þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
2022
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
MONSTER DIGITAL,
Delaware | 27-3948465 | |||||||
(State or other jurisdiction of | (I.R.S. Employer | |||||||
incorporation or organization) | Identification No.) |
2655 First Street,
(805) 915-4775
Not Applicable(Former name, former address and former fiscal year, if changed since last report)
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Common Stock $0.0001 Par Value | NMTR | The Nasdaq Stock Market LLC |
☐
☐
Large accelerated filer | Accelerated filer | |||||||||||||
Non-accelerated filer | Smaller reporting company | |||||||||||||
Emerging |
Act. ☐
☒
PART I – FINANCIAL INFORMATION
MONSTER DIGITAL,
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value)
September 30, 2017 | December 31, 2016 | |||||||
(unaudited) | (Note 1) | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash | $ | 174 | $ | 1,453 | ||||
Accounts receivable, net of allowances of $271 and $253, respectively | 127 | 856 | ||||||
Inventories | 498 | 1,105 | ||||||
Prepaid expenses and other | 257 | 619 | ||||||
Total current assets | 1,056 | 4,033 | ||||||
Trademark, net of amortization of $283 and $185, respectively | 2,319 | 2,417 | ||||||
Deposits and other assets | 14 | 14 | ||||||
Total assets | $ | 3,389 | $ | 6,464 | ||||
LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY | ||||||||
Current liabilities | ||||||||
Line of credit | $ | 107 | $ | — | ||||
Accounts payable | 624 | 268 | ||||||
Accrued expenses | 1,506 | 1,786 | ||||||
Customer refund | 1,336 | 1,840 | ||||||
Due to related parties | 34 | 44 | ||||||
Notes payable | 1,270 | 38 | ||||||
Total current liabilities | 4,877 | 3,976 | ||||||
Commitments and contingencies | ||||||||
Shareholders’ (deficit) equity | ||||||||
Preferred stock; 10,000,000 shares authorized; no shares issued and outstanding | — | — | ||||||
Common stock; $.0001 par value; 100,000,000 shares authorized; 9,420,681 and 7,785,011 shares issued and outstanding, respectively | 1 | 1 | ||||||
Additional paid-in capital | 35,986 | 34,575 | ||||||
Accumulated deficit | (37,475 | ) | (32,088 | ) | ||||
Total shareholders’ (deficit) equity | (1,488 | ) | 2,488 | |||||
Total liabilities and shareholders’ (deficit) equity | $ | 3,389 | $ | 6,464 |
The
June 30, 2022 | December 31, 2021 | |||||||||||||
Assets | (Unaudited) | |||||||||||||
Current assets: | ||||||||||||||
Cash and cash equivalents | $ | 29,455,788 | $ | 46,993,285 | ||||||||||
Prepaid expenses and other current assets | 1,892,310 | 2,991,948 | ||||||||||||
Total current assets | 31,348,098 | 49,985,233 | ||||||||||||
Property and equipment, net | 14,522 | 16,094 | ||||||||||||
Right-of-use asset | 140,278 | 166,618 | ||||||||||||
Other assets | 5,580 | 5,580 | ||||||||||||
Total assets | $ | 31,508,478 | $ | 50,173,525 | ||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||
Current liabilities: | ||||||||||||||
Accounts payable | $ | 2,326,017 | $ | 2,434,452 | ||||||||||
Accrued expenses | 6,955,632 | 5,967,822 | ||||||||||||
Lease liability, current portion | 58,167 | 54,796 | ||||||||||||
Total current liabilities | 9,339,816 | 8,457,070 | ||||||||||||
Lease liability, net of current portion | 83,190 | 113,142 | ||||||||||||
Total liabilities | 9,423,006 | 8,570,212 | ||||||||||||
Commitments and contingencies (Note 9) | 0 | 0 | ||||||||||||
Stockholders’ equity: | ||||||||||||||
Preferred stock $0.0001 par value per share, 10,000,000 shares authorized; 0 shares issued and outstanding as of June 30, 2022 (unaudited) and December 31, 2021 | — | — | ||||||||||||
Common stock $0.0001 par value per share, 550,000,000 shares authorized as of June 30, 2022 (unaudited) and December 31, 2021, respectively; 259,107,380 and 258,235,418 shares issued and outstanding as of June 30, 2022 (unaudited) and December 31, 2021, respectively | 25,911 | 25,824 | ||||||||||||
Additional paid-in capital | 213,382,069 | 210,418,156 | ||||||||||||
Accumulated deficit | (191,322,508) | (168,840,667) | ||||||||||||
Total stockholders’ equity | 22,085,472 | 41,603,313 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 31,508,478 | $ | 50,173,525 |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||
Research and development | $ | 7,546,477 | $ | 5,707,290 | $ | 15,914,955 | $ | 8,897,592 | ||||||||||||||||||
General and administrative | 3,648,944 | 2,551,171 | 6,644,715 | 4,759,971 | ||||||||||||||||||||||
Total operating expenses | 11,195,421 | 8,258,461 | 22,559,670 | 13,657,563 | ||||||||||||||||||||||
Loss from operations | (11,195,421) | (8,258,461) | (22,559,670) | (13,657,563) | ||||||||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||||
Interest income, net | 65,319 | 6,505 | 78,133 | 11,592 | ||||||||||||||||||||||
Interest expense | — | (1,154) | (304) | (45,218) | ||||||||||||||||||||||
Change in fair value of derivative liability | — | — | — | 7,000 | ||||||||||||||||||||||
Total other income (expense), net | 65,319 | 5,351 | 77,829 | (26,626) | ||||||||||||||||||||||
Loss before income taxes | (11,130,102) | (8,253,110) | (22,481,841) | (13,684,189) | ||||||||||||||||||||||
Income tax benefit | — | — | — | — | ||||||||||||||||||||||
Net loss | $ | (11,130,102) | $ | (8,253,110) | $ | (22,481,841) | $ | (13,684,189) | ||||||||||||||||||
Net loss per common share, basic and diluted | $ | (0.04) | $ | (0.03) | $ | (0.09) | $ | (0.06) | ||||||||||||||||||
Weighted-average common shares, basic and diluted | 259,001,978 | 249,552,315 | 258,620,816 | 230,522,313 |
MONSTER DIGITAL,
(unaudited)
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net sales | $ | 138 | $ | 779 | $ | 1,277 | $ | 2,999 | ||||||||
Cost of goods sold | 208 | 687 | 1,432 | 2,430 | ||||||||||||
Gross profit (loss) | (70 | ) | 92 | (155 | ) | 569 | ||||||||||
Operating expenses | ||||||||||||||||
Research and development | 19 | 54 | 170 | 168 | ||||||||||||
Selling and marketing | 259 | 550 | 1,286 | 1,777 | ||||||||||||
General and administrative | 1,124 | 1,852 | 3,807 | 3,322 | ||||||||||||
Total operating expenses | 1,402 | 2,456 | 5,263 | 5,267 | ||||||||||||
Operating loss | (1,472 | ) | (2,364 | ) | (5,418 | ) | (4,698 | ) | ||||||||
Other (income) expense, net | ||||||||||||||||
Interest and finance expense | 36 | 25 | 37 | 812 | ||||||||||||
Gain on conversion of debt | — | (557 | ) | — | (557 | ) | ||||||||||
Gain on settlement of customer refund | — | — | (68 | ) | — | |||||||||||
Total other (income) expense | 36 | (532 | ) | (31 | ) | 255 | ||||||||||
Loss before income taxes | (1,508 | ) | (1,832 | ) | (5,387 | ) | (4,953 | ) | ||||||||
Provision for income taxes | — | 2 | — | 2 | ||||||||||||
Net loss | $ | (1,508 | ) | $ | (1,834 | ) | $ | (5,387 | ) | $ | (4,955 | ) | ||||
Loss per share | ||||||||||||||||
Basic and diluted | $ | (0.16 | ) | $ | (0.27 | ) | $ | (0.62 | ) | $ | (1.05 | ) | ||||
Number of shares used in computation | ||||||||||||||||
Basic and diluted | 9,361 | 6,909 | 8,684 | 4,721 |
The
Three and Six Months Ended June 30, 2022 | ||||||||||||||||||||||||||
Common Stock Shares | Common Stock Amount | Additional Paid-in Capital | Accumulated Deficit | Total | ||||||||||||||||||||||
Balance as of December 31, 2021 | 258,235,418 | $ | 25,824 | $ | 210,418,156 | $ | (168,840,667) | $ | 41,603,313 | |||||||||||||||||
Share-based compensation | — | — | 690,000 | — | 690,000 | |||||||||||||||||||||
Net loss | — | — | — | (11,351,739) | (11,351,739) | |||||||||||||||||||||
Balance as of March 31, 2022 | 258,235,418 | 25,824 | 211,108,156 | (180,192,406) | 30,941,574 | |||||||||||||||||||||
Issuance of common stock | 871,962 | 87 | 499,913 | — | 500,000 | |||||||||||||||||||||
Share-based compensation | — | — | 1,774,000 | — | 1,774,000 | |||||||||||||||||||||
Net loss | — | — | — | (11,130,102) | (11,130,102) | |||||||||||||||||||||
Balance as of June 30, 2022 | 259,107,380 | $ | 25,911 | $ | 213,382,069 | $ | (191,322,508) | $ | 22,085,472 |
Three and Six Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
Common Stock Shares | Common Stock Amount | Additional Paid-in Capital | Accumulated Deficit | Total | ||||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2020 | 204,629,064 | $ | 20,463 | $ | 164,182,917 | $ | (132,061,267) | $ | 32,142,113 | |||||||||||||||||||||||||||||||||||
Share-based compensation | — | — | 422,000 | — | 422,000 | |||||||||||||||||||||||||||||||||||||||
Exercise of warrants | 11,634,151 | 1,163 | 6,855,865 | — | 6,857,028 | |||||||||||||||||||||||||||||||||||||||
Exercise of stock options | 61,681 | 6 | 75,897 | — | 75,903 | |||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | (5,431,079) | (5,431,079) | |||||||||||||||||||||||||||||||||||||||
Balance as of March 31, 2021 | 216,324,896 | 21,632 | 171,536,679 | (137,492,346) | 34,065,965 | |||||||||||||||||||||||||||||||||||||||
Issuance of common stock | 34,500,000 | 3,450 | 34,496,550 | — | 34,500,000 | |||||||||||||||||||||||||||||||||||||||
Stock issuance costs | — | — | (2,901,123) | — | (2,901,123) | |||||||||||||||||||||||||||||||||||||||
Share-based compensation | — | — | 937,000 | — | 937,000 | |||||||||||||||||||||||||||||||||||||||
Exercise of warrants | 1,134,100 | 114 | 668,325 | — | 668,439 | |||||||||||||||||||||||||||||||||||||||
Exercise of stock options | 276,944 | 28 | 120,711 | — | 120,739 | |||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | (8,253,110) | (8,253,110) | |||||||||||||||||||||||||||||||||||||||
Balance as of June 30, 2021 | 252,235,940 | $ | 25,224 | $ | 204,858,142 | $ | (145,745,456) | $ | 59,137,910 |
Six Months Ended June 30, | ||||||||||||||
2022 | 2021 | |||||||||||||
Cash flows from operating activities | ||||||||||||||
Net loss | $ | (22,481,841) | $ | (13,684,189) | ||||||||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||
Share-based compensation | 2,464,000 | 1,359,000 | ||||||||||||
Amortization of debt discount | — | 43,983 | ||||||||||||
Depreciation | 4,414 | 3,331 | ||||||||||||
Change in fair value of derivative liabilities | — | (7,000) | ||||||||||||
Non-cash payment of milestone fees | 500,000 | — | ||||||||||||
Changes in operating assets and liabilities, net of acquisitions: | ||||||||||||||
Prepaid expenses and other assets | 1,099,638 | (683,640) | ||||||||||||
Accounts payable | (108,435) | (102,373) | ||||||||||||
Accrued expenses and other liabilities | 987,569 | (262,445) | ||||||||||||
Accrued interest | — | (488) | ||||||||||||
Net cash used in operating activities | (17,534,655) | (13,333,821) | ||||||||||||
Cash flows from investing activities | ||||||||||||||
Purchase of property and equipment | (2,842) | (6,892) | ||||||||||||
Net cash used in investing activities | (2,842) | (6,892) | ||||||||||||
Cash flows from financing activities | ||||||||||||||
Payments of convertible notes | — | (58,199) | ||||||||||||
Proceeds from the exercise of stock options | — | 196,642 | ||||||||||||
Proceeds from issuance of common stock and warrants | — | 34,500,000 | ||||||||||||
Payment of offering costs | — | (2,651,123) | ||||||||||||
Proceeds from exercise of warrants | — | 7,525,467 | ||||||||||||
Net cash provided by financing activities | — | 39,512,787 | ||||||||||||
Net (decrease) increase in cash and cash equivalents | (17,537,497) | 26,172,074 | ||||||||||||
Cash and cash equivalents as of beginning of period | 46,993,285 | 37,851,388 | ||||||||||||
Cash and cash equivalents as of end of period | $ | 29,455,788 | $ | 64,023,462 | ||||||||||
Supplemental disclosure of cash flow information | ||||||||||||||
Cash paid during the period for interest | $ | — | $ | 569 | ||||||||||
Supplemental disclosure of non-cash financing activities | ||||||||||||||
Addition of non-cash stock issuance costs | $ | — | $ | 250,000 | ||||||||||
MONSTER DIGITAL, INC. AND SUBSIDIARYCONSOLIDATED STATEMENT OF SHAREHOLDERS’ (DEFICIT) EQUITY
(Dollars in thousands)(unaudited)
Common Stock | Preferred Stock | Additional Paid-in | Accumulated | Shareholders’ (Deficit) | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
Balance December 31, 2016 | 7,785,011 | $ | 1 | — | $ | — | $ | 34,575 | $ | (32,088 | ) | $ | 2,488 | |||||||||||||||
Issuance of common stock, net of issuance costs | 516,957 | — | — | — | 419 | — | 419 | |||||||||||||||||||||
Issuance of common stock pursuant to stock option plan | 825,610 | — | — | — | — | — | — | |||||||||||||||||||||
Issuance of common stock pursuant to consulting arrangements | 82,500 | — | — | — | — | — | — | |||||||||||||||||||||
Warrant exercise | 38,189 | — | — | — | — | — | — | |||||||||||||||||||||
Warrants issued in connection with convertible notes | — | — | — | — | 44 | — | 44 | |||||||||||||||||||||
Conversion of related party debt into equity | 172,414 | — | — | — | 100 | — | 100 | |||||||||||||||||||||
Amortization of non-cash stock-based compensation | — | — | — | — | 848 | — | 848 | |||||||||||||||||||||
Net loss | — | — | — | — | — | (5,387 | ) | (5,387 | ) | |||||||||||||||||||
Balance September 30, 2017 | 9,420,681 | $ | 1 | — | $ | — | $ | 35,986 | $ | (37,475 | ) | $ | (1,488 | ) |
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
3
MONSTER DIGITAL, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)(unaudited)
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Cash flows from operating activities | ||||||||
Net loss | $ | (5,387 | ) | $ | (4,955 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Stock-based compensation | 848 | 943 | ||||||
Amortization of deferred debt issuance costs and debt discount | 4 | 740 | ||||||
Amortization of trademark | 98 | 98 | ||||||
Gain on settlement of customer refund | (68 | ) | — | |||||
Gain on conversion of debt to common stock | — | (557 | ) | |||||
Provision for doubtful accounts | 20 | 153 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 709 | (437 | ) | |||||
Inventories | 607 | (1,156 | ) | |||||
Prepaid expenses and other | 362 | (299 | ) | |||||
Accounts payable | 356 | (633 | ) | |||||
Accrued expenses | (212 | ) | (124 | ) | ||||
Customer refund | (504 | ) | (10 | ) | ||||
Due to related parties | (10 | ) | — | |||||
Net cash used in operating activities | (3,177 | ) | (6,237 | ) | ||||
Cash flows from financing activities | ||||||||
Proceeds from issuance of preferred stock, net | — | 2,393 | ||||||
