvement Patent on the DenerveX device during the 5 year5-year term, he would continuehave continued to receive a 1% royalty after the 2% royalty expiresexpired for the duration of the effectiveness of the Improvement Patent. No royalties have been paid to Dr. Andrews as of December 31, 2016.
The Company is obligated to reimburse Bovie up to $295,000incurred approximately $13,000 in royalty expense under the co-development agreement for the development of the Pro-40 electrocautery generator. For the year ended December 31, 2018, all of which is in accounts payable at December 31, 2018. The Company incurred approximately $1,000 in royalty expense under the co-development agreement for the year ended December 31, 2017, all of which was included in accounts payable at December 2017 and subsequently paid in 2018.
| F-16 |
Patent Assignment and Contribution Agreements
On February 1, 2013, the Company issued 750,108 shares of common stock to Scott Haufe, M.D. (“Dr. Haufe”) pursuant to the terms of a Contribution and Royalty Agreement dated January 31, 2013 between the Company and Dr. Haufe. This agreement provides for the Company to pay Dr. Haufe royalties equal to 1% of revenues earned from sales of any and all products derived from the use of the DenerveX technology. Royalties are payable to Dr. Haufe within 30 days after the close of each calendar quarter based on actual cash collected from sales of applicable products. The royalty period expires on September 6, 2030.
The Company incurred approximately $8,700 in royalty expense under the Contribution and Royalty agreement for the year ended December 21, 2018, all of which is included in accounts payable at December 31, 2018. The Company incurred approximately $800 in royalty expense under the Contribution and Royalty agreement for the year ended December 21, 2017, all of which was included in accounts payable at December 31, 2017 and subsequently paid in 2018.
Streamline Inc. Asset Sale
The asset sale of Streamline Inc. resulted in the immediate receipt of $500,000 in cash in December 2016, and 2015,a $150,000 note receivable that was due to the Company paid approximately $102,400on January 1, 2018. The $150,000 note receivable represents the non-contingent portion of the receivables due from the sale. The Company received the short-term receivable on January 2, 2018.
The terms of the sale also required that for each of the calendar years ending December 31, 2018 and $181,200, respectively, under this agreement.
The Company did not incur any Streamline related expenses for the year ended December 31, 2018. The Company recorded a nominal amount in Streamline related expenses for the year ended December 31, 2017.
Note 87 – Short Term Liabilities
Finance Agreement
The Company entered into a commercial insurance premium finance and security agreement in December 2016.2017. The agreement finances the Company’s annual D&O insurance premium. Payments are due in quarterly installments of approximately $23,000$24,000 and carry an annual percentage interest rate of 4.9%5.98%.
The Company had anpaid the yearly premium in full and had no outstanding premium balance as of approximately $65,000 at December 31, 20162018 related to the agreement.
Promissory Notes
In conjunction with the consummation of the Streamline acquisition onin March 25, 2015, the Company assumed two promissory notes for approximately $135,000 and $125,000 payable to the Bank of North Dakota New Venture Capital Program and North Dakota Development Fund, both outside non-related parties. Assumption of the liabilities was not included as part of the asset purchase agreement that was executed in December 2016. Thus, the Company retained the promissory notes upon consummation of the divestiture.
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 $165,000$103,000 and $223,000$104,000 at December 31, 20162018 and December 31, 2015,2017, respectively.
The Company incurred interest expense related to the notes for the years ended December 31, 2018 and 2017 in the amount of approximately $3,400 and $7,000, respectively. The Company had unpaid accrued interest in the amount of approximately $70,000 and $69,000 at December 31, 2018 and 2017, respectively, related to the notes.
Expected future payments related to the promissory notes as of December 31, 2016,2018, are approximately as follows:
For the year ended:
| 2019 | 103,000 | |||
| $ | 103,000 |
| F-17 |
| 2017 | 61,000 |
| 2018 | 64,000 |
| 2019 | 45,000 |
$170,000 |
Convertible Debenture
On January 31, 2018, the Company issued a 5% convertible debenture in exchange for $100,000. The debenture accrued interest at 5% per annum. Principal and interest were due on January 30, 2019. The debenture was convertible at the option of the holder into shares of the Company’s common stock at a conversion rate equivalent to 85% of the average closing price of the Company’s common stock for the 20 days preceding the conversion.
On April 26, 2018, the convertible debenture and unpaid accrued interest was converted into an aggregate of 266,301 shares of common stock, eliminating the Company’s debt obligation (Note 5). Prior to the conversion, the Company paidrecognized approximately $1,200 in interest expense related to the promissoryconvertible debenture during the year ended December 31. 2018. The market value of the common stock on the date of the conversion was $0.40. This difference lead to an immaterial amount related to a beneficial conversion feature.
Convertible Notes
In August and September 2018, the Company entered into a securities purchase agreement with select accredited investors, whereby the Company offered up to $1,000,000 in units at a purchase price of $50,000 per unit. Each unit consists of a 12% senior secured convertible note and a three-year warrant to purchase shares of the Company’s common stock. The notes are secured by all of the assets of the Company. (See Note 5).
In the offering, the Company sold an aggregate of 15 units and issued to investors an aggregate of $750,000 in principal amount of convertible notes and 1,875,000 warrants to purchase common stock, resulting in total gross proceeds of $750,000 to the Company. The convertible notes sold in the offering are initially convertible into an aggregate of 1,875,000 shares of common stock but could convert into additional shares if the Company completes a down round financing during the term of the convertible notes. The Company recorded the proceeds from the notes and the accompanying warrants, which accrete over the period the notes are outstanding, on a relative fair value basis of $505,424 and $244,576, respectively. Accretion expense related to the discount on these convertible notes for the year ended December 31, 2016 and 2015 in the amount of2018 was approximately $10,000 and $8,000, respectively.$93,000. The Company hadrecognized $33,700 in unpaid accrued interest in the amount of approximately $69,000 at December 31, 2016 and 2015expense related to the promissory notes.
Note 98 – Common Stock Warrants
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 all warrants are designated as Level 1 since all of the significant inputs are observable and quoted prices used for volatility were available for the four comparative companies in an active market.
