Innoveren Scientific, Inc. - Annual Report: 2016 (Form 10-K)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

  

FORM 10-K

(Mark One) 

☒	ANNUAL REPORT PURSUANT TO SECTI ON 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

 

OR

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

 

Commission file number 001-36763

  

MEDOVEX CORP.

(Exact name of Registrant as specified in its charter)

 

Nevada		46-3312262
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

1950 Airport Road Suite A

Atlanta, Georgia 30341

(844) 633-6839

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value $0.001 per share

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes   ☐  No   ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes   ☐  No   ☒

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   ☒  No   ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   ☒ No   ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 

Large accelerated filer  ☐			Accelerated filer  ☐
Non-Accelerated filer  ☐ (Do not check if a smaller reporting company)			Smaller Reporting Company  ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based upon the closing price of common stock on the last business day of the most recently completed second fiscal quarter, June 30, 2016, was $17,105,294.  The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based upon the closing price of common stock on March 28, 2017 was approximately $17,816,836.  Shares of voting stock held by each executive officer, director and 10% stockholders have been excluded from this calculation. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

As of March 28, 2017, 17,026,688 shares of the registrant’s common stock were outstanding.

 

Documents incorporated by reference: None.

 

  

  

 

TABLE OF CONTENTS

 

		Page No.
	PART I
ITEM 1.	BUSINESS	1
ITEM 1A.	RISK FACTORS	6
ITEM 1B.	UNRESOLVED STAFF COMMENTS	6
ITEM 2.	PROPERTIES	6
ITEM 3.	LEGAL PROCEEDINGS	6
ITEM 4.	MINE SAFETY DISCLOSURE	6
	PART II
ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	7
ITEM 6.	SELECTED FINANCIAL DATA	8
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	8
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	17
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	17
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	18
ITEM 9A	CONTROLS AND PROCEDURES	18
ITEM 9B.	OTHER INFORMATION	19
	PART III
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	19
ITEM 11.	EXECUTIVE COMPENSATION	26
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	27
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	29
ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	31
	PART IV
ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	32
	SIGNATURES AND POWER OF ATTORNEY	33
	EXHIBIT INDEX	34

 

FORWARD-LOOKING INFORMATION

 

This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to future events or our future financial performance. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “expects,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predict,” “should” or “will” or the negative of these terms or other comparable terminology. These statements are only predictions; uncertainties and other factors may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels or activity, performance or achievements expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Our expectations are as of the date this Annual Report is filed, and we do not intend to update any of the forward-looking statements after the date this Annual Report is filed to confirm these statements to actual results, unless required by law.

 

This Annual Report also contains estimates and other statistical data made by independent parties and by us relating to market size and growth and other industry data. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We have not independently verified the statistical and other industry data generated by independent parties and contained in this Annual Report and, accordingly, we cannot guarantee their accuracy or completeness, though we do generally believe the data to be reliable. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors.  Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including, but not limited to, the possibility that we may fail to preserve our expertise in search medical device development; that existing and potential distribution partners may opt to work with, or favor the products of, competitors if our competitors offer more favorable products or pricing terms; that we may be unable to maintain or grow sources of revenue; that changes in the distribution network composition may lead to decreases in query volumes; that we may be unable to attain and maintain profitability; that we may be unable to attract and retain key personnel; that we may not be able to effectively manage, or to increase, our relationships with international customers; that we may have unexpected increases in costs and expenses; or that one or more of the other risks described below in the section entitled “Risk Factors” and elsewhere in this Annual Report may occur.  These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

 

 

PART I

  

ITEM 1.    BUSINESS 

 

Overview

 

MedoveX was incorporated in Nevada on July 30, 2013 as Spinez Corp. MedoveX is the parent company of Debride Inc., (“Debride”), which was incorporated under the laws of Florida on October 1, 2012, but did not commence operations until February 1, 2013.  Spinez Corp. changed its name to MedoveX Corp. and effected a 2-for-1 reverse split of its stock in March, 2014.

 

The goal of the Company is to obtain, develop and commercialize various intellectual property rights (patents, patent applications, knowhow, etc.) in the medical technology area, with particular focus on the development of medical devices. We intend to leverage the extensive experience of our board of directors and management team in the medical industry to seek out product candidates for licensing, acquisition or development.

 

The DenerveX Device

 

Our first acquisition was the DenerveX device.  We believe that the DenerveX device can be developed to encompass a number of medical applications, including pain relief.  

 

The Company acquired the DenerveX patent on January 31, 2013 from Scott Haufe, M.D. (“Dr. Haufe”), a director of the Company, in exchange for 750,108 shares of common stock in the Company and a 1% royalty on all sales of any product sold based on the patent. In September 2013, we entered into a Co-Development Agreement with James Andrews, M.D. (“Dr. Andrews”), a director of the Company, whereby Dr. Andrews committed to further evaluate the DenerveX device and to seek to make modifications and improvements to such technology.  In exchange for such services, the Company agreed to pay Dr. Andrews a royalty equal to two (2%) percent of the DenerveX net sales during the five (5) year term of the Co-Development Agreement. Upon the termination of the term of the Co-Development Agreement, which has a minimum term of five (5) years, then the royalty payable to Dr. Andrews shall be reduced to one (1%) percent of DenerveX net sales after such termination of products covered by any U.S. patent on which Dr. Andrews is listed as a co-inventor; if any such patents are obtained.  Such one (1%) percent royalty shall continue during the effectiveness of such patent.  Pursuant to the Co-Development Agreement, Dr. Andrews agreed to assign any modifications or improvements to the DenerveX to the Company subject to the royalty rights described above.

 

Our intention is to market the product as a disposable, single-use kit which will include all components of the DenerveX product. In addition to the DenerveX device itself, we are developing a dedicated Electro Surgical Generator, the DenerveX Pro-40 generator, to power the DenerveX device. The generator would be provided to customers agreeing to purchase the DenerveX device, and could not be used for any other purpose.

 

We accepted a proposal from Devicix, a Minneapolis, Minnesota third party design and development firm, in November 2013, to develop a prototype device. This proposal included a 5 phase development plan, culminating in the production of a prototype that could be used for validation purposes. Currently we are finalizing the build and test phase of the device, which focuses on completion of the product design verification testing, design optimization as required, and the completion of manufacturing transfer. Through December 31, 2016, we have incurred approximately $1,547,000 for product development services provided by Devicix.

 

In November 2014, we selected Nortech Systems Inc. (“Nortech”), a Minneapolis, Minnesota based U.S. Food and Drug Administration (“FDA”) registered contract manufacturer, to produce 315 DenerveX devices from the prototype supplied by Devicix for use in final development and testing. Our agreement with Nortech includes agreed-upon per unit prices for delivery of the devices. Through December 31, 2016, we have paid approximately $744,000 to Nortech.

 

Also in November 2014, we engaged Bovie Medical Corporation (“Bovie”), a Delaware Corporation, to develop our Electro Surgical Generator, the DenerveX Pro-40 generator, and provide post production support services.  Per our agreement with Bovie, we are invoiced based on deliverables produced by Bovie, which was originally supposed to amount to $295,000 upon completion of all the deliverables. Through December 31, 2016, we have paid approximately $389,000 to Bovie. Additional expenses have been incurred beyond the initial agreement as further customization has been necessary beyond predetermined estimates.

 

Streamline, Inc. Divestiture

 

In May 2016, the Board of Directors authorized management to seek buyers for Streamline, Inc., (“Streamline”), the Company’s wholly owned subsidiary acquired in March 2015. The Company sold all Streamline related assets on December 7, 2016 (the “Closing”). This transaction provided funds needed to complete the development and launch of the Company’s primary product, the DenerveX System, and the decision to sell the Streamline assets helped raise part of the necessary funds required for continuing operations of the Company in a non-dilutive manner to existing shareholders.

 

The transaction resulted in the immediate receipt of $500,000 in cash, and a $150,000 receivable to the Company due on or before January 1, 2018.

 

 

The terms of the agreement also required that for each of the calendar years ending December 31, 2018 and December 31, 2019 (each such calendar year, a “Contingent Period”), a contingent payment in cash (each, a “Contingent Payment”) equal to five percent (5%) of the total net sales received by the acquiring party from the sale of “IV suspension system” products in excess of 100 units during each Contingent Period. Each such Contingent Payment is payable to the Company by the acquiring party by no later than March 31st of the subsequent year; provided, however, that the total aggregate amount of all Contingent Payments owed by the acquiring party to the Company for all Contingent Periods will not exceed $850,000.

 

Competition

 

Developing and commercializing new products is highly competitive.  The market is characterized by extensive research and clinical efforts and rapid technological change.  We face intense competition worldwide from medical device, biomedical technology and medical products and combination products companies, including major medical products companies.  We may be unable to respond to technological advances through the development and introduction of new products.  Most of our existing and potential competitors have substantially greater financial, marketing, sales, distribution, manufacturing and technological resources.  These competitors may also be in the process of seeking FDA or other regulatory approvals, or patent protection, for new products.  Our competitors may commercialize new products in advance of our products.  Our products also face competition from numerous existing products and procedures, which currently are considered part of the standard of care.  We believe that the principal competitive factors in our markets are:

 

●	the quality of outcomes for medical conditions;

 

●	acceptance by surgeons and the medical device market generally;

 

●	ease of use and reliability;

 

●	technical leadership and superiority;

 

●	effective marketing and distribution;

 

●	speed to market; and

 

●	product price and qualification for coverage and reimbursement.

 

We will also compete in the marketplace to recruit and retain qualified scientific, management and sales personnel, as well as in acquiring technologies and licenses complementary to our products or advantageous to our business.

 

We are aware of several companies that compete or are developing technologies in our current and future products areas.  With regard to the DenerveX System, we believe that our principal competitors include device manufacturers Cosman Medical Inc., Stryker Corporation and Spembly Medical Systems.  We may also face competition from developing, but potentially untested technologies such as Zyga’s GLYDER device. In order to compete effectively, our products will have to achieve widespread market acceptance, receive adequate insurance coverage and reimbursement, be cost effective and be simultaneously safe and effective.  

 

Customers

 

Healthcare providers, physicians and third-party payors in the United States and elsewhere play a primary role in the recommendation and prescription of any products for which we obtain marketing approval. 

 

We anticipate selling the DenerveX System in Europe prior to commercialization in the United States. We will utilize the experience of local distributors in the countries we pursue marketing the DenerveX System once approval is obtained.

 

Intellectual Property

 

A key element of our success depends on our ability to identify and create proprietary medical device technologies.  In order to proactively protect those proprietary technologies, we intend to continue to develop and enforce our intellectual property rights in patents, trademarks and copyrights, as available through registration in the United States and internationally, as well as through the use of trade secrets, domain names and contractual agreements such as confidentiality agreements and proprietary information agreements.

 

Currently, our intellectual property rights include the intellectual property acquired from Debride, Inc., which includes the U.S. Patent 8,167,879 B2 (the “Patent”). The Patent was originally filed in 2009 and was issued on May 1, 2012. We intend to leverage the Patent to the fullest extent possible through market development and prosecution of our rights under the Patent.

 

In addition, we have filed 33 additional US and International patents, of which 21 are pending, 8 are pending published, and 4 have been granted. These patents cover a total of 885 claims both in the United States and Internationally.

 

 

The term of individual patents depends upon the legal term of the patents in the countries in which they are obtained.  In most countries in which we file, the patent term is 20 years from the earliest date of filing a non-provisional patent application.  In the United States, a patent’s term may be shortened if a patent is terminally disclaimed over another patent or as a result of delays in patent prosecution by the patentee, and a patent’s term may be lengthened by patent term adjustment, which compensates a patentee for administrative delays by the U.S. Patent and Trademark Office in granting a patent.