Issuance of common stock, net of issuance cost | 419 | — | ||||||
Proceeds from issuance of convertible notes | 1,346 | — | ||||||
Debt discount | (74 | ) | — | |||||
Short term loan – related party | 100 | — | ||||||
Proceeds from the issuance of IPO common stock and warrants | — | 8,151 | ||||||
IPO costs | — | (689 | ) | |||||
Payments of bridge financing | — | (462 | ) | |||||
Proceeds from issuance of bridge financing | — | 406 | ||||||
Payments on trademark note payable | — | (450 | ) | |||||
Proceeds from credit facility | 107 | 581 | ||||||
Payments on credit facility | — | (785 | ) | |||||
Deferred financing costs | — | (57 | ) | |||||
Net cash provided by financing activities | 1,898 | 9,088 | ||||||
Net (decrease) increase in cash | (1,279 | ) | 2,851 | |||||
Cash, beginning of the period | 1,453 | 119 | ||||||
Cash, end of the period | $ | 174 | $ | 2,970 | ||||
Supplemental disclosure of cash flow information | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 1 | $ | 55 | ||||
Non-cash investing and financing activities: | ||||||||
Conversion of related party debt into equity | $ | 100 | $ | — | ||||
Warrants issued in connection with notes payable | $ | 44 | — | |||||
Exchange of debt for equity upon IPO | $ | — | $ | 3,520 | ||||
Reclassification of deferred IPO costs | $ | — | $ | 619 |
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
4
MONSTER DIGITAL,
Organization: Monster Digital,
Public Offering: The Company closed its initial public offering (the “Offering”) on July 13, 2016 and its common stock and warrants are now listed on the Nasdaq Capital Market under the symbols “MSDI” and “MSDIW”, respectively. The Offering generated gross proceeds of $9,132,750 on the sale of 2,025,000 common shares at $4.50 per share and 2,025,000 warrants at $0.01 per warrant.
early-stage candidates for undisclosed rare diseases and/or unmet needs.
Principlesstatements for the years ended December 31, 2021 and 2020 included in the Company’s Annual Report on Form 10-K. However, the following accounting policies are the most critical in fully understanding the Company’s financial condition and results of operations.
June 30, 2022 (Unaudited) | December 31, 2021 | |||||||||||||
Accrued compensation and benefits | $ | 1,421,272 | $ | 1,633,295 | ||||||||||
Accrued clinical expenses | 5,439,111 | 4,228,048 | ||||||||||||
Other accrued expenses | 95,249 | 106,479 | ||||||||||||
Total | $ | 6,955,632 | $ | 5,967,822 |
Concentration of Cash: The Company maintains its cashactual costs incurred, which could result in bank accounts which, at times, may exceed federally insured limits. increases or decreases in research and development expenses in future periods when actual results are known.
Accounts Receivable: Accounts receivable are carried at original invoice amount less allowance for doubtful accounts. Management determinesderived from the allowance for doubtful accounts by identifying troubled accounts and by usingaverage historical experience applied to an agingvolatilities of accounts. Accounts receivable are written off when deemed uncollectible. Recoveries of receivables previously written off are recorded when received. Accounts receivable are consideredpublicly traded companies within the Company’s industry that the Company considers to be past due if any portioncomparable to the Company’s business over a period approximately equal to the expected term. In evaluating comparable companies, the Company considers factors such as industry, stage of life cycle, financial leverage, size and risk profile.
Inventories: Inventories are stated atclosing price of the lower of cost or market, with cost being determinedCompany’s common stock on the weighted average cost methoddate of accounting. The Company purchases finished goods and materials to assemble kits in quantities that it anticipates will be fully used in the near term. Changes in operating strategy, customer demand, and fluctuations in market values can limit the Company’s ability to effectively utilize all products purchased and can result in finished goods with above-market carrying costs which may cause a write-down of inventory. The Company’s policy is to closely monitor inventory levels, obsolescence and lower market values compared to costs and, when necessary, reduce the carrying amount of its inventory to its market value. As of September 30, 2017 and December 31, 2016, inventory on hand was comprised primarily of finished goods ready for sale and packaging and supplies.
grant.
value. The carrying amounthierarchy gives the highest priority to unadjusted quoted prices in active markets for other financial instruments, which include cash, accounts receivable, accounts payable and notes payable, approximate fair value based upon their short-term nature and maturity.
Revenue Recognition: Revenue is realizedidentical assets or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) the sales price is fixed or determinable, (3) collectability is reasonably assured, and (4) products have been shippedliabilities (Level 1 measurements) and the customer has taken ownership and assumed the risk of loss. Distributors and retailers take full ownership of their product upon delivery and sales are fully recognized at that time.
Revenue is reduced by reserves for price protection, sales returns, allowances and rebates. The Company’s reserve estimates are based upon historical data as well as projections of sales, customer inventories, market conditions and current contractual sales terms. If the Company reduces the list price of its products, certain customers may receive a credit from the Company (i.e., price protection)lowest priority to unobservable inputs (Level 3 measurements). The Company estimates the impact of such pricing changes on a regular basis and adjusts its allowances accordingly. Amounts charged to operations for price protection are calculated based on actual price changes on individual products and customer inventory levels. The reserve is then reduced by actual credits given to these customers at the time the credits are issued. We calculate the allowance for doubtful accounts and provision for sales returns and rebates based on management’s estimate of the amount expected to be uncollectible or returned on specific accounts. We provide for future returns, price protection and rebates at the time the products are sold. We calculate an estimate of future returns of product by analyzing units shipped, units returned and point of sale data to ascertain consumer purchases and inventory remaining with retail to establish anticipated returns. Price protection is calculated on a product by product basis. The objective of price protection is to mitigate returns by providing retailers with credits to ensure maximum consumer sales. Price protection is granted to retailers after they have presented the Company an affidavit of existing inventory.
The Company also offers market development credits (“MDF credits”) to certain of its customers. These credits are also charged against revenue.
Shipping and Handling Costs: Historically, the Company has not charged its customers for shipping and handling costs, which is a component of marketing and selling expenses. These costs totaled approximately $18,000 and $24,000Financial instruments recorded in the three months ended September 30, 2017 and 2016, respectively, and approximately $71,000 and $118,000 in the nine months ended September 30, 2017 and 2016, respectively.
Income Taxes: Deferred tax assets and liabilitiesaccompanying condensed consolidated balance sheets are determinedcategorized based on the temporary differences betweeninputs to valuation techniques as follows:
The Company uses a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more likely than not to be realized upon settlement. As of September 30, 2017 and December 31, 2016, there are no known uncertain tax positions.
The Company’s policy is to classify the liability for unrecognized tax benefits as current to the extent that it is more likely than not to be realized upon settlement and to the extent that the Company anticipates payment (or receipt) of cash within one year. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in the tax provision.
Product Warranty: The Company’s memory products are sold under various limited warranty arrangements ranging from three years to five years on solid state drives and a limited lifetime warranty on all other products. Company policy is to establish reserves for estimated product warranty costs in the period when the related revenue is recognized. The Company has the right to return defective products to the manufacturer. As of September 30, 2017 and December 31, 2016, the Company has established a warranty reserve of $96,000 and $118,000, respectively. The warranty reserve is included in accrued expenses in the accompanying consolidated balance sheets.
Research and Development: The Company incurs costs to improve the appeal and functionality of its products. Research and development costs are charged to expense when incurred.
Earnings (Loss) per Share: Basic earnings (loss) per share is calculated by dividing net earnings (loss) attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is calculated similarly but includes potential dilution from the exercise of common stock warrants and options and conversion of debt to equity, except when the effect would be anti-dilutive. Earnings (loss) per share are computed using the “treasury stock method.” At September 30, 2017, outstanding warrants to acquire 4,421,676 shares of common stock (2,025,000 issued further to the Offering, 1,405,007embedded derivative issued in connection with the conversion of preferred stock and bridge loans upon closing2020 Convertible Note, further described in Note 5—Debt, was determined by using a Monte Carlo simulation technique (“MCS”) to value the embedded derivative associated with the note. As part of the MCS valuation, a discounted cash flow (“DCF”) model was used to value the debt on a stand-alone basis and determine the discount rate to utilize in both the DCF and MCS models. The significant estimates used in the DCF model include the time to maturity of the convertible debt and calculated discount rate, which includes an estimate of the Company’s specific risk premium. The MCS methodology calculates the theoretical value of an option based on certain parameters, including: (i) the threshold of exercising the option, (ii) the price of the underlying security, (iii) the time to expiration, or expected term, (iv) the expected volatility of the underlying security, (v) the risk-free rate and (vi) the number of paths. These valuation techniques involve management’s estimates and judgment based on unobservable inputs and are classified in Level 3. We expect similar accounting treatment of the debt under the securities purchase agreement and related convertible note described in Note 10—Subsequent Events.
June 30, | ||||||||||||||||||||||||||
2022 | 2021 | |||||||||||||||||||||||||
Options outstanding under the Innovate 2015 Stock Incentive Plan | 3,592,248 | 5,800,518 | ||||||||||||||||||||||||
Options outstanding under the 2012 Omnibus Incentive Plan, as amended | 23,885,389 | 14,429,626 | ||||||||||||||||||||||||
Options outstanding under the 2022 Stock Incentive Plan | 712,545 | — | ||||||||||||||||||||||||
Options outstanding under the Option Grant Agreements granted to RDD Employees | 985,807 | 985,807 | ||||||||||||||||||||||||
Warrants outstanding at a weighted-average exercise price of $55.31 (expired July 2021) | — | 154,403 | ||||||||||||||||||||||||
Warrants outstanding at an exercise price of $2.54 | 2,233 | 2,233 | ||||||||||||||||||||||||
Warrants outstanding at an exercise price of $3.18 | 113,980 | 113,980 | ||||||||||||||||||||||||
Warrants outstanding at an exercise price of $0.5894 | 22,927,849 | 25,706,449 | ||||||||||||||||||||||||
Total | 52,220,051 | 47,193,016 |
Company’s primary operations are in North America.
In July 2015,August 2020, the FASB issued ASU 2015-11,Inventory (Topic 330): Simplifying the Measurement of Inventory. The standard requires entities to measure most inventory “at the lower of cost2020-06,
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred TaxesEntity’s Own Equity
In February 2016, the FASB issued ASU No. 2016-02,Leases (Topic 842), which requires lessees to recognize assets and liabilities for the rights and obligations created by most leases on their balance sheet. The guidance2020-06 is effective for fiscal years beginning after December 15, 2018, including interim periods within those2021, with early adoption permitted for fiscal years. Early application is permitted. ASU 2016-02 requires modified retrospective adoption for all leases existing at, or entered intoyears beginning after the date of initial application, with an option to use certain transition relief.December 15, 2020. The Company is currently evaluatingadopted this guidance effective January 1, 2022 and the impact the standard may have on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718), which provides for simplification of certain aspects of employee share-based payment accounting including income taxes, classification of awards as either equity or liabilities, accounting for forfeitures and classification on the statement of cash flows. ASU 2016-09 will be effective for the Company in the first quarter of 2017 and will be applied either prospectively, retrospectively or using a modified retrospective transition approach depending on the area covered in this update. The adoption of this ASU 2020-06 did not have a material impact on the Company’s consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-01, BusinessCombinations – Clarifying the Definition of a Business, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard introduces a screen for determining when assets acquired are not a business and clarifies that a business must include, at a minimum, an input and a substantive process that contribute to an output to be considered a business. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company does not expect this new guidance to have a material impact on itscondensed consolidated financial statements.
