Notes to Condensed Consolidated Financial
Statements
(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 and manufacturing 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 (“RGL”)
formed on December 12, 2013. RGL owns one hundred percent (100%) of 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 transmitter device with a re-chargeable power source,
which is designed to enable trending or tracking of blood glucose levels. All of the Company’s operations and assets are
located in England.
The following diagram illustrates
Nemaura’s corporate structure as of December 31, 2019:
The Company was incorporated in 2013,
and has reported recurring losses from operations to date and an accumulated deficit of $16,239,191 as of December 31, 2019. These
operations have resulted in the successful completion of clinical programs to support a CE mark (European Union approval of the
product) approval, as well as a De Novo 510(k) medical device application to the US Food and Drug Administration (“FDA”)
submission. The Company expects to continue to incur losses from operations until revenues are generated through licensing fees
or product sales. However, given the completion of the requisite clinical programs, these losses are expected to be reduced over
time. Management has entered into licensing, supply, or collaboration agreements with unrelated third parties relating to the United
Kingdom, Europe, Qatar and all countries in the Gulf Cooperation Council.
Management has evaluated the expected
expenses to be incurred along with its available cash and credit facility and has determined that the Company has the ability to
continue as a going concern for at least one year subsequent to the date of issuance of these condensed consolidated financial
statements. The Company had an $8 million unsecured senior credit facility made available from certain major stockholders
on August 1, 2019. Further details of the terms of this loan are included in Note 4.
The
Company has $1,067,663 of readily available cash on hand at December 31, 2019. We believe the cash position as of December 31,
2019, plus the credit facility made available from certain major stockholders, is adequate for our current level of operations
through at least February 2021, and for the achievement of certain of our product development milestones. Our plan is
to utilize the cash on hand plus loan draw down to continue establishing commercial manufacturing operations for the commercial
supply of the sugarBEAT device and patches now that CE mark approval has been received.
Management's strategic plans include the
following:
·
support the UK and EU launch of sugarBEAT;
·
pursuing additional capital raising opportunities;
·
obtaining further regulatory approval for the
sugarBEAT device in other countries such as the USA;
·
exploring licensing and partnership opportunities
in other territories; and
·
developing the sugarBEAT device for commercialization
for other applications.
NOTE 2 – BASIS OF PRESENTATION
|
(a)
|
Basis of presentation
|
The accompanying condensed consolidated
financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the
“SEC”), and do not include all of the information and footnotes required by U.S. generally accepted accounting principles
(“U.S. GAAP”) for complete financial statements. However, such information reflects all adjustments consisting of normal
recurring accruals which are, in the opinion of management, necessary for a fair statement of the financial condition and results
of operations for the interim periods. The results for the three and nine months ended December 31, 2019 are not indicative of
annual results. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S.
GAAP for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X.
The accompanying condensed consolidated
financial statements include the accounts of the Company and the Company’s subsidiaries. References to “we”,
“us”, “our”, or the “Company” refer to Nemaura Medical Inc. and its consolidated subsidiaries.
The condensed consolidated financial statements are prepared in accordance with U.S. GAAP, and all significant intercompany balances
and transactions have been eliminated in consolidation.
The functional currency for the
majority of the Company’s operations is the Great Britain Pound Sterling (“GBP”), and the reporting currency
is the US Dollar (“USD”).
|
(b)
|
Changes to significant accounting policies
|
There have been no material changes
to our significant accounting policies as detailed in our Form 10-K for the year ended March 31, 2019.
|
(c)
|
Recently
adopted 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 condensed consolidated
financial statements and assures that there are proper controls in place to ascertain that the Company's condensed consolidated
financial statements properly reflect the change.
