Notes to Condensed Consolidated Financial
Statements
(Unaudited)
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 sugarBEATTM. The sugarBEATTM 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 sugarBEATTM
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 100% of Region Green Limited, a British Virgin Islands corporation (“RGL”) formed on
December 12, 2013. RGL owns 100% of the stock in Dermal Diagnostic (Holdings) Limited, an England and Wales corporation (“DDHL”)
formed on December 11, 2013, which in turn owns 100% of Dermal Diagnostics Limited, an England and Wales corporation formed on
January 20, 2009 (“DDL”), and 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 sugarBEATTM device,
which consists of a disposable patch containing a sensor, and a non-disposable miniature electronic watch with a re-chargeable
power source, which is designed to enable trending or tracking of blood glucose levels. All of the Company’s operations and
assets are located in England.
The following diagram illustrates
Nemaura’s corporate structure as of June 30, 2020:
The Company was incorporated in 2013 and
has reported recurring losses from operations to date and an accumulated deficit of $18,686,131 as of June 30, 2020. 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 U.S. 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 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 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 unaudited condensed
consolidated financial statements. The Company had an $8 million unsecured senior credit facility made available from
certain major stockholders on August 1, 2019. The first $3.5 million became available immediately for draw down, to help fund
the Company’s European commercial launch. The credit facility carries an 8% interest with quarterly interest only
payments. The principal is due on maturity in 5 years. No draw down has been made to date. On April 15, 2020, the Company
entered into a note purchase agreement resulting in cash proceeds of $4,618,074; as set out in Note 6.
The Company has $5,952,934 of readily available cash on hand at June 30, 2020. The Company believes the cash position as of
June 30, 2020, plus the credit facility made available from certain major stockholders, plus funds totaling approximately
$11.5 million raised in July 2020 through the sale of shares is adequate for our current level of operations through at least
August 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 if required, to continue establishing commercial manufacturing operations for the commercial
supply of the sugarBEATTM device and patches now that CE mark approval has been received.
Management's strategic plans include the
following:
•
obtaining further regulatory approval for the sugarBEATTM device in other countries such as the U.S. ,
Premarket approval (“PMA”) submitted
to FDA in early July 2020;
•
exploring licensing opportunities, discussions remain ongoing with several multinational companies ;
• developing the sugarBEATTM
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 months ended June 30, 2020 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. . It is suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s
latest stockholders’ annual report (Form 10-K).
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”).
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(b)
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Changes to significant accounting policies
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The Company adopted Accounting
Standards Update ("ASU") No. 2016-02, Leases, as disclosed below, however there have been no other material changes to
our significant accounting policies as detailed in our Form 10-K for the year ended March 31, 2020.
(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 consolidated financial statements
and assures that there are proper controls in place to ascertain that the Company's consolidated financial statements properly
reflect the change.
In March 2016, the Financial Accounting Standards
Board (the “FASB”) ASU No. 2016-02, Leases. The main difference between the provisions of ASU No. 2016-02 and previous
U.S. GAAP is the recognition of right-of-use assets and lease liabilities by lessees for those leases classified as operating leases
under previous U.S. GAAP. ASU No. 2016-02 retains a distinction between finance leases and operating leases, and the recognition,
measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous
U.S. GAAP. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of
underlying asset not to recognize right-of-use assets and lease liabilities. The accounting applied by a lessor is largely unchanged
from that applied under previous U.S. GAAP. In transition, lessees and lessors are required to recognize and measure leases at
the beginning of the earliest period presented using a modified retrospective approach. This ASU is effective for public business
entities in fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted
as of the beginning of any interim or annual reporting period. The Company adopted this standard on April 1, 2020 and the impact
of adoption of this ASU on the Company’s consolidated financial statements is not significant.
This Quarterly Report on Form 10-Q does
not discuss recent pronouncements that are not anticipated to have a current and/or future impact on the Company, or are unrelated
to the Company’s financial condition, results of operations, cash flows or disclosures.
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, that granted to the third party the exclusive right to market
and promote the sugarBEATTM 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 $1.237 million and $1.240 million as of June 30, 2020 and March 31, 2020, 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 sugarBEATTM
device to occur in the third quarter ending December 31, 2020, approximately $94,000 and $93,000 of the deferred revenue has been
classified as a current liability as of June 30, 2020 and March 31, 2020, respectively.