A summary of the Company’s warrant issuance activity and related information as of December 31, 20162017 and 20152016 is as follows:
Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | |
| Outstanding at 12/31/2014 | 1,474,783 | $3.00 | 4.9 |
| Issued | 500,000 | $1.825 | 5.0 |
| Exercised | -- | -- | -- |
| Expired | -- | -- | -- |
| Outstanding at 12/31/2015 | 1,974,783 | $2.86 | 4.0 |
| Issued | 1,530,064 | $1.34 | 4.2 |
| Exercised | -- | -- | -- |
| Expired | -- | -- | -- |
| Outstanding at 12/31/2016 | 3,504,847 | $1.85 | 3.9 |
| Exercisable at 12/31/2016 | 3,504,847 | $1.85 | 3.9 |
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | ||||||||||
| Outstanding at 12/31/2016 | 3,713,542 | $ | 2.19 | 3.8 | ||||||||
| Issued | 3,889,368 | $ | 1.37 | 4.3 | ||||||||
| Cancelled | (200,000 | ) | $ | 1.625 | — | |||||||
| Outstanding at 12/31/2017 | 7,402,910 | $ | 1.77 | 3.5 | ||||||||
| Issued | 4,705,833 | (1)(2) | 2.7 | |||||||||
| Outstanding at 12/31/2018 | 12,108,743 | $ | 1.38 | 2.6 | ||||||||
| Exercisable at 12/31/2018 | 12,108,743 | $ | 1.38 | 2.6 | ||||||||
The fair value of all warrants issued are determined by using the Black-Scholes-Merton valuation technique and were assigned based on the relative fair value of both the common stock and the warrants issued.
| F-18 |
The inputs used in the Black-Scholes-Merton valuation technique to value each of the warrants issued in 2016 and 20152018 as of their respective issue dates are as follows:
Event Description | Date | MDVX Stock Price | Exercise Price of Warrant | Grant Date Fair Value | Life of Warrant | Risk Free Rate of Return (%) | Annualized Volatility Rate (%) |
| Convertible Note | 11/9/15 | $1.71 | $2.20 | $2.12 | 3 years | 1.27 | 81.00 |
| Modification Agreement | 1/25/16 | $1.32 | $2.00 | $1.93 | 3 years | 1.11 | 99.66 |
| Modification Agreement | 2/16/16 | $1.43 | $1.825 | $1.82 | 3 years | 0.93 | 100.34 |
| Private Placement | 4/19/16 | $1.13 | $1.30 | $1.43 | 5 years | 1.26 | 75.54 |
| Private Placement | 4/29/16 | $1.28 | $1.30 | $1.43 | 5 years | 1.28 | 75.34 |
| Private Placement | 8/5/16 | $1.35 | $1.52 | $1.44 | 5 years | 1.13 | 75.56 |
| Private Placement | 8/16/16 | $1.34 | $1.52 | $1.43 | 5 years | 1.16 | 75.56 |
| Short-Term Loan | 9/16/16 | $1.58 | $1.625 | $1.58 | 3 years | 0.91 | 75.75 |
| Event Description | Date | MDVX Stock Price | Exercise Price of Warrant | Grant Date Fair Value | Life of Warrant | Risk Free Rate of Return (%) | Annualized Volatility Rate (%) | |||||||||||||||||
| Private placement | 2/26/18 | $ | 0.51 | $ | 0.75 | $ | 0.20 | 5 years | 2.60 | 55.91 | ||||||||||||||
| Short-term debt | 3/26/18 | $ | 0.53 | $ | 0.75 | $ | 0.22 | 5 years | 2.64 | 56.57 | ||||||||||||||
| Private placement | 5/1/2018 | $ | 0.44 | (1 | ) | $ | 0.24 | 3 years | 2.66 | 103.29 | ||||||||||||||
| Debt conversion | 5/15/2018 | $ | 0.39 | (1 | ) | $ | 0.20 | 3 years | 2.75 | 103.32 | ||||||||||||||
| Convertible notes | 8/8/2018 | $ | 0.37 | (2 | ) | $ | 0.19 | 3 years | 2.68 | 104.37 | ||||||||||||||
| Convertible notes | 9/28/2018 | $ | 0.40 | (2 | ) | $ | 0.21 | 3 years | 2.88 | 105.07 | ||||||||||||||
(1)Warrants issued with the May 2018 private placement and debt conversion had an initial exercise price of $0.75 and contain a contingent feature which would adjust the exercise price of the warrant in the event the Company issues any shares of common stock or common stock equivalents in a private placement of equity or debt securities at a price less than $0.75 per share. On August 8, 2018, the Company completed the issuance of convertible debt at an initial conversion price of $0.40. Accordingly the exercise price on these warrants was adjusted downward to $0.40.
(2)Warrants issued with the August 8, 2018 and September 28, 2018 convertible notes have an initial exercise price of $0.75 and contain a contingent feature which would adjust the exercise price of the warrant in the event the Company issues any shares of common stock or common stock equivalents in a private placement of equity or debt securities at which 90% of the issuance price is less than $0.75.
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 10 – Discontinued operations
Year Ended December 31, | ||
2016 | 2015 | |
| Revenues | $-- | $33,045 |
| Cost of Goods Sold | -- | 25,383 |
| Gross Profit | -- | 7,662 |
| Operating Expenses | ||
| General and administrative | 218,444 | 439,257 |
| Sales & Marketing | -- | 664 |
| Research and development | 59,418 | 72,357 |
| Depreciation and amortization | 189,652 | 426,600 |
| Disposal Loss | 852,864 | -- |
| Impairment loss | 1,584,048 | -- |
| Total Operating Expenses | 2,904,426 | 938,878 |
| Operating Loss | (2,904,426) | (931,216) |
| Other Expenses | ||
| Interest expense | 9,983 | 8,040 |
| Total Other Expenses | 9,983 | 8,040 |
| Net Loss | $(2,914,409) | $(939,256) |
Year Ended December 31, | ||
2016 | 2015 | |
| Cash Flows used in Operating Activities | $(452,592) | $(1,272,992) |
| Cash Flows used in Investing Activities | 1,286 | (1,286) |
| Cash Flows used in Financing Activities | -- | (70,109) |
| Net Cash Used in Discontinued Operations | $(451,306) | $(1,344,387) |
The Company’s policy is to record interest and penalties on uncertain tax positions as a component of income tax expense. As of December 31, 2016,2018, 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, 20142017, 2016 and 2013,2015, which remain subject to examination by major tax jurisdictions as of December 31, 2016.2018. The Company does not have anyCompany’s tax years that areyear ending in December 31, 2014 is no longer subject to U.S. federal, state, and local, or non-US income tax examinations.
For the years ended December 31, 20162018 and 2015,2017, the Company has incurred net losses and, therefore, has no current income tax liability and recognized no income tax expense. 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, 2016,2018 and 2017 since it is currently more likely than not that the benefit will not be realized in future periods.