Other pronouncements issued
NOTE 2 — GOING CONCERN
As of September 30, 2017, the Company has incurred cumulative net losses from its inception of approximately $37 million, has incurred a year to date loss of approximately $5.4 million, and has negative operating cash flows, a working capital deficit and stockholders’ deficit. These circumstances raise substantial doubt as toabout the Company’s ability to continue as a going concern. In response to this uncertainty, Management has taken certain measures in 2016 and toconcern for at least one year following the date in 2017 and has plans for the remainder of 2017 and beyond, with the objective of alleviating this concern. They include the following:
While the Company believes it will be successful in obtaining the necessary financing to fund its operations, there are no assurances that such additional funding will be achieved and that it will succeed in its future operations. Theaccompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts of liabilities that might be necessary should the Company be unable to continue in existence as a going concern.
NOTE 3 — POTENTIAL MERGER
On July 3, 2017, the Company entered into an Agreement and Plan of Merger with Innovate Biopharmaceuticals, Inc. (“Innovate”). The Merger Agreement is filed as Exhibit 2.1 to the Company’s Form 8K filed with the Securities and Exchange Commission on July 6, 2017 and this discussion regarding the potential merger should be read in conjunction with the Merger Agreement. Under the terms of the Merger Agreement, pending stockholder approval of the transaction, the Company will merge into Innovate with Innovate surviving the Merger and becoming a wholly-owned subsidiary of the Company. Subject to the terms of the Merger Agreement, at the effective time of the Merger, Innovate stockholders will receive a number of newly issued shares of the Company’s common stock determined using an exchange ratio defined in the Merger Agreement. The exchange ratio will be based on a pre-transaction valuation of $60 million for Innovate’s business and $6 million for the Company’s business. As a result, current stockholders of the Company would collectively own approximately 9% and Innovate stockholders would collectively own approximately 91% of the combined company on a pro-forma basis, subject to adjustment based on the Company’s net cash balance and the relative capitalization of the two companies at closing, as described more fully in the Merger Agreement. Following the Merger, stockholders of Innovate will become the majority owners of the Company.
On September 27, 2017, Monster Digital, Inc. transferred all of its businesses and assets, including all shares of SDJ Technologies, Inc., and those liabilities of the Company not assumed by Innovate further to the Merger to MD Holding Co. Inc., a wholly owned subsidiary. If approved by the stockholders of the Company, the shares of MD Holding Co., Inc. are expected to be spun off pro rata to holders of the Company’s common stock immediately prior to the Merger (the “Spin-Off”).
NOTE 4 — DEBT AND EQUITY FINANCING
Credit Facility
In June 2015, the Company secured an accounts receivable financing facility with Bay View Funding. The contract provides for maximum funding of $4 million and a factoring fee of 1.35% for the first 30 days and .45% for each 10-day period thereafter that the financed receivable remains outstanding. Upon the execution of this contract, the balance owed under a prior credit facility was repaid and that contract was terminated. There was $107,000 outstanding under this facility as of September 30, 2017 and no amount outstanding as of December 31, 2016. There are no financial or similar covenants associated with this facility.
Convertible Debt Financing
On July 24, 2017, the Company entered into a Private Placement Engagement Agreement with WestPark Capital, Inc. for the purpose of raising up to $1,150,000 in convertible debt. An aggregate of $540,000 in convertible debt raised in June and July 2017 prior to the consummation of the WestPark Capital, Inc. agreement are under the same terms. The Promissory Notes bear interest at 15% and are convertible to common stock concurrent with a potential merger (see Note 3) at the lesser of $0.75 per share or 75% of the average market value of the Company’s common stock for the five days preceding the consummation of such merger. Otherwise, the Notes become due March 31, 2019. For every $2.50 in note principal purchased, investors receive one warrant, exercisable for five years, to purchase shares of common stock at $2.00. The Company has raised $1,346,500 pursuant to this agreement and, as of September 30, 2017, a total of $1,346,500 in principal of the convertible Notes remains outstanding. As of September 30, 2017 and December 31, 2016, a total of $38,000 in principal of convertible Notes payable that matured in the second quarter of 2015 remains outstanding.
Promissory Notes
From October 2015 through March 7, 2016, the Company issued promissory notes; the notes were due and payable at the earlier of one year from the date of issuance or the closing date of the Company’s initial public offering, bore an interest rate of 15% that was accrued upon issuance, irrespective of whether the promissory note was outstanding for part or full term until maturity, and had a loan origination fee of $.225 for each dollar loaned. The loan origination fee associated with the notes as of September 30, 2016 was $756,000 and was recorded as accrued interest and debt discount to the notes payable and is being amortized over the life of the notes. Debt discount amortized as interest expense in the three and nine months ended September 30, 2016 was approximately $25,000 and $389,000, respectively. All principal, fees and interest were payable on the due date. In July 2016, the Company completed the Offering whereby 90% of the outstanding promissory notes totaling $3,024,000 were converted to 672,000 shares of common stock and 672,000 warrants at the offering price of $4.50 per share. The 15% accrued interest and the 22.5% origination fee were waived as part of the conversion. The remaining, unconverted $336,000 of promissory notes were paid out of the proceeds of the Offering along with the accrued interest and origination fee attributable to those notes. No balance is due as of September 30, 2017 and December 31, 2016.
Due to Monster, Inc.
In addition to the issuance of shares of common stock and common stock purchase warrants, the Company agreed to pay Monster, Inc. $500,000 as consideration for use of the name Monster Digital, Inc. pursuant to Amendment No. 3 to the Trademark License Agreement between the Company and Monster, Inc. Of this total balance, the Company agreed to pay $125,000 in December 2015 and the balance from the proceeds of the planned IPO. The Company paid $50,000 of the $125,000 in December 2015 and the balance in January 2016. The remaining $375,000 was paid in September 2016.
Notes payable consists of the following (in thousands):
September 30, 2017 | December 31, 2016 | |||||||
Notes payable, convertible debt | $ | 38 | $ | 38 | ||||
Convertible notes payable, net of debt discount of $40 and net of issuance cost of $75 | 1,232 | — | ||||||
Total | $ | 1,270 | $ | 38 |
NOTE 5 — ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
September 30, 2017 | December 31, 2016 | |||||||
Royalties | $ | 375 | $ | 125 | ||||
Reserve for charges against sales | 196 | 334 | ||||||
Accrued purchase orders | 150 | 158 | ||||||
Deferred gain | 273 | — | ||||||
Due to customer for promotion credits | 59 | 445 | ||||||
Others | 453 | 724 | ||||||
Total | $ | 1,506 | $ | 1,786 |
NOTE 6 — STOCKHOLDERS’ EQUITY
Common Stock Purchase Warrants: In 2016, the Company issued warrants to acquire 3,755,100 shares of common stock, 2,025,000 issued further to the Offering and 1,405,007 issued in connection with the conversion of preferred stock and bridge loans upon closing of the Offering. In March and April 2016, the Company issued 171,000 warrants to purchase shares of common stock at $2.00 per share in connection with the issuance of restricted stock. In May 2017, 39,392 warrants to purchase common stock at $0.0052 were exercised, in a cashless exercise, in exchange for the net equivalent shares of common stock. In June 2016, 102,041 warrants to purchase shares of common stock at $2.00 per share were issued in connection with the conversion of debt to equity. In the three months ended September 30, 2017, 538,600 warrants to purchase shares of common stock at $2.00 per share were issued in connection with the issuance of convertible promissory notes. As of September 30, 2017 and December 31, 2016, warrants to purchase 4,421,676 and 3,991,015 shares of common stock, respectively, are outstanding. Unexercised warrants will expire from 2017 to 2025.
The Company filed Tender Offer Statements with the Securities and Exchange Commission on October 13, 2017, offering the Company’s warrant holders the opportunity to purchase one share of common stock for each warrant held at a price of $0.45. The consummation of the offer is dependent upon stockholder approval and said approval is presented as a proposal to stockholders in the Company’s definitive Proxy Statement filed with the Securities and Exchange Commission on October 12, 2017. The proceeds of the offer will be held in escrow pending the result of the shareholder vote. The offer expires on November 17, 2017.
Restricted Shares: In August 2015, the Company issued 84,170 shares of restricted common stock to the Company’s Chairman of the Board pursuant to a consulting agreement. The consulting agreement was effective in May 2015.
In August 2015, the Company issued 382,575 shares of restricted common stock in connection with the Trademark License Agreement with Monster, Inc. The fair value of the 382,575 shares approximating $2,103,000 were recorded as part of the Trademark in August 2015. In regards to the valuation of the Company’s common stock, the Board of Directors (“Board”) engaged an independent third party valuation of the Company.
In August 2016, the Company authorized the issuance of 40,000 shares of restricted common stock pursuant to a services agreement with an investment relations firm and recognized $7,000 and $21,000 of compensation expense related to restricted shares in the three and nine months ended September 30, 2017, respectively. In addition, the Company authorized the issuance of 125,000 shares of restricted common stock to Jawahar Tandon pursuant to a consulting agreement and recognized the full $563,000 of compensation expense related to the restricted shares during the year ended December 31, 2016.
In November 2016, the Company entered into a securities purchase agreement providing for the issuance and sale to an investor of 333,333 shares of our common stock. The shares issued in the Private Placement were sold at a purchase price per share of $1.50, for aggregate gross proceeds to us of approximately $500,000 and aggregate net proceeds to us, after deducting for placement agent fees and expenses, of approximately $446,000. The investor was issued an additional 80,000 shares in May 2017 in a non-cash transaction. The additional share issuance was intended to adjust the aggregate shares awarded to the investor in relation to future investment rounds that were transacted at $1.15 per share. Under the same Private Placement Memorandum, the Company issued 151,515 shares of restricted common stock to its Chairman of the Board at a purchase price of $1.65 per share for gross proceeds of $250,000 and net proceeds of approximately $226,000.
In March 2017, the Company issued 226,000 shares of common stock at $1.50 per share pursuant to a Private Placement Memorandum for aggregate gross proceeds of $339,000 and net proceeds, after deducting for commission and placement agent fees and expenses, of approximately $307,000. These shareholders were issued an additional 47,478 shares in July 2017 in a non-cash transaction to adjust the aggregate shares awarded to those investors in relation to a future investment round at $1.15. In April 2017, the Company issued an additional 116,000 shares at $1.15 for aggregate gross proceeds of $133,400 and net proceeds, after deducting for commission, of approximately $112,000.
On June 23, 2017, the Company issued 172,414 shares of common stock at $0.58 per share in exchange for a $100,000 promissory note dated June 7, 2017 due to GSB Holdings, Inc., a family owned company of David Clarke, the Company’s CEO and Chairman of the Board. The issuance price was $0.05 greater than the closing price of the Company’s common stock on the issuance date.
During the second quarter of 2017, the Company issued 87,500 fully vested shares of restricted common stock and recognized $56,150 of non-cash, stock-based compensation at the time of issuance. The Company issued 15,000 of the 87,500 shares for product marketing, 12,500 shares pursuant to an employee severance agreement, 25,000 additional shares to its investor relations firm and 35,000 shares as compensation for the activities of a special committee of its Board.
Also, during the second quarter of 2017, the Company issued 95,000 shares of restricted common stock to certain employees. During the three and nine months ended September 30, 2017, the Company recognized $8,000 and $14,000 of non-cash, stock-based compensation, respectively. Another $53,000 of stock-based compensation remains to be amortized over 19 months.
During the three months ended September 30, 2017, the Company issued 30,000 shares of restricted stock to the three independent members of its Board, recognizing $16,000 of non-cash, stock-based compensation with $16,000 remaining to be amortized over three months.
Preferred Stock: In March 2016, the Company issued a confidential Private Placement Memorandum (“PPM”) for a maximum of 3,000,000 shares of Series A Convertible Preferred Stock, with a purchase price of $1.00 per share and convertible into one share of the Company’s common stock and having an 8%, noncumulative dividend. Pursuant to the PPM, as of June 30, 2016, 2,802,430 shares of Series A Preferred Stock were subscribed for net proceeds of approximately $2.4 million. In July 2016, the Company completed the Offering in which all shares of Series A referred Stock was converted into 622,762 shares of common stock and 622,762 warrants at the public offering price of $4.50 per share and the issuance of 134,044 shares of common stock further to the conversion.
NOTE 7 — STOCK OPTIONS
In 2012, the Company’s Board approved the 2012 Omnibus Incentive Plan (the “Plan”) which allows for the granting of stock options, stock appreciation rights, awards of restricted stock and restricted stock Units, stock bonuses and other cash and stock-based performance awards. A total of 970,350 shares of common stock have been approved and reserved for issuance under the Plan, which includes a 600,000 share increase approved by the Company’s stockholders in May 2016. During the nine months ended September 30, 2017, no options were granted under the Plan. In addition, during the nine months ended September 30, 2017 and 2016, 46,100 and 51,512 options, respectively, were forfeited for employees who were no longer with the Company and were returned to the pool of available options. There were 150,049 and 778,949 shares of common stock available to grant as options or restricted stock at September 30, 2017 and December 31, 2016, respectively.