 

We intend to continually re-assess and refine our intellectual property strategy in order to fortify our position in our market space in the United States and internationally.  To that end, we are prepared to file additional patent applications should our intellectual property strategy require such filings and/or where we seek to adapt to competition or seize business opportunities.  

 

Many biotechnology companies and academic institutions are competing with us in the medical device field and filing patent applications potentially relevant to our business.  Internally, we have established business procedures designed to maintain the confidentiality of our proprietary information, including the use of confidentiality agreements with employees, independent contractors, consultants and companies with which we conduct business.  Also, we generally require employees to assign patents and other intellectual property to us as a condition of employment with us.

 

In order to contend with the inevitable possibility of third party intellectual property conflicts, we review and assess the third-party intellectual property landscape for competitive and other developments that may inform or impact our intellectual property development and commercialization strategies. We may find it necessary or prudent to obtain licenses from third party intellectual property holders.  Where licenses are readily available at reasonable cost, such licenses are considered a normal cost of doing business.  In other instances, however, where a third party holds relevant property and is a direct competitor, a license might not be available on commercially reasonable terms or available at all.  We will attempt to manage the risk that such third party intellectual property may pose by conducting, among other measures, freedom-to-operate studies to guide our early-stage research away from areas where we are likely to encounter obstacles in the form of third party intellectual property.

 

Government Regulations

 

Government authorities in the United States, at the federal, state and local level, and in other countries extensively regulate, among other things, the research, development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, post-approval monitoring and reporting, marketing and export and import of products such as those we are developing. Any product that we develop must be approved by the FDA before they may be legally marketed in the United States and by the appropriate foreign regulatory agency before they may be legally marketed in foreign countries.

 

FDA Regulation

 

The DenerveX System and any other product we may develop must be approved or cleared by the FDA before it is marketed in the United States.  Before and after approval or clearance in the United States, our products are subject to extensive regulation by the FDA under the Federal Food, Drug, and Cosmetic Act and/or the Public Health Service Act, as well as by other regulatory bodies.  

 

FDA regulations govern, among other things, the development, testing, manufacturing, labeling, safety, storage, record-keeping, market clearance or approval, advertising and promotion, import and export, marketing and sales, and distribution of medical devices and products.

 

In the United States, the FDA subjects medical products to rigorous review.  If we do not comply with applicable requirements, we may be fined, the government may refuse to approve our marketing applications or to allow us to manufacture or market our products, and we may be criminally prosecuted.  Failure to comply with the law could result in, among other things, warning letters, civil penalties, delays in approving or refusal to approve a product, product recall, product seizure, interruption of production, operating restrictions, suspension or withdrawal of product approval, injunctions, or criminal prosecution.

 

FDA Approval or Clearance of Medical Devices

 

In the United States, medical devices are subject to varying degrees of regulatory control and are classified in one of three classes depending on the extent of controls the FDA determines are necessary to reasonably ensure their safety and efficacy:

 

 

In general, the higher the classification, the greater the time and cost to obtain approval to market. There are no “standardized” requirements for approval, even within each class. For example, the FDA could grant 510(k) status, but require a human clinical trial, a typical requirement of a PMA. They could also initially assign a device Class III status, but end up approving a device as a 510(k) device if certain requirements are met.  The range of the number and expense of the various requirements is significant. The quickest and least expensive pathway would be 510(k) approval with a just a review of existing data. The longest and most expensive path would be a PMA with extensive randomized human clinical trials. We cannot predict how the FDA will classify the DenerveX device, nor predict what requirements will be placed upon us to obtain market approval, or even if they will approve the DenerveX device at all. However, we believe the pathway that will be required by the FDA will be somewhere between the two extremes described above.

 

 

 

We intend to apply to the FDA for 510(k) clearance for our DenerveX device. However, it is very possible the FDA will deny this request and require the more expensive PMA process. The Company has budgeted based on the assumption that the PMA process will be required.  

 

To request marketing authorization by means of a 510(k) clearance, we must submit a pre-market notification demonstrating that the proposed device is substantially equivalent to another currently legally marketed medical device, has the same intended use, and is as safe and effective as a currently legally marketed device and does not raise different questions of safety and effectiveness than does a currently legally marketed device.

  

510(k) submissions generally include, among other things, a description of the device and its manufacturing, device labeling, medical devices to which the device is substantially equivalent, safety and biocompatibility information, and the results of performance testing.  In some cases, a 510(k) submission must include data from human clinical studies.  We believe that other medical devices which have been approved by the FDA have many aspects that are substantially similar to the DenerveX device, which may make obtaining 510(k) clearance possible.  Marketing may commence only when the FDA issues a clearance letter finding substantial equivalence.  After a device receives 510(k) clearance, any product modification that could significantly affect the safety or effectiveness of the product, or that would constitute a significant change in intended use, requires a new  510(k) clearance or, if the device would no longer be substantially equivalent, would require PMA. In addition, any additional claims the Company wished to make at a later date, such as the permanent relief of pain, may require a PMA.  If the FDA determines that the product does not qualify for 510(k) clearance, they will issue a Not Substantially Equivalent letter, at which point the Company must submit and the FDA must approve a PMA before marketing can begin.

 

During the review of a 510(k) submission, the FDA may request more information or additional studies and may decide that the indications for which we seek approval or clearance should be limited.  In addition, laws and regulations and the interpretation of those laws and regulations by the FDA may change in the future. We cannot foresee what effect, if any, such changes may have on us.

 

European Union Approvals

 

The EU requires a CE mark certification or approval in order to market the DenerveX System in the various countries of the European Union or other countries outside the United States.  To obtain CE mark certification of the DenerveX System, we are required to work with an accredited European notified body organization to determine the appropriate documents required to support certification in accordance with existing medical device directive.  The predictability of the length of time and cost associated with such a CE marketing may vary, or may include lengthy clinical trials to support such a marking. Once the CE mark is obtained, a company may market the DenerveX System in the countries of the EU.  We have targeted the submission of our application for CE marketing in the first half of 2017. Management believes it will be able to obtain European CE mark approval to market the DenerveX System before it will obtain FDA approval. The Company has retained third party experts to assist with the European approval. Management has also contracted several European distributor and has retained a European sales manager to assist the distributor and promote the product in Europe.

 

Clinical Trials of Medical Devices

 

One or more clinical trials are becoming necessary to support an FDA submission. Clinical studies of unapproved or un-cleared medical devices or devices being studied for uses for which they are not approved or cleared (investigational devices) must be conducted in compliance with FDA requirements.  If an investigational device could pose a significant risk to patients, the sponsor company must submit an Investigational Device Exemption, or "IDE" application to the FDA prior to initiation of the clinical study.  An IDE application must be supported by appropriate data, such as animal and laboratory test results, showing that it is safe to test the device on humans and that the testing protocol is scientifically sound.  The IDE will automatically become effective 30 days after receipt by the FDA unless the FDA notifies the company that the investigation may not begin.  Clinical studies of investigational devices may not begin until an institutional review board ("IRB") has approved the study.

 

During any study, the sponsor must comply with the FDA’s IDE requirements.  These requirements include investigator selection, trial monitoring, adverse event reporting, and record keeping.  The investigators must obtain patient informed consent, rigorously follow the investigational plan and study protocol, control the disposition of investigational devices, and comply with reporting and record keeping requirements. We, the FDA, or the IRB at each institution at which a clinical trial is being conducted, may suspend a clinical trial at any time for various reasons, including a belief that the subjects are being exposed to an unacceptable risk.  During the approval or clearance process, the FDA typically inspects the records relating to the conduct of one or more investigational sites participating in the study supporting the application.

 

Post-Approval Regulation of Medical Devices

 

After a device is cleared or approved for marketing, numerous and pervasive regulatory requirements continue to apply.  These include:

 

We will continue to be subject to inspection by the FDA to determine our compliance with regulatory requirements.

 

 

Manufacturing cGMP Requirements

 

Manufacturers of medical devices are required to comply with FDA manufacturing requirements contained in the FDA’s current Good Manufacturing Practices ("cGMP") set forth in the quality system regulations promulgated under section 520 of the Food, Drug and Cosmetic Act.  cGMP regulations require, among other things, quality control and quality assurance as well as the corresponding maintenance of records and documentation.  Failure to comply with statutory and regulatory requirements subjects a manufacturer to possible legal or regulatory action, including the seizure or recall of products, injunctions, consent decrees placing significant restrictions on or suspending manufacturing operations, and civil and criminal penalties.  Adverse experiences with the product must be reported to the FDA and could result in the imposition of marketing restrictions through labeling changes or in product withdrawal.  Product approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problems concerning safety or efficacy of the product occur following the approval.

 

International Regulation

 

We are subject to regulations and product registration requirements in many foreign countries in which we may seek to sell our products, including in the areas of product standards, packaging requirements, labeling requirements, import and export restrictions and tariff regulations, duties and tax requirements. The time required to obtain clearance required by foreign countries may be longer or shorter than that required for FDA clearance, and requirements for licensing a product in a foreign country may differ significantly from FDA requirements.

 

European Good Manufacturing Practices

 

In the European Union, the manufacture of medical devices is subject to good manufacturing practice ("GMP"), as set forth in the relevant laws and guidelines of the European Union and its member states. Compliance with GMP is generally assessed by the competent regulatory authorities.  Typically, quality system evaluation is performed by a Notified Body, which also recommends to the relevant competent authority for the European Community CE Marking of a device.  The Competent Authority may conduct inspections of relevant facilities, and review manufacturing procedures, operating systems and personnel qualifications.  In addition to obtaining approval for each product, in many cases each device manufacturing facility must be audited on a periodic basis by the Notified Body.  Further inspections may occur over the life of the product.  

 

Our third party manufacturer has ISO certification which is generally one of the requirements for approval under the guidelines established in the European Union.

 

United States Anti-Kickback and False Claims Laws

 

In the United States, there are Federal and state anti-kickback laws that prohibit the payment or receipt of kickbacks, bribes or other remuneration intended to induce the purchase or recommendation of healthcare products and services.  Violations of these laws can lead to civil and criminal penalties, including exclusion from participation in Federal healthcare programs.  These laws are potentially applicable to manufacturers of products regulated by the FDA as medical devices, and hospitals, physicians and other potential purchasers of such products.  Other provisions of Federal and state laws provide civil and criminal penalties for presenting, or causing to be presented, to third-party payers for reimbursement, claims that are false or fraudulent, or which are for items or services that were not provided as claimed.  In addition, certain states have implemented regulations requiring medical device and pharmaceutical companies to report all gifts and payments of over $50 to medical practitioners.  This does not apply to instances involving clinical trials.  Although we intend to structure our future business relationships with clinical investigators and purchasers of our products to comply with these and other applicable laws, it is possible that some of our business practices in the future could be subject to scrutiny and challenge by Federal or state enforcement officials under these laws.

 

Research, Product Development and Technical Operations Expense

 

Research and development costs and expenses consist primarily of fees paid to external service providers, laboratory testing, supplies, costs for facilities and equipment, and other costs for research and development activities. Research and development expenses are recorded in operating expenses in the period in which they are incurred. Estimates have been used in determining the expense liability of certain costs where services have been performed but not yet invoiced.

 

We monitor levels of performance under each significant contract for external service providers for activities through communications with the service providers to reflect the actual amount expended.

 

Employees

 

As of December 31, 2016, we had 11 total employees, 10 of which were full-time employees.  None of our employees is represented by a union and we believe our employee relations to be good.