A reconciliation of the statutory federal income tax expense (benefit) to the effective tax is as follows:
2016 | 2015 | |
| Statutory rate - federal | 34.0% | 34.0% |
| State taxes, net of federal benefit | 4.0 | 4.0 |
| Income tax benefit | 38.0% | 38.0% |
| Less valuation allowance | (38.0) | (38.0) |
| Total | 0.0% | 0.0% |
| 2018 | 2017 | |||||||
| Statutory rate – federal | 21.0 | % | 21.0 | % | ||||
| State taxes, net of federal benefit | 4.0 | 4.0 | ||||||
| Income tax benefit | 25.0 | % | 25.0 | % | ||||
| Less valuation allowance | (25.0 | ) | (25.0 | ) | ||||
| Total | 0.00 | % | 0.00 | % | ||||
The Company’s financial statements contain certain deferred tax assets which have arisen primarily as a result of losses incurred that are considered startup costs for tax benefits associated with the loss before income taxes incurred,purposes, as well as net deferred income tax assets resulting from other temporary differences related to certain reserves and differences between book and tax depreciation and amortization. We record a valuation allowance against our net deferred tax assets when we determine that based on the weight of available evidence, it is more likely than not that our net deferred tax assets will not be realized.
| F-19 |
In our evaluation of the weight of available evidence, wethe Company considered recent reported losses as negative evidence which carried substantial weight. Therefore, wethe Company considered evidence related to the four sources of taxable income, to determine whether such positive evidence outweighed the negative evidence associated with the losses incurred. The positive evidence considered included:
| ● | taxable income in prior carryback years, if carryback is permitted under the tax law; |
| ● | future reversals of existing taxable temporary differences; |
| ● | tax planning strategies; and |
| ● | future taxable income exclusive of reversing temporary differences and carryforwards. |
During fiscal 20162018 and 2015, we2017, the Company weighed all available positive and negative evidence and concluded the weight of the negative evidence of a cumulative loss continued to outweigh the positive evidence. Based on the conclusions reached, wethe Company maintained a full valuation allowance during 20162018 and 2015.
Deferred tax assets and liabilities consist of the following at December 31:
2016 | 2015 | |
| Deferred Tax Assets: | ||
| Start-up costs | $5,738,469 | $3,528,944 |
| Share-based compensation | 203,761 | 57,673 |
| Total Deferred Tax Assets | 5,942,230 | 3,586,617 |
| Valuation Allowance | (5,942,230) | (3,586,617) |
| Net Deferred Tax Asset | $-- | $-- |
| 2018 | 2017 | |||||||
| Deferred Tax Assets: | ||||||||
| Start-up costs | $ | 6,816,896 | $ | 5,566,520 | ||||
| Share-based compensation | 243,848 | 238,109 | ||||||
| Total Deferred Tax Assets | 7,060,744 | 5,804,629 | ||||||
| Valuation Allowance | (7,060,744 | ) | (5,804,629 | ) | ||||
| Net Deferred Tax Asset | $ | — | $ | — | ||||
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, 2016.2018. The Company has not undergone any tax examinations since inception and is therefore not subject to examination by any applicable tax authorities.
Note 1310 - Related-Party Transactions
Patent Assignment and Royalty Agreement
As further described in Note 4,6, the Company has a Contribution and Royalty Agreement with Dr. Haufe. No royalties have been paid asHaufe, a former director of December 31, 2016.
Co-Development Agreement
As further described in Note 7,6, the Company hasentered into a Co-Development Agreement with Dr. Andrews. No royalties have been paid asAndrews, a former director of December 31, 2016.
The Company believes that such aircraft charter is on terms no less favorable then it would receive from a third party. General aviation expenses paid to TAG was approximately $26,000 for the years ended December 31, 2016 and 2015.
Operating Lease
As described in Note 7,6, the Company payspaid 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 were $1,800$2,147 per month through August 31, 2016. Effective September 1, 2016, rent payments under this arrangement increased to $2,000 per month.
Consulting Expense
As described in Note 6, the Company paid $160,000 and $110,000, respectively, for the years ended December 31, 20162018 and 2015.
| F-20 |
Note 1411 - Research and Development
Devicix Prototype Manufacturing Agreement
In November 2013, the Company accepted a proposal from Devicix, a Minneapolis Minnesota based FDA registered contract medical device 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 December 31, 2016, we have paid approximately $1,547,000 to Devicix.
During 2016,2018, the Company incurred approximately $481,000$101,000 of expense under this agreement, with approximately $63,000$69,000 of the amount in payables at December 31, 2016.2018. During 2015,2017, the Company incurred approximately $399,000$302,000 of expense under this agreement, with approximately $7,000 of the amount in expenses under the agreement, of which approximately $22,000 was included in accounts payablepayables at December 31, 2015.
DenerveX Generator Manufacturing Agreement
The DenerveX device requires a custom electrocautery generator for power. As described in Note 8,7, in November 2014, the Company contracted with Bovie 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 requiresrequired a base $295,000 development fee to customize the unit, plus additional amounts if further customization iswas deemed necessary beyond predetermined estimates.Through
The Company incurred approximately $19,000 for the year ended December 31, 2016, we have paid2018, of which $15,000 was included in accounts payable at December 31, 2018. The Company incurred approximately $389,000$33,000 for the year ended December 31, 2017. The manufacturing agreement is complete as of December 31, 2018, and the Company does not expect to Bovie.
Nortech Manufacturing Agreement
In November 2014, wethe Company selected Nortech Systems Inc. (“Nortech”), a Minneapolis, Minnesota based FDA registered contract manufacturer, to produce 315 DenerveX devices from the prototype supplied by Devicix for use in final development and clinical trials. The agreement with Nortech includes agreed upon per unit prices for delivery of the devices.
The Company incurred fees of approximately $455,000 of expense under this agreement, with approximately $61,000 of$106,000 to Nortech for the amount in payables atyear ended December 31, 2016. From inception through2018. The Company incurred fees of approximately $146,000 to Nortech for the year ended December 31, 2016, we have paid approximately $744,000 to Nortech.
Note 1512 – Liquidity, Going Concern and Management’s Plans
The Company incurred net losses of approximately $16,227,000$4,909,000 and $6,523,000$6,456,000 for the years ended December 31, 20162018 and 2015,2017, respectively. The Company will continue to incur losses until such time as it can bringsell a sufficient numberenough volume of approved products to market and sell themthe DenerveX System with margins sufficient to offset expenses.
To date, the Company’s soleprimary source of funds has been from the issuance of debt and equity.
The Company anticipates cash expenditures will remain consistent as diminishing research and development costs will be offset by the cost of clinical trials to obtain FDA approval and moving forward with the recent commercialization of the DenerveX System. The Company expects future cash flow expenditures to increase if the FDA requires a de novo regulatory path, instead of a 510(k) approval. The Company also continues to incur similar costs as it continues to operate as a publicly traded entity.
Subsequent to year-end, on January 8, 2019, the Company issuedexecuted the Asset Purchase Agreement with RMS, as amended, by which the Company entered into a promissory note forsecurities purchase agreement (the “SPA”) with select accredited investors and raised an aggregate amount of $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 Companywith $1,800,000 received $970,000 in cash and the elimination$200,000 by cancellation of $30,000 of directors’ fees upon execution of the agreement. The second installment of $1,000,000 was received in December 2016.
