Note
2 - Going Concern and Management’s Liquidity Plan
The
accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. The Company incurred a net loss of approximately $10.2 million
and $ 2.4 million during the nine months ended September 30, 2017 and 2016, respectively, and has an accumulated deficit of approximately
$33.1 million at September 30, 2017. Cash used in operating activities was approximately $4.7 million and $2.3 million for the
nine months ended September 30, 2017 and 2016, respectively. These aforementioned factors raise substantial doubt about the Company’s
ability to continue as a going concern for a period of one year from the issuance of these financial statements. Historically,
the Company has financed its operations through equity and debt financing transactions and expects to continue incurring operating
losses for the foreseeable future. The financial statements do not include any adjustments relating to the recoverability and
classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue
as a going concern within one year after the date the financial statements are issued.
The
Company will need to raise additional capital to sustain its operations, repay its debt, pursue its product development initiatives
and penetrate markets for the sale of its products. Management believes that the Company has access to capital resources through
possible additional public or private equity offerings, debt financings, or other means; however, the Company cannot provide any
assurance that it will be able to raise additional capital or obtain new financing on commercially acceptable terms. If the Company
is unable to secure additional capital, it may be required to curtail its operations or delay the execution of its business plan.
Note
3 - Summary of Significant Accounting Policies
Interim
Financial Statements
The
accompanying unaudited condensed financial statements and notes are representations of the Company’s management, who are
responsible for their integrity and objectivity. These statements have been prepared in accordance with GAAP for interim financial
information pursuant to Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP
for annual financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal
recurring items) that are considered necessary for a fair presentation of the condensed financial statements of the Company as
of September 30, 2017 and for the three months and nine months ended September 30, 2017 and 2016. The results of operations for
the three months and nine months ended September 30, 2017 are not necessarily indicative of the operating results for the full
year ending December 31, 2017, or any other period. These condensed financial statements should be read in conjunction with the
audited financial statements and related disclosures of the Company as of December 31, 2016 and 2015, and for the years then ended,
included in the Offering Circular (“Offering Circular”) that forms part of the Company’s Registration Statement
on Form 1-A (File No. 024-10662), which was qualified by the Securities and Exchange Commission on June 9, 2017.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
require management to make estimates and assumptions that affect certain reported amounts and disclosures. These estimates and
assumptions are reviewed on an on-going basis and updated as appropriate. Actual results could differ from these estimates. The
Company’s significant estimates relate to valuation of warrants and derivative liabilities, uncollectible accounts, deferred
tax valuation allowances, warranty obligations and reserves for slow-moving inventory.
Inventories
Inventories
are recorded at the lower-of-cost-or-market. Cost is determined using a specific identification method. The Company reduces the
carrying value of inventory for those items that are potentially excess, obsolete or slow-moving based on changes in customer
demand, technology developments or other economic factors.
The
Company periodically analyzes anticipated product sales based on historical results, current sales pipeline and marketing plans.
Based on these analyses, the Company anticipates the amounts of product, if any, that will not be sold during the next twelve
months.
Stock-Based
Compensation
The
Company accounts for options and restricted shares granted to employees by measuring the cost of services received in exchange
for the award of equity instruments based upon the fair value of the award on the date of grant. The fair value of that award
is then ratably recognized as expense over the period during which the recipient is required to provide services in exchange for
that award.
Options,
restricted shares and warrants granted to consultants and other non-employees are recorded at fair value as of the grant date
and subsequently adjusted to fair value at the end of each reporting period until such options and warrants vest, and the fair
value of such instruments, as adjusted, is expensed over the related vesting period. Outstanding non-employee grants continue
to be adjusted to fair value after the vesting, and the fair value adjustment is expensed.
Net
Loss per Share
Basic
loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss attributable to common
stockholders by the weighted average number of common shares outstanding, plus potentially dilutive common shares. Convertible
debt, preferred stock, restricted stock units, stock options and warrants are excluded from the diluted net loss per share calculation
when their impact is antidilutive. The Company reported a net loss for the three and nine months ended September 30, 2017 and
2016, and as a result, all potentially dilutive common shares are considered antidilutive for these periods.
Common
shares potentially issuable at September 30, 2017 and 2016 consist of:
|
|
2017
|
|
|
2016
|
|
Options
|
|
|
250,160
|
|
|
|
236,691
|
|
Restricted stock
|
|
|
44,500
|
|
|
|
-
|
|
Warrants
|
|
|
1,427,493
|
|
|
|
8,228
|
|
Series B-1 convertible preferred stock
|
|
|
-
|
|
|
|
1,662,104
|
|
Series A-1 convertible preferred stock
|
|
|
-
|
|
|
|
960,083
|
|
Total
|
|
|
1,722,153
|
|
|
|
2,867,106
|
|
Reclassification
Certain
amounts in the 2016 financial statements of operations have been reclassified to conform to the 2017 presentation. These reclassifications
had no impact on previously reported net loss.
Subsequent
Events
The
Company evaluates events and/or transactions occurring after the balance sheet date and before the issue date of the condensed
financial statements to determine if any of those events and/or transactions require adjustment to or disclosure in the financial
statements.
Revision
of Financial Statements
During
the preparation of its Offering Circular Supplement for the quarterly period ended March 31, 2017, the Company determined it had
improperly classified its Notes Payable, MLSC and certain related accrued interest as long-term liabilities, which resulted in
an understatement of current liabilities as of December 31, 2016. The Company assessed the materiality of the misstatement in
accordance with Staff Accounting Bulletin No. 99, “Materiality” and No. 108, “Quantifying Misstatements”,
and concluded that these classification errors were not qualitatively material and there was no impact on the Company’s
condensed statements of operations, cash flows, changes in redeemable and convertible preferred stock and stockholders’
equity (deficiency) and net loss per share for the years then ended, nor on the Company’s stockholders’ equity (deficiency).
As such, the correction of the error is reflected in the December 31, 2016 balance sheet. Disclosure of the revised amounts will
also be reflected in future filings containing the applicable periods.
The
effect of this revision on the line items within the Company’s balance sheet as of December 31, 2016 was as follows:
|
|
December 31, 2016
|
|
|
|
As previously
reported
|
|
|
Adjustment
|
|
|
As revised
|
|
Total current liabilities
|
|
$
|
1,807,311
|
|
|
$
|
1,193,984
|
|
|
$
|
3,001,295
|
|
Non-current liabilities
|
|
$
|
4,709,156
|
|
|
$
|
(1,193,984
|
)
|
|
$
|
3,515,172
|
|
Total liabilities
|
|
$
|
6,516,467
|
|
|
$
|
-
|
|
|
$
|
6,516,467
|
|
Recent
Accounting Pronouncements
In May 2017, the FASB issued ASU No. 2017-09,
Compensation—Stock Compensation (Topic 718); Scope of Modification Accounting. The amendments in this ASU provide guidance
that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. If
the value, vesting conditions or classification of the award changes, modification accounting will apply. The guidance is effective
for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating
the impact of the adoption of this standard on its financial statements.
In September 2017, the FASB issued ASU No.
2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases
(Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of
Prior SEC Staff Announcements and Observer Comments” that enhances the guidance surrounding sale leaseback transactions,
accounting for taxes on leveraged leases and leases with third party value. The related amendments to the Topics described above
become effective on the same schedule as Topics 605, 606, 840 and 842.
In
addition to the above, see discussion of recent accounting pronouncements are described in Note 3 to the Company’s
audited financial statements included in the Company’s Offering Circular.