On December 23, 2015, the Company authorized restricted stock grants under its 2012 Omnibus Incentive Plan of 47,135 to two executives of the Company, the grants accepted and effective January 4, 2016. In August 2016, 33,688 shares were forfeited and returned to the option pool.
On the effective date of the Offering, 111,332 shares of restricted stock were granted to four executives of the Company. In January 2017, an additional 30,000 shares were granted to two of the same executives. Subsequent to the granting of the restricted stock, 101,332 shares were forfeited and returned to the option pool. Also concurrent to the Offering, 10,000 shares of restricted stock were granted to each of the Company’s four outside directors. In January 2017, an additional 5,000 shares were granted to three of the directors. Since 45,000 of these shares were issued during the quarter fully vested, the Company recognized $29,000 of stock-based compensation at grant. Also in January 2017, 175,000 shares of restricted stock were issued to the Company’s CEO fully vested and the Company recognized $266,000 of stock-based compensation at the time of the grant.
Also granted on the effective date of the Offering were previously approved options to acquire 86,502 common shares at an exercise price per share of $4.50 to four executives of the Company. Subsequent to the granting of the stock options, 69,668 options were forfeited and returned to the option pool.
In August 2016, pursuant to a services agreement and outside of the Plan, the Company granted options to acquire 38,143 shares of common stock to an investor relations firm.
The Company follows the provision of ASC Topic 718,Compensations – Stock Compensation which 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 grant date fair value estimated in accordance with the provisions of ASC 718 is generally recognized as an expense over the requisite service period.
In 2016, the following stock option grants were made:
Option Date | Options Granted | Exercise Price | Estimated Fair Value of Underlying Stock | Intrinsic Value | ||||||||||||
August 2016 | 6,004 | $ | 5.00 | $ | 3.00 | None | ||||||||||
August 2016 | 7,230 | $ | 7.00 | $ | 3.00 | None | ||||||||||
August 2016 | 9,986 | $ | 9.00 | $ | 3.00 | None | ||||||||||
August 2016 | 14,923 | $ | 11.00 | $ | 3.00 | None |
The Company utilizes the Black-Scholes valuation method to value stock options and recognizes compensation expense over the vesting period. The expected life represents the period that the Company’s stock-based compensation awards are expected to be outstanding. The Company uses a simplified method provided in Securities and Exchange Commission release Staff Accounting Bulletin No. 110 which averages an awards weighted average vesting period and contractual term for “plain vanilla” share options. The expected volatility was estimated by analyzing the historic volatility of similar public companies. No dividend payouts were assumed as the Company has not historically paid, and is not anticipating to pay, dividends in the foreseeable future. The risk-free rate of return reflects the weighted average interest rate offered for U.S. treasury rates over the expected life of the options.
A summary of significant assumptions used to estimate the fair value of the stock options granted in 2016 are as follows:
A summary of option activity for the Plan as of September 30, 2017 and changes for the nine months then ended are represented as follows:
Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contract Term (Years) | Aggregate Intrinsic Value | |||||||||||||
Options outstanding January 1, 2017 | 62,934 | $ | 4.50 | 9.50 | $ | — | ||||||||||
Granted | — | — | — | — | ||||||||||||
Forfeited | (46,100 | ) | — | — | — | |||||||||||
Outstanding at September 30, 2017 | 16,834 | $ | 4.50 | 8.75 | $ | — |
The following table summarizes restricted share activity for the nine months ended September 30, 2017:
Number of Shares | Weighted Average Grant Date Fair Value | |||||||
Outstanding January 1, 2017 | 128,467 | $ | 3.87 | |||||
Granted | 1,124,103 | 1.18 | ||||||
Vested | (622,570 | ) | 1.21 | |||||
Forfeited | (70,000 | ) | 3.06 | |||||
Outstanding at September 30, 2017 | 560,000 | $ | 1.46 |
The Company recorded non-cash stock-based compensation related to stock options and restricted stock of $189,000 and $848,000 during the three and nine months ended September 30, 2017, respectively. The Company recorded $943,000 non-cash stock-based compensation in the nine months ended September 30, 2016.
As of September 30, 2017, the total compensation expense related to unvested options and restricted stock not yet recognized totaled approximately $384,000. The weighted average vesting period over which the total compensation expense will be recorded related to unvested options and restricted stock not yet recognized at September 30, 2017 was approximately 10 months.
NOTE 8 — RELATED PARTY TRANSACTIONS
Borrowings: From time to time, the Company receives short-term, non-interest bearing loans from Tandon Enterprises, Inc. for the purpose of funding temporary working capital needs. For the nine months ended September 30, 2016, the Company borrowed $24,000, net of repayments. The $346,100 owed to Tandon Enterprises at June 30, 2016 was converted into 76,911 shares of common stock and warrants at the effective date of the Offering.
In September 2015, David Clarke, the Company’s Chairman of the Board and a significant stockholder of the Company, loaned the Company $100,000 further to a promissory note bearing interest at 5% per annum, principal and unpaid interest payable on demand. In addition, Mr. Clarke incurred expenses on behalf of the Company totaling approximately $50,000. Concurrent with the closing of the Offering, the loan and liability related to the expenses were converted into 33,333 shares of common stock and 33,333 warrants at the public offering price of $4.50.
On June 7, 2017, GSB Holdings, Inc., a family owned company of David Clarke, the Company’s CEO and Chairman of the Board, loaned the Company $100,000 further to a promissory note and issued 102,041 three-year warrants at an exercise price of $2.00 in lieu of interest. On June 23, 2017, the Company issued 172,414 shares of common stock at $0.58 per share in exchange for the promissory note. The issuance price was $0.05 greater than the closing price of the Company’s common stock on the issuance date.
Restricted Shares: In November 2016, the Company issued 151,515 shares of restricted common stock to its Chairman of the Board at a purchase price of $1.65 per share pursuant to a Private Placement Memorandum. In March 2017, the Company issued 70,000 shares of restricted stock to its Chairman of the Board at a purchase price of $1.50 per share pursuant to a Private Placement Memorandum.
NOTE 9 — INCOME TAXES
For the nine months ended September 30, 2017 and 2016, the income tax provision recorded was $0 and $2,000, respectively. The Company’s income tax provision generally consists of state income taxes currently paid or payable.
The ultimate realization of the deferred tax asset is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Due to the uncertainty surrounding the realization of these deferred tax assets, the Company has recorded a 100% valuation allowance. Net operating loss carryforwards expire between the years 2029 and 2036. Tax years ended December 31, 2016, 2015, 2014 and 2013 are open and subject to audit.
The effective income tax provision as a percentage of pre-tax loss differs from expected combined federal and state income tax of 40% as a result of the full valuation allowance.
Management is not aware of any uncertain tax positions and does not expect the total amount of recognized tax benefits to change significantly in the next twelve months.
NOTE 10 — CUSTOMER AND VENDOR CONCENTRATIONS
Approximately 20%, 15% and 14% of the Company’s gross sales were made to three customers for the nine months ended September 30, 2017. At September 30, 2017, the amount included in outstanding accounts receivable related to these customers was approximately $251,000. Approximately 42% of the Company’s gross sales were made to one customer for the nine months ended September 30, 2016.
Approximately 97% of the Company’s purchases were provided by three vendors for the nine months ended September 30, 2017. At September 30, 2017, the amount in accounts payable related to these vendors was approximately $6,000. Approximately 95% of the Company’s purchases were provided by three vendors for the nine months ended September 30, 2016.
NOTE 11 — COMMITMENTS AND CONTINGENCIES
Royalty
The Company entered into the initial trademark license agreement with Monster, Inc. (formerly Monster Cable Products, Inc.) effective July 7, 2010. In 2012, the agreement was amended giving the Company exclusive rights to utilize the name “Monster Digital” on memory products for a period of 25 years (expires July 7, 2035) under the following payment schedule of royalties to Monster, Inc. This license agreement contains various termination clauses that include (i) change in control, (ii) breach of contract and (iii) insolvency, among others. The Company is required to remit royalty payments to Monster, Inc. on or before the 30th day following the end of each calendar quarter. At any time during the term of the agreement, a permanent license may be negotiated.
The royalty schedule became effective in August 2011 and was further amended in April 2012. As amended, royalties under this contract are as follows:
Effective July 1, 2014, the royalty rate on certain products was reduced from 4% to 2% for a period of 12 months, based on a mutual understanding between the Company and the licensor.
For the three months ended September 30, 2017 and 2016, royalty expense amounted to approximately $125,000. For the nine months ended September 30, 2017 and 2016, royalty expense amounted to approximately $375,000 and $246,000, respectively, and is included as a component of selling and marketing expenses in the accompanying consolidated statements of operations. At September 30, 2017, $375,000 is due for royalties and the Company is not in compliance with the royalty payment schedule.
Operating Lease
The Company occupied executive offices in Simi Valley, CA pursuant to a lease through January 31, 2018. Effective as of March 31, 2017, the Company terminated the lease by mutually accepted and favorable terms with the lessor. Effective April 1, 2017, the Company entered into a one-year lease for warehouse space in Ontario, CA.
Customer Payment Agreement
In July 2015, the Company entered into an agreement with a customer under which the Company will pay the customer a total of $835,000 owed to the customer for promotional and other credits related to sales that occurred in 2014. The credits were accrued as contra-sales in 2014. Under the terms of the agreement, there is no interest and the Company will make 12 monthly payments of $65,000 beginning in August 2015, and one final payment of $65,000 in August 2016. The Company is not in compliance with the payment agreement and the balance owed is $57,000 at September 30, 2017.
In January 2017, the Company entered into an agreement with a customer under which the Company settled an amount due of $1.84 million for $1.5 million, recording a $341,000 deferred gain and recognizing a current period gain of $68,000. The settlement included an initial payment of $250,000 with the remaining balance to be paid in monthly installments through December 2018. The Company and the customer entered into an addendum to the agreement in September 2017 whereby the customer agreed to accept a one-time payment of $600,000. The funds for this payment are from an investor who was offered shares of common stock below market and, as such, are held in escrow pending shareholder approval as one of the proposals in the Company’s proxy. The addendum, and consequently the offer to accept this one-time payment, become null and void if payment is not released from escrow by November 30, 2017 at which time the original January 2017 settlement will remain in full force.
Legal Matters
The Company is subject to certain legal proceedings and claims arising in connection with the normal course of its business.
On February 16, 2016, the Company received a letter from GoPro, Inc., or GoPro, alleging that the Company infringes on at least five U.S. patents held by GoPro, and requesting that the Company confirms in writing that it will permanently cease the sale and distribution of its Villain camera, along with any camera accessories, including the waterproof camera case and standard housing. The five patents specifically identified by GoPro in the letter were U.S. Patent No. D710,921: camera housing design, U.S. Patent No. D702,747: camera housing design, U.S. Patent No. D740,875: camera housing design, U.S. Patent No. D737,879: camera design and U.S. Patent No. 721,935: camera design. Based upon our preliminary review of these patents, the Company believes it has some defenses to GoPro’s allegations, although there can be no assurance that the Company will be successfulable to obtain additional capital on terms acceptable to the Company, on a timely basis or at all. The failure to obtain sufficient additional funding could adversely affect the Company’s ability to achieve its business objectives and product development timelines and could have a material adverse effect on the Company’s results of operations.
The supplier$1.0 million to $2.5 million depending on net sales of the Company’s Villain camera has contractually representedproducts in a single calendar year, followed by royalty payments in the single digits based on net product sales.
Class Complaint
to the closing of the Lobesity Acquisition. As consideration for the assets purchased in the Lobesity Acquisition (including but not limited to the MHS License), the Company is obligated to pay Lobesity (i) potential worldwide regulatory and clinical milestone payments totaling $45.5 million for a single indication (with the total amount payable, if multiple indications are developed, not to exceed $58.0 million), (ii) up to $50.0 million in global sales-related milestone payments, and (iii) subject to certain adjustments, a mid-single digit royalty on worldwide net sales.