Subsequent to the period ended December 31, 2016,consummation of the Asset Purchase Agreement with RMS, the Company completed a capital raise and convertedhas raised an outstanding note payable into equity. The combination of these transactions enabledadditional $5,200,000 with select accredited investors under the same SPA. Through March 31, 2019 the Company to regain compliance and evidence such by the extension deadline. On March 1, 2017, NASDAQ issued a determination that the Company had evidenced compliance with the minimum stockholders’ equity requirement for continued listing on the NASDAQ Capital Market.
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.
| F-21 |
Note 1613 - Subsequent Events
As described in Note 6, In November 2016, the Board authorized the issuance of shares of common stock to all Board members, both current and former, in an amount equivalent to $240,000, representing their accrued but unpaid directors’ fees as of December 31, 2016. In January 2017,previously disclosed on a Form 8-K filed on October 18, 2018, the Company issuedentered into an aggregateAsset Purchase Agreement (the “Asset Purchase Agreement”) with Regenerative Medicine Solutions, LLC (“RMS”), Lung Institute LLC (“Lung Institute”), RMS Lung Institute Management LLC (“RMS Management”), Cognitive Health Institute Tampa, LLC (“CHIT”), RMS Shareholder, LLC (“RMS Shareholder”) and RMS Acquisition Corp. (“RMS Acquisition”) (collectively, the “Parties”). On January 8, 2019, the Parties to the Asset Purchase Agreement entered into an amendment thereto (the “APA Amendment”) to, among other things, i) update the contracts assigned to and liabilities assumed by RMS Acquisition, ii) amend the number of 173,911 shares at $1.38 per share, which was the average closing priceSeries C preferred stock of the Company’s stock during 2016,Company (the “Series C Preferred Stock”) issued to fulfill this obligation.
In connection with the Asset Purchase Agreement and APA Amendment, on January 8, 2019, RMS, Lung Institute, RMS Management, CHIT and RMS Acquisition executed an assignment and assumption agreement (the “Assignment and Assumption Agreement”), pursuant to which RMS, Lung Institute, RMS Management and CHIT assigned and transferred to RMS Acquisition all the rights and interests in the Assigned Contracts as listed in the APA Amendment and RMS Acquisition assumed all the obligations and liabilities under the Assumed Liabilities as defined in the APA Amendment.
On February 9, 2017,January 8, 2019, the Company executed the Asset Purchase Agreement, as amended, by which the Company entered into a Unit Purchase Agreementsecurities purchase agreement (the “SPA”) with selected accredited investors wherebyfour purchasers (the “Purchasers”) pursuant to which the four Purchasers invested in the Company hadan aggregate amount of $2,000,000, with $1,800,000 in cash and $200,000 by cancellation of debt as explained below, in exchange for forty (40) units (the “Units”), each consisting of a convertible note (the “Convertible Note”) with the rightprincipal amount of $50,000 and a warrant (the “Warrant”) to sell in a private placementpurchase common stock (the “Common Stock”) of the Company.
Pursuant to this SPA, the Company initially offered a minimum of $3,000,000$1,000,000 and upa maximum of $6,000,000, and subsequently increased to a maximum of $5,000,000$8,000,000 (the “Maximum Amount”) of units. Each Unit had a purchase price of $100,000 and consisted of (i) 96,154 shares of the Company’s common stock, par value $0.001 per share at a purchase price of $1.04 per share, and (ii) a warrant to purchase 48,077 shares of common stock. Each warrant has an initial exercise price of $1.50 per share and is exercisable for a period of five (5) years from the date of issuance.
In March 2018, the Company issued toRMS the noteholders’ an aggregate of 200,00039,772,498 shares of common stock.
Through March 31, 2019, the Company has entered into other SPA’s under the same terms with additional purchasers, which has brought the aggregate principal amount of capital raised in the offerings to stock will have on its consolidated financial statements.
| F-22 |
| ITEM 9. |
None.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act"“Exchange Act”), is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to our management, including our principal executive officer and principal financialaccounting officer, as appropriate to allow timely decisions regarding disclosure.
Our Chief Executive Officer (our “CEO”) and our Principal FinancialAccounting Officer (our "CFO"“Controller”), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of December 31, 2016,2018, the end of our fiscal year. In designing and evaluating disclosure controls and procedures, we recognize that any disclosure controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objective. As of December 31, 2016, basedBased on the evaluation of theseour disclosure controls and procedures and in lightas of the material weaknesses found in our internal controls,December 31, 2018, our CEO and our CFOController concluded that our disclosure controls and procedures were not effective.
In light of the conclusion that our internal disclosure controls over financial reporting were ineffective as of December 31, 2016,2018, we have applied procedures and processes as necessary to ensure the reliability of our financial reporting in regardsregard to this annual report. Accordingly, the Company believes, based on its knowledge, that: (i) this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading with respect to the period covered by this report; and (ii) the financial statements, and other financial information included in this annual report, fairly present in all material respects our financial condition, results of operations and cash flows as of and for the periods presented in this annual report.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act.
Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Under the supervision of our CEO and CFO,Controller, the Company conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 20162018 using the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"(“COSO”) (2013 Framework).
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In our assessment of the effectiveness of internal control over financial reporting as of December 31, 2016,2018, we determined that control deficiencies existed that constituted material weaknesses. Specifically, our CFOController currently performs most of the accounting related functions.
In order to obtain proper segregation of accounting related duties, additional personnel will need to be hired and duties allocated so this material weakness can be corrected.
Due to our abilitythe fact the RMS Asset Purchase Agreement closed subsequent to obtain additional financing and hire additional employees,yearend, the Company expects to be able to design and implement effective internal controls into address the futurematerial weaknesses that address these material weaknesses.
Accordingly, we concluded that these material weaknesses resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the Company'sCompany’s internal controls.
As a result of the material weaknesses described above, our CEO and CFOController concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 20162018 based on criteria established in Internal Control—Integrated Frameworkissued by COSO (2013 Framework).
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal controls over financial reporting because this is not required of the Company pursuant to Regulation S-KSK Item 308(b).
| 21 |
Changes in internal control over financial reporting
During 2018, due to the Company’s financial condition, we terminated our Accounting Clerk, thus creating a lack of segregation of duties as it left only one person performing most of the financial functions thereby creating a material weakness in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(f) or Rule 15d-15(e) promulgated under the Exchange Act that occurred during the quarter ended December 31, 2016, that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
None.
Our board of directors consists of ten (10)(3) members: Larry Papasan, Scott M. W. Haufe, M.D., James R. Andrews, M.D., Jarrett Gorlin, Randal R. Betz, M.D., Major General C.A. “Lou” Hennies (retired), Ron Lawson, Steve Gorlin, John C. Thomas, Jr.William E. Horne, Raymond Monteleone and Jon Mogford. Steve Gorlin is the father of Jarrett Gorlin, the Company’s Chief Executive Officer.
