Innoveren Scientific, Inc. - Quarter Report: 2016 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 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)	(IRS Employer Identification Number)
3279 Hardee Avenue
Atlanta, Georgia	30341
(Address of Principal Executive Offices)	(Zip Code)
(844) 633-6839
(Registrant's Telephone Number, Including Area Code)

 

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 Web site, 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 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 ☐	Smaller Reporting Company ☒
(Do not check if smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 

☐ Yes ☒No

 

As of November 16, 2016, 15,032,107 shares of the registrant’s common stock were outstanding.

 

 

MEDOVEX CORP.

 

TABLE OF CONTENTS

 

	Page
PART I – FINANCIAL INFORMATION
Item 1.     Financial Statements
Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015	1
Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015 (unaudited)	2
Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2016 (unaudited)	3
Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 (unaudited)	4
Notes to Consolidated Financial Statements (unaudited)	5
Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations.	25
Item 3.     Quantitative and Qualitative Disclosures About Market Risk.	32
Item 4.     Controls and Procedures.	32
PART II – OTHER INFORMATION
Item 1.     Legal Proceedings.	32
Item 1A.  Risk Factors.	32
Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds.	33
Item 3.     Defaults Upon Senior Securities.	33
Item 4.     Mine Safety Disclosures.	33
Item 5.     Other Information.	33
Item 6.     Exhibits.	33
SIGNATURES	34

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” as defined under United States federal securities laws. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

 

●

our ability to market, commercialize and achieve broader market acceptance for our products;

 

●

our ability to successfully expand, and achieve full productivity from, our sales, clinical support and marketing capabilities;

 

●

our ability to successfully complete the development of, and obtain regulatory clearance or approval for, our products; and

 

●

the estimates regarding the sufficiency of our cash resources, our ability to obtain additional capital or our ability to maintain or grow sources of revenue.

 

In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these words. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. You should also refer to the section of our Annual report on Form 10-K entitled “Risk Factors” for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We do not undertake to update any of the forward-looking statements after the date of this Quarterly Report, except to the extent required by applicable securities laws.

 

 

MEDOVEX CORP. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

 

	September 30, 2016	December 31, 2015
	(unaudited)
Assets
Current Assets
Cash	$914,151	$1,570,167
Prepaid expenses	538,004	169,253
Current assets held for sale	1,878	35,509
Total Current Assets	1,454,033	1,774,929
Property and Equipment, Net	23,903	23,724
Deposits	2,751	2,751
Goodwill	--	6,455,645
Noncurrent Assets Held for Sale	1,500,986	3,274,685
Total Assets	$2,981,673	$11,531,734
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable	$198,157	$278,309
Accrued liabilities	273,744	92,634
Interest payable	--	7,490
Note payable, net of debt discount	874,916	76,586
Current liabilities held for sale	148,999	134,859
Total Current Liabilities	1,495,816	589,878
Long-Term Liabilities
Convertible debt	--	753,914
Noncurrent liabilities held for sale	109,569	164,726
Deferred Rent	1,179	491
Total Long-Term Liabilities	110,748	919,131
Total Liabilities	1,606,564	1,509,009
Stockholders' Equity
Preferred stock - $.001 par value: 500,000 shares
authorized, no shares outstanding	--	--
Common stock - $.001 par value: 49,500,000 shares
authorized, 14,283,752 and 11,256,175 shares issued at September 30, 2016 and December 31, 2015, respectively, 14,283,752 and 11,048,203 shares outstanding at September 30, 2016 (unaudited) and December 31, 2015, respectively	14,284	11,256
Additional paid-in capital	24,683,866	20,164,911
Due from Stockholder	(5,000)	(20,000)
Accumulated deficit	(23,318,041)	(10,133,442)
Total Stockholders' Equity	1,375,109	10,022,725
Total Liabilities and Stockholders' Equity	$2,981,673	$11,531,734

 

See notes to consolidated financial statements

 

 

MEDOVEX CORP. AND SUBSIDIARY

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

 

	Three Months Ended September 30,		Nine Months Ended September 30,
	2016	2015	2016	2015
Revenues	$--	$--	$--	$--
Operating Expenses
General and administrative	1,230,833	1,089,809	3,384,322	3,614,527
Sales and marketing	107,001	17,000	166,240	29,000
Research and development	395,752	239,189	772,238	828,449
Depreciation and amortization	2,033	1,721	6,042	4,739
Impairment of goodwill	--	--	6,455,645	--
Total Operating Expenses	1,735,619	1,347,719	10,784,487	4,476,715
Operating Loss	(1,735,619)	(1,347,719)	(10,784,487)	(4,476,715)
Other Expenses
Interest expense	15,887	--	359,981	--
Total Other Expenses	15,887	--	359,981	--
Loss from Continuing Operations	(1,751,506)	(1,347,719)	(11,144,468)	(4,476,715)
Discontinued Operations
Loss from discontinued operations	(57,023)	(98,926)	(2,040,131)	(287,937)
Total Loss from Discontinued Operations	(57,023)	(98,926)	(2,040,131)	(287,937)
Net Loss	$(1,808,529)	$(1,446,645)	$(13,184,599)	$(4,764,652)
Basic and diluted net loss per common share
from continuing operations	$(0.13)	$(0.12)	$(0.87)	$(0.44)
Basic and diluted net loss per common share
from discontinued operations	$(0.004)	$(0.01)	$(0.16)	$(0.03)
Basic and diluted net loss per common share	$(0.13)	$(0.13)	$(1.03)	$(0.47)
Basic and diluted weighted average common shares outstanding	13,847,346	11,256,176	12,843,008	10,214,509

