Notes to Condensed Consolidated Financial Statements
Three and Six Months Ended September 30, 2017 and 2016
(Unaudited)
INTERIM FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES
Nemaura Medical Inc. ("Nemaura" or the "Company"), through its operating subsidiaries, performs medical device research of a continuous glucose monitoring system ("CGM"), named sugarBEAT. The sugarBEAT device is a non-invasive, wireless device for use by persons with Type I and Type II diabetes, and may also be used to screen pre-diabetic patients. The sugarBEAT device extracts analytes, such as glucose, to the surface of the skin in a non-invasive manner where it is measured using unique sensors and interpreted using a unique algorithm.
Nemaura is a Nevada holding company organized in 2013. Nemaura owns one hundred percent (100%) of Region Green Limited, a British Virgin Islands corporation formed ("RGL") on December 12, 2013. Region Green Limited owns one hundred percent (100%) of the stock in Dermal Diagnostic (Holdings) Limited, an England and Wales corporation ("DDHL") formed on December 11, 2013, which in turn owns one hundred percent (100%) of Dermal Diagnostics Limited, an England and Wales corporation formed on January 20, 2009 ("DDL"), and one hundred percent (100%) of Trial Clinic Limited, an England and Wales corporation formed on January 12, 2011 ("TCL").
DDL is a diagnostic medical device company headquartered in Loughborough, Leicestershire, England, and is engaged in the discovery, development and commercialization of diagnostic medical devices. The Company's initial focus has been on the development of the sugarBEAT device, which consists of a disposable patch containing a sensor, and a non-disposable miniature electronic watch with a re-chargeable power source, which is designed to enable trending or tracking of blood glucose levels. Except for a US cash account (approximately $48,000 at September 30, 2017), all of the Company’s operations and assets are located in England.
The following diagram illustrates our corporate and shareholder structure as of September 30, 2017:
NEMAURA MEDICAL INC.
Notes to Condensed Consolidated Financial Statements
Three and Six Months Ended September 30, 2017 and 2016
(Unaudited)
The Company has a limited operating history, recurring losses from operations and an accumulated deficit of $7,953,451 as of September 30, 2017. The Company expects to continue to incur losses from operations at least until clinical trials are completed later this calendar year and the product becomes available to be marketed. Management has evaluated its ability to continue as a going concern for the next twelve months from the issuance of these September 30, 2017 consolidated financial statements, and considered the expected expenses to be incurred along with its available cash, and has determined that there is not substantial doubt as to its ability to continue as a going concern for at least one year subsequent to the date of issuance of these financial statements. The Company has $597,539 of readily available cash on hand at September 30, 2017 and approximately $1.35 million will be available in December 2017, which is currently in a fixed rate deposit account. In addition, the Company has approximately $4.74 million of cash in a fixed rate deposit account which matures in December 2018.
Management's strategic plans include the following:
- continuing to advance commercialization of the Company's principal product, in the UK, European and other international markets;
- pursuing additional capital raising opportunities; and
- continuing to explore and execute prospective partnering or distribution opportunities.
NOTE 2 -- BASIS OF PRESENTATION
(a) Basis of presentation:
The accompanying condensed consolidated financial statements include the accounts of the Company and the Company’s subsidiaries, DDL, TCL, DDHL and RGL. The consolidated financial statements are prepared in accordance with the instructions to quarterly reports on Form 10-Q. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and changes in financial position at September 30, 2017 and for all periods presented have been made. Certain information and footnote data necessary for fair presentation of financial position and results of operations in conformity with accounting principles generally accepted in the United States of America have been condensed or omitted. It is therefore suggested that these financial statements be read in conjunction with the summary of significant accounting policies and notes to financial statements included in the Company’s Annual Report on Form 10-K for the Year Ended March 31, 2017. The results of operations for the period ended September 30, 2017 are not necessarily an indication of operating results for the full year.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash includes cash equivalents, which the Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Cash and cash equivalents consist primarily of cash deposits maintained in the United Kingdom. From time to time, the Company's cash account balances exceed amounts covered by the Financial Services Compensation Scheme. The Company has never suffered a loss due to such excess balances.
(b)
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Fixed rate cash accounts:
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From time to time the Company invests funds in fixed rate cash savings accounts. These accounts, at the time of the initial investment, provide a higher interest rate than other bank accounts, and also require the Company to maintain the funds in the accounts for a period of time, $1,352,000 through December 2017 and $4,735,000 through December 2018. Early withdrawal may generally be made for liquidity needs.
NEMAURA MEDICAL INC.
Notes to Condensed Consolidated Financial Statements
Three and Six Months Ended September 30, 2017 and 2016
(Unaudited)
(c) Fair value of financial instruments
The Company's financial instruments primarily consist of cash, fixed rate cash accounts, and accounts payable. As of the balance sheet dates, the estimated fair values of non-related party financial instruments were not materially different from their carrying values as presented, due to their short maturities. The fair value of amounts payable to related parties are not practicable to estimate due to the related party nature of the underlying transactions.
(d) Property and equipment
Property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets, generally four years for fixtures and fittings.