NOTE 4 – RELATED PARTY TRANSACTIONS
Nemaura Pharma Limited (“Pharma”),
NDM Technologies Limited (“NDM”) and Black and White Health Care Limited (“B&W”) are entities controlled
by the Company’s Chief Executive Officer, interim Chief Financial Officer, President, director and majority stockholder,
Dewan F.H. Chowdhury.
In accordance with the SEC Staff
Accounting Bulletin 55, these condensed consolidated financial statements are intended to reflect all costs associated with the
operations of DDL and TCL. Pharma has a service agreement with DDL, to undertake development, manufacture and regulatory approvals
under Pharma’s ISO13485 accreditation. In lieu of these services, DDL invoices Pharma on a periodic basis for said services.
Services are provided at cost plus a service surcharge amounting to less than 10% of the total costs incurred.
The following is a summary of activity
between the Company and Pharma and NDM for the three months ended June 30, 2020 and 2019, and the year ended March 31, 2020. These
amounts are unsecured, interest free, and payable on demand.
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Three
Months Ended
June
30, 2020
(unaudited)
($)
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Three
Months Ended
June
30, 2019
(unaudited)
($)
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Year
Ended
March
31, 2020
($)
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Liability due to related parties at beginning of period
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|
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830,093
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964,679
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964,679
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Amounts invoiced by Pharma to DDL, NM and TCL (1)
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298,999
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431,416
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1,800,517
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Amounts invoiced by DDL to Pharma
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—
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—
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(10,963
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)
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Amounts repaid by DDL to Pharma
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(582,089
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)
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(305,060
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)
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(1,897,222
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)
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Foreign exchange differences
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(2,922
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)
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(22,359
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)
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(26,918
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)
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Liability due to related parties at end of year
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544,081
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1,072,676
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830,093
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(1)
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These amounts are included primarily in research and development expenses charged to the Company
by Pharma.
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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
condensed consolidated statements 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 The NASDAQ Stock
Market (“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. Thereafter, the Company effected:
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(i)
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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
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(ii)
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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.
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On December 19, 2019, the Company received
confirmation from NASDAQ that the Company had regained compliance with the Minimum Bid Price Rule and the matter is now resolved.
Amounts are retroactively restated for the period ended June 30, 2019.
Other equity transactions
On October 19,
2018, the Company entered into an Equity Distribution Agreement (the “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”). During the three month
period ended June 30, 2020, a total of 393,352 shares were issued under the Distribution Agreement,
generating gross proceeds of $4,097,083 with associated costs of $122,913. $1,986,038 was received net of ATM financing costs through
June 30, 2020 and $1,988,132 is presented as stock subscriptions receivable as of June 30, 2020 and was collected on July 1, 2020.
During the three month period ended June 30,
2020, 37,933 warrants were exercised, generating $394,475 in additional funds. At June 30, 2020 there were 147,637 warrants outstanding.
During the three month period ended June 30,
2019, 2,500 warrants were exercised, generating $26,001 in additional funds.
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.
On
July 28, 2020, the Company entered into a placement agency agreement with Kingswood Capital Markets, a division of Benchmark Investments,
Inc. (“Kingswood” or the “Placement Agent”), with respect to the issuance and sale of an aggregate of 1,586,206
shares of the Company’s common stock, and warrants to purchase up to 793,103 shares of common stock (the “Placement
Agency Agreement”) .
Each share of common stock and accompanying one-half of a warrant were sold for a combined purchase price of $7.25, for a total
deal size of approximately $11.5 million, not including any future proceeds from the exercise of the warrants and before deducting
the Placement Agent fees
and offering expenses. Each whole warrant is immediately exercisable at a price of $8.00 per share, subject to adjustment in certain
circumstances, and will expire five years from the date of issuance. The shares of common stock were offered together with the
warrants, but the securities were issued separately and are separately transferable.
The closing of
the offering took place on July 30, 2020 and the net proceeds from the sale of the common stock and warrants were approximately
$10.7 million after deducting the Placement
Agent commission and estimated offering expenses paid by the Company. The Company intends to use
the net proceeds from the offering for general corporate purposes, which include, but are not limited to, the commercial launch
of a subscription based service for the U.S. under the Wellness category, lactate
monitor development for launch, glucose monitoring product launch in Europe and the development of
a second generation of sugarBEATTM.