 

Available Information

 

Our website, www.MedoveX.com, provides access, without charge, to our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (“SEC”). The information provided on our website is not part of this report, and is therefore not incorporated by reference unless such information is otherwise specifically referenced elsewhere in this report.

 

 

Materials filed by the Company with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding our company that we file electronically with the SEC.

 

 

ITEM 1A.    RISK FACTORS

 

Not applicable to smaller reporting companies.

 

ITEM 1B.    UNRESOLVED STAFF COMMENTS

 

Not applicable to smaller reporting companies.

 

ITEM 2.    PROPERTIES

 

The Company pays TAG Aviation, a company owned by CEO Jarrett Gorlin, for executive office space in Atlanta, GA at a rate of $2,147 per month plus related utilities. The rental rate is 90% of the amount billed to TAG Aviation by the owner of the property.

 

The Company has a commercial building lease agreement with Sugar Oak Kimball Royal, LLC. The thirty-six month lease, having commenced on August 1, 2015, provides for the lease by the Company of approximately 2,358 square feet of space in Alpharetta, GA. Base annual rent is initially set at approximately $2,750 per month.

 

We believe our existing facilities are suitable for Company operations.

 

ITEM 3.    LEGAL PROCEEDINGS

 

None.

 

ITEM 4.    MINE SAFETY DISCLOSURES

 

Not Applicable.

 

 

 

PART II

 

ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

The following table sets forth the range of high and low sales prices of the common stock on the NASDAQ Capital Market for each period indicated:

 

Market and Market Prices of Common Stock (per common share)

 

	2016
By Quarter	High	Low
First	$1.51	$0.85
Second	2.25	1.01
Third	1.70	1.25
Fourth	1.73	1.33

 

On March 28, 2017, the price per share of the Company’s common stock had a high of $1.44 per share, and a low of $1.35 per share.  The Company had approximately 185 holders of record of common stock as of March 28, 2017.

 

Dividends

 

We have not declared or paid any cash dividends on our common stock and presently intend to retain our future earnings, if any, to fund the development and growth of our business and, therefore, do not anticipate paying any cash dividends in the foreseeable future.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

As of December 31, 2016, we have granted an aggregate of 1,124,900 options to purchase common stock under the Plan at a weighted average price of $2.15 per share to certain employees, consultants and our outside directors.

 

Recent Sales of Unregistered Securities; Uses of Proceeds from Registered Securities

 

On March 25, 2015, we acquired Streamline and committed to issue an aggregate of 1,875,000 shares of common stock as partial consideration for this company. The closing price of our common stock on this date was $4.50.

 

On April 29, 2016, we completed an offering of privately placed securities with accredited investors, which in the aggregate, yielded a total of 1,211,760 shares and warrants to purchase 605,880 shares to be issued to investors.

 

On August 5, 2016, we completed an offering of privately places securities with accredited investors, which in the aggregate, yielded a total of 958,332 shares and warrants to purchase 479,168 shares to be issued to investors.

 

On September 16, 2016, we completed an offering of privately placed securities in the form of a secured note with accredited investors, which in the aggregate, yielded a total of warrants to purchase 200,000 shares to be issued to investors.

 

On February 9, 2017, we completed an offering of common stock, warrants and preferred stock, as well as a conversion of certain debentures into common stock, preferred stock and warrants. The offering and debt conversion resulted in the issuance of an aggregate of 1,797,595 shares of common stock, 2,005,761 warrants to purchase common stock and 22,139 shares of Series A Preferred Stock.

All of the foregoing securities were issued in reliance upon the exemption from registration pursuant to Section 4(a)(2) under the Securities Act, as amended, and Regulation D, promulgated thereunder.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

On November 9, 2015, the Company issued a convertible promissory note to Steve Gorlin, a director and father of Jarrett Gorlin, the Company’s CEO, for the principal amount of $2,000,000.

 

The loan principal was to be advanced in two installments of $1,000,000 each, the first installment being made upon execution of the promissory note and the second installment to be made by March 1, 2016. The loan and interest earned could be converted into common stock at $2 per share, subject to adjustment.

 

The outstanding principal earns interest at a rate of 5.5% per annum and is to be paid quarterly. The Company also issued a 3 year warrant to Mr. Steve Gorlin to purchase 500,000 shares of common stock at $2.20 per share.

 

On January 25, 2016, the Company entered into a modification agreement (the “Modification Agreement”) with Mr. Steve Gorlin. Mr. Steve Gorlin agreed to convert the first advance of $1,000,000 into an aggregate of 571,429 shares of its Common Stock, thus eliminating the Company’s $1,000,000 debt obligation.

 

 

On February 16, 2016, the Company and Mr. Steve Gorlin entered into an amendment to the Modification Agreement, reducing the number of shares of Common Stock that Mr. Steve Gorlin received upon the conversion of the $1,000,000 from 571,429 shares to 552,041 shares.

 

On March 15, 2016 the Board of Directors approved a second amendment to the Modification Agreement. The date for making the second installment of $1,000,000 was moved to November 1, 2016.

 

Additionally, the language in the Note was changed to clarify that the consideration received by the Company on the first installment was in the form of $970,000 cash and $30,000 in directors’ fees due to Mr. Steve Gorlin.

 

On November 10, 2016, the Board of Directors approved a third amendment to the Modification Agreement. The date for making the second installment of $1,000,000 was extended to December 1, 2016.

 

On December 1, 2016, the Board of Directors approved a fourth amendment to the Modification Agreement. Pursuant to the fourth amendment, Mr. Gorlin assigned a portion of the obligation to purchase the additional 571,429 shares of the Company at $1.75 per share. The obligation to purchase 142,857 shares for $250,000 was assigned to an outside non related party.

 

Additionally, the obligation to purchase 114,286 shares for $200,000 was assigned to a related party that provides consulting services for the Company. Mr. Gorlin retained the obligation to purchase 314,286 shares, for a total purchase price of $550,000.

 

Pursuant to the fourth Amendment, Mr. Gorlin also assigned a portion of the warrant for the right to purchase 112,500 of the 500,000 shares of common stock of the Company from the warrants issued to Mr. Gorlin on November 9, 2015.

 

The purchase of the additional shares of the Company by Mr. Gorlin and the two outside parties was completed in December 2016. The Company received an aggregate of $1,000,000 in exchange for the issuance of an aggregate of 571,429 shares at a price of $1.75 per share.

 

ITEM 6.    SELECTED FINANCIAL DATA

 

Not required for smaller reporting company.

 

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Overview

 

MedoveX was incorporated in Nevada on July 30, 2013 as Spinez Corp. MedoveX is the parent company of Debride, which was incorporated under the laws of Florida on October 1, 2012. The Company is in the business of designing and marketing proprietary medical devices for commercial use in the United States and Europe. The Company is currently seeking approval from the FDA and the European Union for a CE Mark for the DenerveX System.

 

In May 2016, the Board of Directors authorized management to seek buyers for Streamline, Inc., (“Streamline”), the Company’s wholly owned subsidiary acquired in March 2015. In December 2016, the Company sold, under an asset purchase agreement, all related Streamline assets.

 

The DenerveX Device

 

Our first acquisition was the DenerveX device.  We believe that the DenerveX device can be developed to encompass a number of medical applications, including pain relief.  

 

The Company acquired the DenerveX patent on January 31, 2013 from Scott Haufe, M.D. (“Dr. Haufe”), a director of the Company, in exchange for 750,108 shares of common stock in the Company and a 1% royalty on all sales of any product sold based on the patent.

 

In September 2013, we entered into a Co-Development Agreement with James Andrews, M.D. (“Dr. Andrews”), a director of the Company, whereby Dr. Andrews committed to further evaluate the DenerveX device and to seek to make modifications and improvements to such technology.  In exchange for such services, the Company agreed to pay Dr. Andrews a royalty equal to two (2%) percent of the DenerveX net sales during the five (5) year term of the Co-Development Agreement. Upon the termination of the term of the Co-Development Agreement, which has a minimum term of five (5) years, then the royalty payable to Dr. Andrews shall be reduced to one (1%) percent of DenerveX net sales after such termination of products covered by any U.S. patent on which Dr. Andrews is listed as a co-inventor; if any such patents are obtained.  Such one (1%) percent royalty shall continue during the effectiveness of such patent.  Pursuant to the Co-Development Agreement, Dr. Andrews agreed to assign any modifications or improvements to the DenerveX to the Company subject to the royalty rights described above.

 

Our intention is to market the product as a disposable, single-use kit which will include all components of the DenerveX device product. In addition to the DenerveX device itself, we are developing a dedicated Electro Surgical Generator, the DenerveX Pro-40, to power the DenerveX device.

 

The generator would be provided to customers agreeing to purchase the DenerveX device, and could not be used for any other purpose.

 

 

We accepted a proposal from Devicix, a Minneapolis, Minnesota third party design and development firm, in November 2013, to develop a prototype device. This proposal included a 5 phase development plan, culminating in the production of a prototype that could be used for validation purposes. Currently we are in the final states of the build and test phase of the device, which focuses on completing the product design verification testing, design optimization as required, and the completion of manufacturing transfer. Through December 31, 2016, we have paid approximately $1,547,000 to Devicix.

 

In November 2014, we selected Nortech Systems Inc. (“Nortech”), a Minneapolis, Minnesota based FDA registered contract manufacturer, to produce 315 DenerveX devices from the prototype supplied by Devicix for use in final development and non-clinical trials. The agreement with Nortech includes agreed upon per unit prices for delivery of the devices. Actual work on development of the final units began in November 2014. Through December 31, 2016, we have paid approximately $744,000 to Nortech.

 

Also in November 2014, we engaged Bovie Medical Corporation (“Bovie”), a Delaware Corporation, to develop the Electro Surgical Generator and provide post production support services.  Per our agreement with Bovie, we are invoiced based on deliverables produced by Bovie, which was originally supposed to amount to $295,000 upon completion of all the deliverables. Through December 31, 2016, we have paid approximately $389,000 to Bovie for production services. The original $295,000 agreement was a base number along the pathway of development. Additional requirements were incurred as the research and development process progressed and as a result certain prices increased and additional costs were incurred to further customize the DenerveX System.  

 

The Company has entered into some of the final stages of the development and verification of the DenerveX Device and the DenerveX Pro-40 power generator as a system. Final development, testing and verification to set standards is the main focus for these final stages. Additionally, the company has be tested the DenerveX System in an extensive living tissue model under very strict Good Laboratory Practice Standards to measure, verify, and establish its’ effectiveness for performance as a system. Other testing will include device sterilization, shelf life verification and shipping and performance testing to very specific standards.

 

The DenerveX System (the DenerveX Device and the DenerveX Pro-40 generator) were successfully tested as a system by SGS, a world leader in safety performance testing, and received certification of compliance in January 2017. SGS, a highly respected testing and verification firm, tested the DenerveX System using an extensive set of testing standards.

 

Regulatory Approval

 

The Company is currently seeking approval from the FDA for commercialization of the DenerveX System in the US, and we are also seeking approval from the European Union for a CE Mark for commercialization of the DenerveX System throughout the EU.

 

Once the Company obtains a CE Mark, which we anticipate will be in the first half of 2017, we will provide a copy of the CE certificate along with other necessary documentation to obtain regulatory approval for commercialization of the DenerveX System throughout certain countries including Columbia, Peru, Argentina, Mexico, Turkey, Israel, New Zealand and Australia. The documentation required to accompany the CE Mark to obtain regulatory approval in the aforementioned countries include copies of the ISO 3485 certification, the SGS certificate of approval and a statement of Good Manufacturing Practices (“GMP”).