June 30, | December 31, | ||||||||||
2022 (Unaudited) | 2021 | ||||||||||
Outstanding stock options | 29,175,989 | 20,894,767 | |||||||||
Warrants to purchase common stock | 23,044,062 | 23,044,062 | |||||||||
For possible future issuance under the 2022 Plan | 11,287,455 | 5,478,787 | |||||||||
Total common shares reserved for future issuance | 63,507,506 | 49,417,616 | |||||||||
Number of Options | Weighted-Average Exercise Price | Aggregate Intrinsic Value | Weighted-Average Remaining Contractual Life (in years) | |||||||||||||||||||||||
Outstanding at December 31, 2021 | 5,300,518 | $ | 1.69 | $ | 837,459 | 2.7 | ||||||||||||||||||||
Options granted | — | — | ||||||||||||||||||||||||
Options forfeited | (1,708,270) | 2.09 | ||||||||||||||||||||||||
Options exercised | — | — | ||||||||||||||||||||||||
Outstanding at June 30, 2022 | 3,592,248 | 1.49 | — | 3.2 | ||||||||||||||||||||||
Exercisable at June 30, 2022 | 3,592,248 | 1.49 | — | 3.2 | ||||||||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
Expected dividend yield | 0% | 0% | 0% | 0% | ||||||||||||||||||||||
Expected stock-price volatility | —% | 75% - 76% | 79% | 68% - 85% | ||||||||||||||||||||||
Risk-free interest rate | —% - —% | 0.8% - 1.1% | 1.4% - 1.9% | 0.1% - 1.1% | ||||||||||||||||||||||
Expected term of options (in years) | 0 | 2.3 - 6.1 years | 6.1 years | 2.3 - 6.1 years |
Number of Options | Weighted-Average Exercise Price | Aggregate Intrinsic Value | Weighted-Average Remaining Contractual Life (in years) | |||||||||||||||||||||||
Outstanding at December 31, 2021 | 14,608,442 | $ | 1.19 | $ | 2,296,720 | 8.5 | ||||||||||||||||||||
Options granted | 9,412,420 | 0.74 | ||||||||||||||||||||||||
Options forfeited | (135,473) | 0.75 | ||||||||||||||||||||||||
Options exercised | — | — | ||||||||||||||||||||||||
Outstanding at June 30, 2022 | 23,885,389 | 1.01 | — | 8.7 | ||||||||||||||||||||||
Exercisable at June 30, 2022 | 9,208,688 | 1.20 | — | 7.8 | ||||||||||||||||||||||
Vested and expected to vest at June 30, 2022 | 22,774,801 | $ | 1.02 | $ | — | 8.6 |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
Expected dividend yield | 0% | — | 0% | — | ||||||||||||||||||||||
Expected stock-price volatility | 79% | — | 79% | — | ||||||||||||||||||||||
Risk-free interest rate | 3.2% | — | 3.2% | — | ||||||||||||||||||||||
Expected term of options (in years) | 5.8 years | — | 5.8 years | — |
Number of Options | Weighted-Average Exercise Price | Aggregate Intrinsic Value | Weighted-Average Remaining Contractual Life (in years) | |||||||||||||||||||||||
Outstanding at December 31, 2021 | — | $ | — | $ | — | — | ||||||||||||||||||||
Options granted | 712,545 | 0.26 | ||||||||||||||||||||||||
Options forfeited | — | — | ||||||||||||||||||||||||
Options exercised | — | — | ||||||||||||||||||||||||
Outstanding at June 30, 2022 | 712,545 | 0.26 | — | 10.0 | ||||||||||||||||||||||
Exercisable at June 30, 2022 | — | — | — | — | ||||||||||||||||||||||
Vested and expected to vest at June 30, 2022 | 659,601 | $ | 0.26 | $ | — | 10.0 |
Number of Shares | Weighted-Average Exercise Price | Aggregate Intrinsic Value | Weighted-Average Remaining Contractual Life (in years) | |||||||||||||||||||||||
Outstanding at December 31, 2021 | 985,807 | $ | 0.63 | $ | 343,486 | 3.3 | ||||||||||||||||||||
Options granted | — | — | ||||||||||||||||||||||||
Options forfeited | — | — | ||||||||||||||||||||||||
Options exercised | — | — | ||||||||||||||||||||||||
Outstanding at June 30, 2022 | 985,807 | 0.63 | 37,416 | 2.8 | ||||||||||||||||||||||
Exercisable at June 30, 2022 | 985,807 | 0.63 | 37,416 | 2.8 | ||||||||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
Research and development | $ | 248,000 | $ | 280,000 | $ | 426,000 | $ | 442,000 | ||||||||||||||||||
General and administrative | 1,526,000 | 657,000 | 2,038,000 | 917,000 | ||||||||||||||||||||||
Total share-based compensation | $ | 1,774,000 | $ | 937,000 | $ | 2,464,000 | $ | 1,359,000 | ||||||||||||||||||
The Class Complaint seeks class status on behalfaccelerated vesting of all of his unvested options and restricted stock unit awards.
Year ending December 31, | Operating Leases | ||||
2022 | $ | 36,000 | |||
2023 | 72,000 | ||||
2024 | 54,000 | ||||
Total lease payment | 162,000 | ||||
Less: imputed interest | (20,643) | ||||
Total | $ | 141,357 |
Although the ultimate outcomedate of this matter cannot be determined with certainty, the Company believes that the allegations stated in the Class Complaint are without meritQuarterly Report on Form 10-Q, and the Company and the Individual Defendants intendwe assume no obligation to defend themselves vigorously against such allegations and claims.
Management’s Discussion and Analysis of Financial Condition and Results of Operations additional number of patients needed to reach a significant clinical outcome between placebo and larazotide would be too large to support trial continuation. The 2021, respectively. We expect to continue to incur operations. financial condition.ITEMMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.interimconsolidated financial statements and the related notes to those financial statements appearingthereto included elsewhere in this Report.CertainQuarterly Report on Form 10-Q and our audited financial statements in this Report constitute forward-looking statements. These forward-looking statements include statements, which involve risks and uncertainties, regarding, among other things, (a) our projected sales, profitability, and cash flows, (b) our growth strategy, (c) anticipated trendsrelated notes thereto for the year ended December 31, 2021, included in our industry, (d) our future financing plans,Annual Report on Form 10-K, filed with the SEC on March 23, 2022.(e) our anticipated needs for, and use of, working capital. They are generally identifiable by usedebilitating disorders in which the biology of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plan,” “potential,” “project,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend,” gut is a contributing factor. We are developing vurolenatide, a proprietary Phase 2 long-acting GLP-1 agonist, for SBS; larazotide, a tight junction regulator for multi-system inflammatory syndrome in children; and a robust pipeline of early-stage candidates for undisclosed rare diseases and/or unmet needs. Our current product development pipeline is described in the negativetable below:wordswere key secondary objectives in the trial. The primary purpose of this open-label Phase 1b/2a trial was to assess the compound’s safety and potential efficacy to inform future development.other variationsSF-36, is a set of generic, coherent and easily administered quality-of-life measures. These measures rely upon patient self-reporting and are now widely utilized by managed care organizations and by Medicare for routine monitoring and assessment of care outcomes in adult patients.wordsresults, we have identified the most effective and tolerable dose and dosing interval intended to progress into the Phase 3 study. The study is ongoing and remains blinded to study staff, patients and investigators.comparable terminology. diagnose rare diseases affecting fewer than 200,000 people in the U.S. Under the Orphan Drug Act, orphan designation qualifies drug sponsors for development incentives conferred by the FDA, including tax credits for qualified clinical testing.light2019, we initiated a Phase 3 clinical trial (“CeDLara”) for our drug candidate, larazotide in CeD. In June 2022, we announced completion of these risks and uncertainties, there can be no assurancea pre-specified interim analysis for the Phase 3 CeDLara study for patients with CeD who continue to experience gastrointestinal symptoms while adhering to a gluten-free diet. The interim analysis was conducted by an independent statistician, with the sole purpose of re-estimating the treatment group size required to detect a statistically significant clinical effect of larazotide, utilizing patient data from the study.forward-looking statements contained in this filing will in fact occur. You should not place undue reliance on these forward-looking statements.forward-looking statements speak only asinterim analysis included the first approximately 50% of the date on which they are madeinitial target enrollment and exceptfollowed the completion of the 12-week double-blind efficacy portion of the study. Following thorough analysis of the interim data, we decided to discontinue further development of larazotide in celiac disease. The study of larazotide for the treatment of MIS-C is not affected by this decision. Resources dedicated to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events.The “Company”, “we,” “us,” and “our,” refer to Monster Digital, Inc. and its wholly-owned subsidiary SDJ Technologies, Inc.OverviewGeneralOur primary business focus is the design, development and marketing of premium products under the “Monster Digital” brand for use in high-performance computing and consumer and mobile product applications. We have invested significantly in building a broad distribution channel for the sale of products bearing the “Monster Digital” brand. Our current focus is to leverage our distribution network through cooperating with Monster, Inc. to identify and market additional specialty and consumer electronics products. Our primary product offering is a line of action sports cameras used in adventure sport, adventure photography and extreme-action videography.Our license with Monster, Inc. allows us to manufacture and sell certain high-end products, utilizing the Monster premium brand name which is highly recognized by consumers for its high quality audio-video products. We work with our subcontract manufacturers and suppliers to offer new and enhanced products that use existing technology and adopt new technologies to satisfy existing and emerging consumer demands and preferences. On the marketing side, we partner with Monster, Inc.larazotide celiac program will be reallocated to support the sales and marketingvurolenatide Phase 3these products onlarazotide where the mechanism of action may be applicable.global basis. Historically, memory has beencollaboration with the most significant partEuropean Biomedical Research Institute of our business and itSalerno, Italy (“EBRIS”) to study larazotide for the treatment of MIS-C. MIS-C is a commodityrare and serious complication of COVID-19 with symptoms that tends to be subject to price erosion. Usingresemble those of Kawasaki disease, potentially including persistent fever, gastrointestinal symptoms, myocardial dysfunction, and cardiogenic shock with ventricular dysfunction in the Monster branding to quickly introduce new technologiessetting of multisystem inflammation. MIS-C occurs when SARS-CoV-2 superantigens move through the tight junctions between the gut epithelial cells into the bloodstream, leading to the market is designedhyperinflammatory immune response. We believe that larazotide’s mechanism of action as a tight junction regulator may prevent SARS-CoV-2 superantigens from entering the bloodstream. Following receipt of a Study May Proceed letter from the FDA under a recently filed Investigator IND, EBRIS initiated a Phase 2a study in MIS-C in the fourth quarter of 2021 to bring aboutevaluate the introductionuse of products that are not subject to the same levellarazotide in a group of downward pressure on pricing as is common with memory products. In addition, we intend to expand and continue to invest in our international operations, which we believe will be an important factor in our continued growth.On July 3, 2017, our Company entered into an Agreement and Plan of Merger with Innovate Biopharmaceuticals, Inc. (“Innovate”). The Merger Agreement is filed as Exhibit 2.1 to the Company’s Form 8K filed with the Securities and Exchange Commission on July 6, 2017 (the “Merger Agreement”) and this discussion regarding the potential merger (the “Merger”) should be read in conjunction with the Merger Agreement.children through a randomized placebo-controlled trial at MassGeneral Hospital for Children led by pediatric pulmonologist Lael Yonker, M.D. Under the terms of the Merger Agreement, pending stockholder approvalcollaboration agreement, we will supply larazotide for the purposes of the transaction,clinical study and EBRIS is responsible for conducting the Company will mergePhase 2a trial inclusive of all associated clinical costs.Innovatesystemic circulation. We recently announced a collaboration with Innovate survivingGustav Roussy, a leading cancer center in Villejuif, France, using NM-102. This collaboration adds to an initial 14-month preclinical research project initiated in March 2019, which focused on the Mergerrelationship between intestinal microbiome composition and becomingsystemic responses to cancer treatments such as chemotherapy and immune checkpoint inhibitors.wholly-owned subsidiaryproprietary and highly specific humanized monoclonal antibody, now known as NM-136, that targets glucose-dependent insulinotropic polypeptide (“GIP”), as well as the related intellectual property (the "Lobesity Acquisition"). GIP is a hormone found in the upper small intestine that is released into circulation after food is ingested, and when found in high concentrations, can contribute to obesity and obesity-related disorders such as Prader-Willi Syndrome. NM-136 has been shown to prevent GIP from binding to its receptor, which in preclinical obesity models has been shown to significantly decrease weight and abdominal fat by reducing nutrient absorption from the intestine as well as nutrient storage without affecting appetite. We have initiated antibody profiling to support a preclinical development program.Company. Subject to the termsform of the Merger Agreement, at the effective timea $5 million upfront payment, as 40% cash and 60% equity (consisting of the Merger, Innovate stockholders will receive a number of newly issued2,417,211 shares of the Company’sunregistered common stock determined using an exchange ratio defined in the Merger Agreement. The exchange ratio will be based on a pre-transaction valuation of $60 million for Innovate’s business and $6 million for the Company’s business. As a result, current stockholders of the Company would collectively own approximately 9% and Innovate stockholders would collectively own approximately 91% of the combined company on a pro-forma basis, subject to adjustment based on the Company’s net cash balance and the relative capitalization of the two companiespriced at closing, as described more fully in the Merger Agreement. Following the Merger, stockholders of Innovate will become the majority owners of the Company.On September 27, 2017, Monster Digital, Inc. transferred all of its businesses and assets, including all shares of SDJ Technologies, Inc., and those liabilities of the Company not assumed by Innovate further to the Merger to MD Holding Co. Inc., a wholly owned subsidiary. If approved by the stockholders of the Company, the shares of MD Holding Co., Inc. will be spun off pro rata to holders of the Company’s common stockour 3-day volume weighted-price immediately prior to the Merger (the “Spin-Off”).The Company filedclosing), plus the right to contingent payments including certain potential worldwide regulatory and clinical milestone payments totaling $45.5 million for a definitive Schedule 14A, Information Requiredsingle indication (with the total amount payable, if multiple indications are developed, not to exceed $58.0 million), global sales-related milestone payments totaling up to $50.0 million, and, subject to certain adjustments, a mid-single digit royalty on worldwide net sales.a Proxy Statementeach year since inception. Substantially all of our operating losses resulted from expenses incurred in connection with our research and development programs and from general and administrative costs associated with our operations. To date, we have financed our operations primarily through public offerings of equity securities and private placements of convertible debt and equity securities.Securitiesthree months ended June 30, 2022 and Exchange Commission on October 12, 2017 in order to obtain2021, respectively, and $22.5 million and $13.7 million during the required stockholder approval for the Mergersix months ended June 30, 2022 and the Spin-Off, as well as other related matters. There can be no assurance that such stockholder approval will be attained or that, if such stockholder approval is attained, the Merger or Spin-Off will be completed.operating losses and negative cash flows from operations in the near future and will require additional capital resources to execute strategic initiatives that include the Merger and the Spin-Off.Net salesThe principal factors