Our current executive officers are Jarrett Gorlin,William E. Horne, Chief Executive Officer; Patrick Kullmann, President and Chief Operating Officer; Jeffery Wright,Jeremy Daniel, Chief Financial Officer and Treasurer; Dennis Moon, Executive Vice President; and Manfred Sablowski, Senior Vice President of Sales & Marketing.
Directors and Executive Officers
The following table provides information as of March 31, 2017April 1, 2019 as to each person who is, as of the filing hereof, a director and/or executive officer of the Company:
| Name | Position(s) | Age | ||
| Chief Executive Officer & Chairman of the Board | 64 | |||
| 42 | ||||
| Director (1) | 71 | |||
| Director | ||||
| Jeffery Wright | ||||
| (1) | |||
No Family Relationships
There is no family relationship between any director and executive officer or among any directors or executive officers, except that Steve Gorlin is Jarrett Gorlin’s father.officers.
| 22 |
Business Experience and Background of Directors and Executive Officers
William E. Horne
William “Bill” Horne is a founder and current Medical Director for the American Sports Medicine Institute, a non-profit organization dedicated to the prevention, education and research in orthopaedic and sports medicine, as well as the Andrews Research and Education Institute.
Raymond Monteleone
Raymond Monteleone, 71, serves managerial and consultative roles at several enterprises. Mr. Monteleone currently serves as the chairman and president of Paladin Global Partners, LLC since 2007; a board member and vice president of Dannelly, Monteleone & Associates, LLC since 2010; sits on the board of Chenmoore Engineering Inc. since 2015; is a managing member at Diner Investment Partners, LLC since 2016 and Uyona Management, LLC since 2013; a managing member and the chief financial officer at HBRE, LLC since 2013 and Horne Management, LLC since 2011; and the president at Monteleone & Associates Consulting, Inc. since 2005. Mr. Monteleone received a college degree from the New York Institute of Technology and an MBA degree from Florida Atlantic University.
A former partner with Arthur Young (now EY), Ray Monteleone joins Medovex after working closely with several large and small companies serving as board member and/or advisor, specializing in strategic planning, health care, tax and financial planning and corporate management. Mr. Monteleone previously held officer positions with Sensormatic Electronics Corporation, a billion dollar company listed in the New York Stock Exchange and also served aswas a member of the Health Care Advisory Board of Arsenal Capital Partners. He presently serves as a DirectorDirectors of Plasmology 4, Corporation as well as a Director of DJO Global, a Blackstone company.
Michael Yurkowsky
Michael Yurkowsky operates his own family office, YP Holdings LLC, which has an investment portfolio of 50 private companies and participated in over 100 financing transactions with public companies since 2012. He is alsoPreviously Mr. Yurkowsky managed his own hedge fund and worked as a broker at several national broker-dealer firms.
Michael Yurkowsky comes to Medovex with more than 25 years of experience in financial services. Yurkowsky spent the Founderfirst ten years of CG3 Consulting, LLC, a global medical technology advisory firm in Minneapolis, Boston and San Diego which he founded in 2008. CG3 Consulting provides consulting services to clients in the healthcare, scientific and technology industries. Prior to establishing CG3 Consulting, Mr. Kullmann was a senior director at Medtronic in their $2.3 billion Cardiovascular Division. He started his career working as a surgical sales representativebroker with several national broker-dealers and as a licensed investment banker. He went on to start and manage his own hedge fund, specializing in the Texas Medical Centerdebt arbitrage. In 2012, he opened his own family office, YP Holdings LLC, which has invested in Houston.more than 50 private companies and participated in more than 100 public company financing transactions. Throughout his career, Mr. KullmannYurkowsky has served in senior marketing, market developmenton multiple public and sales leadership positions at Boston Scientific, Baxter, Johnson & Johnson, and four start-up medical device companies – two of which had successful liquidity events for a combined value of $220m. He is a graduate of Northern Michigan University,private boards and has an MBA from California Coastal University. The board believes that Mr. Kullmann has the experience, qualifications, attributes and skills necessary to serve as President and Chief Operating Officer because of his years of experiencebeen involved in the medical technology field.
NON-DIRECTOR EXECUTIVE OFFICERS
Chief Financial Officer and Treasurer – Jeremy Daniel
Jeremy Daniel has been the Chief Financial Officer of Regenerative Medicine Solutions, LLC (“RMS”) since 2013. Prior to that, Mr. Daniel worked in the private sector in the accounting and finance field for the past twenty years. Mr. Jeremy Daniel is a Certified Public Accountant and received a college degree from the University of Cincinnati and an MBA degree from Xavier University. The Company currently does not have any employment agreement with Mr. Jeremy Daniel.
Controller and Principal Accounting Officer – Jeffery Wright
Mr. Wright is a Certified Public Accountant and haspreviously served as our Chief Financial Officer and Treasurer sincefrom January 2015.2015 through August 2017. Prior to joining the Company in December 2014, Mr. Wright was an audit senior at Ernst & Young within the Assurance Services division, where he had an opportunity to help manage audits of large ($2 billion to $10 billion annual revenue) publicly-traded companies. He also has experience auditing medium size ($2 million - $200 million annual revenue) privately-held companies in multiple industries with other accounting firms. Prior to his career in public accounting, Mr. Wright worked as a trading analyst in the retirement trust services department at Reliance Trust Company, managing the institutional trading desk to settle mutual fund transactions with the National Securities Clearing Corporation. Mr. Wright holds Master of Professional Accountancy and Bachelor of Business Administration degrees from the Georgia State University Robinson College of Business and is a member of the Georgia Society of Certified Public Accountants.
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Liability and Indemnification of Directors and Officers
Our Articles of Incorporation provide that to the fullest extent permitted under Nevada law, our directors will not be personally liable to the Company or its stockholders for monetary damages for breach of the duty of care, breach of fiduciary duty or breach of any other duties as directors. Our Articles of Incorporation also provide for indemnification of our directors and officers by the Company to the fullest extent permitted by law.
Role of Board in Risk Oversight Process
Our board of directors has responsibility for the oversight of the Company’s risk management processes and, either as a whole or through its committees, regularly discusses with management our major risk exposures, their potential impact on our business and the steps we take to manage them. The risk oversight process includes receiving regular reports from board committees and members of senior management to enable our board to understand the company’s risk identification, risk management and risk mitigation strategies with respect to areas of potential material risk, including operations, finance, legal, regulatory, strategic and reputational risk.