 

See notes to consolidated financial statements

 

 

MEDOVEX CORP. AND SUBSIDIARY

UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the nine months ended September 30, 2016

 

						Total
	Common Stock		Additional	Due From	Accumulated	Stockholders'
	Shares	Amount	Paid-in Capital	Stockholder	Deficit	Equity
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
Repayment of due from stockholder through forgone director fees	--	--	--	15,000	--	15,000
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
Stock based compensation	--	--	562,209	--	--	562,209
Net loss	--	--	--	--	(13,184,599)	(13,184,599)
Balance - September 30, 2016	14,283,752	$14,284	$24,683,866	$(5,000)	$(23,318,041)	$1,375,109

 

See notes to consolidated financial statements

 

 

MEDOVEX CORP. AND SUBSIDIARY

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

	Nine Months Ended September 30,
	2016	2015
Cash Flows from Operating Activities
Net loss	$(13,184,599)	$(4,764,652)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation	6,171	4,739
Amortization of intangible assets	189,522	--
Amortization of debt discount	261,973	--
Debt conversion expense	68,694	--
Impairment loss	1,584,048	--
Goodwill impairment loss	6,455,645	--
Stock based compensation	562,209	179,123
Straight-line rent adjustment	688	197
Non-cash consulting services	249,300	--
Non-cash directors fees	15,000	--
Adjustment of fair value of warrant modification	25,720	--
Changes in operating assets and liabilities, net of effects of acquisition:
Accounts receivable	33,045	--
Prepaid expenses	(368,165)	39,434
Accounts payable	(80,152)	(323,843)
Interest payable	(2,061)	--
Accrued liabilities	173,427	51,100
Net Cash Used in Operating Activities	(4,009,535)	(4,813,902)
Cash Flows from Investing Activities
Acquisition of Streamline, Inc., net of cash received	--	(1,152,292)
Deposits	--	(2,586)
Expenditures for property and equipment	(6,221)	(5,306)
Net Cash Used in Investing Activities	(6,221)	(1,160,184)
Cash Flows from Financing Activities
Proceeds from issuance of common stock, net of offering costs	1,934,622	--
Proceeds from issuance of warrants, net of offering costs	541,648	--
Proceeds from issuance short term debt	995,000	--
Principal payments under note payable obligation	(111,530)	(23,200)
Proceeds from issuance of common stock from underwriter’s overallotment	--	1,084,136
Net Cash Provided by Financing Activities	3,359,740	1,060,936
Net Decrease in Cash	(656,016)	(4,913,150)
Cash - Beginning of period	1,570,167	6,684,576
Cash - End of period	$914,151	$1,771,426
Non-cash investing and financing activities
Issuance of common stock for acquisition of Streamline	$--	$8,437,500
Repayment of due from stockholder through forgone director fees	15,000	--
Issuance of common stock for consulting services	249,300	--
Conversion of note and accrued interest to common stock	1,072,513	--
Non-cash investing and financing activities	$1,336,813	$8,437,500

 

See notes to consolidated financial statements

  

 

MEDOVEX CORP.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 Note 1 - Organization and Significant Accounting Policies

 

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.

 

On March 9, 2015, the Board of Directors of MedoveX and Streamline, Inc., a Minnesota corporation (“Streamline”), approved an Agreement and Plan of Merger (the “Merger Agreement”). On March 24, 2015, Streamline shareholders approved the Merger Agreement and the transaction closed immediately thereafter. Under the Merger Agreement, STML Merger Sub, Inc. a wholly-owned subsidiary of MedoveX, merged with Streamline, and thus Streamline became a wholly-owned subsidiary of MedoveX. Streamline is in the business of designing, developing, manufacturing and marketing 510(k) and 510(k) exempt products for use in the medical field.

 

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. See Note 10.

 

Note 2 - Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

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

 

Unaudited interim results

 

The accompanying consolidated balance sheets as of September 30, 2016, consolidated statements of operations for the three and nine months ended September 30, 2016 and 2015, statement of changes in stockholders’ equity for the nine months ended September 30, 2016 and the statements of cash flows for the nine months ended September 30, 2016 and 2015 are unaudited. The unaudited interim consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments which included normal recurring adjustments, necessary to present fairly the Company’s financial position as of September 30, 2016 and results of operations and cash flows for the three and nine months ended September 30, 2016 and 2015. The financial data and other information disclosed in the notes to the consolidated financial statements related to the three and nine month periods are unaudited. The results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016 or for any other interim period or for any future year.

 

The accompanying unaudited consolidated financial statements have been prepared based upon SEC rules that permit reduced disclosure for interim periods. For a more complete discussion of significant accounting policies and certain other information, please refer to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015. These financial statements reflect all adjustments that are necessary for a fair presentation of results of operations and financial condition for the interim periods shown, including normal recurring accruals and other items.

 

 

Use of Estimates

 

In preparing the consolidated 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. The Company’s significant estimates include the fair value, useful life, carrying amount and impairment of its patented technology, the deferred income tax asset and the related valuation allowance, and the fair value of its share based payment arrangements.

 

For those estimates that are sensitive to the outcome of future events, actual results could differ from those estimates.