that have affected or could affect our net sales from period to period are:The condition of the economy in general and of the memory storage products industry in particular,Our customers’ adjustments in their order levels,Changes in our pricing policies or the pricing policies of our competitors or suppliers,The addition or termination of key supplier relationships,The rate of introduction and acceptance by our customers of new products,Our ability to compete effectively with our current and future competitors,Our ability to enter into and renew key corporate and strategic relationships with our customers, vendors and strategic alliances,Changes in foreign currency exchange rates,A major disruption of our information technology infrastructure,Unforeseen catastrophic events, such as armed conflict, terrorism, fires, typhoons and earthquakes, andAny other disruptions, such as labor shortages, unplanned maintenance or other manufacturing problems.Cost of goods soldCost of goods sold primarily includes the cost of products that we purchase from third party manufacturers and sell to our customers. Additional packaging and assembly (labor) costs for certain product orders is also a component of costs of goods sold. Cost of goods sold is also affected by inventory obsolescence if our inventory management is not effective or efficient. We mitigate the risk of inventory obsolescence by stocking relatively small amounts of inventory at any given time, and relying instead on a strategy of manufacturing or acquiring products based on orders placed by our customers.General and administrative expensesGeneral and administrative expenses relate primarily to compensation and associated expenses for personnel in general management, information technology, human resources, procurement, planning and finance, as well as outside legal, investor relations, accounting, consulting and other operating expenses.Selling and marketing expensesSelling and marketing expenses relate primarily to salary and other compensation and associated expenses for internal sales and customer relations personnel, advertising, outbound shipping and freight costs, tradeshows, royalties under a brand license, and selling commissions.Research and development expensesResearch and development expenses consist of compensation and associated costs of employees engaged in research and development projects, as well as materials and equipment used for these projects, and third party compensation for research and development services. We do not engage in any long-term research and development contracts, and all research and development costs are expensed as incurred.Other expensesInterest and finance expense includes interest paid or payable to a finance company for outstanding borrowings, bank fees, purchase order finance fees, interest accrued on convertible debt, amortization of a debt discount that arose as a result of the issuance of warrants with convertible debt, and amortization of debt issuance costs. Debt conversion expense is a non-cash charge for the effect of an induced conversion of debt to equity.Three Months ended September 30, 2017 Compared to Three Months ended September 30, 2016Results of OperationsThe following discussion explains in greater detail our consolidated operating results and financial condition. This discussion should be read in conjunction with the consolidated financial statements and notes herein. Three months ended
September 30, 2017 2016 (in thousands) Net sales $ 138 $ 779 Net sales for the three months ended September 30, 2017 decreased approximately 82% to $138,000 from $779,000 for the three months ended September 30, 2016. We began to rapidly transition away from memory product sales beginning in the third quarter of 2016. In the three months ended September 30, 2017, gross sales of memory product totaled approximately $4,000. In the three months ended September 30, 2016, gross sales of memory product totaled approximately $487,000. In addition, working capital constraints continue to limit our ability to build traction with our action sports camera line. Three months ended
September 30, 2017 2016 (in thousands except percentages) Cost of goods sold $ 208 $ 687 Gross profit (loss) $ (70 ) $ 92 Gross profit margin (50.7 )% 11.8 % Cost of goods decreased approximately 70%, which was less than the decrease in sales. As a percent of net sales, cost of goods sold was 150.7% in the three months ended September 30, 2017 as compared to 88.2% for the three months ended September 30, 2016. Gross profit (loss) in the three months ended September 30, 2017 decreased to ($70,000) from $92,000 in the three months ended September 30, 2016. Gross profit (loss) as a percentage of net sales was (50.7%) in the three months ended September 30, 2017, compared to 11.8% in the three months ended September 30, 2016. In general, gross profit as a percentage of net sales is a result of a combination of factors, including product mix, customer mix, and specific pricing decisions. These factors can affect a significant change in gross profit as a percentage of net sales from one period to the next, particularly when sales are relatively low. Specific to the current quarter ended September 30, 2017, we right-priced our product to be more competitive in the action sports camera space, selling at a lower margin, throughout 2017 and, in some cases, have sold hard to move product at cost or below cost. In addition, semi variable and fixed indirect costs became a higher percentage of sales at this significantly lower sales volume. Three months ended
September 30, 2017 2016 (in thousands) Selling and marketing $ 259 $ 550 General and administrative $ 1,124 $ 1,852 Sales and marketing for the three months ended September 30, 2017 decreased approximately 53%, to $259,000, compared to $550,000 for the three months ended September 30, 2016. The decrease in sales and marketing expense was significantly attributable to a decrease in sales department headcount and to the decrease in costs that vary directly with sales.General and administrative expenses for the three months ended September 30, 2017 decreased by approximately 39% to $1.1 million compared to $1.9 million in the three months ended September 30, 2016. There were significant decreases in compensation related expenses and consulting expense. In addition, during the three months ended September 30, 2017, we recorded non-cash, stock-based compensation of $189,000 as compared to $829,000 in the three months ended September 30, 2016. These decreases were offset by an increase in legal expense related primarily to the proposed merger. Three months ended
September 30, 2017 2016 (in thousands) Research and development (“R&D”) $ 19 $ 54 R&D for the three months ended September 30, 2017 decreased approximately 65% to $19,000, compared to $54,000 for the three months ended September 30, 2016. The decrease is most significantly related to the reduction in compensation expense that took effect in June 2017. With respect to our products, the basic functional technology we use has changed very little over time, therefore, our R&D spending has primarily related to enhancing existing functionality, introducing new functions within existing products, and designing and engineering new products largely with existing proven technology. Though we are in the process of product redesign, we do not expect that R&D costs as a percentage of sales will be significant for the foreseeable future. Three months ended
September, 2017 2016 (in thousands) Interest and finance expense $ 36 $ 25 Gain on conversion of debt $ - $ (557 ) Interest expense for the three months ended September 30, 2017 is primarily related to convertible promissory notes issued from June to September 2017. Interest expense in 2016 was primarily related to our accounts receivable factoring facility which is being utilized sparingly. In the three months ended September 30, 2016, a $557,000 gain on debt conversion resulted from bridge loan accrued interest and deferred financing costs converted to common stock as part of our public offering. Three months ended
September 30, 2017 2016 (in thousands) Income tax provision $ - $ 2 Income tax expense generally consists of state income taxes due or paid in the states in which we operate. We have not recognized a deferred tax benefit for the operating losses generated during the periods due to the uncertainty that we will generate taxable income in the future that will allow us to utilize the benefit.Nine Months ended September 30, 2017 Compared to Nine Months ended September 30, 2016Results of OperationsThe following discussion explains in greater detail our consolidated operating results and financial condition. This discussion should be read in conjunction with the consolidated financial statements and notes herein. Nine months ended
September 30, 2017 2016 (in thousands) Net sales $ 1,277 $ 2,999 Net sales for the nine months ended September 30, 2017 decreased approximately 57% to $1.3 million from $3.0 million for the nine months ended September 30, 2016. We began to rapidly transition away from memory product sales beginning in the third quarter of 2016. In the nine months ended September 30, 2017, gross sales of memory product totaled approximately $154,000. In the nine months ended September 30, 2016, gross sales of memory product totaled approximately $2.2 million. In addition, working capital constraints continue to limit our ability to build traction with our action sports camera line. Nine months ended
September 30, 2017 2016 (in thousands except percentages) Cost of goods sold $ 1,432 $ 2,430 Gross profit (loss) $ (155 ) $ 569 Gross profit margin (12.1 )% 19.05 % Cost of goods sold decreased approximately $1.0 million for the nine months ended September 30, 2017 to $1.4 million, compared to $2.4 million for the nine months ended September 30, 2016. As a percent of net sales, cost of goods sold increased to 112.1% in the nine months ended September 30, 2017 from 81.0% for the nine months ended September 30, 2016. Gross profit (loss) in the nine months ended September 30, 2017 decreased to $(155,000) from $569,000 in the nine months ended September 30, 2016. Gross profit (loss) as a percentage of net sales was (12.1%) in the nine months ended September 30, 2017, compared to 19.0% in the nine months ended September 30, 2016. In general, gross profit as a percentage of net sales is a result of a combination of factors, including product mix, customer mix, and specific pricing decisions. These factors can affect a significant change in gross profit as a percentage of net sales from one period to the next, particularly when sales are relatively low. Specific to the current nine months ended September 30, 2017, we right-priced our product to be more competitive in the action sports camera space, selling at lower margins throughout 2017 and, in some cases, have sold hard to move product at cost or below cost. Nine months ended
September 30, 2017 2016 (in thousands) Selling and marketing $ 1,286 $ 1,777 General and administrative $ 3,807 $ 3,322 Sales and marketing for the nine months ended September 30, 2017 decreased approximately 28%, to $1.3 million, compared to $1.8 million for the nine months ended September 30, 2016. The decrease in sales and marketing expense was significantly attributable to the decrease in headcount in our sales department as well as a decrease in expenses that vary directly with sales.General and administrative expenses for the nine months ended September 30, 2017 increased by approximately 15% to $3.8 million compared to $3.3 million in the nine months ended September 30, 2016. There were increases in cost related to being a public company that included increases in non-cash, stock-based compensation, professional services and the new cost of directors’ and officers’ insurance. These increases were partially offset by decreases in headcount that took effect in the second and third quarters of 2017. Nine months ended
September 30, 2017 2016 (in thousands) Research and development (“R&D”) $ 170 $ 168 R&D for the nine months ended September 30, 2017 was relatively flat as compared to the nine months ended September 30, 2016. Though there were costs related to new product design in 2017, there have also been reductions in compensation taking effect in the second and third quarters of 2017. With respect to our products, the basic functional technology we use has changed very little over time, therefore, our R&D spending has primarily related to enhancing existing functionality, introducing new functions within existing products, and designing and engineering new products largely with existing proven technology. Though we are in the process of product redesign, we do not expect that R&D costs as a percentage of sales will be significant for the foreseeable future. Nine months ended
September 30, 2017 2016 (in thousands) Interest and finance expense $ 37 $ 812 Gain on conversion of debt — (557 ) Gain on settlement of customer refund $ (68 ) $ — Interest expense for the nine months ended September 30, 2017 is primarily related to convertible promissory notes issued from June to September 2017. For the nine months ended September 30, 2016 we incurred approximately $740,000 in amortization of debt discount and deferred financing costs related to bridge loan financing. Also during that period, we incurred interest expense related to accounts receivable factoring that has been used sparingly during the nine months ended September 30, 2017. In the nine months ended September 30, 2016, a $557,000 gain on debt conversion resulted from bridge loan accrued interest and deferred financing costs converted to common stock as part of our public offering. In the nine months ended September 30, 2017, a $68,000 gain on settlement of customer refund is the amortization of a $340,000 deferred gain that resulted from a settlement agreement on a customer refund from fiscal 2012. Nine months ended
September 30, 2017 2016 (in thousands) Income tax provision $ — $ 2 No income tax expense was recognized in the nine-month periods ended September 30, 2017 and 2016. We have not recognized a deferred tax benefit for the operating losses generated during the periods due to the uncertainty that we will generate taxable income in the future that will allow us to utilize the benefit.Financial ConditionLiquidity and Capital ResourcesOur primary sources of liquidity throughout the nine months ended September 30, 2017 and 2016 have been our initial public offering, cash raised in private placements of common stock and convertible debt and accounts receivable financing.In June 2015, we secured an accounts receivable financing facility with Bay View Funding. The contract provides for maximum funding of $4.0 million and a factoring fee of 1.35% for the first 30 days and .45% for each 10-day period thereafter that the financed receivable remains outstanding. As of September 30, 2017, the balance owed on this facility was $107,000. The facility automatically renews annually at year-end unless terminated with 30 days notice.On July 13, 2016, we closed an initial public offering and received net proceeds of $8,151,000.In November 2016, we issued 484,848 shares of common stock in a Private Placement receiving net proceeds of approximately $672,000.In March and April 2017, the Company issued additional shares pursuant to a Private Placement Memorandum, issuing 342,000 shares receiving net proceeds of approximately $419,000. From May through September 2017, the Company issued convertible promissory notes for total gross proceeds of $1,346,500.On July 24, 2017, the Company entered into a Private Placement Engagement Agreement with WestPark Capital, Inc. for the purpose of raising up to $1,150,000 in convertible debt. An aggregate of $540,000 in convertible debt raised in June and July 2017 prior to the consummation of the WestPark Capital, Inc. agreement are under the same terms. The Promissory Notes bear interest at 15% and are convertible to common stock concurrent with a potential merger (see Note 3) at the lesser of $0.75 per share or 75% of the average market value of the Company’s common stock for the five days preceding the consummation of such Merger. Otherwise, the Notes become due March 31, 2019. For every $2.50 in Note principal purchased, investors receive one warrant, exercisable for five years, to purchase shares of common stock at $2.00. The Company has raised $1,346,500 pursuant to this agreement and, as of September 30, 2017, a total of $1,346,500 in principal of the convertible Notes remains outstanding. As of September 30, 2017 and December 31, 2016, a total of $38,000 in principal of convertible Notes payable that matured in the second quarter of 2015 remains