In May 2014, the Financial Accounting
Standards Board ("FASB") issued Accounting Standards Updates ("ASU") No. 2014-09 (“ASC 606”), Revenue
from Contracts with Customers. ASC 606 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 has replaced most existing
revenue recognition guidance in U.S. GAAP when it became effective. ASC 606, as amended, became effective for annual reporting
periods beginning after December 15, 2017. Early adoption was permitted. As an Emerging Growth Company, the Company is allowed
to adopt new, or updated, accounting standards using the same time frame that applies to private companies. The Company adopted
this standard on April 1, 2019.
While
the Company is not currently recognizing revenue, we have implemented the guidelines within ASC 606. This standard applies to all
contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration
arrangements and financial instruments. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised
goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods
or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity
performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the
contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract;
and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model
to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or
services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606,
the Company assesses the goods or services promised within each contract and determines those that are performance obligations,
and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction
price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
The
Company may enter into product development and other agreements with collaborative partners. The terms of the agreements may include
non-refundable signing and licensing fees, milestone payments and royalties on any product sales derived from collaborations.
The
Company has entered into license agreements and for these, 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 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.
In
June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, or ASU 2018-07. ASU
2018-07 simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments
to employees, with certain exceptions. The Company adopted ASU 2018-07 as of April 1, 2019. The adoption of ASU 2018-07 has not
had a material impact on the Company’s financial position, results of operations or related disclosures and no transition
adjustment at date of adoption was required.
Recent accounting pronouncements
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 have two options: they are required to recognize and measure leases
at the beginning of the earliest period presented using a modified retrospective approach or recognize a cumulative effect adjustment
to the opening balance of retained earnings at their adoption date. This ASU is effective for public business entities in fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2018 and for private companies ASU 2016-02 is
effective beginning after December 15, 2020. Early adoption is permitted as of the beginning of any interim or annual reporting
period. As an Emerging Growth Company, the Company is allowed to adopt new, or updated, accounting standards using the same time
frame that applies to private companies. The Company will adopt this standard on April 1, 2021. Management is currently evaluating
the impact of adoption of this ASU on the Company’s condensed consolidated financial statements but as there are no significant
leases, no significant changes to opening retained earnings are expected.
NOTE 3 – LICENSING AGREEMENTS
United Kingdom and the Republic of
Ireland, the Channel Islands and the Isle of Man
In March 2014, the Company entered into
an Exclusive Marketing Rights Agreement with an unrelated third party, which granted 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
$1.321 million and $1.303 million as of December 31, 2019 and March 31, 2019, 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. As the Company now expects commercialization of the sugarBEAT device to occur
in the second quarter ending September 30, 2020, approximately $66,000 and $65,000 of the deferred revenue has been classified
as a current liability as of December 31, 2019 and March 31, 2019, respectively.
Further details of licensing agreements
are disclosed in the Form 10-K for the year ended March 31, 2019.
NOTE 4 – RELATED PARTY TRANSACTIONS
Nemaura Pharma Limited (“Pharma”),
NDM Technologies Limited (“NDM”) and Black and White Health Care Limited (“B&W”) are entities controlled
by the Company’s Chief Executive Officer and majority stockholder, Dewan F.H. Chowdhury.
In accordance with the SEC Staff Accounting
Bulletin 55, these condensed consolidated financial statements are intended to reflect all costs associated with the operations
of DDL and TCL. Pharma has a service agreement with DDL, to undertake development, manufacture and regulatory approvals under Pharma’s
ISO13485 Accreditation. In lieu of these services, DDL invoices Pharma on a periodic basis for said services. Services are provided
at cost plus a service surcharge amounting to less than 10% of the total costs incurred.
The following is a summary of activity between
the Group and Pharma, NDM and B&W for the nine months ended December 31, 2019 and 2018, and the year ended March 31, 2019.