 

Distribution Agreements

 

In July 2015, we entered into a non-exclusive distribution center agreement with Technology Consult Berlin GmbH (“TCB”) pursuant to which TCB shall manage and coordinate the DenerveX System products as a distribution center in which the Company exports to the European Union country distributors.

 

Also in July 2015, we entered into an international distribution agreement with EDGE Medical, a company organized and located in the United Kingdom (the “UK”). EDGE Medical is expected to provide sales, marketing and distribution services for the various country hospitals throughout the UK for the launch of the DenerveX System.

 

We entered into three more international distribution agreements in August 2015. The first was with German based Aureus Medical for the distribution of its DenerveX System throughout Germany. Aureus Medical distributes spine and pain management solutions in the spine space.

 

The second distribution agreement was with Turkey based MEDS Medikal Ltd. for the distribution of the DenerveX System throughout Turkey. MEDS Medikal Ltd. has been providing sales, marketing and distribution services in the spine surgery market space in Turkey since 1997, representing leading brands of the world.

 

The third distribution agreement entered into in August 2015 was with Sydney based Medical Innovators Pty.Ltd. for the distribution of the DenerveX System throughout Australia and New Zealand. The agreement will expand the market for us by leveraging the Spine industry-leading marketing, sales, support and distribution power of Medical Innovators Pty. Ltd.

 

In April 2016, we entered into an international distribution agreement with Innosurge, a supplier of innovative orthopedic surgery equipment. The agreement covers the distribution of the DenerveX System throughout Scandinavia, including Denmark, Sweden, Norway and Finland.

In September 2016, we entered into an international distribution agreement with M. Fast Technologies LTD, a leading supplier of innovative spine surgery products. The agreement covers the distribution of the DenerveX System throughout Israel.

 

In January 2017, we entered into an international distribution agreement with AlfaMed s.r.l., a supplier of innovative spine surgery equipment. The agreements covers the distribution of the DenerveX System throughout Italy.

 

 

 

Medical Advisory Agreements

 

Also in August 2015, we entered into two medical advisory board agreements with European leading spine surgeons Dr. Martin Deeg and Dr. Karsten Ritter-Lang. Under the terms of the agreements, both doctors will leverage their expertise, experience and relationships in the spine treatment space, specifically the facet joint pain area by advising us on matters related to its technology and the area of facet joint pain therapies. They will also provide services to help introduce the DenerveX System to other leading physicians and medical professionals. Through December 31, 2016, we have paid approximately $15,500 to Dr. Martin Deeg.

 

In November 2015 we entered into a medical advisory agreement another leading European spine surgeon, Dr. Vik Kapoor of Manchester, England. Through December 31, 2016, we have paid $10,000 to Dr. Kapoor.

 

Employment Agreements

 

In November 2016, the Company hired Jill Schweiger as its new Senior Vice President of Regulatory, Clinical and Quality. Mrs. Jill Schweiger is a highly qualified and accomplished leader with a highly demonstrable track record of success in the areas of clinical studies and regulatory affairs.

 

In January 2017, the Company hired and named Mr. Ed Valdez to the position of Quality Manager. Mr. Valdez is a former Integra Life Sciences quality and regulatory manager for devices used in neurosurgery, stereotaxy, ENT and general surgery.

 

Consulting Agreements

 

In August 2016, the Company hired Mr. Juan Davila as Director of Sales & Marketing for the Latin-America market region. Mr. Davila will be developing and implementing an overall corporate sales and marketing strategy, directly engaging and managing all future MedoveX distributors throughout Latin America, and translating the company's business objectives into marketing strategies that drive future revenue. In addition, Mr. Davila will also provide services to help introduce the Company’s DenerveX System to leading physicians and medical professionals in Latin America. Through December 31, 2016, we have paid approximately $10,000 to Mr. Davila.

 

Sales & Marketing

 

In order to maintain the positive momentum and high interest level in the DenerveX System with our signed distributors throughout Europe and Asia Pacific, we attended several spinal workshops and marketing related events in 2016.

We are planning similar sales and marketing related endeavors in 2017 to continue with our efforts to create and maintain a high level of interest in the European spine community, our anticipated product launch into the European market.

Streamline, Inc. Divestiture

 

In May 2016, the Board of Directors authorized management to seek buyers for Streamline, Inc., (“Streamline”), the Company’s wholly owned subsidiary acquired in March 2015. The Company sold all Streamline related assets on December 7, 2016 (the “Closing”).

 

This transaction provided funds needed to complete the development and launch of the Company’s primary product, the DenerveX System, and the decision to sell the Streamline assets helped raise part of the necessary funds required for continuing operations of the Company in a non-dilutive manner to existing shareholders.

 

The transaction resulted in the immediate receipt of $500,000 in cash, and a $150,000 note receivable to the Company due on or before January 1, 2018.

 

The terms of the agreement also required that for each of the calendar years ending December 31, 2018 and December 31, 2019 (each such calendar year, a “Contingent Period”), a contingent payment in cash (each, a “Contingent Payment”) equal to five percent (5%) of the total net sales received by the acquiring party from the sale of “IV suspension system” products in excess of 100 units during each Contingent Period. Each such Contingent Payment is payable to the Company by the acquiring party by no later than March 31st of the subsequent year; provided, however, that the total aggregate amount of all Contingent Payments owed by the acquiring party to the Company for all Contingent Periods will not exceed $850,000.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which we have prepared in accordance with United States generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those described in greater detail below.

 

We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

While our significant accounting policies are described in more detail in the notes to our consolidated financial statements included elsewhere in this report, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our financial condition and results of operations.

 

 

Goodwill and Impairment of Long-Lived Assets

 

Goodwill is the excess of the purchase price over the fair value of net assets of acquired businesses. Goodwill is tested for impairment annually or whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. The test for impairment requires us to make several estimates about fair value. Our estimates associated with the goodwill impairment test are considered critical due to the amount of goodwill recorded on our consolidated balance sheets and the judgment required in determining fair value. Goodwill impairment has been recognized for the year ended December 31, 2016. See Note 11.

 

Other intangible assets include trademarks and purchased technology. Intangible assets with a definite life are amortized on a straight-line basis, as appropriate, with estimated useful lives ranging from five to seven years, and are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable.

Definite-lived intangible assets are tested for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable. Impairment has been recognized for definite-lived intangible assets for the year ended December 31, 2016. See Note 11.

 

Although we believe that the recorded fair value of our non-financial assets is appropriate at December 31, 2016, these fair values may not be indicative of net realizable value or reflective of future fair values.

 

Fair Value Measurements

 

We measure certain non-financial assets at fair value on a non-recurring basis. These non-recurring valuations include evaluating assets such as long-lived assets and non-amortizing intangible assets for impairment; allocating value to assets in an acquired asset group; and applying accounting for business combinations.

 

We use the fair value measurement framework to value these assets and report the fair values in the periods in which they are recorded or written down.

 

The fair value measurement framework includes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair values in their broad levels. These levels from highest to lowest priority are as follows:

 

The determination of fair value and the assessment of a measurement’s placement within the hierarchy requires judgment. Level 3 valuations often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost, market, or income valuation methodologies applied to unobservable management estimates and assumptions. Management’s assumptions could vary depending on the asset or liability valued and the valuation method used. Such assumptions could include: estimates of prices, earnings, costs, actions of market participants, market factors, or the weighting of various valuation methods. We may also engage external advisors to assist us in determining fair value, as appropriate.

 

Although we believe that the recorded fair value of our financial instruments is appropriate, these fair values may not be indicative of net realizable value or reflective of future fair values.

 

 

Income Taxes

 

The Company uses the liability method of accounting for income taxes, which requires recognition of temporary differences between financial statement and income tax bases of assets and liabilities, measured by enacted tax rates. A valuation allowance is recorded to reduce deferred tax assets when necessary.

 

We file income tax returns in the U.S. federal jurisdiction and certain state jurisdictions. The tax years that could be subject to audit are 2013, 2014 and 2015.

 

Stock-Based Compensation

 

A summary of significant assumptions used to estimate the fair value of the equity awards granted in 2016 and 2015 follows:

 

Stock-based compensation expense for the years ended December 31, 2016 and 2015 includes both common stock and stock options granted to certain employees, consultants, and directors and has been recorded as general and administrative expenses. We follow the provisions of the ASC Topic 718, Compensation- Stock Compensation which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees and non-employee directors, including employee stock options.

 

Stock compensation expense based on the fair value on the grant date estimated in accordance with the provisions of ASC 718 is generally recognized as an expense over the requisite service period.

 

The stock grant prices and the option prices were set at the estimated fair value of the common stock on the date of grant using the market approach.  Under the market approach, the fair value of the common stock was determined to be the value of the stock on the date of the grant.

 

We utilize the Black-Scholes valuation method to recognize compensation expense over the vesting period for stock options. The expected life represents the period that our stock option-based compensation awards are expected to be outstanding.

 

We use a simplified method provided in Securities and Exchange Commission release, Staff Accounting Bulletin No. 110, which averages an award's weighted average vesting period and contractual term for "plain vanilla" share options. The expected volatility was estimated by analyzing the historic volatility of similar public biotech companies in an early stage of development. The Company uses, and will continue to use in the future, the historic volatility of similar biotech companies until we have either a sufficient amount of historical information regarding the volatility of our own share price or other traded financial instruments are available to derive an implied volatility to support an estimate of expected volatility. No dividend payouts were assumed as we have not historically paid, and do not anticipate paying, dividends in the foreseeable future.

 

The risk-free rate of return reflects the weighted average interest rate offered for US treasury rates over the expected term of the options.

 

The significant assumptions used to estimate the fair value of the stock option-based equity awards granted in 2016 are;

 

Grant date	January 6	August 17	November 10
Weighted fair value of options granted as of December 31, 2016	$0.67	$0.91	$1.06
Expected term (years)	6	6	6
Risk-free interest rate	1.82%	1.28%	1.74%
Volatility	83%	75.55%	76.67%
Dividend yield	None	None	None

                              

During 2016, the Company granted options to purchase 744,900 shares of common stock, and 180,500 shares of common stock were granted. Total equity awards granted in 2016 was 925,400. 

 

 

RESULTS OF OPERATIONS

 Overview

 

We started operations late in 2013. We anticipate that our quarterly and annual results of operations will be impacted for the foreseeable future by several factors, including successful development of a prototype product, approval of the product by regulatory agencies in the United States and abroad, and the rate of adoption of our product by medical professionals. On December 7, 2016, we sold Streamline after the Board authorized management to find a buyer in May 2016. Due to these factors, we believe that period to period comparisons of our results of operations are not a good indication of our future performance.

 

The following table sets forth our results of operation for the years ended December 31, 2016 and 2015:

 

Operating Expenses:	2016	2015
General and administrative	$4,872,626	$4,561,470
Sales and marketing	391,698	101,772
Research and development	1,126,535	867,822
Depreciation and amortization	11,267	6,498
Impairment of goodwill	6,455,645	--
Total operating expenses	12,857,771	5,537,562
Operating Loss	(12,857,771)	(5,537,562)
Other Expenses:
Interest expense	455,304	46,259
Total Other Expenses	455,304	46,259
Loss from Continuing Operations	(13,313,075)	(5,583,821)

 

Discontinued Operations
Loss from discontinued operations	477,497	939,256
Impairment loss	1,584,048	--
Disposal loss	852,864	--
Total Loss from Discontinued Operations	(2,914,409)	(939,256)
Net Loss	$(16,227,484)	$(6,523,077)

 

Revenue

 

We have not produced any revenue to date with the DenerveX System. Prior to the divestiture of Streamline in December 2016, we had only nominal sales of the Streamline ISS poles that occurred in December 2015 which are included in the loss from discontinued operations for the year ended December 31, 2015.