 

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 September 30, 2016 and December 31, 2015 consists of funds deposited in checking accounts with commercial banks.

 

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, 2015 and September 30, 2016, 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.

 

Goodwill And Purchased Intangible Assets

 

Goodwill is reviewed for impairment annually on December 31st 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:

 

 

 

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 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 three broad levels. These levels from highest to lowest priority are as follows:

 

●     Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities;

 

●     Level 2: Quoted prices in active markets for similar assets or liabilities or observable prices that are based on inputs not quoted on active markets, but corroborated by market data; and

 

●     Level 3: Unobservable inputs or valuation techniques that are used when little or no market data is available.

 

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.

 

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 lease term. The lease term commences on the date that the Company takes possession of or controls the physical use of the property. Deferred rent is included in non-current liabilities on the consolidated balance sheet.

 

Research and Development

 

Research and development costs are expensed as incurred.

 

Advertising

 

The Company expenses all advertising costs as incurred. For the three and nine months ended September 30, 2016, advertising costs were approximately $107,000 and $166,000 respectively. For the three and nine months ended September 30, 2015, advertising costs were approximately $17,000 and $29,000, respectively.

 

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation in accordance with the ASC 718, Stock Compensation. ASC 718 addresses all forms of share-based payment awards including shares issued under employee stock purchase plans and stock incentive shares. Under ASC 718, awards result in a cost that is measured at fair value on the awards’ grant date, based on the estimated number of awards that are expected to vest and will result in a charge to operations

 

Income Taxes

 

The Company accounts for income taxes under ASC 740, Income Taxes, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.

 

Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

 

Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the asset will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

 

The standard addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements.

 

Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.

 

ASC 740 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of December 31, 2015 and September 30, 2016, the Company does not have a liability for unrecognized tax uncertainties.

 

The Company’s policy is to record interest and penalties on uncertain tax positions as a component of income tax expense. As of September 30, 2016, the Company has not incurred any interest or penalties relating to uncertain tax positions.

 

The Company’s evaluation was performed for the tax years ending December 31, 2015, 2014 and 2013, which remain subject to examination by major tax jurisdictions as of September 30, 2016. The Company does not have any tax years that are no longer subject to U.S. federal, state, and local, or non-US income tax examinations.

 

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. There is no difference between the basic and diluted net loss per share. 3,506,281 warrants and 894,900 common stock options outstanding were considered anti-dilutive at September 30, 2016. 1,474,783 warrants and 380,000 common stock options were considered anti-dilutive at September 30, 2015.

 

 

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.

 

Refer to Note 4 for the summary of the purchase price allocation based on the completion of the valuation of the assets and liabilities assumed.

 

Discontinued Operations

 

As more fully described in Note 9, 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 assets and liabilities have been reclassified as held for sale for all periods presented and the results of operations have been classified as discontinued operations for all periods presented. See Note 9.

 

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 May 2014, the Financial Accounting Standards Board (“FASB”) issued accounting standards update (“ASU”) ASU 2014-09, “Revenue Recognition - Revenue from Contracts with Customers” (ASU 2014-09) that requires companies to recognize revenue when a customer obtains control rather than when companies have transferred substantially all risks and rewards of a good or service. This update is effective for annual reporting periods beginning on or after December 15, 2017 and interim periods therein and requires expanded disclosures. The Company is currently assessing the impact the adoption of ASU 2014-09 will have on its consolidated financial statements.

 

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 September 30, 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. The Company is currently assessing the impact the adoption of ASU 2015-17 will have on its consolidated financial statements.

 

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, net, consists of the following:

	Useful Life	September 30, 2016	December 31, 2015
Furniture and fixtures	5 years	$21,359	$17,271
Computers and software	3 years	18,237	16,275
		39,596	33,546
Less accumulated depreciation		(15,693)	(9,822)
Total		$23,903	$23,724

 

Depreciation expense amounted to $2,033 and $6,042, respectively, for the three and nine months ended September 30, 2016. Depreciation expense amounted to $1,657 and $4,798, respectively, for the three and nine months ended September 30, 2015.

 

Note 4 - Acquisition

 

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. is now 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 to be 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 September 30, 2016, the Company had received transmittal letters from Streamline shareholders representing 1,873,377 shares of MedoveX common stock. There is one remaining holder who has not tendered the original transmittal letter for the remaining 1,623 shares. 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 the Company as needed. Of the $750,000 working capital commitment, approximately $57,000 and $456,000, respectively, was funded for the three and nine month periods ended September 30, 2016. $98,000 and $288,000, respectively, was funded for the three and nine month periods ended September 30, 2015. The $750,000 working capital funding commitment has been fully satisfied as of September 30, 2016.

 

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 5 - Equity Transactions

 

PRIVATE Placement

 

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 1,211,760 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 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.

 

On September 16, 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 units consisting of $115,000 for a senior secured note, $15,000 of which was deemed to be an original issue discount, and a warrant to purchase 20,000 shares of the Company’s common stock par value $.001 per share. 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. The purchase price for each Unit is $100,000. See Note 7.

 

At the closing, the Company issued to the Investors ten units, consisting of Notes in the aggregate amount of $1,150,000 and warrants to purchase an aggregate of 200,000 shares of common stock, for gross proceeds of $1,000,000.

 

Stock-Based Compensation

 

On April 14, 2016, the Company entered into a two month business advisory and investor relations consulting agreement for the purpose of creating market awareness of the Company. The Company paid $60,000 per month for the two month period and issued 37,500 common shares as part of the consulting fee agreement. The closing price of the Company’s stock on April 28, 2016, the day the shares were issued, was $1.28 per share.