Note
4 - Inventories
Inventories
consist of the following:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
133,994
|
|
|
$
|
81,223
|
|
Parts and components
|
|
|
20,312
|
|
|
|
1,212
|
|
Total cost
|
|
|
154,306
|
|
|
|
82,435
|
|
Less: Excess and obsolete inventory reserve
|
|
|
(30,955
|
)
|
|
|
-
|
|
Total inventories, net
|
|
$
|
123,351
|
|
|
$
|
82,435
|
|
When
recorded, inventory reserves are intended to reduce the carrying value of inventories to their net realizable value. The Company
establishes inventory reserves when conditions exist that indicate inventory may be in excess of anticipated demand or is obsolete
based upon assumptions about future demand for the Company’s products or market conditions. The Company regularly evaluates
the ability to realize the value of inventories based on a combination of factors including the following: forecasted sales or
usage, estimated product end of life dates, estimated current and future market value and new product introductions. At September
30, 2017, the Company provided a reserve of approximately $31,000 for excess and obsolete inventories.
Note
5 -Revolving Line of Credit
On
June 8, 2017, the Company’s Chief Executive Officer and Director, entered into an agreement with the Company pursuant to
which he committed irrevocably to establish an up to $1,000,000 revolving line of credit for the Company. This commitment is subject
to the preparation, execution and delivery of definitive loan documentation in customary form, including note(s) incorporating
substantially the terms and conditions set forth in the accompanying term sheet. The line of credit will bear an interest rate
of 10% of per annum and will terminate upon the earlier of (i) December 31, 2018; and (ii) the Company entering into a debt or
loan facility with a bank or non-bank lender in the aggregate amount of not less than the greater of (A) $500,000 and (B) the
then outstanding principal and interest under the facility.
Note
6 - Notes Payable, MLSC
On
June 6, 2017, Myomo and MLSC entered into an agreement to extend and amend Myomo’s promissory note to MLSC. The promissory
note’s maturity date of June 7, 2017 was extended to May 7, 2019, with repayment in twenty-four equal monthly installments
beginning June 7, 2017. The unpaid principal and accrued interest is due and payable upon the earlier of (i) May 7, 2019, (ii)
the closing of an initial public offering, prior to August 1, 2017, with gross proceeds of not less than $10 million, (iii) the
sale of additional equity securities of $5 million or more at any time unless associated with the occurrence of an initial public
offering prior to August 1, 2017, (iv) the closing of an acquisition of the Company, and (v) the occurrence of a default, as defined
in the promissory note. The amended promissory note bears a reduced interest rate of 7% per annum. MLSC has the right, at its
sole discretion, to extend the maturity date. Myomo has the right to redeem the note, in whole or in part, without penalty or
premium with thirty days’ notice to MLSC.
Note
7 - Notes Payable, Shareholder
On
May 23, 2017, Myomo and a related party noteholder entered into an agreement to amend Myomo’s related party promissory notes.
The maturity date was extended from June 8, 2017 to June 8, 2019, unless prior to that date, the Company completes an equity financing
in any twelve-month period raising an aggregate of $10 million in gross proceeds (a “Qualified Financing”), excluding
the conversion into common stock in an initial public offering of any convertible notes outstanding on the date of this amendment.
In such case, these notes become due within 30 days of the completion of the financing. The Company may elect, in its sole discretion,
to repay up to 50% of the outstanding principal and any accrued but unpaid interest as shall be due and payable under this note
by issuing shares of the Company’s equity equal to 80% of the price per share of common stock.
The
Company was notified in October 2017 that the noteholder liquidated all of its outstanding common stock. As of September 30, 2017,
the Noteholder is no longer a related party.
Note
8 - 2016 Convertible Promissory Notes
During
the three months ended March 31, 2017 the Company issued the 2016 convertible promissory notes with an aggregate principal balance
of $1,770,000 for cash. In addition, during this period the Company entered into an agreement with certain 2015 convertible promissory
noteholders whereby the noteholders of the 2015 convertible promissory noteholders exchanged $430,000 notes for an equivalent
amount of 2016 convertible promissory notes (See Note 9). The Company did not recognize a gain or loss on the exchange of the
notes. The 2016 convertible promissory notes had an interest rate of 8% per annum and matured on December 31, 2018, at which time
the principal and any accrued but unpaid interest would be due and payable on demand. The notes were subordinated to the notes
payable, MLSC.
The
2016 convertible promissory notes provided that in the event the Company, on or before the date of the repayment in full of these
notes, sells shares of its equity securities to investors in any public equity financing resulting in gross proceeds to the Company
of at least $5 million (excluding the conversion of these convertible promissory notes and any other indebtedness, but including,
for such purposes, all amounts raised in the Company’s initial public offering, then the outstanding principal balance of
these notes, and any accrued but unpaid interest will be automatically converted into the equity securities upon the closing of
the initial public offering. The number of shares of equity securities of the Company to be issued upon such conversion shall
be equal to the quotient obtained by dividing the entire principal amount plus accrued interest by the lower of (i) a price per
share equal to $35,000,000 divided by the aggregate number of shares of capital stock outstanding on a fully diluted basis immediately
prior to the initial closing of the Qualified Financing, as defined, and (ii) eighty percent (80%) of the per share price
paid by the Investors in the Qualified Financing.
On
June 5, 2017, the Company modified the terms of these 2016 convertible promissory notes such that the automatic conversion of
these notes will occur upon any public equity financing resulting in gross proceeds to the Company of at least $5,000,000, excluding
the conversion of the notes and any other indebtedness, but including, for such purposes, all amounts raised in the IPO and the
concurrent private placement.
Upon
the closing of the Company’s IPO on June 9, 2017, in accordance with the terms of the 2016 convertible promissory notes,
the principal balance of these notes, and all accrued but unpaid interest, totaling $5,467,389 were converted into 1,055,430 shares
of common stock at weighted-average price of $5.18 per share.
In
connection with the issuance of the 2016 convertible promissory notes, the Company issued, to these noteholders, warrants to purchase
common stock which are exercisable for three years from the date of the IPO. One warrant was issued for each share of common stock
issued as part of the conversion. Upon the closing of the IPO, the warrants became exercisable and the warrant terms became fixed,
such that at June 30, 2017, there were warrants outstanding to purchase 799,349 shares of common stock exercisable at $6.47 per
share. As of the IPO date, the Company determined that the relative fair value of the warrants attributable to 2016 convertible
promissory note holders (excluding those issued in conjunction with the exchange of the 2015 convertible promissory notes) was
$1,628,006.
In
accordance with ASC 470-20-25-20 “Contingent Conversion Option” if the conversion terms of the 2016 convertible promissory
notes are triggered by future events not controlled by the issuer, they shall be accounted for as contingent conversion options.
The Company determined that the future public equity financing (the IPO) is considered to be a contingency outside the control
of the issuer. Accordingly, upon the closing of the Company’s IPO, the Company determined that the embedded conversion option
was a beneficial conversion feature with a value of $3,825,320. Because the combined relative fair value of the warrants and the
value of the beneficial conversion feature exceeded the principal value of the 2016 convertible promissory notes, which were automatically
converted pursuant to their terms on the IPO date, the Company recorded an immediate charge to interest expense for the debt discount
in the statement of operations on June 9, 2017 equal to the $4,142,000 principal value of the notes.