(e) Intangible assets
Intangible assets consist of licenses and patents associated with the sugarBEAT device and are amortized on a straight-line basis, generally over their legal lives of up to 20 years.
(f) Revenue recognition
Revenue is recognized when the four basic criteria of revenue recognition are met: (1) a contractual agreement exists; (2) transfer of rights has been completed; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured.
The Company may enter into product development and other agreements and with collaborative partners. The terms of the agreements may include nonrefundable signing and licensing fees, milestone payments and royalties on any product sales derived from collaborations.
The Company recognizes up front license payments as revenue upon delivery of the license only if the license has stand alone value to the customer. However, where further performance criteria must be met, revenue is deferred and recognized on a straight line basis over the period the Company is expected to complete its performance obligations.
Royalty revenue will be recognized upon the sale of the related products provided the Company has no remaining performance obligations under the agreement.
(g) Research and development expenses
The Company charges research and development expenses to operations as incurred. Research and development expenses primarily consist of salaries and related expenses for personnel and outside contractor and consulting services. Other research and development expenses include the costs of materials and supplies used in research and development, prototype manufacturing, clinical studies, related information technology and an allocation of facilities costs.
(h) Income taxes
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss carry forwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided to reduce the carrying amount of deferred income tax assets if it is considered more likely than not that some portion, or all, of the deferred income tax assets will not be realized.
NEMAURA MEDICAL INC.
Notes to Condensed Consolidated Financial Statements
Three and Six Months Ended September 30, 2017 and 2016
(Unaudited)
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company has elected to classify interest and penalties related to unrecognized tax benefits as part of income tax expense in the consolidated statements of comprehensive loss. The Company does not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense related to unrecognized tax benefits recognized for the three months ended September 30, 2017 and 2016. The Company’s deferred tax asset consists primarily of net operating loss carried forwards, and are fully allowed for as realization of these assets is not considered to be more likely than not.
Basic earnings per share is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period. There were no potentially dilutive securities as of September 30, 2017 and 2016. For the three month and six month periods ended September 30, 2017 and 2016, warrants to purchase 10 million shares of common stock were anti-dilutive and were excluded from the calculation of diluted loss per share.
(j) Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results may differ from those estimates.
(k) Foreign currency translation
The functional currency of the Company is the Great Britain Pound Sterling ("GBP"). The reporting currency is the United States dollar (US$). Stockholders' equity is translated into United States dollars from GBP at historical exchange rates. Assets and liabilities are translated at the exchange rates as of balance sheet date. Income and expenditures are translated at the average exchange rates prevailing during the reporting period.
The translation rates are as follows:
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Six months ended
September 30
,
2017
(unaudited)
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Six months ended
September 30
,
2016
(unaudited)
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Three months ended
September 30
,
2017
(unaudited)
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Three months ended
September 30
,
2016
(unaudited)
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Twelve months ended
March 31,
2017
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Period end GBP : US$ exchange rate
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1.340
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1.325
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1.340
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1.325
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1.245
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Average period/yearly GBP : US$ exchange rate
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1.279
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1.382
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1.283
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1.370
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1.315
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Adjustments resulting from translating the financial statements into the United States dollar are recorded as a separate component of accumulated other comprehensive loss in stockholders' equity.
(l) Recent accounting pronouncements
The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company's financial reporting, the Company undertakes a study to determine the consequences of the change to its consolidated financial statements and assures that there are proper controls in place to ascertain that the Company's consolidated financial statements properly reflect the change.
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Updates ("ASU") No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 has been modified multiple times since its initial release. This ASU outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. ASU 2014-09, as amended, becomes effective for annual reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact that this standard will have on its financial statements and related disclosures. The impact is expected to be insignificant until the Company begins to generate revenue, except as to the possible impact related to the deferred revenue recorded in connection with the licensing agreement described in Note 4 which the Company is currently evaluating. The standard permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method.
NEMAURA MEDICAL INC.
Notes to Condensed Consolidated Financial Statements
Three and Six Months Ended September 30, 2017 and 2016
(Unaudited)
In March 2016, the FASB issued ASU No. 2016-02, Leases. The main difference between the provisions of ASU No. 2016-02 and previous U.S. GAAP is the recognition of right-of-use assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. ASU No. 2016- 02 retains a distinction between finance leases and operating leases, and the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous U.S. GAAP. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize right-of-use assets and lease liabilities. The accounting applied by a lessor is largely unchanged from that applied under previous U.S. GAAP. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. This ASU is effective for public business entities in fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted as of the beginning of any interim or annual reporting period. The Company has not yet determined the effect of the standard on its ongoing reporting.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments. ASU No. 2016-15 is intended to reduce diversity in how certain cash receipts and cash payments are presented in the statement of cash flows. The new guidance clarifies the classification of cash activity related to debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate and bank-owned life insurance policies, distributions received from equity-method investments, and beneficial interests in securitization transactions. The guidance also describes a predominance principle pursuant to which cash flows with aspects of more than one class that cannot be separated should be classified based on the activity that is likely to be the predominant source or use of cash flow. This ASU is effective for public entities for annual and interim periods beginning after December 15, 2017. Early adoption is permitted as of the beginning of any interim or annual reporting period. The Company is currently evaluating the impact this standard will have on its financial statements and related disclosures, but does not expect it to have a material effect on the Company's consolidated financial statements and related disclosures.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows - Restricted Cash. ASU 2016-18 requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet is required. This ASU is effective for public entities for annual and interim periods beginning after December 15, 2017. Early adoption is permitted as of the beginning of any interim or annual reporting period. The Company is currently evaluating the impact this standard will have on its financial statements and related disclosures.