 

On August 17, 2016, the Board approved a stock grant of 60,000 common shares from the 2013 Stock Option Plan to the Company’s investor relations consultant in recognition of the efforts in maintaining shareholder relations with a diverse shareholder group. The closing price of the Company’s stock on August 17, 2016, the day the shares were issued, was $1.28 per share. The fair value of the common stock issued was approximately $77,000.

 

On September 15, 2016, the Company entered into a six month business advisory and investor relations consulting agreement for the purpose of creating market awareness of the Company. As of September 30, 2016, the Company paid a total of $407,500, which included a monthly $7,500 retainer fee, and issued 83,000 common shares as part of the consulting fee agreement. The closing price of the Company’s stock on September 26, 2016, the day the shares were issued, was $1.50 per share.

 

 

Stock-Based Compensation Plan

 

2013 Stock Option Incentive Plan

 

On October 14, 2013, the MedoveX Corp. Board of Directors approved the MedoveX Corp. 2013 Stock Incentive Plan (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.

 

The stock options are exercisable at a price equal to the market value of the common stock 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 its 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.

 

On January 6, 2016, the Board of Directors authorized the Company to issue options to purchase an aggregate of 214,900 shares of common stock to certain employees, consultants, and directors. The stock options vest as follows: 25% on the date of grant and 25% on each of the next three years after the grant date. The options issued are exercisable at a price of $0.95, which is equal to the market value of the common stock on the date of the grant.

 

On August 17, 2016, the Board of Directors authorized the Company to issue options to purchase an aggregate of 300,000 shares of common stock to certain directors. The stock options vest as follows: 50% on the date of grant and 50% one year after the grant date. The options are exercisable at a price of $1.20. The market value of the common stock on the date of the grant was $1.28. This lead to an immaterial amount related to a beneficial conversion feature.

 

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.

 

The significant assumptions used to estimate the fair value of the equity awards granted are;

 

Grant date	January 6, 2016	August 17, 2016
Weighted Fair value of options granted	$0.67	$0.91
Expected term (years)	6	6
Risk-free interest rate	1.82%	1.28%
Volatility	83.00%	75.55%
Dividend yield	None	None

 

For the three and nine months ended September 30, 2016, the Company recognized approximately $230,000 and $562,000, respectively, as compensation expense with respect to the stock options. For the three and nine months ended September 30, 2015, the Company recognized approximately $76,000 and $179,000, respectively, as compensation expense with respect to the stock options.

 

 

Stock Option Activity

 

As of September 30, 2016, there were 486,175 shares of time-based, non-vested stock options. As of September 30, 2016 there was approximately $421,000 of total unrecognized stock-based compensation expense related to these non-vested stock options. That expense is expected to be recognized on a straight-line basis over a weighted average period of 2.30 years.

 

The following is a summary of stock option activity at September 30, 2016:

 

	Shares	Weighted Average Exercise Price	Weighted Average Remaining Term (Years)	Aggregate Intrinsic Value
Outstanding at 12/31/2015	380,000	$3.95	9.1	$--
Granted	514,900	$1.10	9.3	$--
Exercised	--	--	--	$--
Cancelled	--	--	--	$--
Outstanding at 9/30/2016	894,900	$2.31	9.1	$--
Exercisable at 9/30/2016	408,725	$2.31	8.9	$--

 

Note 6 - 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 cost (see “Related Party Transactions”) on a monthly basis. Rent expense and utility costs paid to TAG Aviation amounted to approximately $7,300 and $22,000, respectively for the three and nine months ended September 30, 2016.

 

Rent expense and utility costs paid to TAG Aviation amounted to approximately $7,000 and $21,000, respectively for the three and nine months ended September 30, 2015.

 

On July 8, 2015, the Company entered into 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.

 

Total lease expense for the three and nine months ended September 30, 2016 was approximately $8,300 and $25,000, respectively, related to this lease. Future minimum lease payments under this rental agreement are approximately as follows:

 

For the year ended:

 

December 31, 2016	$8,500
December 31, 2017	35,000
December 31, 2018	21,000
	$64,500

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 three and nine month periods ended September 30, 2016 was approximately $900 and $2,500, respectively. Total lease expense for the three and nine month periods ended September 30, 2015 was approximately $700 and $2,000, respectively. Future minimum lease payments under this operating lease agreement are approximately as follows:

 

For the year ended:

 

December 31, 2016	$700
December 31, 2017	2,600
December 31, 2018	800
	$4,100

Purchase Orders

 

The Company had approximately $343,000 and $484,000, respectively, at September 30, 2016 and December 31, 2015, in outstanding purchase order obligations related to the research and development build of the DenerveX device to Nortech and Bovie Inc.

 

Consulting Agreements

 

On December 2, 2013, the Company engaged one of its founding stockholders to provide business development consulting services over a one-year period at a fee of $10,000 per month. The agreement was subsequently extended and increased to $35,000 per month in 2015. Effective January 1, 2016, the fee was modified to $5,000 per month through June 30, 2016. Effective August 1, 2016, the $5,000 per month fee was extended through January 18, 2017.