The audit committee reviews information regarding liquidity and operations, and oversees our management of financial risks. Periodically, the audit committee reviews our policies with respect to risk assessment, risk management, loss prevention and regulatory compliance. Oversight by the audit committee includes direct communication with our external auditors, and discussions with management regarding significant risk exposures and the actions management has taken to limit, monitor or control such exposures. The compensation committee is responsible for assessing whether any of our compensation policies or programs has the potential to encourage excessive risk-taking. The nominating/corporate governance committee manages risks associated with the independence of the board, corporate disclosure practices, and potential conflicts of interest. While each committee is responsible for evaluating certain risks and overseeing the management of such risks, the entire board is regularly informed through committee reports about such risks. Matters of significant strategic risk are considered by our board as a whole.
Board Committees and Independence
Our board of directors has established an audit committee, a nominating and corporate governance committee and a compensation committee, each of which operates under a charter that has been approved by our board.
The following committees are independent as defined underin the rulesprocess of being formulated; and selections of chairman to be finalized at the NASDAQ Capital Market.
| ● | Nominating and corporate governance committee | |
| ● | Compensation committee |
Mr. ThomasRay Monteleone chairs the audit committee. The audit committee’s main function is to oversee our accounting and financial reporting processes, internal systems of control, independent registered public accounting firm relationships and the audits of our financial statements.
This committee’s responsibilities include, among other things:
| ● | appointing, approving the compensation of and assessing the independence of our registered public accounting firm; |
| ● | overseeing the work of our independent registered public accounting firm, including through the receipt and consideration of reports from such firm; |
| ● | reviewing and discussing with management and the independent registered public accounting firm our annual and quarterly financial statements and related disclosures; |
| ● | monitoring our internal control over financial reporting, disclosure controls and procedures and code of business conduct and ethics; |
| ● | overseeing our internal audit function; |
| ● | overseeing our risk assessment and risk management policies; |
| ● | establishing policies regarding hiring employees from the independent registered public accounting firm and procedures for the receipt and retention of accounting related complaints and concerns; |
| ● | meeting independently with our internal auditing staff, independent registered public accounting firm and management; |
| ● | reviewing and approving or ratifying any related person transactions; and |
| ● | preparing the audit committee report required by the Securities and Exchange Commission, or SEC, rules. |
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All audit and non-audit services, other thande minimis non-audit services, to be provided to us by our independent registered public accounting firm must be approved in advance by our audit committee.
Our board of directors has determined that John C. Thomas, Jr.Ray Monteleone is an “audit committee financial expert” as defined in applicable SEC rules.
We have adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A current copy of the code will be posted on the Corporate Governance section of our website,www.MedoveX.com.
In addition, we intend to post on our website all disclosures that are required by law or the listing standards of The NASDAQ Capital Market concerning any amendments to, or waivers from, any provision of the code. The reference to our website address does not constitute incorporation by reference of the information contained at or available through our website, and you should not consider it to be a part of this Annual Report.
Procedures for Security Holders to Recommend Nominees for Election as Directors
There have been no material changes to the procedures by which security holders may recommend nominees to the board of directors since the Company last described such procedures or any material changes thereto.
Company Policy as to Director Attendance at Annual Meetings of Stockholders
The Company'sCompany’s policy encourages board members to attend annual meetings of stockholders.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires each person who is a director or officer or beneficial owner of more than 10% of the common stock of the Company to file reports in connection with certain transactions. To the knowledge of the Company, based solely upon a review of forms or representations furnished to the Company during or with respect to the most recent completed fiscal year, there were a few isolated instances where the director purchased or received shares and was late filing under section 16(a). All of the required filings have now been made.
| Name & Position | Fiscal Year | Salary ($) | Bonus ($) | Stock Awards ($) | All Other Compensation ($) | Total ($) | ||||||||||||||||
| Jarrett Gorlin, CEO | 2015 | 272,000 | - | - | - | 272,000 | ||||||||||||||||
| 2016 | 272,000 | - | - | - | 272,000 | |||||||||||||||||
| Patrick Kullmann, COO | 2015 | 231,000 | - | - | - | 231,000 | ||||||||||||||||
| 2016 | 231,000 | - | - | - | 231,000 | |||||||||||||||||
| Dennis Moon, EVP | 2015 | 201,000 | - | - | - | 201,000 | ||||||||||||||||
| 2016 | 201,000 | - | - | - | 201,000 | |||||||||||||||||
| Jeffery Wright, CFO | 2015 | 130,000 | - | - | - | 130,000 | ||||||||||||||||
| 2016 | 130,000 | - | - | - | 130,000 | |||||||||||||||||
| Manfred Sablowski, SVP | 2015 | 150,000 | - | - | - | 150,000 | ||||||||||||||||
| 2016 | 150,000 | - | - | - | 150,000 | |||||||||||||||||
| Name & Position | Fiscal Year | Salary ($) | Bonus ($) | Stock Option Awards ($) | All Other Compensation ($) | Total ($) | ||||||||||||||||||
| William E. Horne, CEO | 2018 | 153,333 | - | - | - | 153,333 | ||||||||||||||||||
| 2017 | - | - | - | - | - | |||||||||||||||||||
| Jeremy Daniel, CFO | 2018 | - | - | - | - | - | ||||||||||||||||||
| 2017 | - | - | - | - | - | |||||||||||||||||||
| Jeffery Wright, Controller | 2018 | 140,000 | - | - | - | 140,000 | ||||||||||||||||||
| 2017 | 140,000 | - | - | 33,600 | 173,600 | |||||||||||||||||||
The current annualized salaries of our executive officers are as follows:
| Name & Position | Annual Salary | |||
| William E. Horne, CEO | $ | 650,000 | ||
| Jeremy Daniel, CFO | $ | 200,000 | ||
| Jeffery Wright, Controller | $ | 60,000 | ||
Director Compensation
In October 2018, the Board authorized the issuance of shares of common stock to all former Board members in an amount equivalent to $180,000, representing their accrued but unpaid directors’ fees as of September 30, 2018. The board established a policyCompany issued an aggregate of paying outside (non-employee) directors320,202 shares at $0.42 per share, which was the average closing price of the Company’s stock during the year through September 30, 2018, to fulfill this obligation. The closing price of the Company’s stock on October 3, 2018, the day the shares were issued, was $0.40 per share.
There are no arrangements or understandings between the Company and Mr. Michael Yurkowsky.
There are understandings between the Company and Mr. Raymond Monteleone as follows; $5,000 per quarter for each full quarter of service.
ITEM 12. |
The information is presented for each person we know to be a beneficial owner of 5% or more of our securities, each of our directors and executive officers, and our officers and directors as a group.
The percentage of common equity beneficially owned is based upon 14,855,18124,717,271 shares of Common Stock issued and outstanding as of December 31, 2016.
The number of shares beneficially owned by each stockholder is determined under the rules issued by the Securities and Exchange Commission and includes voting or investment power with respect to such securities.