The
Company had capitalized deferred issuance costs of approximately $20,800 relating to 2016 convertible promissory notes and had
amortized approximately $6,700 to interest expense in the statements of operations through the date of its IPO. Debt issuance
costs are comprised of incremental legal and accounting fees directly related to the issuance of convertible promissory notes.
Debt issuance costs are amortized over the life of the related debt instrument. Net debt issuance costs are included in the balance
sheets as a reduction (debt discount) of the related convertible promissory notes prior to the closing of the Company’s
IPO.
Note
9 - 2015 Convertible Promissory Notes
For
the three months ended March 31, 2017, the noteholders exchanged $430,000 of their 2015 Convertible Promissory Notes for 2016
convertible promissory notes of an equivalent principal amount. The other 2015 Convertible Promissory Notes that were previously
outstanding had been exchanged for 2016 convertible promissory notes of an equivalent principal amount in 2016. The Company did
not recognize a gain or loss the exchange of the notes. (See Note 8).
In
connection with the issuance of the 2015 convertible promissory notes, the Company agreed to issue warrants to purchase common
stock to these noteholders, which are exercisable for five years from the date of the IPO. The number of shares of stock to be
acquired under the warrants is determined by a formula which amounts to 15% of the principal amount invested divided by the lowest
price paid per share for the equity securities by the investors in the Equity Financing as defined. Upon the closing of the IPO,
the Company issued warrants to purchase 29,425 shares of common stock exercisable at $5.25 per share. All warrants issued were
outstanding at June 30, 2017. As of the IPO date, the Company determined that the relative fair value of the warrants attributable
to original 2015 convertible promissory note holders (including those issued in conjunction with the exchange into the 2016 convertible
promissory notes) was $457,456.
In
accordance with ASC 470-20-25-20 “Contingent Conversion Option” if the conversion terms of the convertible note are
triggered by future events not controlled by the issuer, they shall be accounted for as contingent conversion options. The Company
determined that the future public equity financing (the IPO) is considered to be a contingency outside the control of the issuer.
Accordingly, upon the closing of the Company’s IPO, the Company determined that the embedded conversion option was a beneficial
conversion feature with a value of $1,003,867. Because the combined relative fair value of the warrants and the value of the beneficial
conversion feature exceeded the principal value of the 2015 convertible promissory notes (as exchanged), which were automatically
converted pursuant to their terms on the IPO date, the Company recorded an immediate charge to interest expense for the debt discount
in the statement of operations on June 9, 2017 equal to the $1,030,000 principal value of the notes.
Note
10 - Stock-based Compensation
The
Company recognized stock-based compensation expense related primarily to the issuance of stock option awards to employees and
non-employees and restricted stock units in the condensed statements of operations as follow:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
1,974
|
|
|
$
|
626
|
|
|
$
|
3,274
|
|
|
$
|
626
|
|
Selling, general and administrative
|
|
|
(59,170
|
)
|
|
|
43,874
|
|
|
|
234,948
|
|
|
|
71,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(57,196
|
)
|
|
$
|
44,500
|
|
|
$
|
238,222
|
|
|
$
|
72,188
|
|
Stock
Options
The
Company uses the Black-Scholes option pricing model to estimate the grant date fair value of its stock options. There was no income
tax benefit recognized in the financial statements for share-based compensation arrangements for the nine months ended September
30, 2017. The assumptions underlying the calculation of grant date fair value are as follows for the nine months ended:
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
Volatility
|
|
|
64% - 80%
|
|
|
81%
|
%
|
Risk-free interest rate
|
|
|
0.58% - 2.07%
|
|
|
0.58%
|
%
|
Weighted-average expected option term (in years)
|
|
|
5.50-6.25
|
|
|
5.75-6.25
|
|
Dividend yield
|
|
|
-%
|
|
|
-%
|
%
|
The
stock price volatility for the Company's options was determined using historical volatilities for industry peers. The risk-free
interest rate was derived from U.S. Treasury rates existing on the date of grant for the applicable expected option term. The
expected term represents the period of time that options are expected to be outstanding. Because the Company does not have sufficient
historical exercise behavior, it determines the expected life assumption using the simplified method, which is an average of the
contractual term of the option and its ordinary vesting period. The expected dividend yield assumption is based on the fact that
the Company has never paid, nor has any intention to pay, cash dividends.
As
of September 30, 2017, there was $485,703 of unrecognized compensation cost related to employees and non-employee unvested stock
option grants, which is expected to be recognized over a weighted-average remaining service period of approximately 2.0 years.
Restricted
Shares
The
fair value of the Company’s restricted shares granted to employees is calculated based upon the fair market value of the
Company’s stock at the date of grant. As of September 30, 2017, there was $259,370 of unrecognized compensation cost related
to employees unvested restricted share grants, which is expected to be recognized over a weighted-average remaining service period
of approximately 3.9 years. The stock compensation expense is being amortized over the respective vesting periods between 6 months
and 4 years. The Company recorded $41,005 of share-based compensation expenses for these restricted shares during the nine months
ended September 30, 2017.
Note
11 - Fair Value of Financial Instruments
The
Company measures the fair value of financial assets and liabilities based on the guidance of ASC 820 “Fair Value Measurements
and Disclosures” (“ASC 820”) which defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements.
ASC
820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may
be used to measure fair value:
|
●
|
Level
1 - Quoted prices available in active markets for identical assets or liabilities.
|
|
|
|
|
●
|
Level
2 - Quoted prices for similar assets and liabilities in active markets or inputs that are observable.
|
|
|
|
|
●
|
Level
3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the
assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar valuation techniques
that use significant unobservable inputs.
|
The
carrying amounts of the Company’s other financial instruments, such as cash and cash equivalents, accounts receivable and
accounts payable, approximate fair value due to the short-term nature of these instruments. The carrying amounts of the Company’s
notes payables approximates fair value, as the notes include contractual interest rates, taken together with other features such
as concurrent issuance of warrants, which are comparable to rates of returns for instruments of similar credit risk.
Derivative
liabilities measured at fair value on a recurring basis at September 30, 2017 were as follows:
|
|
In Active
Markets
for
Identical
Assets or
Liabilities
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
September 30,
2017
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
Common stock warrant liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
92,359
|
|
|
$
|
92,359
|
|
The
following table presents the fair value reconciliation of Level 3 liabilities measured at fair value during the nine months ended
September 30, 2017:
|
|
Common
stock
|
|
|
|
warrant
liability
|
|
Balance – January 1, 2017
|
|
$
|
-
|
|
Issuance of warrants
|
|
|
156,725
|
|
Change in fair value of derivative liabilities
|
|
|
(64,366
|
)
|
Balance – September 30, 2017
|
|
$
|
92,359
|
|
Assumptions
utilized in the valuation of Level 3 liabilities are described as follows:
|
|
For
Nine Months Ended
September 30, 2017
|
Risk-free
interest rate
|
|
1.72%-1.92%
|
Expected
life
|
|
3.9-4.9
years
|
Expected
volatility of underlying stock
|
|
65%
- 80%
|
Expected
dividend yield
|
|
-
|
The
expected stock price volatility for the Company’s common stock warrant liabilities was determined by the historical volatilities
for industry peers and used an average of those volatilities. Risk free interest rates were obtained from U.S. Treasury rates
for the applicable periods. The expected term used is the contractual life of the instrument being valued. The expected dividend
yield was not considered in the valuation of the common stock liabilities as the Company has never paid, nor has the intention
to pay, cash dividends.