 

On July 1, 2015, the Company engaged Dirk Kemmstedt to provide sales, marketing and distribution consulting services over a six-month period for $55,000. Effective January 1, 2016, this consulting agreement was modified to decrease the monthly compensation to $5,000 per month through June 30, 2016. Effective August 1, 2016, the marketing agreement was modified to a full time consulting position and extended over a one-year period at a fee of €10,000 per month.

 

As described in Note 5, on September 15, 2016, the Company entered into a six month business advisory and investor relations consulting agreement for the purpose of creating market awareness of the Company. The Company paid a total of $407,500, which included a monthly $7,500 retainer fee, for the six month period and issued 83,000 common shares as part of the consulting fee agreement. The closing price of the Company’s stock on September 26, 2016, the day the shares were issued, was $1.50 per share.

 

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 are for terms of three years and 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.

 

 

ComDel Manufacturing, Development and Services Contract

 

On July 8, 2015, the Company entered into a manufacturing agreement with ComDel Innovation, Inc. (“ComDel”). The terms of the service contract state ComDel is to manufacture, assemble and test the Company’s Streamline IV Suspension System (IV Poles), the patented product acquired in the Streamline acquisition, and to develop future product line extensions of the IV Suspension System. This service contract was cancelled after the decision was made by the board of directors to authorize management to seek a buyer for Streamline.

 

Generator development agreement

 

In November 2014, the Company executed an agreement with Bovie, Inc. to develop an electrocautery generator that would be used exclusively with the DenerveX System.

 

The Company is obligated to reimburse Bovie up to $295,000 under this agreement for development of the generator. For the three and nine months ended September 30, 2016, the Company paid approximately $1,000 and $25,000, respectively, under this agreement. For the three and nine months ended September 30, 2015, the Company paid approximately $85,000 and $181,000, respectively, under this agreement.

 

Note 7 – Short Term Liabilities

 

Finance Agreement

 

The Company entered into a commercial insurance premium finance and security agreement in December 2015. The agreement financed the Company’s annual D&O insurance premium and was paid in full as of September 30, 2016. Payments were due in quarterly installments of approximately $26,033 and carried an annual percentage interest rate of 4.65%.

 

The Company paid approximately $26,033 and $78,099, respectively, for the three and nine month periods ended September 30, 2016 related to the finance agreement.

 

Convertible Debt

 

On November 9, 2015, the Company issued a convertible promissory note to Steve Gorlin, a director and the father of Jarrett Gorlin, the Company’s CEO, for the principal amount of up to $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 Convertible Note provided that the principal and accrued but unpaid interest could be converted into common stock at $2 per share. The outstanding principal was to earn interest at a rate of 5.5% per annum and was 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 (see Note 8).

 

On January 25, 2016, the Company entered into a modification agreement (the “Modification Agreement”) with Mr. Steve Gorlin.  Mr. Gorlin agreed to immediately convert the promissory note into an aggregate of 571,429 shares of its Common Stock, eliminating the Company’s $1,000,000 debt obligation and any accrued interest in exchange for amending the conversion price of the promissory note from $2.00 per share to $1.75 per share.

 

Additionally, Mr. Gorlin also agreed to acquire 571,429 additional shares of Common Stock at a price of $1.75 per share for a total purchase price of $1,000,000 within two months from the date of the agreement. The January 25, 2016 modification agreement also amended the exercise price of the warrant issued to Mr. Gorlin on November 9, 2015 from $2.20 per share to $2.00 per share (see note 8).

 

 

On February 16, 2016, the Company and Steve Gorlin entered into an Amendment to the Modification Agreement in order to reduce the amount of shares of Common Stock that Mr. Gorlin was to receive upon the conversion of the $1,000,000 promissory note from 571,429 ($1.75 per share) shares to 552,041 ($1.81 per share) shares. In consideration for reducing the amount of shares of common stock that he was to receive, the Company agreed to reduce the exercise price of Steven Gorlin’s 500,000 share warrant from $2.00 per share to $1.825 per share (see Note 8). This amendment to the Modification Agreement was made to address certain concerns of the NASDAQ.

 

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 extended 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. The $30,000 in directors’ fees was recorded as a reduction in equity and is expensed as earned. $10,000 of directors fees were earned in 2015 after issuance of the note. For the three and nine months ended September 30, 2016, $5,000 and $15,000, respectively, of directors’ fees were earned by Mr. Gorlin to reduce the balance outstanding to $5,000.

 

The Company originally recorded both the convertible debt and the accompanying warrant on a relative fair value basis of approximately $715,000 and $285,000, respectively. The closing price of the Company’s stock on the day prior to issuing the convertible debt was $1.75 per share. See Note 8 for the inputs used to value the warrant as of the respective issue date. Steve Gorlin was also granted piggyback registration rights with respect to the shares of common stock issuable upon conversion of the Note and upon exercise of the warrants.

 

Short Term Note Payable

 

As discussed in Note 5, on September 13, 2016, the Board of Directors approved a resolution authorizing the Company to obtain a secured nine-month term loan for the principal amount of $1,150,000. In connection therewith, on September 16, 2016, the Company entered into a Unit Purchase Agreement with selected accredited investors whereby the Company had the right to sell units in a private placement to secure the loan.

 

Original Issuance Discount

The principal face value of the loan is $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 has a default interest rate of 15% per year and a maturity date of June 16, 2017. The Company is required to repay the principal amount of the loan following the Company’s receipt of any financing in aggregate of $1,650,000 in the next six months. Additionally, investors have the option to convert the $150,000 original issuance discount, which will accrete over the life of the loan, and principal into future financing or be paid back in cash.