Under these rules, beneficial ownership includes any shares as to which the individual or entity has sale or shared voting power or investment power. Unless otherwise indicated, the address of all listed stockholders is c/o MEDOVEX, 1950 Airport Road3060 Royal Boulevard South Suite A,150, Atlanta, Georgia 30341.Alpharetta 30022. Unless otherwise indicated each of the stockholders listed has sole voting and investment power with respect to the shares beneficially owned, subject to community property laws where applicable.
Number of Shares Beneficially Owned(1) | Percentage of common equity beneficially owned | |
| Scott M.W. Haufe, M.D., Director | 776,610(2)(4) | 5.1% |
| Sablowski, Manfred, Officer | 60,225(11) | 0.4% |
| Jarrett Gorlin, Director and Officer | 560,065(3)(10) | 3.7% |
| Larry W. Papasan, Co-chair of the Board of Directors | 203,576(4) | 1.3% |
| John C. Thomas, Jr., Director | 85,400(4) | 0.6% |
| Patrick Kullmann, Officer | 234,989(5)(8) | 1.5% |
| Jeffery Wright, Officer | 29,875(7) | 0.2% |
| Major General C.A. “Lou” Hennies, Director | 106,788(4) | 0.7% |
| James R. Andrews, M.D., Director | 106,788(4) | 0.7% |
| Ron Lawson, Director | 150,000(12) | 1.0% |
| Steve Gorlin, Co-chair of the Board of Directors | 1,195,789(6) | 7.8% |
| Randal R. Betz, M.D., Director | 106,788(4) | 0.7% |
Mogford Jon, Director | 75,000(13) | 0.5% |
| Dennis Moon, Officer | 208,614(9) | 1.4% |
| Officers and Directors as a Group (14 persons) | 3,900,507 | 25.6% |
Number of Shares Beneficially Owned(1) | Percentage of common equity beneficially owned | |||||||
| William E. Horne, Director and Officer | — | 0.010 | % | |||||
| Jeremy Daniel, Officer | — | — | ||||||
| Raymond Monteleone, Director | — | — | ||||||
| Michael Yurkowsky, Director | 1,022,009 | 4.13 | % | |||||
| Jeffery Wright, Officer | 137,220 | (3) | 0.006 | % | ||||
| Officers and Directors as a Group (5 persons) | ||||||||
| (1) | Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting or investment power with respect to shares beneficially owned and options exercisable within 60 days. Beneficial ownership is based on information furnished by the individuals or entities. |
| (2) | Includes |
Equity Compensation Plan Information
In October 2013, the Company adopted the 2013 Stock Incentive Plan (the “Plan”).
The Plan is intended to secure for us and our stockholders the benefits arising from ownership of our Common Stock by individuals we employ or retain who will be responsible for the future growth of the enterprise. The Plan is also designed to help attract and retain superior personnel for positions of substantial responsibility, including advisory relationships where appropriate, and to provide individuals with an additional incentive to contribute to our success.
The “Administrator” of the Plan is the Compensation Committee of the Board; however, the Administrator may also delegate to one or more officers of the Company the authority to make most determinations otherwise reserved for decision by the Administrator. Under the Plan, the Administrator has the flexibility to determine eligible participants and the type and amount of awards to grant to eligible participants.
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The Administrator may make the following types of grants under the Plan, each of which will be an “Award”:
| ● | qualified incentive stock options (“QISOs”); |
| ● | nonqualified stock options; and |
| ● | awards of restricted stock and/or restricted stock units. |
Our officers, key employees, directors, consultants and other independent contractors or agents who are responsible for or contribute to our management, growth or profitability will be eligible for selection by the Administrator to participate in the Plan, provided, however, that QISOs may be granted only to our employees.
We authorized and reserved for issuance under the Plan an aggregate of 1,650,0002,650,000 shares of our Common Stock. The Company did not grant any stock options in 2018. As of December 31, 2016,2018, we have grantedoutstanding an aggregate of 1,124,9001,314,059 options to purchase common stock at a weighted average price of $2.15$2.78 per share to certain employees, consultants and to outside directors. As of December 31, 2016,share. In 2018 we have granted an aggregate of 143,00075,000 common stock shares from the Plan to certain outside consultants at the market price on the day of grant. If any of the awards granted under the Plan expire, terminate or are forfeited for any reason before they have been exercised, vested or issued in full, the unused shares allocable to or subject to those expired, terminated or forfeited awards will become available for further grants under the Plan.
| ITEM 13. |
The Company payspaid TAG Aviation (“TAG”), a company owned by former CEO Jarrett Gorlin, for executive office space in Atlanta Georgia at a rate of $2,147 per month plus related utilities.
Policies and Procedures for Related Person Transactions
Our board of directors has adopted written policies and procedures for the review of any transaction, arrangement or relationship in which we are a participant, the amount involved exceeds $120,000 and one of our executive officers, directors, director nominees or 5% stockholders, or their immediate family members, each of whom we refer to as a “related person,” has a direct or indirect material interest.
If a related person proposes to enter into such a transaction, arrangement or relationship, which we refer to as a “related person transaction,” the related person must report the proposed related person transaction to our Chief Executive Officer. The policy calls for the proposed related person transaction to be reviewed and, if deemed appropriate, approved by our audit committee. Whenever practicable, the reporting, review and approval will occur prior to entry into the transaction.
If advance review and approval is not practicable, the committee will review, and, in its discretion, may ratify the related person transaction. The policy also permits the chairman of the committee to review and, if deemed appropriate, approve proposed related person transactions that arise between committee meetings, subject to ratification by the committee at its next meeting. Any related person transactions that are ongoing in nature will be reviewed annually.
A related person transaction reviewed under the policy will be considered approved or ratified if it is authorized by the committee after full disclosure of the related person’s interest in the transaction. As appropriate for the circumstances, the committee will review and consider:
| ● | the related person’s interest in the related person transaction; |
| ● | the approximate dollar value of the amount involved in the related person transaction; |
| ● | the approximate dollar value of the amount of the related person’s interest in the transaction without regard to the amount of any profit or loss; |
| ● | whether the transaction was undertaken in the ordinary course of our business; |
| ● | whether the terms of the transaction are no less favorable to us than terms that could have been reached with an unrelated third party; and |
| ● | the purpose of, and the potential benefits to us of, the transaction. |
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The committee may approve or ratify the transaction only if the committee determines that, under all of the circumstances, the transaction is in our best interests. The committee may impose any conditions on the related person transaction that it deems appropriate.