 

Operating Expenses

 

We classify our operating expenses into four categories: research & development, sales & marketing, general & administrative expense and depreciation and amortization expense.

 

Research and Development Costs and Expenses

 

Research and development costs and expenses consist primarily of fees paid to external service providers, laboratory supplies, costs for facilities and equipment, and other costs for research and development activities.

 

Research and development expenses are recorded in operating expenses in the period in which they are incurred. Estimates have been used in determining the liability of certain costs where services have been performed but not yet invoiced.

We monitor levels of performance under each significant contract for external service providers, including the extent of patient enrollment and other activities through communications with the service providers to reflect the actual amount expended.

 

 

General and Administrative Expenses

 

During 2016, the Company incurred approximately $1,780,000 in personnel costs, compared to approximately $1,390,000 in 2015. Professional fees were approximately $1,453,000 in 2016 and $2,552,000 in 2015 which consisted primarily of professional costs related to the development of the DenerveX device and the acquisition of Streamline in 2015. Travel expenses were approximately $226,000 during 2016 and $295,000 in 2015.

 

We anticipate that our general and administrative expenses will continue at a comparable rate in the future to support clinical trials, commercialization of our product candidate and continued costs of operating as a public company.

 

Sales & Marketing Expenses

 

During 2016, the Company incurred approximately $392,000 in sales and marketing expenses compared to $102,000 in 2015. Sales and marketing expense consists primarily of fees paid to vendors for tradeshows and consultants in correlation with the pre-launch of the DenerveX in Europe.

 

Depreciation & Amortization

 

Depreciation and amortization expense are recorded in the period in which they are incurred. During 2016, the Company recognized approximately $11,300 in depreciation expense, compared to approximately $6,700 in 2015. During 2016, the Company recognized approximately $190,000 in amortization expense compared to approximately $427,000 in 2015. Amortization expense is a result of amortizing the intangible assets acquired in the Streamline acquisition and the significant decrease in amortization expense in 2016 compared to 2015 is a result of having ceased amortization of the intangible assets upon Streamline being classified as held for sale in May 2016. Amortization expense is included in the total loss from discontinued operations at December 31, 2016 and 2015.

 

Liquidity and Capital Resources

 

Since our inception, we have incurred losses and anticipate that we will continue to incur losses in the foreseeable future.

 

While we expect our research and development costs for the DenerveX System to dissipate, we also anticipate increased expenditures for clinical trials to obtain FDA approval of the DenerveX System as well as expenses related to the commercial launch of the DenerveX system. We will need additional cash to fully fund these activities.

 

Our independent registered public accounting firm has included an explanatory paragraph with respect to our ability to continue as a going concern in its report on our consolidated financial statements as of and for the years ended December 31, 2016 and 2015.

 

The presence of the going concern explanatory paragraph suggests that we may not have sufficient liquidity or minimum cash levels to operate the business.   

 

Sources of Liquidity

 

Debt

 

On November 9, 2015, we issued a convertible promissory note to Steve Gorlin, a related party, for $2,000,000, the principal to be advanced in two installments. We received $970,000 in cash and the elimination of $30,000 in directors’ fees payable on November 9, 2015. This debt was subsequently converted into equity in January 2016, ultimately in exchange for 552,041 shares of common stock. On March 1, 2016, the Board of Directors approved extending the date for the second installment of $1,000,000 to November 1, 2016. After a further extension was granted, on December 1, 2016, we received the second installment of $1,000,000 from Mr. Gorlin and associates.

 

On September 16, 2016, the Company entered into short term contractual obligation for a secured nine month term loan for the principal amount of $1,150,000. The principal face value of the loan was $1,150,000 and was issued with an original issuance discount of $150,000 which resulted in aggregate proceeds of $1,000,000. The loan was subsequently converted to equity in February 2017.

 

The Company issued warrants to purchase an aggregate of 200,000 shares of common stock par value $.001 per share in conjunction with the short term note. Each warrant has an initial exercise price of $1.625 per share, and is initially exercisable six months following the date of issuance and for a period of three (3) years from the date of issuance.

 

In addition to the convertible promissory note and the short term loan, the debt presented on our December 31, 2016 balance sheet is also comprised of two promissory notes issued by Streamline prior to our acquisition of that entity in March 2015 and a finance agreement for the Company’s annual D&O insurance premium. The two notes, including unpaid accrued interest, total approximately $234,000 at December 31, 2016. The finance agreement totals approximately $65,000 at December 31, 2016 and payments are due in equal quarterly installments.

 

 

 

Equity

 

In January 2016, the first of two $1,000,000 installments from Steve Gorlin’s convertible promissory note and the related accrued interest were converted into equity.

 

In April 2016, the Company entered into a unit purchase agreement with selected accredited investors whereby the Company had the right to sell in a private placement a minimum of $1,000,000 and up to a maximum of $2,000,000 of units. The offering resulted in gross proceeds of $1,398,034.

 

In August, 2016, the Company entered into a Unit Purchase Agreement with selected accredited investors whereby the Company had the right to sell in a private placement a minimum of $250,000 and up to a maximum of $1,300,000 of units. The offering resulted in gross proceeds of $1,300,000.

 

In December 2016, the second of the $1,000,000 installment payments due from Steve Gorlin’s convertible promissory note was received. The Board of Directors approved a fourth amendment to the Modification Agreement by which Mr. Gorlin assigned a portion of the obligation to purchase the additional 571,429 shares of the Company at $1.75 per share. The closing price of the Company’s stock on December 1, 2016, the day the shares were issued, was $1.37 per share.

 

The obligation to purchase 142,857 of the additional shares was assigned to an outside non-related party for a total purchase price of $250,000. Additionally, the obligation to purchase 114,286 of the additional shares was assigned to a related party that provides consulting services for the Company for a total purchase price of $200,000. Mr. Gorlin retained the obligation to purchase 314,286 of the additional shares, for a total purchase price of $550,000.

 

In exchange for entering into the fourth Amendment, Mr. Gorlin also assigned a portion of the warrant for the right to purchase 112,500 of the 500,000 shares of common stock of the Company from the warrants issued on November 9, 2015.

 

The Company received an aggregate of $1,000,000 in exchange for the issuance of an aggregate of 571,429 shares at a price of $1.75 per share.

 

The Company is exploring other fundraising options for 2017, however, since we believe that the likelihood of obtaining traditional debt financing at our stage of development is low, our source of funds in the foreseeable future will likely be from the sale of capital stock or some type of structured capital arrangement involving either equity or a combination of debt with an equity component. 

 

Cash Flows

 

Net cash used in operating activities was approximately $5,427,000 during the year ended December 31, 2016, compared to approximately $5,982,000 in 2015. Net cash provided by investing activities was approximately $415,000 during the year ended December 31, 2016, compared to approximately $1,159,000 used in 2015. Net cash provided by financing activities was approximately $4,335,000 during the year ended December 31, 2016, compared to approximately $2,027,000 in 2015.

 

The Company had approximately $893,000 and $1,570,000 of cash on hand at December 31, 2016 and 2015, respectively.

 

Results of Discontinued Operations

 

Our discontinued operations generated net losses of approximately $2,914,000 and $939,000 for the years ended December 31, 2016 and 2015, respectively.

 

The results of discontinued operations for the year ended December 31, 2016 include the write down of intangible assets acquired with the purchase of Streamline Inc. in March 2015. The impairment loss recorded included a write down of the acquired trademark of $548,000, and approximately $1,036,000 to write-down the acquired developed technology.

 

The results of discontinued operations for the current period ended December 31, 2016 also includes a disposal loss of approximately $853,000 that was recorded upon consummation of the Streamline divestiture.

 

Results of Continuing Operations

 

Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015

 

Total operating expenses increased approximately $7,320,000, or 132%, to approximately $12,900,000 for the year ended December 31, 2016, as compared to approximately $5,538,000 for the year ended December 31, 2015.

 

The results of continuing operations for the current year ended December 31, 2016 include a write down of $6,455,645 in goodwill recorded in connection with the purchase of Streamline Inc. in March 2015.

 

The increase in expenses over the prior year is primarily the result of the impairment charges. Impairment charges aside, we continued to incur similar product development costs associated with the DenerveX System as well as costs incurred related to being a public entity.

 

 

Funding Requirements

 

We anticipate our cash expenditures will remain consistent as we continue to operate as a publicly traded entity and as we move forward from the final development stages of the DenerveX System onto clinical trial studies. We expect future cash flow expenditures to increase if the FDA requires a de novo regulatory path, instead of a 510(k) approval.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements as defined in Regulation S-K Item 303(a)(4) during the periods presented, investments in special-purpose entities or undisclosed borrowings or debt. Additionally, we are not a party to any derivative contracts or synthetic leases.

 

Contractual Obligations and Commercial Commitments

 

The Company has long term contractual obligations for the two promissory notes issued to the Bank of North Dakota New Venture Capital Program and North Dakota Development Fund. Both of the Bank of North Dakota New Venture Capital Program and North Dakota Development Fund notes were assumed in conjunction with the consummation of the Streamline acquisition on March 25, 2015, and require combined monthly payments of $5,661 through August 2019.

 

The Company rents commercial office space in Alpharetta, GA. Base annual rent is initially set at $2,750 per month and the lease term ends December 31, 2018.

 

The Company also currently reimburses its CEO, Jarrett Gorlin, for the lease of executive office space at a cost of $2,147 per month, which it believes is at fair market value. 

 

The Company has a consulting agreement with Lifeline Industries Inc., a related party, at a monthly fee of $10,000 through February 9, 2018.

 

The Company has outstanding material purchase order obligations of approximately $234,000 related to the build of the DenerveX device at December 31, 2016.

 

The Company has a consulting agreement with a sales manager in Europe to provide sales, marketing, and distribution consulting services at a monthly fee of €10,000 through August 1, 2017.

 

The Company also has employment agreements with the executive officers that commit the Company to a six month severance and benefits package if those employees separate under certain conditions, including a change in control of the Company.

 

Changes in Board of Directors

 

On August 11, 2016 the Company received a resignation letter from Mr. Thomas Hills from his position as a member of the Board of Directors of the Company. There were no disagreements between Mr. Hills and the Company.

 

On August 17, 2016, the Company appointed Ron Lawson to fill Mr. Hills’ vacancy and to serve as a member of the Company’s Board. In connection with his appointment, Mr. Lawson was granted 300,000 stock options under the Company’s 2013 Stock Option Incentive Plan. Each stock option has an exercise price of $1.20 and is exercisable pursuant to the terms of the stock option award. The closing price of the Company’s stock on August 17, 2016, the day the shares were issued, was $1.28 per share. 150,000 of the options vest immediately and 150,000 vest in one year.

 

On October 18, 2016, the Company received a resignation letter from Mr. John Blank from his position as a member of the board of directors. There were no disagreements between Mr. Blank and the Company.

 

On October 19, 2016, Jon Mogford, PH.D was appointed to fill the vacancy created by Mr. Blank’s resignation. Dr. Mogford was designated as a nominee for director in the proxy statement for the 2016 annual meeting, which was approved by the Company’s stockholders at the 2016 annual meeting in November 2016. In connection with his appointment, Dr. Mogford was granted 150,000 stock options under the Company’s 2013 Stock Option Incentive Plan. Each stock option has an exercise price of $1.58 and is exercisable pursuant to the terms of the stock option award. The closing price of the Company’s stock on November 10, 2016, the day the shares were issued, was $1.58 per share. 75,000 of the options vest immediately and 75,000 vest in one year.