 

Warrants

Warrants to purchase an aggregate of 200,000 shares of common stock were issued as part of the short term note agreement with a strike price of $1.625 which was $0.125 above market with an exercise date six months from the closing. The warrants must be exercised within three years from the date of issuance. The Company recorded the proceeds from the loan and the accompanying warrants on a relative fair value basis of approximately $864,000 and $136,000, respectively. The carrying amount has also been reduced by $5,000 related to debt issuance costs. The closing price of the Company’s stock on the day prior to entering into the agreement was $1.50 per share. See Note 8 for the inputs used to value the warrant as of the respective issue date.

 

As of September 30, 2016, the loan is being accreted to its $1,150,000 face amount over the 9 month period the loan will be outstanding. The note is also presented net of the issuance costs of $5,000 which will accrete over the life of the note, based on the effective interest method. Accretion expense for the three and nine month period ended September 30, 2016 was approximately $15,887.

 

 

Note 8 – Common Stock Warrants

 

As described in Note 7, on November 9, 2015, the Company issued a warrant to Steve Gorlin to purchase 500,000 shares of common stock at an exercise price of $2.20 as additional incentive for making the loan. The warrant is exercisable for up to three years from the date of issuance. The fair value of the warrant at the date of issuance was determined to be approximately $398,000 using the Black-Scholes-Merton valuation technique and, based on the relative fair value of both the convertible debt and the warrant, was recorded at approximately $715,000 and $285,000, respectively. Fair value measurement valuation techniques, to the extent possible, should maximize the use of observable inputs and minimize the use of unobservable inputs. The Company’s fair value measurements of the warrant are designated as Level 1 since all of the significant inputs were observable, and quoted prices were available for the four comparative companies in an active market.

 

The inputs used to value the warrant as of the respective issue dates are as follows:

 

 

As more fully described in Note 7, the Company entered into two modification agreements with Steve Gorlin related to the convertible debt. Both of the modification agreements amended the exercise price of the warrant issued to Mr. Gorlin.

 

The inputs used to value the warrants as of the January 25, 2016 modification dates are as follows:

●     The market price of the Company’s stock of $1.32

●     Revised exercise price: $2.00

●     Life of warrant: 3 years

●     Risk free return rate: 1.11%

●     Annualized volatility rate of four comparative companies: 99.66%

 

The inputs used to value the warrants as of the February 16, 2016 modification dates are as follows:

●     The market price of the Company’s stock of $1.43

●     Revised exercise price: $1.825

●     Life of warrant: 3 years

●     Risk free return rate: 0.93%

●     Annualized volatility rate of four comparative companies: 100.34%

 

The Company recognized approximately $26,000 in expenses related to the adjustment modifications to the fair value of the warrant for the nine months ended September 30, 2016.

 

As described in Note 5, the Company issued warrants in connection with the private placement in April 2016. The warrants are exercisable for up to five years after six months following the date of issuance. The fair value of the warrants at the date of issuance were determined to be $314,353 and $69,761, respectively, for the issuance on April 19, 2016 and April 29, 2016. Fair values were determined by using the Black-Scholes-Merton valuation technique and were assigned based on the relative fair value of both the common stock and the warrants issued. The Company’s fair value measurements of the warrants are designated as Level 1 since all of the significant inputs were observable, and quoted prices were available for the four comparative companies in an active market.

 

 

The inputs used to value the warrants as of the April 19, 2016 issuance date are as follows:

 

 

The inputs used to value the warrants as of the April 29, 2016 issuance date are as follows:

 

 

As described in Note 5, the Company issued warrants in connection with the private placement in August 2016. The warrants are exercisable for up to five years after six months following the date of issuance. The fair value of the warrants at the date of issuance were determined to be approximately $286,311 and $37,080, respectively, for the issuance on August 5, 2016 and August 16, 2016. Fair values were determined by using the Black-Scholes-Merton valuation technique and were assigned based on the relative fair value of both the common stock and the warrants issued. The Company’s fair value measurements of the warrants are designated as Level 1 since all of the significant inputs were observable, and quoted prices were available for the four comparative companies in an active market.

 

The inputs used to value the warrants as of the August 5, 2016 issuance date are as follows:

 

 

The inputs used to value the warrants as of the August 16, 2016 issuance date are as follows:

 

 

As described in Note 5, the Company issued warrants in connection with the receipt of the secured nine month term loan in September 2016. The warrants are exercisable for up to three years after six months following the date of issuance. The fair value of the warrants at the date of issuance were determined to be approximately $154,203. Based on the Black-Scholes-Merton valuation technique, the Company recorded the proceeds from the loan and the accompanying warrants on a relative fair value basis of approximately $1,014,000 and $136,000, respectively. The Company’s fair value measurements of the warrants are designated as Level 1 since all of the significant inputs were observable, and quoted prices were available for the four comparative companies in an active market.

 

 

The inputs used to value the warrants as of the September 16, 2016 issuance date are as follows:

 

 

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

 

Note 9 – Discontinued operations

 

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. The Company seeks additional funds to complete the development and launch of the Company’s primary product, the DenerveX device, and anticipates the sale to be completed within one year. Selling this business unit could help raise necessary funds to fund continuing operations of the Company in a non-dilutive manner to existing shareholders. Streamline’s assets and liabilities have been reclassified as held for sale for all periods presented. The operating results of Streamline are included in discontinued operations for the periods presented. Streamline is immediately available for sale in its present condition.