outstanding.Discussion of Cash Flows Nine months ended September 30, 2017 2016 Change (in thousands) Net cash used in operating activities $ (3,177 ) $ (6,237 ) $ 3,060 Net cash used in investing activities — — — Net cash provided by financing activities 1,898 9,088 (7,190 ) Net increase (decrease) in cash $ (1,279 ) $ 2,851 $ (4,130 ) Operating ActivitiesNet cash used in operating activities in the nine months ended September 30, 2017 was approximately $3.2 million, due primarily to the net loss of $5.4 million. The loss as a use of cash was partially offset by using existing inventory for sales during the quarter, by collections of accounts receivable related to first and second quarter sales and by a $356,000 increase in accounts payable. One other significant use of cash was a net $504,000 reduction in amounts due to customers. Net cash used in operating activities in the nine months ended September 30, 2016 was approximately $6.2 million, due primarily to the net loss of $5.0 million. Other uses of cash included an increase in accounts receivable of $437,000 and an increase in inventory of approximately $1.2 million. These uses of cash were partially offset by certain non-cash expense items that included $740,000 of amortization of deferred debt issuance costs and debt discount and $943,000 of non-cash, stock-based compensation.Investing ActivitiesOur current operating structure does not depend upon a significant investment in capital equipment or operating facilities. Substantially all of our manufacturing is conducted offshore by third party manufacturers. Our warehouse is leased under a one-year operating lease. For the nine months ended September 30, 2017 and 2016, we used no cash in investing activities.Financing ActivitiesNet cash provided by financing activities for the nine months ended September 30, 2017 was approximately $1.9 million and was primarily attributable to issuance of common stock pursuant to a private placement memorandum and the issuance of convertible promissory notes. Net cash provided by financing activities for the nine months ended September 30, 2017 was approximately $9.1 million and was primarily attributable to our initial public offering as well as proceeds from bridge loan financing and preferred stock issuances during the first nine months of 2016.Debt InstrumentsAs of September 30, 2017, debt instruments include two convertible notes payable with a total principal amount of $38,000 due in 2015 that remain unpaid and $1,346,500 in convertible promissory notes.Operating and Capital Expenditure RequirementsWe have not achieved profitability since our inception and we expect to continue to incur net losses for the foreseeable future.future, which may fluctuate significantly between periods. We expectanticipate that our cash expendituresexpenses will increase substantially as and to increasethe extent we:near term asCOVID-19 pandemic;fundobtain regulatory approval;future growth. As a publicly traded company weintellectual property rights;significantadditional legal, accounting, regulatory, tax-related and other expenses that we were not required to incuroperate as a privatepublic company. In addition, the Sarbanes-Oxley Act, as well as rules adopted by the Securities and Exchange Commission, or SEC, and the Nasdaq Stock Market, requires public companies to implement specified corporate governance practices that we expect will increase our legal and financial compliance costs and will make some activities more time-consuming and costly.Our current cash balance is not sufficient to fund the operation for the remainder of 2017.believe that there is substantial doubt about our Company’s ability to continue as a going concern. We will need to raise substantial additional financing in the futurefunding to support our operating activities. Adequate funding may not be available to us on acceptable terms, or at all. We currently anticipate that we will seek to fund our operations. In order to meet these additional cash requirements, we will need to sell additional equity or convertible securities that will result in dilution to our stockholders. If we raise additional fundsoperations through the issuance of convertible securities, these securities could have rights senior to those of our common stock and could contain covenants that restrict our operations. There can be no assurance that we will be able to obtain additional equity or debt financingfinancings, strategic alliances or licensing arrangements, or other sources of financing. Our failure to obtain sufficient funds on acceptable terms acceptablecould have a material adverse effect on our business, results of operations and financial condition.us, if at all. If we raise additional funds through collaborationdelay the expected development timelines and licensing agreementsmay increase the anticipated aggregate costs for our product candidates. Impacts from the COVID-19 pandemic include, but are not limited to, disruptions in the supply chain for clinical supplies, delays in the timing and pace of participant enrollment in clinical trials and lower than anticipated participant enrollment and completion rates due to COVID-19 clinical site closures, delays in the review and approval of our regulatory submissions by the FDA and other agencies with third parties, it may be necessary to relinquish valuable rightsrespect to our product candidates, technologies or future revenue streams orand other unforeseen disruptions. Site activation and patient enrollment have been impacted by the COVID-19 pandemic and could continue to grant licenses on terms that may not be favorable to us. For additional risks associatedimpacted by the pandemic over the next several months and potentially longer. We are working closely with our substantial capital requirement, please see “Risk Factors” in our annual report on Form 10-K filed with the Securitiesclinical trial sites and Exchange Commission on March 31, 2017.We have entered into an agreementproduct candidate manufacturers to ensure that is intended to culminate in a merger as well as a spin-offpatient safety and clinical supply of our camera business (see Note 3product candidates are not adversely impacted by the pandemic, while also attempting to progress our trials and product candidate development as much as we can. In response to the COVID-19 pandemic, we put in place several safety measures for our employees, patients, healthcare providers and suppliers. These measures included, but were not limited to, substantially restricting travel, limiting access to our corporate office, including allowing employees to work remotely, providing personal protective equipment to employees, investigator sites and third-party vendors, implementing social distancing protocols, and coordinating safety protocols with our investigator sites.Consolidated Financial Statements). This potential transaction is expectedpandemic in the regions with clinical trial sites, the timing and availability of the COVID-19 vaccines and length and severity of travel restrictions and other limitations ordered by governmental agencies. New and potentially more contagious variants, could further affect the impact of the COVID-19 pandemic on our operations.result in a surviving entity that would be better capitalized. The transaction requires stockholder approvalraise capital when needed or on acceptable terms to fund our development programs and there can be no assurance that shareholder approval will be obtained or that, if approved by stockholders, the proposed transaction will be completed.Off-Balance Sheet Arrangementsany off-balance sheet arrangements, as defined by applicable SEC rulesa material adverse impact on our business and regulations.CRITICAL ACCOUNTING POLICIES AND ESTIMATESin conformity with U.S. GAAP requires that managementus 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 condensed consolidated financial statements, andas well as the reported amounts of net sales and expenses incurred during the reporting period. On an on-going basis, we evaluate ourperiods. Our estimates which are based uponon our historical experiences, market trendsexperience and financial forecasts and projections, and uponon various other assumptions that management believes to bewe believe are reasonable under the circumstances, atthe results of which form the basis for making judgments about the carrying value of assets and liabilities that certain pointare not readily apparent from other sources. Changes in time.estimates are reflected in reported results for the period in which they become known. Actual results may differ significantly at times,materially from these estimates under different assumptions or conditions.
We believe
Revenue recognition
Net sales (revenue) are recognized when there is persuasive evidence that an arrangement exists, when delivery has occurred, when2021:
Three Months Ended June 30, | ||||||||||||||||||||||||||
2022 | 2021 | $ Change | % Change | |||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||
Research and development | $ | 7,546,477 | $ | 5,707,290 | $ | 1,839,187 | 32 | % | ||||||||||||||||||
General and administrative | 3,648,944 | 2,551,171 | 1,097,773 | 43 | % | |||||||||||||||||||||
Total operating expenses | 11,195,421 | 8,258,461 | 2,936,960 | 36 | % | |||||||||||||||||||||
Loss from operations | (11,195,421) | (8,258,461) | (2,936,960) | 36 | % | |||||||||||||||||||||
Total other income (expense), net | 65,319 | 5,351 | 59,968 | 1,121 | % | |||||||||||||||||||||
Net loss | $ | (11,130,102) | $ | (8,253,110) | $ | (2,876,992) | 35 | % |
Three Months Ended June 30, | ||||||||||||||||||||||||||
2022 | 2021 | |||||||||||||||||||||||||
Research and development expenses: | ||||||||||||||||||||||||||
NM-001 Celiac Disease | $ | 1,007,454 | $ | 1,955,129 | ||||||||||||||||||||||
NM-002 Short Bowel Syndrome | 3,216,657 | 1,803,987 | ||||||||||||||||||||||||
NM-102 Orphan Indication | 174,807 | 742,998 | ||||||||||||||||||||||||
NM-136 Obesity Disorder | 1,584,587 | — | ||||||||||||||||||||||||
Milestone & license fees | 500,000 | — | ||||||||||||||||||||||||
Other research and development expenses | 1,062,972 | 1,205,176 | ||||||||||||||||||||||||
Total research and development expenses | $ | 7,546,477 | $ | 5,707,290 |
Six Months Ended June 30, | ||||||||||||||||||||||||||
2022 | 2021 | $ Change | % Change | |||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||
Research and development | $ | 15,914,955 | $ | 8,897,592 | $ | 7,017,363 | 79 | % | ||||||||||||||||||
General and administrative | 6,644,715 | 4,759,971 | 1,884,744 | 40 | % | |||||||||||||||||||||
Total operating expenses | 22,559,670 | 13,657,563 | 8,902,107 | 65 | % | |||||||||||||||||||||
Loss from operations | (22,559,670) | (13,657,563) | (8,902,107) | 65 | % | |||||||||||||||||||||
Total other income (expense), net | 77,829 | (26,626) | 104,455 | (392) | % | |||||||||||||||||||||
Net loss | $ | (22,481,841) | $ | (13,684,189) | $ | (8,797,652) | 64 | % |
Six Months Ended June 30, | ||||||||||||||||||||||||||
2022 | 2021 | |||||||||||||||||||||||||
Research and development expenses: | ||||||||||||||||||||||||||
NM-001 Celiac Disease | $ | 2,658,947 | $ | 3,501,281 | ||||||||||||||||||||||
NM-002 Short Bowel Syndrome | 7,043,591 | 2,592,947 | ||||||||||||||||||||||||
NM-102 Orphan Indication | 1,101,301 | 848,243 | ||||||||||||||||||||||||
NM-136 Obesity Disorder | 2,360,129 | — | ||||||||||||||||||||||||
Milestone & license fees | 500,000 | — | ||||||||||||||||||||||||
Other research and development expenses | 2,250,987 | 1,955,121 | ||||||||||||||||||||||||
Total research and development expenses | $ | 15,914,955 | $ | 8,897,592 |
Certain customersissuance of the 2022 Convertible Note, subject to a subsequent financing requirement to raise at least $25.0 million by March 31, 2023, and a minimum liquidity requirement. The 2022 Convertible Note is further described in Note 10—Subsequent Events.
Inventories
Inventory is stated at the lower of cost or market, with cost being determined on the weighted average cost method of accounting. We purchase finished goods and materials to assemble kits in quantities that we anticipate will be fully used in the near term. Changes in operating strategy, customer demand, and fluctuations in market values can limit our ability to effectively utilizecomplete the development and commercialization of our products. There are a number of variables beyond our control including the timing, success and overall expense associated with our clinical trials. Consequently, there can be no assurance that we will be able to achieve our objectives and we will need to seek additional funding. If we are unable to raise additional funds when needed, our ability to develop our product candidates will be impaired. We may also be required to delay, reduce or terminate some or all products purchasedof our development programs and can resultclinical trials. We continue to evaluate multiple dilutive and non-dilutive sources for future funding. If we raise additional funds through the issuance of equity securities, substantial dilution to our existing stockholders could occur. We have concluded that the prevailing conditions and ongoing liquidity risks faced by us raise substantial doubt about our ability to continue as a going concern.
Six Months Ended June 30, | ||||||||||||||
2022 | 2021 | |||||||||||||
Net cash (used in) provided by: | ||||||||||||||
Operating activities | $ | (17,534,655) | $ | (13,333,821) | ||||||||||
Investing activities | (2,842) | (6,892) | ||||||||||||
Financing activities | — | 39,512,787 | ||||||||||||
Net (decrease) increase in cash and cash equivalents | $ | (17,537,497) | $ | 26,172,074 |
Share-based compensation/Warrants valuation
$6,000.
Fair value measurements
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on the assumptions that market participants would use in pricing an asset or liability. Fair value is based on a hierarchy of valuation techniques, which is determined on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs create a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
The carrying amount for other financial instruments, which include cash, accounts receivable, accounts payable, line of credit and notes payable, approximate fair value based upon their short-term nature and maturity.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 1 of Notes to Consolidated Financial Statements.
Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), we are not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).
Controls and Procedures
As required by
We maintain a set of disclosure controls and procedurescompany that are designed to ensure that information required to be disclosed by usa company in the reports filedthat it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified byin the Securities and Exchange Commission’s ruleSEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriated, to allow timely decision regarding required disclosure.
Based upon their evaluation as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosureprocedures include, without limitation, controls and procedures are not effectivedesigned to ensure that information required to be included in our periodic Securities and Exchange Commission filing is recorded, processed, summarized, and reported within the time periods specifieddisclosed by a company in the Securitiesreports that it files or submits under the Exchange Act is accumulated and Exchange Commission rulescommunicated to the company’s management, including its principal executive and forms.
Our management has determinedprincipal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer concluded that, we had a material weakness in our internal control over financial reporting as of SeptemberJune 30, 20172022 our disclosure controls and December 31, 2016 relating to the design and operation of our closing and financial reporting processes. We have concluded that this material weaknessprocedures were effective in our internal control over financial reporting is due to the fact that we do not yet have the appropriate resources with the appropriate level of experience and technical expertise to oversee our closing and financial reporting processes.
In order to remediate this material weakness, we have taken the following actions:
Notwithstanding the material weakness that existed as of September 30, 2017 and December 31, 2016, our management has concludedproviding reasonable assurance that the consolidated financial statements presentedinformation required to be disclosed by us in this filing present fairly,report was accumulated and communicated in all material respects, our financial position, results of operation and cash flows in conformity with GAAP.
the manner provided above.