 

 

Notice of Delisting

 

On August 30, 2016, we received a letter from the listing qualifications department of the NASDAQ stock market notifying us that the Company’s stockholders’ equity of $1,311,796 as reported in our quarterly report on form 10-Q for the quarter ended June 30, 2016 was below the minimum stockholders’ equity of $2,500,000 required for continued listing on the NASDAQ capital market (the “Capital Market”). The decline in the Company’s stockholders’ equity was largely a result of the recognition of an impairment loss recorded in our form 10-Q for the quarter ended June 30, 2016 related to the intangible assets of Streamline Inc., the Company’s wholly owned subsidiary acquired in March 2015.

 

On February 24, 2017, the Company filed a Form 8K with the Securities and Exchange Commission summarizing the actions taken to regain and affirmatively state its current compliance with NASDAQ's stockholder equity requirement.

 

On March 1, 2017, NASDAQ issued a determination letter stating that the company had successfully evidenced compliance with the minimum $2,500,000 stockholders' equity requirement for continued listing on the Capital Market.

 

NASDAQ will continue to monitor the Company’s ongoing compliance with the stockholders’ equity requirement and, if at the time of its next periodic report the Company does not evidence compliance, that it may be subject to delisting.

 

Indemnification

 

We have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is or was serving, at our request, in such capacity, to the maximum extent permitted under the laws of the State of Nevada.

 

The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. However, we maintain directors and officers insurance coverage that may contribute, up to certain limits, a portion of any future amounts paid for indemnification of directors and officers. We believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal. Historically, we have not incurred any losses or recorded any liabilities related to performance under these types of indemnities.

 

Additionally, in the normal course of business, we have made certain guarantees, indemnities and commitments under which we may be required to make payments in relation to certain transactions. These indemnities include intellectual property and other indemnities to our customers and distribution network partners in connection with the sales of our products, and indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease.

 

It is not possible to determine the maximum potential loss under these guarantees, indemnities and commitment due to our limited history of prior indemnification claims and the unique facts and circumstances involved in each particular provision.

 

Recently Adopted Accounting Standards

 

As further described in the notes to the consolidated financial statements, the Company elected to early adopt the provisions of ASU 2014-10, Development Stage Entities, which eliminated certain financial reporting requirements for development stage entities included in ASC 915 Development Stage Entities.

 

In August 2014, FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, or ASU 2014-15. ASU 2014-15 explicitly requires a company’s management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. The new standard will be effective in the first annual period ending after December 15, 2016, although early application is permitted. We adopted this standard on January 1, 2017. We do not expect the adoption of this standard to have a material impact on our consolidated statements of financial position, results of operations or cash flows.

 

Jumpstart Our Business Startups Act of 2012

 

The JOBS Act permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies.

 

We are choosing to "opt out" of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

 

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not Applicable.

 

ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA  

 

 

 

 

INDEX TO THE FINANCIAL STATEMENTS

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Shareholders of

MedoveX Corporation and Subsidiary

 

We have audited the accompanying consolidated balance sheets of MedoveX Corporation and Subsidiary (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MedoveX Corporation and Subsidiary, as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 15 to the consolidated financial statements, the Company’s products are being developed and have not generated revenues to date. As a result, the Company has suffered losses since its inception. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 15. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Frazier & Deeter, LLC

 

Frazier & Deeter, LLC

Atlanta, Georgia

 

 

 

MEDOVEX CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
	December 31, 2016	December 31, 2015
Assets
Current Assets
Cash	$892,814	$1,570,167
Prepaid expenses	364,822	169,253
Current assets held for sale	--	35,509
Total Current Assets	1,257,636	1,774,929
Long Term Receivable	150,000	--
Property and Equipment, net of accumulated depreciation	97,590	23,724
Deposits	2,751	2,751
Goodwill	--	6,455,645
Noncurrent assets held for sale	--	3,274,685
Total Assets	$1,507,977	$11,531,734
Liabilities and Stockholders' Equity
Current Liabilities
Interest payable	$69,222	$76,712
Accounts payable	225,725	278,309
Accrued liabilities	459,800	100,317
Notes payable, current portion	126,086	134,540
Short-term note payable, net of debt discount	970,240	--
Total Current Liabilities	1,851,073	589,878
Long-Term Liabilities
Convertible debt	--	753,914
Notes payable, net of current portion	103,742	164,726
Deferred rent	1,179	491
Total Long-Term Liabilities	104,921	919,131
Total Liabilities	1,955,994	1,509,009
Stockholders' (Deficit) Equity
Preferred stock - $.001 par value: 500,000 shares
authorized, no shares outstanding	--	--
Common stock - $.001 par value: 49,500,000 shares authorized,
14,855,181 and 11,256,175 shares issued at December 31, 2016 and December 31, 2015, respectively, 14,855,181 and 11,048,203 shares outstanding at December 31, 2016 and December 31, 2015, respectively	14,855	11,256
Additional paid-in capital	25,898,054	20,164,911
Due from stockholder	--	(20,000)
Accumulated deficit	(26,360,926)	(10,133,442)
Total Stockholders' (Deficit) Equity	(448,017)	10,022,725
Total Liabilities and Stockholders' (Deficit) Equity	$1,507,977	$11,531,734

 

See notes to consolidated financial statements

 

 

MEDOVEX CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

 

	For the year ended December 31,
	2016	2015
Operating Expenses
General and administrative	$4,872,626	$4,561,470
Sales & Marketing	391,698	101,772
Research and development	1,126,535	867,822
Depreciation and amortization	11,267	6,498
Impairment of goodwill	6,455,645	--
Total Operating Expenses	12,857,771	5,537,562
Operating Loss	(12,857,771)	(5,537,562)
Other Expenses
Interest expense	455,304	46,259
Total Other Expenses	455,304	46,259
Loss from Continuing Operations	(13,313,075)	(5,583,821)
Discontinued Operations
Loss from discontinued operations	477,497	939,256
Impairment loss	1,584,048	--
Disposal loss	852,864	--
Total Loss from Discontinued Operations	(2,914,409)	(939,256)
Net Loss	$(16,227,484)	$(6,523,077)
Basic and diluted net loss per common share from continuing operations	$(1.00)	$(0.51)
Basic and diluted net loss per common share from discontinued operations	(0.22)	(0.09)
Basic and diluted net loss per common share	$(1.22)	$(0.60)
Basic and diluted weighted average common shares outstanding	13,250,789	10,943,675

 

See notes to consolidated financial statements

 

 

MEDOVEX CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the year ended December 31, 2016 and 2015

	Common Stock		Additional	Due From	Accumulated	Total Stockholders'
	Shares	Amount	Paid-in Capital	Stockholder	Deficit	Equity
Balance – December 31, 2014	9,172,480	$9,173	$10,106,841	$--	$(3,610,365)	$6,505,649
Issuance of common stock to underwriters in January 2015	208,695	208	1,083,928	--	--	1,084,136
Value of common stock to acquire Streamline on date of closing at $4.50 per share	1,875,000	1,875	8,435,625	--	--	8,437,500
Stock based compensation	--	--	253,659	--	--	253,659
Issuance of warrant to Steve
Gorlin on November 9 2015	--	--	284,858	--	--	284,858
Receivable portion of Note
of convertible debt	--	--	--	(20,000)	--	(20,000)
Net loss	--	--	--	--	(6,523,077)	(6,523,077)
Balance – December 31, 2015	11,256,175	$11,256	$20,164,911	$(20,000)	$(10,133,442)	$10,022,725

 

Conversion of promissory note on January 25, 2016	552,041	552	1,071,961	--	--	1,072,513
Warrant price modification on January 25, 2016	--	--	18,050	--	--	18,050
Warrant price modification on February 16, 2016	--	--	7,670	--	--	7,670
Issuance of common stock pursuant to private placement completed in April 2016	1,211,703	1,212	800,435	--	--	801,647
Issuance of warrants pursuant to private placement completed in April 2016	--	--	374,623	--	--	374,623
Issuance of common stock in exchange for consulting services in May 2016	37,500	38	47,962	--	--	48,000
Issuance of common stock pursuant to private placement completed in August 2016	1,083,333	1,083	975,526	--	--	976,609
Issuance of warrants pursuant to private placement completed in August 2016	--	--	323,391	--	--	323,391
Issuance of common stock in exchange for consulting services in August 2016	60,000	60	76,740	--	--	76,800
Issuance of warrants pursuant to loan completed in September 2016	--	--	135,971	--	--	135,971
Issuance of common stock in exchange for consulting services in September 2016	83,000	83	124,417	--	--	124,500
Issuance of common stock in December 2016 pursuant to conversion of promissory note in January 2016	571,429	571	999,429	--	--	1,000,000
Repayment of stockholder receivable	--	--	--	20,000	--	20,000
Stock based compensation	--	--	776,968	--	--	776,968
Net loss	--	--	--	--	(16,227,484)	(16,227,484)
Balance – December 31, 2016	14,855,181	$14,855	$25,898,054	$--	$(26,360,926)	$(448,017)

 

See notes to consolidated financial statements

 

MEDOVEX CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

	Year Ended December 31,
	2016	2015
Cash Flows from Operating Activities
Net loss	$(16,227,484)	$(6,523,077)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation	11,396	6,669
Amortization of intangible assets	189,522	426,429
Amortization of debt discount	357,297	38,770
Debt conversion expense	68,694	--
Intangible asset impairment loss	1,584,048	--
Goodwill impairment loss	6,455,645	--
Disposal loss	852,864
Stock based compensation	776,968	253,659
Straight-line rent adjustment	688	491
Common stock issued for consulting services	249,300	--
Non-cash directors fees	20,000	--
Adjustment of fair value of warrant modification	25,720	--
Changes in operating assets and liabilities, net of effects of acquisition and disposition:
Deposits	--	(2,751)
Accounts receivable	33,045	(33,045)
Prepaid expenses	(128,400)	63,474
Accounts payable	(52,584)	(164,144)
Interest payable	(3,670)	76,712
Accrued liabilities	359,483	(125,130)
Net Cash Used in Operating Activities	5,427,468	(5,981,943)
Cash Flows from Investing Activities
Acquisition of Streamline, Inc., net of cash received	--	(1,152,291)
Disposition of Streamline Inc.	500,000	--
Expenditures for property and equipment	(85,133)	(7,059)
Net Cash Provided by (Used in) Investing Activities	414,867	(1,159,350)
Cash Flows from Financing Activities
Principal payments under note payable obligation	(136,022)	(37,251)
Proceeds from issuance of convertible debt	--	695,142
Proceeds from issuance of common stock, net of offering costs	2,778,256	--
Proceeds from issuance of warrants, net of offering costs	833,985	284,858
Proceeds from issuance of short term debt	859,029	--
Proceeds from issuance of common stock from underwriter’s overallotment	--	1,084,136
Net Cash Provided by Financing Activities	4,335,248	2,026,885
Net Decrease in Cash	677,353	(5,114,409)
Cash - Beginning of period	1,570,167	6,684,576
Cash - End of period	$892,814	$1,570,167
Supplementary Cash Flow Information
Cash paid for interest	$11,469	$8,040
Non-cash investing and financing activities
Issuance of common stock for acquisition of Streamline	$--	$8,437,500
Finance agreement for insurance policy	66,582	76,581
Due from shareholder for issuance of convertible debt	--	20,000
Repayment of due from stockholder through forgone director fees	20,000	--
Issuance of common stock for consulting services	249,300	--
Conversion of note and accrued interest to common stock	1,072,513	--
Note receivable from disposition of Streamline	150,000	--

 

See notes to consolidated financial statements

 

Note 1 - Organization

 

Description of Business

 

MedoveX Corp. (the “Company” or “MedoveX”), was incorporated in Nevada on July 30, 2013 as SpineZ Corp. (“SpineZ”) and changed its name to MedoveX Corp. on March 20, 2014. MedoveX is the parent company of Debride Inc. (“Debride”), which was incorporated under the laws of the State of Florida on October 1, 2012. The Company is in the business of designing and marketing proprietary medical devices for commercial use in the United States and Europe. The Company is currently seeking approval from the FDA and CE for DenerveX device.