These amounts are unsecured, interest free, and payable on demand.
|
|
Nine Months Ended
December 31, 2019
(unaudited)
($)
|
|
Nine Months Ended
December 31, 2018
(unaudited)
($)
|
|
Year
Ended
March 31, 2019
($)
|
Liability due to related party, beginning of period
|
|
|
964,679
|
|
|
|
613,818
|
|
|
|
613,818
|
|
Amounts invoiced by DDL to Pharma
|
|
|
(5,874
|
)
|
|
|
—
|
|
|
|
(977
|
)
|
Amounts invoiced by Pharma to DDL, NM and TCL (1)
|
|
|
1,369,272
|
|
|
|
1,539,114
|
|
|
|
2,312,412
|
|
Amounts repaid by DDL to Pharma
|
|
|
(1,642,019
|
)
|
|
|
(1,130,755
|
)
|
|
|
(1,569,496
|
)
|
Amounts invoiced by B&W to DDL
|
|
|
—
|
|
|
|
—
|
|
|
|
2,206
|
|
Amounts repaid by DDL to B&W
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,622
|
)
|
Foreign exchange differences
|
|
|
15,970
|
|
|
|
(103,383
|
)
|
|
|
(84,843
|
)
|
Forgiveness of payable accounted for as an equity contribution
|
|
|
—
|
|
|
|
—
|
|
|
|
(302,819
|
)
|
Liability due to related party, end of the period
|
|
|
702,028
|
|
|
|
918,794
|
|
|
|
964,679
|
|
|
|
|
|
(1)
|
These amounts are included primarily in research and development expenses charged to the Company
by Pharma.
|
The Company has an $8 million unsecured senior
credit facility made available from certain majority stockholders as of August 1, 2019. The first $3.5 million became available
immediately for draw down, which will help fund the Company’s European commercial launch. The credit facility is non-dilutive
carrying 8% interest with quarterly interest only payments. The principal is due on maturity in 5 years. There has been no draw
down to date. No decision to date has been made on when the remaining capital will be needed and will be available for draw down.
The Company routinely reviews its
statement of cash flows presentation of related party transactions for financing or operating classification based on the underlying
nature of the item and intended repayment.
NOTE 5 – STOCKHOLDERS’
EQUITY
Reverse stock split
The Company was notified by NASDAQ on July
15, 2019 that the Company no longer met the requirements of NASDAQ Rule 5550(a)(2) requiring listed securities to maintain a minimum
closing bid price of $1.00 per share. The Company effected:
|
(i)
|
A reverse split of the Company’s issued and outstanding common
stock, par value $0.001 per share on a one (1) for ten (10) basis; and
|
|
(ii)
|
A decrease in the Company’s authorized number of shares of
common stock on the same basis from 420,000,000 shares of common stock to 42,000,000 shares of common stock which were effective
with NASDAQ at the opening of business on December 5, 2019.
|
On December 19, 2019 the Company received confirmation
from NASDAQ that the Company has regained compliance with the Minimum Bid Price Rule and the matter is now resolved.
The activity described in these
condensed consolidated financial statements reflects this one for ten reverse split. All shares and amounts included have been
retroactively restated as required by accounting standards.
Other equity transactions
On October 5, 2017, the Company
entered into common stock exchange agreements with each of its three largest stockholders, to exchange, in the aggregate, 13,732,400
shares of the Company’s common stock for 13,732 shares of Series A Convertible Preferred Stock (the “Series A Preferred”).
Each share of Series A Preferred is convertible into 1,000 shares of the Company’s common stock, automatically upon the occurrence
of all of certain triggering events, as set forth in the Certificate of Designation for the Series A Preferred, namely (a) the
sugarBEAT device to be commercialized has CE mark regulatory approval; (b) retail sales having commenced; and (c) retail sales
exceeding $5 million, inclusive of advanced sales or voluntarily by the holder after February 7, 2018, if these triggering events
have not occurred. Each holder of issued and outstanding Series A Preferred is entitled to a number of votes equal to the
number of shares of common stock into which the Series A Preferred is convertible. Holders of Series A Preferred are entitled to
vote on any and all matters presented to stockholders of the Company, except as provided by law. The Series A Preferred has
no preference to the common stock as to dividends or distributions of assets upon liquidation or winding up of the Company (which
has been agreed to by the holders of the Series A Preferred). The Company determined that the fair value of the shares of
Series A Preferred issued for the shares of common stock was equivalent to the fair value of the shares of common stock exchanged.