There
On February 16, 2016, the Company receivedLegal Proceedings
The supplier of the Company’s Villain camera has contractually represented and warranted that it owns or has paid royaltiesparty to any and all intellectual property, designs, software, hardware, packaging, components, manuals andlegal or governmental regulatory proceedings, nor is our management aware of any other portion, partpending or elementthreatened legal or government regulatory proceedings proposed to be initiated against us, in each case that iswould have a material adverse effect on our business, financial condition or may be subject to the Villain and the parts and accessories thereof sourced by the supplier. This supplier has contractually agreed to pay any claims, damages, or costs that the Company suffers as a result of the patent infringement or a violation of international, U.S. or state laws or regulations as detailed in the prior sentence.
On September 15, 2017, a putative class action complaint (the “Class Complaint”) was filed in the United States District Court for the Central District of California against the Registrant, David H. Clarke, the Registrant’s Chief Executive Officer and a member of the Company’s Board of Directors (“Clarke”), Jonathan Clark (“Clark”), the Company’s Interim President and a member of the Registrant’s Board of Directors, Robert Machinist (“Machinist”), a member of the Registrant’s Board of Directors, Christopher Miner (“Miner”), a member of the Company’s Board of Directors and Steven Barre (“Barre”), a member of the Company’s Board of Directors (Messrs. Clarke, Clark, Machinist, Miner and Barre are hereinafter referred to as the “Individual Defendants”).
The Class Complaint seeks class status on behalf of all of the Company’s public shareholders persons and alleges violations by the Company and the Individual Defendants of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and the rules promulgated thereunder, and secondary control person liability against the Individual Defendants under Section 20(a) of the Exchange Act primarily related to the Merger. The Class Complaint seeks to enjoin the Company and the Individual Defendants from proceeding with an anticipated stockholder vote on the Merger or consummating the Merger, unless and until the Company discloses certain alleged material information which the Class Complaint alleges has been omitted from the Proxy or in the event the Merger is consummated, to recover an unspecified amount of damages resulting from the Individual Defendants’ alleged violations Sections 14(a) and 20(a) of the Exchange Act.
Although the ultimate outcome of this matter cannot be determined with certainty, the Company believes that the allegations stated in the Class Complaint are without merit and the Company and the Individual Defendants intend to defend themselves vigorously against such allegations and claims.
Our results of operations and financial condition are subject to numerous risks and uncertainties described in our Annual Report on Form 10-K filed on March 31, 2017. You should carefully consider these risk factors in conjunction with the other information contained in this Quarterly Report. Should any of these risks materialize, our business, financial condition and future prospects could be negatively impacted. MaterialRisk Factors.
We need substantial additional capital to continue to fund our operations and we may not be able to obtain the amount of capital required, particularly when the credit and capital markets are unstable. If we are unable to raise substantial additional capital, we would have to modify our business plan, seek to sell assets or curtail some or all of ouroperations.
We currently have minimal cash on hand and an accounts receivable factoring facility limited to $4.0 million. Our existing financial resources are not sufficient to satisfy our future minimum capital requirements. We need substantial additional funding to fund our operations. We do not know whether substantial additional financing is available, or, if available, whether the terms of any financing will be favorable to us. The current worldwide financing environment is challenging, which could make it more difficult for us to raise funds on reasonable terms, or at all. To the extent we raise additional capital by issuing equity securities, our stockholders will likely experience substantial dilution and the new equity securities may have rights, preferences or privileges senior to those"Item 1A. Risk Factors" of our common stock. If we are unable to raise substantial additional capital, or cannot raise substantial capitalAnnual Report on acceptable terms, we will not have sufficient capital to operate our business and would have to modify our business plan, seek to sell assets, or curtail some or all of our operations.
If we fail to meet all applicable continued listing requirements of the Nasdaq Capital Market and Nasdaq determines to delist our common stock, the delisting could adversely affect the market liquidity of our common stock, impair the value of your investment, adversely affect our ability to raise needed funds and subject us to additional trading restrictions and regulations.
Companies listed on The NASDAQ Stock Market, or NASDAQ, are subject to delisting for, among other things, failure to maintain a minimum stockholders’ equity of $2.5 million. On April 17, 2017, we received a deficiency notice from NASDAQ notifying us that, based on our Form 10-K for the year ended December 31, 2016, NASDAQ determined2021, filed with the SEC on March 23, 2022, except as noted below.
On October 24, 2017, our Company requested a hearing before the Panel, which request will stay any delisting action by the Staff at least pending the issuance of the Panel’s decision following the hearing and the expiration of any extension period that may be granted by the Panel. By letter dated October 25, 2017, the request for a hearing before the Panel was granted, such hearing to be held on December 7, 2017. At the hearing, the Company will present its plan to evidence compliance with the Stockholders’ Equity Rule and request an extension of time within which to do so. The Panel has the discretion to grant our Company an extension through no later than April 17, 2018. Our Company’s common stock will continue to trade on Nasdaqcovenants under the symbol “MSDI” at least pending the ultimate conclusion of the hearing process. If we do receive a positive ruling2022 Convertible Note depends on, December 7, 2017, or if we fail to satisfy another NASDAQ requirement for continued listing, NASDAQ staff could provide notice thatamong other things, our commonoperating performance, competitive developments, financial market conditions, and stock will become subject to delisting.
On June 15, 2017, we received a letter from NASDAQ notifying the Company that it is not in compliance with NASDAQ Listing Rule 5810(b) that requires us to maintain a minimum bid price of One Dollar ($1.00) per share. This determination was based upon the closing bid price of the Company’s common stock for the preceding thirty (30) consecutive business days. NASDAQ has provided the Company with 180 calendar days, or until December 12, 2017, to regain compliance by maintaining a closing bid price of One Dollar ($1.00) for at least Ten (10) consecutive business days. The Company is presently evaluating various courses of action to regain compliance. In the event the Company does not regain compliance, the Company may be eligible for additional time, however, there can be no assurance that the Company will regain compliance by December 12, 2017, or that, if it does not, will be granted further time to regain compliance. If the Company fails to satisfy this listing requirement, or any other NASDAQ requirement for continued listing, NASDAQ staff could provide notice that our common stock will become subject to delisting.
The NASDAQ notices have no immediate effect on theexchange listing of our common stock, all of which are significantly affected by financial, business, economic, and other factors, many of which we are not able to control. Accordingly, our cash flow may not be sufficient to allow us to pay principal and interest on the NASDAQ Capital Market. However, we cannot assure you2022 Convertible Note and any additional convertible notes issued under the Purchase Agreement or meet our other obligations under the Purchase Agreement. Our level of indebtedness under the Purchase Agreement could have other important consequences, including the following:
Risks Related to the Merger
Failure to complete the Merger will negatively impact our Company’s stock price, future business or operations.
If the Merger is not completed, our Company will be subject to a number of material risks, including the
following:
Further, if the Merger is terminated and either company’s board of directors determines to seek another merger or business combination, there can be no assurance that it will be able to find a partner on terms as attractive as those provided for in the Merger Agreement. In addition, while the Merger Agreement is in effect and subject to very narrowly defined exceptions, our Company is prohibited from soliciting, initiating or encouraging or entering into certain extraordinary transactions, such as a merger, sale of assets or other business combination, other than with Innovate.
The market price of our Company common stock following the Merger may decline as a result of the Merger.
The market price of our Company common stock may decline as a result of the Merger for a number of
reasons including if:
Our Company and Innovate stockholders may not realize a benefit from the Merger commensurate with the ownership dilution they will experience in connection with the Merger.
If the combined organization is unable to realize the full strategic and financial benefits currently anticipated from the Merger, our Company and Innovate stockholders will have experienced substantial dilution of their ownership interests in their respective companies without receiving any commensurate benefit, or only receiving part of the commensurate benefit to the extent the combined organization is able to realize only part of the strategic and financial benefits currently anticipated from the Merger.
During the pendency of the Merger, our Company and Innovate may not be able to enter into a business combination with another party at a favorable price because of restrictions in the Merger Agreement, which could adversely affect their respective businesses.
Covenants in the Merger Agreement impede the ability of our Company and Innovate to make acquisitions, subject to certain exceptions relating to fiduciaries duties, as set forth below, or complete other transactions that are not in the ordinary course of business pending completion of the Merger.assets. As a result, if we default on our obligations under the Merger is not completed, 2022 Convertible Note,
Certain provisionscollateral agent on behalf of the Merger Agreement may discourage third parties from submitting alternative takeover proposals, including proposals that may be superior toHolder could foreclose on the arrangements contemplated by the Merger Agreement.
The terms of the Merger Agreement prohibit eachsecurity interests and liquidate some or all of our Companyassets, which would harm our business, financial condition and Innovate from soliciting alternative takeover proposals or cooperating with persons making unsolicited takeover proposals, except in limited circumstances when such party’s board of directors determines in good faith that an unsolicited alternative takeover proposal is or is reasonably likely to lead to a superior takeover proposal and is reasonably capable of being consummated and that failure to cooperate with the proponent of the proposal is reasonably likely to result in a breach of the board’s fiduciary duties. In addition, if our Company or Innovate terminate the Merger Agreement under certain circumstances, including terminating because of a decision of a board of directors to recommend a superior proposal, our Company would be required to pay a termination fee of $1.0 million to Innovate or Innovate would be required to pay a termination fee of $1.5 million to our Company, respectively. This termination fee may discourage third parties from submitting alternative takeover proposals to our Company or Innovate or their stockholders, and may cause the respective boards of directors to be less inclined to recommend an alternative proposal.
Because the lack of a public market for Innovate shares makes it difficult to evaluate the fairness of the Merger, the stockholders of Innovate may receive consideration in the Merger that is less than the fair market value of the Innovate shares and/or our Company may pay more than the fair market value of the Innovate shares.
The outstanding capital stock of Innovate is privately held and is not traded in any public market. The lack of a public market makes it extremely difficult to determine the fair market value of Innovate. Because the percentage of our Company equity to be issued to Innovate stockholders was determined based on negotiations between the parties, it is possible that the value of the our Company common stock to be received by Innovate stockholders will be less than the fair market value of Innovate, or our Company may pay more than the aggregate fair market value for Innovate.
Risks Relating to the Spin-Off
The spin-off will occur immediately prior to, and is expressly conditioned upon, the closing of the Merger. All of those risk factors filed by our Company in its previous periodic reports with the SEC, including but not limited to its Annual Report on 10-K for the year ended December 31, 2016 and its Quarterly Report on Form 10-Q for the six months ended June 30, 2017, are applicable to those shares of stock of MD Holding Co., Inc.to be distributed further to the Spin-off. If any of those risks and uncertainties develops into actual events, these events could have a material adverse effect on MD Holding Co., Inc.’s businesses, financial conditions or results of operations. In addition, past financial performanceoperations and could require us to reduce or cease operations and investors may not be a reliable indicatorlose all or part of future performance, and historical trends should not be used to anticipate results or trends in future periods.
Risks Related to Innovate
The value of an investment in our Company following consummation of the Merger will be subject to the significant risks affecting Innovate and those inherent in the biopharmaceutical industry. You should carefully consider the risks and uncertainties described below and other information included in our Company’s definitive proxy statement as filed with the SEC on October 12, 2017. If any of the events described therein occur, the post-acquisition business and financial results could be adversely affected in a material way. This could cause the trading price of the combined company’s common shares to decline, perhaps significantly. The aforementioned risk factors apply to the business and operations of Innovate and will also apply to the business and operations of the combined company following the Merger.
In February 2017,Unregistered Sales of Equity Securities and Use of Proceeds
None.
Mine Safety Disclosures
None
FILED | INCORPORATED BY REFERENCE | |||||||||||||||||||||||||||||||
EXHIBIT NO. | DESCRIPTION | HEREWITH | FORM | EXHIBIT | FILING DATE | |||||||||||||||||||||||||||
10.1* | X | |||||||||||||||||||||||||||||||
10.2# | 8-K | 10.1 | June 22, 2022 | |||||||||||||||||||||||||||||
10.3# | 8-K | 10.2 | June 22, 2022 | |||||||||||||||||||||||||||||
10.4 | 8-K | 10.1 | June 30, 2022 | |||||||||||||||||||||||||||||
10.5 | 8-K | 10.2 | June 30, 2022 | |||||||||||||||||||||||||||||
31.1 | X | |||||||||||||||||||||||||||||||
31.2 | X | |||||||||||||||||||||||||||||||
32.1 | X | |||||||||||||||||||||||||||||||
32.2 | X | |||||||||||||||||||||||||||||||
101.INS | XBRL Instance Document | X |
FILED | INCORPORATED BY REFERENCE | |||||||||||||||||||||||||||||||
EXHIBIT NO. | DESCRIPTION | HEREWITH | FORM | EXHIBIT | FILING DATE | |||||||||||||||||||||||||||
101.SCH | XBRL Taxonomy Extension Schema Document | X | ||||||||||||||||||||||||||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||||||||||||||||||||||||
101.DEF | XBRL Taxonomy Extension Definition Document | X | ||||||||||||||||||||||||||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||||||||||||||||||||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||||||||||||||||||||||||||||
104.0 | Cover Page Interactive Data File (formatted as | X |
MONSTER DIGITAL, INC.
9 METERS BIOPHARMA, INC. | ||||||||||||||
a Delaware corporation | ||||||||||||||
Date: | By: | |||||||||||||
Bethany Sensenig | ||||||||||||||
Chief Financial Officer (Principal Financial and Principal Accounting Officer) |
|