 

In March 2015, the Board of Directors of MedoveX and Streamline, Inc., a Minnesota corporation (“Streamline”), approved an Agreement and Plan of Merger (the “Merger Agreement”). Under the Merger Agreement, STML Merger Sub, Inc. a wholly-owned subsidiary of MedoveX, merged into Streamline, after which Streamline became a wholly-owned subsidiary of Medovex.

 

In May 2016, the Board of Directors authorized management to seek buyers for Streamline, Inc., the Company’s wholly owned subsidiary acquired in March 2015. In December 2016, the Company entered into a definitive asset purchase agreement pursuant to which the Company agreed to sell all Streamline assets upon consummation of the divestiture (the “Closing”). The Closing occurred immediately following the execution of the asset purchase agreement on December 7, 2016. (See Note 10)

 

Note 2 - Summary of Significant Accounting Policies

 

BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

 

The accompanying financial statements include the accounts of Medovex Corp. and its wholly-owned subsidiary, Streamline. All intercompany accounts and transactions have been eliminated in consolidation.

 

Use of Estimates

 

In preparing the financial statements, generally accepted accounting principles in the United States (“U.S. GAAP”) requires disclosure regarding estimates and assumptions used by management that affect the amounts reported in financial statements and accompanying notes. Actual results could differ from those estimates.

 

Concentration of Credit Risk

 

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist solely of cash. At times throughout the year, the Company may maintain certain bank account balances in excess of FDIC insured limits. At December 31, 2016 and 2015, the Company had cash deposits that exceeded federally insured deposit limits. The Company believes that its funds are deposited in high credit quality financial institutions. The Company has not experienced any losses in such accounts to date and believes it is not exposed to any significant credit risk associated with its cash deposits.

 

Cash

 

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company’s cash balances at December 31, 2016 and 2015 consists of funds deposited in checking accounts with commercial banks.

 

Long term Receivable

 

The long term receivable at December 31, 2016 represents the long-term, non-contingent portion of the receivables due from the sale of Streamline which is not due until January 1, 2018. See Note 10. Recording the present value of the receivable at December 31, 2016 and recognizing the subsequent accretion expense over the one year period led to an immaterial amount.

 

Goodwill And Purchased Intangible Assets

 

Goodwill is reviewed for impairment annually on December 31 or more frequently if changes in circumstances or the occurrence of events suggest impairment exists using a two-step process. In step 1, the fair value of each reporting unit is compared to its carrying value, including goodwill. If the fair value exceeds the carrying value, no further work is required and no impairment loss is recognized. If the carrying value exceeds the fair value, the goodwill of the reporting unit is potentially impaired and the Company would then complete step 2 in order to measure the impairment loss. In step 2, the Company would calculate the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets (including unrecognized intangible assets) of the reporting unit from the fair value of the reporting unit. If the implied fair value of goodwill is less than the carrying value of goodwill, the Company would recognize an impairment loss, in the period identified, equal to the difference. See Note 11.

 

 

Other intangible assets consist of developed technology and a trademark. The Company reviews intangible assets for impairment as changes in circumstances or the occurrence of events suggest the remaining value may not be recoverable. See Note 11.

 

Amortization on the intangibles was provided on a straight-line basis over the estimated useful lives of the assets as follows:

 

Trademark	5 years
Developed technology	7 years

 

Although we believe that the recorded fair value of our non-financial assets is appropriate at December 31, 2016, these fair values may not be indicative of net realizable value or reflective of future fair values.

 

 

 

Fair Value Measurements

 

We measure certain non-financial assets at fair value on a non-recurring basis. These non-recurring valuations include evaluating assets such as long-lived assets and non-amortizing intangible assets for impairment; allocating value to assets in an acquired asset group; and applying accounting for business combinations.

 

We use the fair value measurement framework to value these assets and report the fair values in the periods in which they are recorded or written down.

 

The fair value measurement framework includes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair values in their broad levels. These levels from highest to lowest priority are as follows:

 

The determination of fair value and the assessment of a measurement’s placement within the hierarchy requires judgment. Level 3 valuations often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost, market, or income valuation methodologies applied to unobservable management estimates and assumptions. Management’s assumptions could vary depending on the asset or liability valued and the valuation method used. Such assumptions could include: estimates of prices, earnings, costs, actions of market participants, market factors, or the weighting of various valuation methods. We may also engage external advisors to assist us in determining fair value, as appropriate.

 

Although we believe that the recorded fair value of our financial instruments is appropriate, these fair values may not be indicative of net realizable value or reflective of future fair values.

 

Property and Equipment

 

Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the related assets, generally three to five years. Repairs and maintenance are expensed as incurred. Improvements and betterments, which extend the lives of the assets, are capitalized.

 

Leases

 

The Company recognizes rent expense on a straight-line basis over the term of the lease. The lease term commences on the date the Company takes possession of or controls the physical use of the property. Deferred rent is included in non-current liabilities on the balance sheet.

 

Research and Development

 

Research and development costs are expensed as incurred.

 

Advertising

 

The Company expenses all advertising costs as incurred. For the years ended December 31, 2016 and 2015, advertising costs were approximately $392,000 and $102,000, respectively.

 

Income Taxes

 

The Company uses the liability method of accounting for income taxes, which requires recognition of temporary differences between financial statement and income tax bases of assets and liabilities, measured by enacted tax rates. A valuation allowance is recorded to reduce deferred tax assets when necessary.

 

Stock-Based Compensation

 

The Company maintains a stock option incentive plan and accounts for stock-based compensation in accordance with ASC 718, Compensation - Stock Compensation. The Company recognizes share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award to employees and directors. As required by fair value provisions of share-based compensation, employee and non-employee share-based compensation expense recognized is calculated over the requisite service period of the awards and reduced for estimated forfeitures.

 

 

 

Loss per Share

 

Basic loss per share is computed on the basis of the weighted average number of shares outstanding for the reporting period. Diluted loss per share is computed on the basis of the weighted average number of common shares plus dilutive potential common shares outstanding using the treasury stock method. Any potentially dilutive securities are anti- dilutive due to the Company’s net losses. For the years presented, there is no difference between the basic and diluted net loss per share: 3,504,847 warrants and 1,124,900 common stock options outstanding were considered anti-dilutive and excluded for the years presented.

 

Business combinations

 

The Company completed an acquisition on March 25, 2015. This transaction was recorded using guidelines provided by ASC 805, Business Combinations. Following these guidelines, the consideration paid by MedoveX for Streamline was measured on the date of acquisition. An independent valuation of Streamline was performed using the discounted cash flow method. Based on the estimated value of Streamline, the consideration paid by MedoveX and the tangible assets of Streamline, management determined the intangible portion of the purchase price should be assigned between developed technology, trademark, and goodwill.

 

Discontinued Operations

 

As more fully described in Note 10, in May 2016, management was authorized to locate a buyer for Streamline Inc., the Company’s wholly owned subsidiary acquired in March 2015, by the Board of Directors. Streamline’s results of operations have been classified as discontinued operations for all periods presented.

 

reclassification

 

Some items in the prior period financial statements were reclassified to conform to the current period presentation. Reclassifications had no effect on prior period net income or shareholders’ equity.

 

Recently Issued Accounting Pronouncements

In August 2014, FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, or ASU 2014-15. ASU 2014-15 explicitly requires a company’s management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. The new standard will be effective in the first annual period ending after December 15, 2016, although early application is permitted. We do not expect the adoption of this standard to have a material impact on our consolidated statements of financial position, results of operations or cash flows.

 

In April 2015, FASB issued ASU No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the presentation of Debt Issuance Costs, to reduce the complexity of having different balance sheet presentation requirements for debt issuance costs and debt discounts and premiums. The guidance requires debt issuance costs related to a recognized debt liability be reported on the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 is effective for public companies for annual reporting periods beginning after December 15, 2015, and interim periods within those fiscal years. The Company has adopted the amendments of ASU 2015-03 effective January 1, 2016.

 

In November 2015, FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. ASU 2015-17 simplifies the presentation of deferred taxes by requiring deferred tax assets and liabilities be classified as noncurrent on the balance sheet. ASU 2015-17 is effective for public companies for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years. The guidance may be adopted prospectively or retrospectively and early adoption is permitted. We believe the adoption of this standard will have no material impact on our consolidated statements of financial position, results of operations or cash flows.

 

In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842). The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. ASU 2016-02 is effective for public companies for annual reporting periods beginning after December 15, 2018, and interim periods within those fiscal years. The guidance may be adopted prospectively or retrospectively and early adoption is permitted. The Company is currently assessing the impact the adoption of ASU 2016-02 will have on its consolidated financial statements.

 

 

 

Note 3 - Property and Equipment

 

Property and equipment consists of the following:

 

	Useful Life	December 31, 2016	December 31, 2015
Furniture and fixtures	5 years	$65,987	$17,100
Computers and software	3 years	19,928	16,275
Leasehold improvements	5 years	32,593	--
		118,508	33,375
Less accumulated depreciation and amortization		(20,918)	(9,651)
Total		$97,590	$23,724

 

Depreciation and amortization expense, excluding depreciation and amortization from Streamline, Inc., amounted to $11,267 for the year ended December 31, 2016 and $6,498 for the year ended December 31, 2015.

 

Note 4 – Patent Assignment and Contribution and Agreements

 

On February 1, 2013, the Company issued 750,108 shares of common stock to Scott Haufe, M.D. (“Dr. Haufe”) pursuant to the terms of a Contribution and Royalty Agreement dated January 31, 2013 between the Company and Dr. Haufe. This agreement provides for the Company to pay Dr. Haufe royalties equal to 1% of revenues earned from sales of any and all products derived from the use of the DenerveX technology. Royalties are payable to Dr. Haufe within 30 days after the close of each calendar quarter based on actual cash collected from sales of applicable products. The royalty period expires on September 6, 2030. No royalties have been paid as of December 31, 2016.

 

The Company executed a co-development agreement for the DenerveX technology with royalty provisions with James R. Andrews, M.D., as more fully described in Note 7.

 

 

 

Note 5 – Acquisitions

 

On March 25, 2015, the Company acquired Streamline Inc. pursuant to an Agreement and Plan of Merger dated March 9, 2015. As a result of this transaction, Streamline, Inc. became a wholly owned subsidiary of the Company. Under the terms of the Agreement and Plan of Merger, the Company paid $1,397,466 cash and authorized the issuance of 1,875,000 shares of common stock, of which 200,000 shares were held in escrow until September 25, 2016 to satisfy indemnification obligations under the agreement. The Company incurred approximately $344,000 in acquisition related legal fees.

 

On September 25, 2016, the escrow was released for the full 200,000 shares. As of December 31, 2016, the Company had received transmittal letters for all of the 1,875,000 shares of MedoveX common stock. The terms of the Merger Agreement also required a commitment by MedoveX to supply a minimum of $750,000 in working capital to the Streamline subsidiary, to fund the operations and product development of Streamline as needed. The $750,000 working capital funding commitment was fully satisfied upon consummation of the divestiture. See Note 10.