 

The carrying amounts of the major classes of assets and liabilities of the discontinued operations available for sale are as follows:

 

	September 30, 2016	December 31, 2015
Current Assets
Inventory	$1,878	$1,878
Accounts receivable, Net	--	33,045
Prepaid expenses	--	586
Total Current Assets	1,878	35,509
Property and Equipment, Net	986	1,114
Trademark, net	--	595,000
Developed Technology, net	1,500,000	2,678,571
Total Assets	$1,502,864	$3,310,194
Current Liabilities
Interest payable	$70,831	$69,222
Accrued liabilities	--	7,683
Notes payable	78,168	57,954
Total Current Liabilities	148,999	134,859
Long-Term Liabilities
Notes payable, net of current portion	109,569	164,726
Total Liabilities	$258,568	$299,585

 

 

The results of the discontinued operations, which represents Streamline’s IV Suspension System (“ISS”), are as follows:

 

	Three Months Ended September 30,		Nine Months Ended September 30,
	2016	2015	2016	2015
Revenues	$--	$--	$--	$--
Operating Expenses
General and administrative	54,606	86,970	199,237	228,678
Research and development	--	9,956	59,418	54,259
Depreciation and amortization	--	--	189,652	--
Impairment loss	--	--	1,584,048
Total Operating Expenses	54,606	96,926	2,032,355	282,937
Operating Loss	(54,606)	(96,926)	(2,032,355)	(282,937)
Other Expenses
Interest expense	2,417	2,000	7,776	5,000
Total Other Expenses	2,417	2,000	7,776	5,000
Net Loss	$(57,023)	$(98,926)	$(2,040,131)	$(287,937)

 

Cash flows from discontinued operations are as follows:

 

	Nine Months Ended September 30,
	2016	2015
Cash Flows used in Operating Activities	$(425,011)	$(494,737)
Cash Flows used in Investing Activities	--	(1,286)
Cash Flows used in Financing Activities	(39,630)	(70,109)
Net Cash Used in Discontinued Operations	$(464,641)	$(566,132)

 

Amortization expense related to the available for sale intangible assets for the three and nine months ended September 30, 2016 was approximately $0 and $190,000, respectively. Amortization expense related to the available for sale intangible assets for the three and nine months ended September 30, 2015 was approximately $142,143 and 284,285, respectively.

 

Depreciation expense amounted to $21 and $129, respectively, for the three and nine months ended September 30, 2016. Depreciation expense amounted to $64 and $107, respectively, for the three and nine months ended September 30, 2015.

 

There is no expected future amortization of the available for sale intangible assets as of September 30, 2016. As further discussed in Note 9, the recognition of amortization expense related to the available for sale intangible assets ceased in May 2016 when the Board of Directors authorized Management to seek buyers for Streamline.

 

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 to the Bank of North Dakota New Venture Capital Program and North Dakota Development Fund, both outside non-related parties.

 

 

Payments on both of the notes are due in aggregate monthly installments of approximately $5,700 and carry an interest rate of 5%. Both of the notes have a maturity date of August 1, 2019.

 

The promissory notes had outstanding balances of approximately $189,000 and $223,000, respectively, at September 30, 2016 and December 31, 2015.

 

Expected future payments, including interest, related to the promissory notes as of September 30, 2016, are approximately as follows:

 

For the year ended:

 

2016	$28,000
2017	68,000
2018	68,000
2019	42,000
	$206,000

 

The Company paid interest expense related to the promissory notes for the three and nine months ended September 30, 2016 in the amount of approximately $800 and $6,100, respectively. The Company paid interest expense related to the notes for the three and nine months ended September 30, 2015 in the amount of approximately $3,100 and $5,100, respectively. The Company had unpaid accrued interest in the amount of approximately $71,000 and $69,000, respectively, at September 30, 2016 and December 31, 2015 related to the promissory notes.

 

Note 10 – Impairment of intangible assets

 

As discussed in Note 2, the Company reviews long-lived assets for impairment whenever events or changes in circumstances or occurrence of events suggest impairment exists in accordance with FASB ASC 360.

 

The Board of Directors decision to seek buyers for Streamline, as discussed in Note 9, was made after management evaluated and determined potential impairment indicators existed relating to poor operating performance as sales are less than previously anticipated. The impact of the operating losses incurred from the Streamline portion of the business contributes significantly to the Company’s operations and financial results. As such, the Company separated the asset groups accordingly between the amortizable intangible assets in developed technology and trademark, and the non-amortizable intangible asset in goodwill, and completed an impairment analysis using a two-step process as described in Note 2.

 

As a result of the impairment analysis, the Company determined the carrying value of the developed technology exceeded the calculated fair value. Consequently, the Company recognized a write-down of approximately $1,035,714 related to the developed technology in the quarter ended June 30, 2016. The remaining $1,500,000 in developed technology is classified as a held for sale current asset at September 30, 2016 while the Company seeks a buyer for Streamline.

 

As a result of the impairment analysis, the Company also determined the carrying value of the trademark and goodwill exceeded the calculated fair value. Consequently, impairment losses of $6,455,645 and $548,333, respectively, were recognized in the quarter ended June 30, 2016 related to goodwill and the trademark. The impairment losses resulted in a complete write down of both assets and, consequently, are not reported as of September 30, 2016.