(m) Risks and uncertainties
The Company is in the development stage of one primary product that it expects to introduce to the UK market after completion of clinical trials and CE mark approval (European Union approval of the product). The Company has entered into sales and marketing agreements for the product, but has not yet entered into manufacturing agreements. These matters raise uncertainties as regulatory acceptance of the Company’s primary product development efforts and if acceptance is attained, the cost structure to produce the product.
(n) Subsequent events
In October 2017, the Company’s board of directors designated 200,000 shares of Series A Convertible Preferred Stock, as authorized by its articles of incorporation. The par value of the preferred stock is $0.001 per share. Each share of preferred stock is convertible into 1,000 shares of the Company’s common stock, automatically upon the occurrence of certain triggering events, as set forth in the certificate of designation, or voluntarily by the holder after February 1, 2019, if these triggering events have not occurred. Each holder of issued and outstanding preferred stock is entitled to a number of votes equal to the number of shares of common stock into which the preferred stock is convertible. Holders of preferred are entitled to vote on any and all matters presented to stockholders of the Company, except as provided by law. The preferred stock has preference to the common stock as to dividends or distributions of assets upon liquidation or winding up of the Company. Currently, no shares of preferred stock have been issued.
NEMAURA MEDICAL INC.
Notes to Condensed Consolidated Financial Statements
Three and Six Months Ended September 30, 2017 and 2016
(Unaudited)
NOTE 4 – LICENSING AGREEMENT
In March 2014, the Company entered into an Exclusive Marketing Rights Agreement with an unrelated third party, that granted to the third party the exclusive right to market and promote the sugarBEAT device and related patches under its own brand in the United Kingdom and the Republic of Ireland, the Channel Islands and the Isle of Man. The Company received a non-refundable, up front cash payment of GBP 1,000,000 (approximately $1.340 million and $1.245 million as of September 30, 2017 and March 31, 2017 respectively) which is wholly non-refundable, upon signing the agreement.
As the Company has continuing performance obligations under the agreement, the up front fees received from this agreement have been deferred and will be recorded as income over the term of the commercial licensing agreement beginning from the date of clinical evaluation approval. As the Company expects commercialization of the sugarBEAT device to occur in the year ending March 31, 2019, approximately $67,000 of the deferred revenue has been classified as a current liability.
In April 2014, a Letter of Intent was signed with the third party which specified a 10 year term and in November 2015, a Licence, Supply and Distribution agreement with an initial 5 year term was executed. The Company grants the exclusive right to market and promote its product in the United Kingdom, and purchase the product at specified prices.
NOTE 5 – RELATED PARTY TRANSACTIONS
Nemaura Pharma Limited (Pharma) and NDM Technologies Limited (NDM) are entities controlled by the Company’s majority shareholder,
Dewan
F.H. Chowdhury.
In accordance with the United States Securities and Exchange Commission (SEC) Staff Accounting Bulletin 55, these financial statements are intended to reflect all costs associated with the operations of DDL and TCL. Pharma has invoiced DDL and TCL for research and development services. In addition, certain operating expenses of DDL and TCL were incurred and paid by Pharma and NDM which have been invoiced to the Company. Certain costs incurred by Pharma and NDM are directly attributable to DDL and TCL and such costs were billed to the Company. Prior to the year ended March 31, 2016, other costs were shared between the organizations. In situations where the costs were shared, expense has been allocated between Pharma and NDM and DDL and TCL using a fixed percentage allocation and were billed to the Company. Management believes the allocation methodologies used are reasonable. DDL and TCL advanced Pharma certain amounts to cover a portion of the costs.
Following is a summary of activity between the Company and Pharma and NDM for the six months ended September 30, 2017 and 2016. These amounts are unsecured, interest free, and payable on demand.
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Six Months Ended
September 30, 2017
(unaudited)
($)
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Six Months Ended
September 30, 2016
(unaudited)
($)
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Balance due from (to) Pharma and NDM at beginning of period
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(687,609
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)
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(494,145
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)
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Amounts invoiced by Pharma to DDL and TCL (1)
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(239,758
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)
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(286,096
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)
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Amounts invoiced by DDL to Pharma
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-
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15,886
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Amounts repaid by DDL to Pharma
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440,266
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-
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Amounts paid by DDL on behalf of Pharma
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19,889
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-
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Foreign exchange differences
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(40,164
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)
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46,420
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Balance due to Pharma and NDM at end of the period
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(507,376
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)
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(717,935
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)
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(1) These amounts are included primarily in research and development expenses charged to the Company by Pharma and NDM.