In addition to the transactions that are excluded by the instructions to the SEC’s related person transaction disclosure rule, our board of directors has determined that the following transactions do not create a material direct or indirect interest on behalf of related persons and, therefore, are not related person transactions for purposes of this policy:
| ● | interests arising solely from the related person’s position as an executive officer of another entity (whether or not the person is also a director of such entity) that is a participant in the transaction, where (i) the related person and all other related persons own in the aggregate less than a 10% equity interest in such entity, (ii) the related person and his or her immediate family members are not involved in the negotiation of the terms of the transaction and do not receive any special benefits as a result of the transaction and (iii) the amount involved in the transaction is less than the greater of $200,000 or 5% of the annual gross revenues of the company receiving payment under the transaction; and |
| ● | a transaction that is specifically contemplated by provisions of our charter or bylaws. |
The policy provides that transactions involving compensation of executive officers shall be reviewed and approved by the compensation committee in the manner specified in its charter.
We did not have a written policy regarding the review and approval of related person transactions. Nevertheless, with respect to such transactions, it was our policy for our board of directors to consider the nature of and business reason for such transactions, how the terms of such transactions compared to those which might be obtained from unaffiliated third parties and whether such transactions were otherwise fair to and in the best interests of, or not contrary to, our best interests.
In addition, all related person transactions required prior approval, or later ratification, by our board of directors.
Stock Option Grants to Executive Officers and Directors
We authorized and reserved for issuance under the Plan an aggregate of 1,650,0002,650,000 shares of our Common Stock. No stock options were issued under the Plan in 2018. In 2016 and 2015,2017 we granted an aggregate of 597,600 and 200,000, respectively,147,611, of options to purchase common stock to executive officers and directors. If any of the Awards granted under the Plan expire, terminate or are forfeited for any reason before they have been exercised, vested or issued in full, the unused shares allocable to or subject to those expired, terminated or forfeited awards will become available for further grants under the Plan.
Policies and Procedures for Approving Related Person Transactions
Our policy and procedure with respect to any related person transaction between the Company and any related person requiring disclosure under Item 404(a) of regulation S-K under the Exchange Act, is that the Company'sCompany’s audit committee reviews all such transactions.
This review covers any material transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships, in which the Company was and is to be a participant, and a related party had or will have a direct or indirect material interest, including, purchases of goods or services by or from the related party or entities in which the related party has a material interest, indebtedness, guarantees of indebtedness and employment by the Company of a related party. The board of directors has adopted a written policy reflecting the policy and procedure identified above.
The following is a summary of the fees billed to the Company by Frazier & Deeter, LLC for professional accounting services rendered for the fiscal years ended December 31, 20162018 and 2015.
Fiscal Year 2016 | Fiscal Year 2015 | |
| Audit fees | $108,500 | 125,155 |
| Tax fees – Frazier & Deeter | 16,000 | $12,500 |
| Total | $124,500 | $137,655 |
| Fiscal Year 2018 | Fiscal Year 2017 | |||||||
| Audit fees | $ | 108,000 | $ | 99,500 | ||||
| Tax fees | 3,000 | 11,000 | ||||||
| Other fees | — | 2,500 | ||||||
| Total | $ | 111,000 | $ | 113,000 | ||||
Audit fees consist of fees billed for services rendered for the audit of our financial statements and review of our financial statements included in our quarterly reports on Form 10–Q.
Tax fees consist of fees billed for professional services related to the preparation of our U.S. federal and state income tax returns.
Policy on Pre-Approval by Audit Committee of Services Performed by Independent Registered Public Accounting Firms
The policy of the audit committee is to pre-approve all audit and permissible non-audit services to be performed by the independent public accounting firm during the fiscal year. The audit committee pre-approves services by authorizing specific projects within the categories outlined above. The audit committee'scommittee’s charter delegates to its Chair the authority to address any requests for pre-approval of services between audit committee meetings, and the Chair must report any pre-approval decisions to the audit committee at its next scheduled meeting. All of the services related to the fees described above were approved by the audit committee pursuant to the pre-approval provisions set forth in the applicable SEC rules and the audit committee'scommittee’s charter.
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| ITEM 15. |
(a)(1)Financial Statements. The following are filed as part of Item 15 of this Annual Report on Form 10-K:
| F-2 | |
| F-3 | |
| F-4 | |
| F-5 | |
| F-6 | |
| F-7 |
(a)(3)Exhibits required by Item 601 of Regulation S-K. The information required by this Section (a)(3) of Item 15 of this Annual Report on Form 10-K is set forth on the exhibit index that follows the Signatures page hereof.
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Pursuant to the requirements of Section 13 or 15(d) 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.
MEDOVEX CORP. | ||
| Date: April 10, 2019 | By: | /s/ William E. Horne |
Chief Executive Officer | ||
| Signature | Title | Date | ||
| /s/ | Chief Executive Officer | |||
| (Principal Executive Officer) | ||||
| /s/ | ||||
| (Principal Financial and Accounting Officer) | ||||
| /s/ | ||||
| /s/ | ||||
| Director |
| 30 |
Exhibits
| Exhibit Number | ||||
| 31 |
| (*) | Filed herewith |
| (1) | Incorporated by reference herein from the Registration Statement on Form S-1/A filed on |
| (2) | Incorporated by reference herein from the Current Report on Form 8-K filed on March 11, 2015. |
| (3) | Incorporated by reference herein from the Current Report on Form 8-K filed on December 12, |
| (4) | Incorporated by reference herein from the Current Report on |
| (5) | Incorporated by reference herein from the Current Report on Form 8-K filed on January 25, 2016. |
| (6) | Incorporated by reference herein from the Current Report on Form 8-K filed on February 17, |
| (7) | Incorporated by reference herein from the Current Report on Form 8-K filed on November 4, 2016 |
| (8) | Incorporated by reference herein from the Current Report on Form 8-K filed on December 6, 2016 |
| (9) | Incorporated by reference herein from the Current Report on Form 8-K filed on April 25, |
| (10) | Incorporated by reference herein from the Current Report on Form 8-K filed on May 5, |
| (11) | Incorporated by reference herein from the Current Report on Form 8-K filed on August 8, 2016 |
| (12) | Incorporated by reference herein from the Current Report on Form 8-K filed on September 19, 2016 |
| (13) | Incorporated by reference herein from the Current Report on Form 8-K filed on July 14, 2017 |
| (14) | Incorporated by reference herein from the Current Report on Form 8-K filed on February 6, 2018 |
| (15) | Incorporated by reference herein from the Current Report on Form 8-K filed on March 1, 2018 |
| (1) | Incorporated by reference herein from the Registration Statement on Form S-1/A filed on December 9, 2014. |
| (2) | Incorporated by reference herein from the Current Report on Form 8-K filed on March 11, 2015. |
| (3) | Incorporated by reference herein from the Current Report on Form 8-K filed on January 25, 2016. |
| (4) | Incorporated by reference herein from the Current Report on Form 8-K filed on February 17, 2016. |
| (*) | Filed herewith |
ITEM 16. SUMMARY. NONE.
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