The
Company’s other financial instruments include cash and cash equivalents and accounts receivable, which management believes
approximates fair value due to the short-term nature of these instruments. The carrying value of the Company’s trade payables
and notes payable also approximates fair value, as the notes bear terms and conditions comparable to the current market for obligations
with similar terms and maturities.
Note
12 - Common Stock
On
June 9, 2017, the Company completed its IPO raising $4,991,235, before selling agent commissions and other offering expenses of
$1,061,157, through the sale of 665,498 shares of its common stock at a price of $7.50 per share.
On
June 9, 2017, the Company also closed on a private placement pursuant to which it sold to accredited investors an aggregate of
557,216 units at $5.25 per unit, for aggregate proceeds of $2,925,385, before offering expenses of $2,500. Each unit consists
of one share of common stock and a three-year warrant to purchase one share of common stock exercisable for $7.50 per share.
In
June 2017, the Company issued 4,000 shares to an investor relations firm for services performed. The Company recorded a charge
to operations for $30,000 for the fair value of the stock issued.
During
the nine months ended September 30, 2017 the Company issued 79,929 shares of common stock through the exercise of stock options
for proceeds of $23,954. During the nine months ended September 30, 2016 the Company issued 124,456 shares of common stock through
the exercise of stock options for proceeds of $2,876.
Note
13 - Redeemable and Convertible Preferred Stock
Convertible
Preferred Stock consisted of the following as of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preference
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
|
|
Dividend
|
|
|
Including
|
|
|
|
Shares
|
|
|
Issued and
|
|
|
Par Value
|
|
|
Cumulative
|
|
|
Arrearage
|
|
|
Dividend
|
|
|
|
Authorized
|
|
|
Outstanding
|
|
|
per Share
|
|
|
Dividends
|
|
|
Per Share
|
|
|
Arrearage
|
|
Series B-1 Preferred Stock
|
|
|
1,862,500
|
|
|
|
1,662,104
|
|
|
$
|
0.0001
|
|
|
$
|
1,495,127
|
|
|
$
|
0.90
|
|
|
$
|
9,701,313
|
|
Series A-1 Preferred Stock
|
|
|
1,594,958
|
|
|
|
960,083
|
|
|
$
|
0.0001
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,740,066
|
|
Upon
closing of the IPO, the Company issued 960,083 shares of common stock upon the conversion of 960,083 shares of Series A-1 Preferred
Stock, and 1,662,104 shares of common stock upon the conversion of 1,662,104 shares of Series B-1 Preferred Stock. As of September
30, 2017, the Company does not have any convertible preferred stock issued or outstanding.
Note
14 - Stock Options and Restricted Stock Units
The
Company granted options for 91,600 shares of common stock during the nine months ended September 30, 2017, at a weighted-average
exercise price of $2.42. The aggregate fair value of the awards on the grant date was approximately $135,000.
The
Company granted 46,500 shares of restricted shares to certain executives and employees during the nine months ended September
30, 2017. The aggregate fair value of the awards on the grant date was approximately $314,000.
Note
15 - Warrants
On
June 9, 2017, the Company issued warrants for the purchase of 557,216 shares of common stock to investors in connection with a
private placement that closed concurrently with the Company’s IPO, as more fully described in Note 1. The warrants are exercisable
for three years from the date of the IPO and are fully vested and exercisable at any time by the holder at a price of $7.50 per
share. The warrants can only be settled in the Company’s own shares, and as such, under ASC 815 Derivatives and Hedging
the warrants were deemed to be equity instruments and, therefore are included in stockholders’ equity and no fair value
adjustments are required from period-to-period.
On
June 9, 2017, the Company issued warrants for the purchase of 33,275 shares of common stock to its IPO selling agent. The warrants
are fully vested, exercisable at any time after December 9, 2017 by the holder at an exercise price of $8.25 per share and have
a life of five years. The warrants include a fundamental transaction clause which provides for the warrant holder to be paid in
cash upon an event as defined in the warrant. The cash payment is to be computed using the Black-Scholes valuation model for the
unexercised portion of the warrant. Accordingly, under ASC 815 Derivatives and Hedging the warrants were deemed to be a derivative
liability and are marked to market at each reporting period. Accordingly, on the date of issuance the Company recorded as a derivative
liability the fair value of the warrants which was $156,725 and on June 30, 2017 the derivative liability was marked to its then
fair market value of $250,415. On September 30, 2017 the derivative liability was marked to its then fair market value of $92,359.
In
connection with the issuance of its 2016 and 2015 convertible promissory notes, as more fully described in Notes 8 and 9, the
Company issued warrants that expire three years from the date of its IPO for the purchase of 799,349 shares of common stock and
warrants that expire five years from the date of its IPO for the purchase of 29,425 shares of its common stock.
In
addition, in connection with the issuance of its promissory notes to MLSC and a shareholder, as more fully described in Notes
7 and 8 to our audited financial statements included in our Offering Circular, the Company issued warrants that expire in 2021
for the purchase of 8,228 shares of stock at an exercise price of $6.47 per share.
Note
16 - Related Party Transactions
The
Company sells its products to GRE, an orthotics and prosthetics practice, whose ownership includes Jonathan Naft, a minority stockholder
and officer of the Company. Sales to this related party are sold at standard list prices. Sales to GRE were approximately $102,000
and $24,500 in the nine-months ended September 30, 2017 and 2016, respectively.
The
Company also obtains consulting and fabrication services from GRE. Charges for these services amounted to approximately $214,000
and $113,000 during the nine months ended September 30, 2017 and 2016, respectively. Included in accounts payable and accrued
expenses at September 30, 2017 and December 31, 2016, is $33,800 and $6,600, respectively, due to the related party.
Certain
directors, executive officers and 5% stockholders of the Company purchased 296,669 (53% of total) shares of common stock with
warrants, at $5.25 per unit in the Company’s private placement that closed concurrently with the IPO on June 9, 2017.
N
ote
17 - Commitments and Contingencies
Litigation
In
the normal course of business, the Company may be involved in legal proceedings, claims and assessments arising from the ordinary
course of business. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Currently,
there is no litigation against the Company.
Warranty
Liability
Warranty
expense amounted to:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,903
|
|
|
$
|
16,705
|
|
|
$
|
28,031
|
|
|
$
|
22,821
|
|
Major
Customers
For
the nine months ended September 30, 2017, three customers accounted for approximately 55% (29%-$258,200, 15%-$130,600, and 11%-$101,700
[related party]) of revenues, excluding grant revenue.
For
the nine months ended September 30, 2016, three customers accounted for approximately 58% (27%-$170,100, 18%-$113,700 and 13%-$83,600)
of revenues, excluding grant revenue.
At
September 30, 2017, six customers accounted for approximately 90% (22%-$57,500, 20%-$51,800 [related party], 15%-37,500, 12%-29,800,
11%-28,800 and 10%-$26,100) of accounts receivable.
At
December 31, 2016, four customers (23%-$26,100, 23%-$25,700, 21%-$24,500 [related party] and 13%-$15,200) accounted for approximately
80% of accounts receivable.
Contingently
Issuable Shares
The
Company, in the first quarter of 2017, accrued $26,000 for contingently issuable shares of its common stock in connection with
a technology licensing agreement.