 

The closing price of the common stock on March 25, 2015 was $4.50 per share. Based on this price and cash consideration, the acquisition of Streamline was valued at $9,834,966.

 

The following is a summary of the allocation of the fair value of Streamline.

 

Assets acquired
Cash	$245,174
Inventory	1,878
Other assets	165
Developed technology	3,000,000
Trademark	700,000
Goodwill	6,455,645
Total assets acquired	10,402,862
Liabilities assumed
Accounts payable	301,940
Accrued liabilities	6,018
Notes payable	259,938
Total	567,896
Net assets acquired	$9,834,966

 

Note 6 - Equity Transactions

 

Private Placements

 

In April 2016, the Company entered into a unit purchase agreement with selected accredited investors whereby the Company had the right to sell in a private placement a minimum of $1,000,000 and up to a maximum of $2,000,000 of units. Each unit had a purchase price of $100,000 and consisted of (i) 86,957 shares of the Company’s common stock, par value $0.001 per share at a purchase price of $1.15 per share, and (ii) a warrant to purchase 43,478 shares of common stock. Each warrant has an exercise price of $1.30 per share and is exercisable six months following the date of issuance for a period of five (5) years from the date of issuance.

 

The offering resulted in gross proceeds of $1,398,034 and resulted in the issuance of an aggregate of 1,211,703 shares of common stock and warrants to purchase 605,829 shares. The Placement Agent collected an aggregate of approximately $222,000 in total fees related to the offering and was also issued warrants on the same terms to purchase an aggregate of 181,992 shares.

 

On August 5, 2016, the Company entered into a Unit Purchase Agreement with selected accredited investors whereby the Company had the right to sell in a private placement a minimum of $250,000 and up to a maximum of $1,300,000 of units. Each Unit had a purchase price of $250,000 and consisted of (i) 208,333 shares of the Company’s common stock, par value $0.001 per share at a purchase price of $1.20 per share, and (ii) a warrant to purchase 104,167 shares of Common Stock. Each Warrant has an initial exercise price of $1.52 per share, and is initially exercisable six months following the date of issuance for a period of five (5) years from the date of issuance.

 

The offering resulted in gross proceeds of $1,300,000 and resulted in the issuance of an aggregate of 1,083,333 shares of common stock and warrants to purchase 541,669 shares.

 

 

Stock-Based Compensation

 

During 2016, we issued 180,500 shares of common stock under consulting agreements for investor relation services. These shares were valued based upon the closing price of our stock at the respective dates, ranging from $1.28 to $1.50 per share and valued at $249,300. Additionally, in conjunction with the share based payments, we also paid $535,000 under the consulting agreements for the investor relations services.

 

On November 10, 2016, the Board authorized the issuance of shares of common stock, priced at the average closing price of the Company’s stock during 2016, to all Board members, both current and former, in an amount equivalent to $240,000, representing their accrued but unpaid directors’ fees as of December 31, 2016. In January 2017, the Company issued 173,911 shares at $1.38 per share to fulfill this obligation.

 

Stock-Based Compensation Plan

 

2013 Stock Option Incentive Plan

 

On October 14, 2013, shareholders approved the MedoveX Corp. 2013 Stock Incentive Plan (the “Plan”). Under the Plan, the Company may grant incentive stock options to employees and non-statutory stock options to employees, consultants, and directors for up to 1,150,000 shares of common stock. On November 10, 2016, shareholders approved a 500,000 share increase in the number of shares available for issuance under the Plan, from 1,150,000 to 1,650,000 shares.

 

The stock options are exercisable at a price equal to the market value on the date of the grant. The Plan gives full authority for granting options, determining the type of options granted, and determining the fair market value of the options to the Plan Administrator.

 

The Company has the right, but not obligation, to repurchase any shares obtained through exercise of an option from terminated Plan participants. The Company has 90 days from the date of termination to exercise it’s repurchase right. The Company must pay the Fair Market Value (“FMV”) of the shares if the termination was for any reason other than for cause, or the option price (if less than FMV of the shares) if the termination is for cause. The FMV is determined by the Plan Administrator on the date of termination.

 

During 2016, the Company granted options to purchase 294,900 shares of common stock to certain employees and consultants. 274,900 of the options vest as follows: 25% on the date of grant and 25% on each of the next three anniversaries. The options granted were at the market value of the common stock on the date of the grant. The remaining 20,000 options vest as follows: 50% on the date of grant and 50% one year after the grant date and are exercisable at $1.20. The market value of these remaining common stock on the date of grant was $1.28.

 

During 2016, the Company granted options to purchase 450,000 shares of common stock to certain directors that vest as follows: 50% on the date of grant and 50% one year after the grant date. 300,000 of the options are exercisable at $1.20. The market value of these common stock on the date of grant was $1.28. The remaining 150,000 options are exercisable at $1.58 which was the fair value of the common stock on the grant date.

 

We utilize the Black-Scholes valuation method to recognize compensation expense over the vesting period. The expected life represents the period that our stock-based compensation awards are expected to be outstanding.

 

We use a simplified method provided in Securities and Exchange Commission release, Staff Accounting Bulletin No. 110, which averages an award's weighted average vesting period and contractual term for "plain vanilla" share options. The expected volatility was estimated by analyzing the historic volatility of similar public biotech companies in an early stage of development.

 

No dividend payouts were assumed as we have not historically paid, and do not anticipate paying, dividends in the foreseeable future. The risk-free rate of return reflects the weighted average interest rate offered for US treasury rates over the expected term of the options.

 

Grant date	January 6	August 17	November 10
Fair value of options granted during 2016	$0.67	$0.91	$1.06
Exercise price	$0.95	$1.20	$1.58
Number of options	214,900	320,000	210,000
Expected term (years)	6	6	6
Risk-free interest rate	1.82%	1.28%	1.74%
Volatility	83%	75.55%	76.67%
Dividend yield	None	None	None

 

 

 

For the years ended December 31, 2016 and 2015, the Company recognized approximately $777,000 and $254,000, respectively, as compensation expense with respect to stock options.

 

A summary of the Company’s share-based compensation activity and related information is as follows:

 

	Shares	Weighted Average Exercise Price	Weighted Average Remaining Term (Years)
Outstanding at 12/31/2014	60,000	$2.50	8.8
Granted	320,000	$4.22	9.3
Exercised	--	--	--
Cancelled	--	--	--
Outstanding at 12/31/2015	380,000	$3.95	9.1
Granted	744,900	$1.24	9.52
Exercised	--	--	--
Cancelled	--	--	--
Outstanding at 12/31/2016	1,124,900	$2.15	9.0
Exercisable at 12/31/2016	523,725	$2.31	9.0

 

As of December 31, 2016, there were 601,175 shares of time-based, non-vested stock. Unrecognized compensation cost amounts to approximately $596,000 as of December 31, 2016 and will be recognized as an expense on a straight-line basis over a remaining weighted average service period of 1.7 years. The fair value of vested share-based compensation at December 31, 2016 and 2015 was approximately $697,000 and $138,000, respectively.

 

Note 7 – Commitments

 

Operating Leases

 

Office Space

 

The Company pays TAG Aviation, a company owned by its Chief Executive Officer, Jarrett Gorlin (“Mr. Gorlin”) for office space that is currently being used as the Company’s principal business location plus utilities (see “Related Party Transactions”) on a monthly basis. Payments under this arrangement are $2,147 per month. Rent expense and utilities cost paid to TAG Aviation amounted to approximately $30,400 and $28,400 for the years ended December 31, 2016 and 2015, respectively.

 

On July 8, 2015, the Company entered into a 3 year lease agreement for a commercial building which commenced on August 1, 2015.

Total lease expense for the year ended December 31, 2016 and 2015 was approximately $34,000 and $14,000, respectively, related to this lease. Future minimum lease payments under this rental agreement are approximately as follows:

 

For the year ended:

 

December 31, 2017	35,000
December 31, 2018	21,000
	$56,000

 

Equipment

 

The Company entered into a non-cancelable 36 month operating lease agreement for equipment on April 22, 2015. The agreement is renewable at the end of the term and requires the Company to maintain comprehensive liability insurance.

 

Total lease expense for the year ended December 31, 2016 was approximately $2,600. Future minimum lease payments under this operating lease agreement are approximately as follows:

 

For the year ended:

 

December 31, 2017	2,600
December 31, 2018	800
	$3,400

 

Purchase Orders

 

For the years ended December 31, 2016 and 2015, the Company had approximately $234,000 and $484,000, respectively, in outstanding purchase order obligations related to the research and development build of the DenerveX device to Nortech and Bovie Medical Corporation (“Bovie”).

 

 

Consulting Agreements

 

The Company has a consulting agreement with one its’ founding stockholders to provide business development consulting services through January 2017 at a fee of $5,000 per month. The agreement was subsequently extended and increased to $10,000 per month through January 18, 2018. See Note 16.

 

The Company has a consulting agreement with a sales consultant to provide sales, marketing and distribution consulting services over a one-year period for €10,000 per month through August 1, 2017.

 

As described in Note 6, on September 15, 2016, the Company entered into a six month business advisory and investor relations consulting agreement at a fee of $400,000 for the purpose of creating market awareness of the Company.

 

Employment Agreements

 

The Company entered into Employment Agreements with each of its five executive officers for aggregate compensation amounting to approximately $984,000 per annum, plus customary benefits. These employment agreements, having commenced at separate dates, are for terms of three years which began in October 2013 and ends in January 2018.

 

The agreements provide for the Company to pay six months of severance in the event of (i) the Company’s termination of an executive’s employment without cause, (ii) the resignation by an executive for good reason, (iii) a change in control of the Company, (iv) a material reduction in an executive’s duties, or (v) a requirement that an executive move their primary work location more than 50 miles.

 

Co-Development Agreement

 

In September 2013, the Company executed a Co-Development Agreement with James R. Andrews, M.D. (“Dr. Andrews”) to further evaluate, test and advise on the development of products incorporating the use of the patented technology. In exchange for these services the Company is obligated to pay Dr. Andrews a royalty of 2% of revenues earned from applicable product sales over a period of 5 years. If Dr. Andrews is listed as inventor of any Improvement Patent on the DenerveX device during the 5 year term, he would continue to receive a 1% royalty after the 2% royalty expires for the duration of the effectiveness of the Improvement Patent. No royalties have been paid to Dr. Andrews as of December 31, 2016.

 

Generator development agreement

 

The Company is obligated to reimburse Bovie up to $295,000 for the development of the Pro-40 electrocautery generator. For the year ended December 31, 2016 and 2015, the Company paid approximately $102,400 and $181,200, respectively, under this agreement.

 

Note 8 – Short Term Liabilities

 

Finance Agreement

 

The Company entered into a commercial insurance premium finance and security agreement in December 2016. The agreement finances the Company’s annual D&O insurance premium. Payments are due in quarterly installments of approximately $23,000 and carry an annual percentage interest rate of 4.9%.

 

The Company had an outstanding premium balance of approximately $65,000 at December 31, 2016 related to the agreement.

 

Promissory Notes

 

In conjunction with the consummation of the Streamline acquisition on March 25, 2015, the Company assumed two promissory notes for approximately $135,000 and $125,000 payable to the Bank of North Dakota New Venture Capital Program and North Dakota Development Fund, both outside non-related parties. Assumption of the liabilities was not included as part of the asset purchase agreement that was executed in December 2016. Thus, the Company retained the promissory notes upon consummation of the divestiture.