On November 6, 2017, the transactions
contemplated by the exchange agreements were consummated and 13,732,400 shares of common stock were cancelled. As a result, the
Company had 6,767,600 shares of common stock issued and outstanding as of March 31, 2018.
On June 5, 2018, the three holders
of the Company’s Series A Preferred each delivered notices of conversion to voluntarily convert their Series A Preferred,
in the aggregate amount of 13,732 of Series A Preferred shares, into 13,732,400 shares of common stock. The holders had the
right to voluntarily convert each share of Series A Preferred into 1,000 shares of common stock of the Company.
On October 19, 2018, the Company
entered into an Equity Distribution Agreement (“Distribution Agreement”) with Maxim Group LLC, as sales agent (“Maxim”),
pursuant to which the Company may offer and sell, from time to time, through Maxim (the “Offering”), up to $20,000,000
in shares of its common stock (the “Shares”). Between October 19, 2018, and March 31, 2019, the Company issued 23,500
shares of its common stock through the Distribution Agreement and received gross proceeds of $455,105. $161,103 of costs were incurred
in relation to this transaction. For the nine months ended December 31, 2019, a total of 14,339 shares were issued under the Distribution
Agreement generating gross proceeds of $152,492 and costs of $9,575. As of December 31, 2019, the Company may sell, from time to
time, the remaining $19,392,402 in shares of common stock under the Distribution Agreement. There was no activity in the three
months ended December 31, 2019.
On December 18, 2018, the Company
entered into a placement agency agreement with Dawson James Securities, Inc. with respect to the issuance and sale of an aggregate
of up to 240,000 units, each unit consisting of one share of common stock, par value $0.001 per share, together with one warrant
to purchase one share of common stock at an exercise price equal to $10.40 per share, in a public offering. The warrants offered
in the public offering will terminate on the fifth anniversary of the date of issuance. The public offering price for each unit
was $10.40.
The closing of the offering occurred
on December 20, 2018 and at such closing the Company sold 194,206 shares of common stock and 194,206 warrants for gross proceeds
of $2,019,743. The net proceeds to the Company from the sale of the shares of common stock and the warrants was $1,691,498, after
deducting $328,245 of placement agent commissions and other offering expenses payable by the Company. As of December 31, 2019,
8,636 of the warrants had been exercised, generating $89,811 of additional proceeds. There was no activity in the three month period
ended December 31, 2019.
Effective December 18, 2018, the
Company issued a unit purchase option to the placement agent to purchase 9,710 shares and 9,710 warrants. The Company has classified
this option as equity. The unit purchase option has a term of three years and an exercise price of $13.00.
Earnings (loss) per share
The following table sets forth
the computation of basic and diluted earnings (loss) per share (“EPS”) for the periods indicated.
|
|
Three months ended
December 31,
|
|
Nine months ended
December 31,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
($)
|
|
|
|
($)
|
|
|
|
($)
|
|
|
|
($)
|
|
Net loss attributable to common stockholders
|
|
|
(445,007
|
)
|
|
|
(925,889
|
)
|
|
|
(2,813,312
|
)
|
|
|
(2,828,318
|
)
|
Weighted average basic and diluted shares outstanding
|
|
|
20,808,050
|
|
|
|
20,540,709
|
|
|
|
20,798,013
|
|
|
|
17,217,952
|
|
Basic and diluted earnings (loss) per share:
|
|
|
(0.02
|
)
|
|
|
(0.05
|
)
|
|
|
(0.14
|
)
|
|
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company excludes warrants outstanding,
which are anti-dilutive given the Company is in a loss position, from the basic and diluted earnings per share calculation.