Item
2. Management’s discussion and analysis of financial condition and results of operations
You
should read the following discussion and analysis of our unaudited financial condition and results of our operations together
with our financial statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the audited financial
information and the notes thereto included in the Offering Circular that forms part of our Registration Statement on Form 1-A
(File No. 024-10662), which was filed with the Securities and Exchange Commission under Regulation A of the Securities Act of
1933 on June 9, 2017 . This discussion contains forward-looking statements reflecting our current expectations, whose actual outcomes
involve risks and uncertainties. Actual results and the timing of events may differ materially from those stated in or implied
by these forward-looking statements due to a number of factors, including those discussed in the section entitled “Cautionary
Statement regarding Forward-Looking Statements” and elsewhere in this Quarterly Report on Form 10-Q.
Overview
Myomo
is a commercial-stage medical robotics company, specializing in myoelectric braces, or orthotics, for people with neuromuscular
disorders. We develop and market the MyoPro product line, which is a myoelectric-controlled upper limb brace, or orthosis. The
orthosis is a rigid brace used for the purpose of supporting a patient’s weak or deformed arm to enable and improve functional
ADLs in the home and community. It is custom constructed by a qualified O&P practitioner during a custom fabrication process
for each individual user to meet their specific needs. Our products are designed to help restore function in individuals with
neuromuscular conditions due to brachial plexus injury, stroke, traumatic brain injury, spinal cord injury and other neurological
disorders. We sell our products through O&P providers, the VA, and our exclusive distributor for certain accounts and geographic
markets, Ottobock.
Our
myoelectric orthoses have been clinically shown in peer reviewed published research studies to help restore the ability to complete
functional tasks by supporting the affected joint and enabling individuals to self-initiate and control movement of their partially
paralyzed limbs by using their own muscle signals.
Our
technology was originally developed at MIT in collaboration with medical experts affiliated with Harvard Medical School. Myomo
was incorporated in 2004 and completed licensing of its technology from MIT in 2006.
In
2012, we introduced the MyoPro, a custom fabricated orthosis that is individually fabricated for the patient over a positive model
of the patient; this fitting process requires specialized education, training, and experience to custom-fabricate and provision
to the patient. The primary business focus shifted during this time period from devices which were designed for rehabilitation
therapy and sold to hospitals to providing an assistive device through O&P practices to patients who are otherwise impaired
for use at home, work, and in the community that facilitates ADLs.
During
2015, we extended our basic MyoPro for the elbow with the introduction of the MyoPro Motion W, a multi-articulated non-powered
wrist and the MyoPro Motion G, which includes a powered grasp. The MyoPro Motion W allows the user to use their sound arm to adjust
the device and then, for instance, open a refrigerator door, carry a shopping bag, hold a cell phone, or stabilize themselves
to avoid a fall and potential injury. The MyoPro Motion G model allows users with severely weakened or clenched hands, such as
seen in certain stroke survivors, to open and close their hands and perform a large number of ADLs.
In
December 2016, we entered into an agreement with Ottobock, the largest global provider of O&P devices, to begin distributing
the MyoPro product line in the U.S., Canada, and Germany in 2017 upon regulatory approval. In accordance with the terms of this
agreement, Ottobock agreed to certain minimum purchase requirements during the year ending December 31, 2017. Ottobock’s
minimum purchase requirements in Germany, Switzerland, and Austria applied only if we obtained the CE Mark for the MyoPro prior
to June 30, 2017. We obtained the CE Mark for the MyoPro after such date and Ottobock is not bound by the minimum purchase requirements
in those markets. Nevertheless, we expect that our revenue generated from our primary reseller will be higher in the year ending
December 31, 2017 than in prior years.
We
currently sell almost exclusively in the United States. On July 31, 2017, we obtained the CE Mark for the MyoPro. This will enable
us to sell the MyoPro to individuals in the Europe Union, or EU. On October 24, 2017, we obtained a Medical Device License in
Canada, which will enable us to sell the MyoPro in Canada.
Recent
Developments
Initial
Public Offering
On
June 9, 2017, we completed our initial public offering, or IPO, in which we sold 665,498 shares of common stock at an offering
price of $7.50 per share. All then-outstanding shares of redeemable and convertible preferred stock converted to 2,622,187 shares
of common stock at the closing of the IPO. Our shares are traded on the NYSE-American under the symbol “MYO.” We received
proceeds from the IPO of $4,659,000, net of selling agent commissions, but before other offering expenses of approximately $729,000.
Selling agent commissions and other offering expenses have been recorded as a reduction of the proceeds received.
Private
Placement
In
a private offering in the second quarter of 2017, we sold 557,216 units, or Units, to accredited investors for cash proceeds of
$2,925,385. Each Unit consists of one share of common stock and a three-year warrant to purchase one share of common stock at
an exercise price of $7.50 per share. Each Unit was sold at a price of $5.25. Concurrently with the closing of the IPO on June
9, 2017, we issued 557,216 Units, along with the underlying shares of common stock.
Convertible
Notes
On
June 5, 2017, we modified the terms of the then-outstanding convertible promissory notes that we issued in 2016, which we refer
to as the 2016 Convertible Notes such that they would automatically convert into common stock upon any public equity financing
resulting in gross proceeds to us of at least $5,000,000 (excluding the conversion of the notes and any other indebtedness, but
including, for such purposes, all amounts raised in our IPO and the concurrent private placement). All outstanding convertible
notes converted to 1,055,430 shares of common stock at the closing of the IPO.
Promissory
Notes
On
May 23, 2017, we entered into an agreement with a related party noteholder to amend such related party’s promissory notes.
The maturity date was extended from June 8, 2017 to June 8, 2019, unless prior to that date, we complete an equity financing in
any twelve-month period raising aggregate gross proceeds of at least $10 million, excluding the conversion into common stock in
an initial public offering of any convertible notes outstanding on the date of that amendment. Upon completion of such a financing,
these notes will become due within 30 days. However, we may elect, at our sole discretion, to repay on the date of repayment up
to 50% of the outstanding principal and any accrued but unpaid interest as shall be due and payable under this note by issuing
shares of our equity equal to 80% of the price per share of common stock on the repayment date. As of September 30, 2017, we had
outstanding an aggregate of approximately $1,068,350, which is comprised of an aggregate principal amount of $876,458 plus accrued
but unpaid interest of $191,892, as of September 30, 2017.
On
June 6, 2017, we and the MLSC, entered into an agreement to extend and amend our promissory note to MLSC. The promissory note’s
maturity date of June 7, 2017 was extended to May 7, 2019, with repayment in twenty-four equal monthly installments beginning
June 7, 2017. The unpaid principal and accrued interest is due and payable upon the earlier of (i) May 7, 2019, (ii) the closing
of an initial public offering, prior to August 1, 2017, with gross proceeds of not less than $10 million, for which the IPO did
not qualify, (iii) the sale of additional equity securities of $5 million or more at any time other than in connection with our
initial public offering prior to August 1, 2017, (iv) the closing of an acquisition of our company, and (v) the occurrence of
a default, as defined in the promissory note. The amended promissory note bears a reduced interest rate of 7% per annum. MLSC
has the right, at its sole discretion, to extend the maturity date. Myomo has the right to redeem the note, in whole or in part,
without penalty or premium with thirty days’ notice to MLSC.
Results
of Operations
We
have incurred net losses and negative cash flows from operations since inception and anticipate this to continue as we focus our
efforts on expanding our sales and marketing efforts to increase our customer base and expand into new markets, invest in development
of our MyoPro products, the funding of clinical research studies to support our reimbursement efforts, and incur increased costs
required to comply with the regulatory requirements of the SEC, as a result of our becoming a public company.