Loss per
share
The following table sets forth
the computation of basic and diluted loss per share for the periods indicated.
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Three months ended June 30,
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2020
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2019
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($)
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($)
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Net loss attributable to common stockholders
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(1,100,056
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)
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(1,251,265
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)
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Weighted average basic and diluted shares outstanding
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20,879,446
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20,783,636
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Basic and diluted loss per share:
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(0.05
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)
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(0.06
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)
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The Company excludes warrants outstanding,
which are anti-dilutive given the Company is in a loss position, from the basic and diluted loss per share calculation.
Basic loss per share
is computed by dividing loss available to common stockholders by the weighted-average number of common shares outstanding
during the period. For the three month periods ended June 30, 2020 and 2019, 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 month periods ended June 30, 2020 and June 30, 2019, warrants to purchase 147,637 and 185,570 shares of common stock
respectively 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 – NOTES PAYABLE
On April 15, 2020, the Company entered
into a note purchase agreement (the “Note Purchase Agreement”) by and among the Company, DDL, TCL and Chicago Venture
Partners, L.P. (the “Investor”).
Pursuant to the terms of the Note Purchase
Agreement, the Company agreed to issue and sell to the Investor and the Investor agreed to purchase from the Company, a secured
promissory note (the “Secured Note”) in the original principal amount of $6,015,000. In consideration thereof, on April
15, 2020 (the closing date), (i) the Investor (a) paid $1,000,000 in cash, (b) issued to the Company (1) Investor Note #1 in the
principal amount of $2,000,000 (“Investor Note #1”), and (2) Investor Note #2 in the principal amount of $2,000,000
(“Investor Note #2” and together with Investor Note #1, the “Investor Notes”), and (ii) the Company delivered
the Secured Note on behalf of the Company, to the Investor, against delivery of the Purchase Price. For these purposes, the “Purchase
Price” means the Investor’s initial cash purchase price, together with the sum of the initial principal amounts of
the Investor Notes.
The Secured Note is secured by the Collateral.
The Secured Note carries an original issue discount (“OID”) of $1,000,000. In addition, the Company agreed to pay $15,000
to the Investor to cover the Investor’s legal fees, accounting costs, due diligence, monitoring and other transaction costs
incurred in connection with the purchase and sale of the Secured Note (the “Transaction Expense Amount”), all of which
amount is included in the initial principal balance of the Secured Note. The Purchase Price for the Secured Note is $5,000,000,
computed as follows: $6,015,000 original principal balance, less the OID, less the commission expense of $325,000, less the other
Transaction Expense Amounts, resulting in cash proceeds of $4,618,074. The debt less the discount will be accreted over the 24
month term of the Note using the effective interest method. The effective interest rate was 38.8%. Accretion for the 3 months ended
June 30, 2020 was $188,579.
The borrowing period is 24 months, a monitoring
fee equal to 0.833% of the outstanding balance will automatically be added to the outstanding balance on the first day of each
month.
NOTE 7 – OTHER ITEMS
(a) Investor relations agreements
The Company has entered into contracts with
several investor relations specialists to help support the ongoing financing activities of the business.
During the three month periods ended June 30,
2020, and 2019, fees paid to an investor relations company were $21,000 and $20,000, respectively.
(b) Management consultancy agreements
For the three month period ended June 30, 2020,
cash expense was $13,261 and share expense was $59,000 relating to a management consulting company. For the three month period
ended June 30, 2019, cash expense was $36,667 and share expense was $144,366.
During the three
month period ended June 30, 2020, the Company did not issue any restricted common stock to the investor relations and management
consultants. Stock based compensation expense during the three
month period ended of $59,000 related to the release of prepayments and accrued expenses at June
30, 2020. Total cash expense for the three month period to June 30, 2020 was $34,261. Total
stock based compensation expense for the three month period ended
June 30, 2019 was $162,254.
(c) Subsequent events
July 2020 Offering
As set out in Note 5, on July 28,
2020, the Company entered into a sale of common stock and warrants and received approximately $10.7 million after deducting the
placement agent commission and offering expenses paid by the Company.
Termination of Maxim Distribution
Agreement
On August 8, 2020, pursuant to
the terms of the Distribution Agreement, as amended, between the Company and Maxim, the Company provided notice of termination
of the Distribution Agreement, as amended, to Maxim. Accordingly, the Agreement, as amended, will terminate on August 18, 2020.