Basic earnings (loss) per share
is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding
during the period. For the three and nine month periods ended December 31, 2019 and 2018, warrants to purchase one million shares
of common stock were anti-dilutive and were excluded from the calculation of diluted loss per share. For
the three and nine month periods ended December 31, 2019, warrants to purchase 185,570 shares of common stock and a unit purchase
option to purchase 9,710 shares of common stock as well as 9,710 warrants were considered anti-dilutive and were also excluded
from the calculation of diluted loss per share.
NOTE 6 – OTHER ITEMS
(a) Investor relations agreements
The Company enters into contracts
with various investor relations specialists to help support the ongoing financing activities of the business. Further details of
historic fees paid and arrangements are detailed in our Form 10-K for the year ended March 31, 2019.
Investor Relations Company 1
- On June 27, 2018, the Company entered into a Master Services Agreement with investor relations company 1. There has been
no additional activity with investor relations company 1 during the three and nine months ended December 31, 2019.
Investor Relations Company 2
- On May 1, 2019, we reinstated the existing agreement with investor relations company 2, which remained a rolling monthly
contract. The cash fees expensed for the nine month period ended December 31, 2019 were $47,500 with 1,250 shares issued and expensed
to investor relations for consideration of $12,376.
During the quarter ended December
31, 2019, no further shares were issued and cash fees of $15,000 were expensed to investor relations.
Investor Relations Company 3
- On March 18, 2019 the Company cancelled its existing agreement with investor relations company 3 and entered into a new agreement.
The term of this contract has been agreed to be on a month to month basis. Compensation is partly in cash and partly in restricted
common stock. At the beginning of each monthly term a cash payment of $5,000 will be made and 750 shares of restricted stock will
be issued. This contract ended in May 2019. Total stock compensation expense for the three and nine months ended December 31, 2019
was $0 and $17,888.
(b) Management Consultancy Agreements
Management Consulting Company
1 – A number of renewals of the original contracts have been entered into with management consulting company 1 in the
current year. Agreements have been for either cash only or a combination of cash and Stock-based compensation.
On October 1, 2019, 5,000 shares
were issued to management company 1 in relation to services rendered in the three month period ending December 31, 2019. The total
expensed to investor relations was $40,000 in the three month period ended December 31, 2019 calculated on a fair value of $0.80
per share. In addition $61,667 was expensed to investor relations relating to cash fees expensed in the three month period to December
31, 2019. For the nine months cash expense totaled $156,176 and stock based compensation was $84,525.
Management Consulting Company
2 - On January 7, 2019 the Company entered into a six-month contract with management consulting company 2 for the provision
of specialist consulting services. 15,000 restricted shares were issued in May 2019, on the fourth month after commencement of
the original contract. A fair value of $0.94 per share, which was the share price on May 7, 2019 (the first day of the first amendment
of the consulting agreement) was applied as the shares were issued fully and irrecoverably on the first day of the contract.
This contract ended on September
30, 2019 and total stock compensation expense for the three and nine months ended December 31, 2019 was $0 and $141,000 respectively.
Total stock-based compensation
recognized during the three and nine months ended December 31, 2019 was $40,000 and $317,664, respectively and $69,167 and $183,667
for the three and nine months ended December 31, 2018, respectively.
(c) R&D Tax Credit
During the three months ended December
31, 2019, the Company received $614,362 from HMRC (Her Majesty’s Revenue and Customs) in tax credits relating to the reimbursement
of research and development expenses incurred during the years ended March 31, 2019 and 2018. This amount is reflected as
a credit provision for income taxes in the Company’s condensed consolidated statements of comprehensive loss for the three
and nine months ended December 31, 2019.
(d) Debt Financing
During the three months ended December 31,
2019, the Company entered into an agreement with a bank to finance an invoice payable related to an insurance policy. The principal
was $132,342 to be repaid over 9 monthly repayments with interest charged at an annual percentage rate of 13.9%. The remaining
balance of $104,135 is included within other liabilities and accrued expenses on the December 31, 2019 condensed consolidated balance
sheet.