The
following table sets forth our Revenue, Gross Margin and Gross Margin% for each of the periods presented.
|
|
Three months ended
|
|
|
Period-to-period
|
|
|
Nine months ended
|
|
|
Period-to-period
|
|
|
|
September 30,
|
|
|
change
|
|
|
September 30,
|
|
|
change
|
|
|
|
2017
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
|
2017
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
488,540
|
|
|
$
|
184,194
|
|
|
$
|
304,346
|
|
|
|
165
|
%
|
|
$
|
1,011,454
|
|
|
$
|
655,184
|
|
|
$
|
356,270
|
|
|
|
54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
124,098
|
|
|
|
77,082
|
|
|
|
47,016
|
|
|
|
61
|
%
|
|
|
301,308
|
|
|
|
186,334
|
|
|
|
114,974
|
|
|
|
62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
364,442
|
|
|
$
|
107,112
|
|
|
$
|
257,330
|
|
|
|
240
|
%
|
|
$
|
710,146
|
|
|
$
|
468,850
|
|
|
$
|
241,296
|
|
|
|
51
|
%
|
Gross margin%
|
|
|
75
|
%
|
|
|
58
|
%
|
|
|
|
|
|
|
17
|
%
|
|
|
70
|
%
|
|
|
72
|
%
|
|
|
|
|
|
|
(2
|
)%
|
Revenues
We
derive revenue primarily from the sale of our products to orthotics and prosthetics practices, as well as the Veterans Health
Administration and other hospitals and through our distributor, Ottobock. We expect that our product revenues will grow as a result
of our increased selling efforts and our distribution agreement with Ottobock.
We
receive federally-funded grants that require us to perform research activities as specified in each respective grant. We are paid
based on the fees stipulated in the respective grants which approximate the projected costs to be incurred by us to perform such
activities. We expect that our grant revenues, in the future, will become a less significant component of our revenues.
Comparison
of the Three Months Ended September 30, 2017 and 2016
Total
revenue increased by $304,000, or 165%, during the three months ended September 30, 2017, as compared to the three months ended
September 30, 2016. During the three months ended September 30, 2017, product revenue increased $279,000 versus the comparable
period of 2016. The increase was due primarily to increased product sales to our distributor Ottobock. We recognized $30,000 of
grant revenue during the three months ended September 30, 2017 as compared to $5,000 for the three months ended September 30,
2016.
Comparison
of the Nine Months Ended September 30, 2017 and 2016
Total
revenue increased by $356,000, or 54%, during the nine months ended September 30, 2017, as compared to the nine months ended September
30, 2016. During the nine months ended September 30, 2017, product revenue increased $264,000 versus the comparable period of
2016. The increase was primarily due to increased product sales to our distributor Ottobock and $37,000 in revenue relating to
our 2016 Össur distribution agreement, and reflects the higher average selling price of units sold. Our 2016 Össur distribution
agreement was scheduled to expire on December 31, 2016, but we verbally extended the agreement for one quarter for specified orders
in Ossur’s sales pipeline at December 31, 2016, and extended the minimum purchase requirements for this amount. In the first
quarter of 2017, Össur had not yet closed all these orders, so we recognized $37,000 of minimum purchase requirement related
revenue that had been deferred in 2016. The nine months ended September 30, 2016 included $61,000 of revenue associated with prior
year sales that was not recognized until the six months ended June 30, 2016 due to the uncertainty of payment at the time of shipment.
We recognized $113,000 of grant revenue during the nine months ended September 30, 2017 as compared to $21,000 for the nine months
ended September 30, 2016.
Gross
margin
Cost
of revenue consists of direct costs for the manufacturing and fabrication of our products, inventory reserves, warranty costs
and royalties associated with licensed technologies. We also include the incremental costs incurred for our funded grants in cost
of revenue.
Comparison
of the Three Months Ended September 30, 2017 and 2016
Gross margin increased to 75% for the three months ended
September 30, 2017, as compared to 58% for the three months ended September 30, 2016.
The
lower gross margin for three months ended September 30, 2016 is due primarily to a $15,000 write-off of inventory; and $10,000
in higher inventory and warranty provisions as compared to three months ended September 30, 2017. Gross margins for the three
months ended September 30, 2017 also benefited from increase in grant revenue of $30,000 associated with the research projects,
which had $4,000 in incremental costs, as compared to $5,000 in grant revenue with $2,000 in incremental costs for the comparable
period of 2016.
Comparison
of the Nine Months Ended September 30, 2017 and 2016
Gross
margin decreased to 70% for the nine months ended September 30, 2017, as compared to 72% in the comparable 2016 period, primarily
due to the recording in the 2017 period of a $31,000 reserve for excess and obsolete inventory as a result of our recently introduced
MyoPro 2 products; and a lower average selling price on sales of demonstration units to our new distributor Ottobock, which have
lower average gross margins than our direct sales to customers; Partially offsetting these drivers of reduced gross margin were
the recording of $37,000 in revenue in the first quarter of 2017 relating to minimum purchase requirements in connection with
our 2016 Össur distribution agreement, without any associated cost of revenue; and the $92,000 increase in grant revenue
in the 2017 period associated with research projects, without incurring any additional incremental costs. Our 2016 Össur
distribution agreement was scheduled to expire on December 31, 2016, but we verbally extended the agreement for one quarter for
specified orders in Ossur’s sales pipeline at December 31, 2016, and extended the minimum purchase requirements for this
amount. In the first quarter of 2017, Össur had not yet closed all these orders, so we recognized $37,000 of minimum purchase
requirement related revenue, without any associated cost of revenue, which had been deferred in 2016. We expect our product gross
margins to vary depending on the mix of our product sales and mix of sales channels.
Operating
expenses
The
following table sets forth our operating expenses for each of the periods presented.
|
|
Three months ended
|
|
|
Period-to-period
|
|
|
Nine months ended
|
|
|
Period-to-period
|
|
|
|
September 30,
|
|
|
change
|
|
|
September 30,
|
|
|
change
|
|
|
|
2017
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
|
2017
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
329,357
|
|
|
$
|
237,688
|
|
|
$
|
91,669
|
|
|
|
39
|
%
|
|
$
|
1,394,865
|
|
|
$
|
714,333
|
|
|
$
|
680,532
|
|
|
|
95
|
%
|
Selling, general and administrative
|
|
|
1,470,058
|
|
|
|
803,249
|
|
|
|
666,809
|
|
|
|
83
|
%
|
|
|
4,047,385
|
|
|
|
1,932,522
|
|
|
|
2,114,863
|
|
|
|
109
|
%
|
Total operating expenses
|
|
$
|
1,799,415
|
|
|
$
|
1,040,937
|
|
|
$
|
758,478
|
|
|
|
73
|
%
|
|
$
|
5,442,250
|
|
|
$
|
2,646,855
|
|
|
$
|
2,795,395
|
|
|
|
106
|
%
|
Research
and development
Research
and development expenses consist of costs for our research and development personnel, including salaries, benefits, bonuses and
stock-based compensation, product development costs, costs required to comply with the regulatory requirements of the Food and
Drug Administration, the cost of certain third-party contractors and travel expense. Research and development costs are expensed
as they are incurred. We intend to continue to develop additional products and enhance our existing products, and expect research
and development costs to continue to increase.
Comparison
of the Three Months Ended September 30, 2017 and 2016
Research
and development expenses increased by $92,000, or 39%, during the three months ended September 30, 2017, as compared to the three
months ended September 30, 2016. The increase was primarily due to additional engineering personnel costs of $72,000.
Comparison
of the Nine Months Ended September 30, 2017 and 2016
Research
and development expenses increased by $681,000, or 95%, during the nine months ended September 30, 2017, as compared to the nine
months ended September 30, 2016. The increase was primarily due to an incentive bonus of $300,000 to an engineering executive,
increased costs relating to the development of the next version of our MyoPro products including $235,000 related to additional
engineering personnel costs, and $125,000 in increased engineering, testing, tooling, set-up and prototype costs.
Selling,
general and administrative
Selling
expenses consist of costs for our sales and marketing personnel, including salaries, benefits, bonuses, stock-based compensation
and sales commissions, costs of marketing and promotional events, clinical studies corporate communications, product marketing
and travel expenses. Sales commissions are generally earned and recorded as expense when the customer order has shipped. We expect
sales and marketing expenses to increase as we expand our business both domestically and internationally.
General
and administrative expenses consist primarily of costs for administrative and finance personnel, including salaries, benefits,
bonuses and stock-based compensation, professional fees associated with legal matters, consulting expenses, costs for pursuing
insurance reimbursements for our products, and costs required to comply with the regulatory requirements of the SEC, as well as
costs associated with accounting systems, insurance premiums and other corporate expenses. We expect that general and administrative
expenses will increase as we pursue insurance reimbursements and seek expanded coverage for our products and add administrative
and accounting support structure for our growing business and as a result of becoming a public company.
Comparison
of the Three Months Ended September 30, 2017 and 2016
Selling,
general and administrative costs increased $667,000, or 83%, during the three months ended September 30, 2017, as compared to
the three months September 30, 2016. The increase was primarily due to increases in personnel costs of $178,000 for additional
administrative staff and sales personnel hired and $86,000 recorded for estimated executive bonuses. Executive salaries increased
by $154,000 as compared to the same period in 2016. During the three months ended March 31, 2016, certain executives of the Company
agreed to temporarily reduce their salaries. These salary reductions were restored in October 2016. Administrative costs including
insurance, rent and office expenses increased $95,000, travel expenses increased $79,000, clinical expenses increased $70,000
related to clinical research to support reimbursement efforts for our products and marketing expenses increased $35,000. These
increases were partially offset by decreases in stock-based compensation expense of $103,000 during the three months ended September
30, 2017, as a result of the mark-to-market valuation for our non-qualified stock options issued to non-employees.
Comparison
of the Nine Months Ended September 30, 2017 and 2016
Selling,
general and administrative costs increased $2,115,000, or 109%, during the nine months ended September 30, 2017, as compared to
the nine months ended September 30, 2016. The increase was primarily due to increases in personnel costs of $439,000 for additional
administrative staff and sales personnel hired and $252,000 recorded for estimated executive bonuses. Executive salaries increased
by $297,000 as compared to the same period in 2016. During the three months ended March 31, 2016, certain executives of the Company
agreed to temporarily reduce their salaries. These salary reductions were restored in October 2016. Professional fees increased
$355,000 for accounting, audit and legal fees as we prepared for our initial public offering and transitioned to a publicly traded
company. Stock-based compensation expense increased $163,000 during the nine months ended September 30, 2017, as a result of the
mark-to-market valuation for our non-qualified stock options issued to non-employees. Travel expenses increased $194,000, clinical
expenses increased $176,000 related to clinical research to support reimbursement efforts for our products and administrative
costs including insurance, rent and office expenses increased $142,000.
Interest
and other expense (income)
The
following table sets forth our interest and other expense (income) for each of the periods presented.
|
|
Three months ended
|
|
|
Period-to-period
|
|
|
Nine months ended
|
|
|
Period-to-period
|
|
|
|
September 30,
|
|
|
change
|
|
|
September 30,
|
|
|
change
|
|
|
|
2017
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
|
2017
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivative liabilities
|
|
$
|
(219,374
|
)
|
|
$
|
-
|
|
|
$
|
(219,374
|
)
|
|
|
N/M
|
|
|
$
|
(64,366
|
)
|
|
$
|
-
|
|
|
$
|
(64,366
|
)
|
|
|
N/M
|
|
Debt discount on convertible notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,172,000
|
|
|
|
-
|
|
|
|
5,172,000
|
|
|
|
N/M
|
|
Interest and other expense, net
|
|
|
43,350
|
|
|
|
84,439
|
|
|
|
(41,089
|
)
|
|
|
(49
|
)%
|
|
|
357,465
|
|
|
|
227,719
|
|
|
|
129,746
|
|
|
|
57
|
%
|
Total interest and other expense (income)
|
|
$
|
(176,024
|
)
|
|
$
|
84,439
|
|
|
$
|
(260,463
|
)
|
|
|
(308
|
)%
|
|
$
|
5,465,099
|
|
|
$
|
227,719
|
|
|
$
|
5,237,380
|
|
|
|
N/M
|
|
Comparison
of the Three Months Ended September 30, 2017 and 2016
The
decrease in the fair value of derivative liabilities is due to the mark-to-market adjustment of our derivative liabilities primarily
due to the decline in our stock price during the three months ended September 30, 2017. The decrease in interest expense, net
is due to the conversion of our convertible promissory notes into common stock on June 9, 2017, our IPO closing date.
Comparison
of the Nine Months Ended September 30, 2017 and 2016
The
change in the fair value of derivative liabilities of $64,000 is due to recording a derivative liability relating to warrants
issued during the nine months ended September 30, 2017. The debt discount on convertible notes resulted from the closing of our
IPO, as the measurement of the value of the previously contingent embedded beneficial conversion option was now determinable and
we were required under generally accepted accounting principles (GAAP) to recognize the value of the embedded beneficial conversion
features and the warrants issued with the notes as a charge to interest expense. Because the combined relative fair value of the
warrants and the value of the beneficial conversion feature exceeded the principal value of the convertible promissory notes,
we recorded an immediate charge to interest expense for the debt discount in the statement of operations on June 9, 2017, our
IPO closing date, equal to the $5,172,000 principal value of the notes. The increase in interest and other expense of $130,000,
net is primarily due to an increase in interest expense on our convertible promissory notes and $26,000 accrued for contingently
issuable shares in connection with a technology license.
Adjusted
EBITDA
We
believe that the presentation of Adjusted EBITDA, a non-GAAP financial measure, provides investors with additional information
about our financial results. Adjusted EBITDA is an important supplemental measure used by our board of directors and management
to evaluate our operating performance from period-to-period on a consistent basis and as a measure for planning and forecasting
overall expectations and for evaluating actual results against such expectations.
We
define Adjusted EBITDA as earnings before interest and other income (expense), taxes, depreciation and amortization adjusted for,
stock based-compensation, the debt discount on convertible notes and the impact of the fair value revaluation of our derivative
liabilities.
Adjusted
EBITDA is not in accordance with, or an alternative to, measures prepared in accordance with U.S. GAAP. In addition, this non-GAAP
measure is not based on any comprehensive set of accounting rules or principles. As a non-GAAP measure, Adjusted EBITDA has limitations
in that it does not reflect all of the amounts associated with our results of operations as determined in accordance with U.S.
GAAP. In particular:
|
●
|
Adjusted
EBITDA does not reflect the amounts we paid in interest expense on our outstanding debt;
|
|
●
|
Adjusted
EBITDA does not reflect the amounts we paid in taxes or other components of our tax provision;
|
|
●
|
Adjusted
EBITDA does not include other income (expense);
|
|
●
|
Adjusted
EBITDA does not include depreciation expense from fixed assets;
|
|
●
|
Adjusted
EBITDA does not include the impact of stock-based compensation;
|
|
●
|
Adjusted EBITDA does not include the debt discount on convertible notes, and
|
|
|
|
|
●
|
Adjusted EBITDA does not include the change in value of our derivative liabilities;
|
Because
of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures including net income
(loss) and our financial results presented in accordance with U.S. GAAP.
The
following table provides a reconciliation of net loss to Adjusted EBITDA for each of the periods indicated:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
GAAP net loss
|
|
$
|
(1,258,949
|
)
|
|
$
|
(1,018,264
|
)
|
|
$
|
(10,197,203
|
)
|
|
$
|
(2,405,724
|
)
|
Adjustments to reconcile to Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
43,150
|
|
|
|
84,034
|
|
|
|
330,065
|
|
|
|
224,784
|
|
Other (income) expense
|
|
|
200
|
|
|
|
405
|
|
|
|
27,400
|
|
|
|
2,935
|
|
Depreciation expense
|
|
|
2,439
|
|
|
|
1,868
|
|
|
|
6,985
|
|
|
|
5,864
|
|
Stock-based compensation
|
|
|
(57,196
|
)
|
|
|
44,500
|
|
|
|
238,222
|
|
|
|
72,188
|
|
Debt discount on convertible notes
|
|
|
-
|
|
|
|
-
|
|
|
|
5,172,000
|
|
|
|
-
|
|
Change in fair value of derivative liabilities
|
|
|
(219,374
|
)
|
|
|
-
|
|
|
|
(64,366
|
)
|
|
|
-
|
|
Adjusted EBITDA
|
|
$
|
(1,489,730
|
)
|
|
$
|
(887,457
|
)
|
|
$
|
(4,486,897
|
)
|
|
$
|
(2,099,953
|
)
|
Liquidity
and Capital Resources
We
measure our liquidity in a number of ways, including the following:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Cash
|
|
$
|
4,958,088
|
|
|
$
|
797,174
|
|
Working Capital (Deficiency)
|
|
$
|
3,880,032
|
|
|
$
|
(1,854,843
|
)
|
Availability
of Additional Funds
We
had working capital and stockholders’ equity of $3,880,000 and $2,575,000, respectively, as of September 30, 2017. We believe
that these conditions raise substantial doubt about our ability to continue as a going concern. We will need to raise further
capital, through the sale of additional equity or debt securities, to support our future operations, and to repay our debt (see
“Promissory Notes”). Our operating needs include costs to operate our business, including amounts required to fund
working capital and capital expenditures. Our future capital requirements and the adequacy of our available funds will depend
on many factors, including our ability to successfully increase sales of our products and services, competing technological and
market developments, and the need to enter into collaborations with other companies or acquire other companies or technologies
to enhance or complement our product offerings.
Based
upon our working capital, line of credit and forecasted continued operating losses, we expect that the cash we currently have
available and the net proceeds of this offering will fund our operations into the first half of 2019. Thereafter, we will
need to raise further capital, through the sale of additional equity or debt securities, to support our future operations and
to repay our debt, unless, if requested, the debt holders agree to convert their notes into equity or extend the maturity dates
of their notes. Our operating needs include costs to operate our business, including amounts required to fund working capital
and capital expenditures. Our future capital requirements and the adequacy of our available funds will depend on many factors,
including our ability to successfully commercialize and market our products and services, competing technological and market developments,
and the need to enter into collaborations with other companies or acquire other companies or technologies to enhance or complement
our product and service offerings.
We
may be unable to raise sufficient additional capital when we need it or raise capital on favorable terms. Debt financing may require
us to pledge certain assets and enter into covenants that could restrict certain business activities or our ability to incur further
indebtedness, and may contain other terms that are not favorable to our stockholders or us. If we are unable to obtain adequate
funds on reasonable terms, we may be required to significantly curtail or discontinue operations or obtain funds by entering into
financing agreements on unattractive terms.
Sources
and Uses of Cash for the Nine Months Ended September 30, 2017 and September 30, 2016
Net
Cash used in Operating Activities
We
experienced negative cash flows from operating activities of $4,723,000 for the nine months ended September 30, 2017, as compared
to negative cash flows from operating activities of $2,299,000 for the nine months ended September 30, 2016. The net cash used
in operating activities for the nine months ended September 30, 2017 was primarily used to fund a net loss of $10,197,000, adjusted
for non-cash expenses in the aggregate amount of $5,461,000, of which $5,108,000 of non-cash adjustments related to fair value
adjustments of warrants and derivative liabilities, and by $13,000 of cash provided by changes in the levels of operating assets
and liabilities, primarily related to increases in accounts payable, accrued expenses and accrued interest partially offset by
increases in our accounts receivable, prepaid expenses and other current assets and payments of deferred offering costs. The net
cash used in operating activities for the nine months ended September 30, 2016 was primarily due to cash used to fund a net loss
of $2,406,000, adjusted for non-cash expenses in the aggregate amount of $81,000 and reduced by $25,000 of cash provided by the
changes in the levels of operating assets and liabilities, primarily related to increases in accounts payable, accrued expenses,
deferred revenue and accrued interest partially offset by increases in our accounts receivable.
Net
Cash Used in Investing Activities
During
the nine months ended September 30, 2017 our cash used in investing activities of $7,200 was for the acquisition of equipment.
Net
Cash Provided by Financing Activities
Net
cash provided by financing activities during the nine months ended September 30, 2017 was $8,891,000, as compared to $1,749,000
during the nine months ended September 30, 2016. During the nine months ended September 30, 2017 we completed our initial public
offering generating $4,368,000 in net proceeds, excluding $438,000 of offering expenses incurred in 2016, and closed our concurrent
private placement generating $2,923,000 in net proceeds. During the nine months ended September 30, 2017 and 2016, $1,770,000
and $1,747,000 of cash, respectively was generated from our convertible note offering. The increases in cash provided by financing
activities during the nine months ended September 30, 2017 was partially offset by $197,000 in repayments of our note with MLSC.
Off-Balance
Sheet Arrangements
None.
Critical
Accounting Policies and Estimates
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
require management to make estimates and assumptions that affect certain reported amounts and disclosures. These estimates and
assumptions are reviewed on an on-going basis and updated as appropriate. Actual results could differ from those estimates. Our
significant estimates include the allowance for doubtful accounts, the valuation of our deferred tax asset, the fair value of
our derivative liabilities and reserves for slow moving inventory.
There
have been no material changes to our critical accounting policies from those described in our audited financial statements included
in our Offering Circular.
Recent
Accounting Pronouncements
In May 2017, the FASB issued ASU No. 2017-09,
Compensation—Stock Compensation (Topic 718); Scope of Modification Accounting. The amendments in this ASU provide guidance
that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. If
the value, vesting conditions or classification of the award changes, modification accounting will apply. The guidance is effective
for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We are currently evaluating
the impact of the adoption of this standard on our financial statements.
In September 2017, the FASB issued ASU No.
2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases
(Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of
Prior SEC Staff Announcements and Observer Comments” that enhances the guidance surrounding sale leaseback transactions,
accounting for taxes on leveraged leases and leases with third party value. The related amendments to the Topics described above
become effective on the same schedule as Topics 605, 606, 840 and 842.
In
addition to the above, see discussion of recent accounting pronouncements in Note 3 to our audited financial statements
included in our Offering Circular.