 

Note 11 - Income Taxes

 

For the period from February 1, 2013 (inception) to September 30, 2016, the Company has incurred net losses and, therefore, has no current income tax liability.  The net deferred tax asset generated by these losses, which principally consist of start-up costs deferred for income tax purposes, is fully reserved as of December 31, 2015 and September 30, 2016, since it is currently more likely than not that the benefit will not be realized in future periods.

 

 

The Company is required to file federal income tax returns and state income tax returns in the states of Florida, Georgia and Minnesota. There are no uncertain tax positions at December 31, 2015 or September 30, 2016. The Company has not undergone any tax examinations since inception.

 

Note 12 - Related-Party Transactions

 

Aviation Expense

 

Periodically the Company may charter general aviation aircraft from TAG Aviation LLC (“TAG”), a company owned by Mr. Jarrett Gorlin.

 

The Company believes that such aircraft charter is on terms no less favorable then it would receive from a third party. General aviation expenses paid to TAG for the three and nine months ended September 30, 2016, were approximately $9,500 and $18,500, respectively. General aviation expenses paid to TAG for the three and nine months ended September 30, 2015, was approximately $15,000 and $26,000, respectively.

 

Operating Lease

 

As described in Note 6, the Company pays TAG Aviation LLC, (“TAG”), a company owned by Mr. Gorlin, for month to month rental of office space at Dekalb-Peachtree Airport in Atlanta Georgia plus cost of utilities. Rent payments under this arrangement were $1,800 per month through August 31, 2016. Effective September 1, 2016, rent payments under this arrangement increased to $2,000 per month.

 

Rent expense and utilities cost paid to TAG Aviation amounted to approximately $7,300 and $22,000, respectively, for the three and nine months ended September 30, 2016. Rent expense and utilities cost paid to TAG Aviation amounted to approximately $7,000 and $21,000, respectively, for the three and nine months ended September 30, 2015.

 

Consulting Expense

 

On December 2, 2013, the Company engaged a founding stockholder who owns 375,000 shares of its common stock to provide the Company with business development advisory services. Fees under this arrangement included a $45,000 up-front payment that was non-refundable and $10,000 per month for each month of services provided to the Company under this arrangement. On January 1, 2015, this consulting agreement was modified to increase the monthly compensation to $35,000 through December 2015. Effective January 1, 2016, the fee was modified again to $5,000 per month through June 2016. Effective August 1, 2016, the $5,000 per month fee was extended through January 18, 2017. Either party could cancel this agreement upon 30 days’ written notice. The Company paid $10,000 and $40,000, respectively, for the three and nine months ended September 30, 2016 under this new arrangement. The Company paid $105,000 and $315,000, respectively, for the three and nine months ended September 30, 2015 under the previous arrangement.

 

Convertible Debt

 

As more fully described in Note 7, on November 9, 2015, the Company issued a convertible promissory note to Steve Gorlin, a related party, for the principal amount of up to $2,000,000.

 

Note 13 - Research and Development

 

Devicix Prototype Design and Development Agreement

 

In November 2013, the Company accepted a proposal from Devicix, a Minneapolis, Minnesota based FDA registered contract designer and developer, to develop a commercially viable prototype of its product that could be used to receive regulatory approval from the FDA and other international agencies for use on humans to relieve pain associated with Facet Joint Syndrome. Through September 30, 2016, the Company has paid approximately $1,406,000 to Devicix.

 

 

The development work commenced in December 2013. The total estimated cost of this work at contract signing was $960,000; however, the terms of the proposal allow either the Company or the designer and developer to cancel the development work with 10-days’ notice. The Company incurred expenses of approximately $103,000 and $340,000, respectively, for the three and nine months ended September 30, 2016, of which approximately $48,000 was included in accounts payable as of September 30, 2016. The Company incurred expenses of approximately $89,000 and $326,000, respectively, for the three and nine months ended September 30, 2015, of which approximately $4,000 was included in accounts payable as of September 30, 2015.

 

Denervex Generator Design, Development And Manufacturing Agreement

 

The DenerveX device requires a custom electrocautery generator for power. As described in Note 6, in November 2014, the Company contracted with Bovie International to customize one of their existing electrocautery generators for use with the DenerveX Device, and then manufacture that unit on a commercial basis once regulatory approval for the DenerveX was obtained. The Bovie agreement requires a base $295,000 development fee to customize the unit, plus additional amounts if further customization is necessary beyond predetermined estimates.

 

The Company paid approximately $1,000 for the three and nine months ended September 30, 2016 under this agreement. The Company paid approximately $85,000 and $181,000, respectively, for the three and nine months ended September 30, 2015 under this agreement. Through September 30, 2016, the Company has paid approximately $312,000 to Bovie.

 

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.

 

Nortech Manufacturing Agreement

 

In November 2014, the Company selected Nortech Systems Inc. (“Nortech”), a Minneapolis, Minnesota based FDA registered contract manufacturer, to produce approximately 1,200 DenerveX devices from the prototype supplied by Devicix for use in final development and testing. 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. The Company paid approximately $250,000 and $362,000, respectively, to Nortech for the three and nine months ended September 30, 2016, of which approximately $116,000 was included in accounts payable as of September 30, 2016. Through September 30, 2016, the Company has paid approximately $651,000 to Nortech.

 

Note 14– Liquidity, Going Concern and Management’s Plans

 

The Company incurred a net loss of approximately $13,185,000 and $4,765,000 for the nine months ended September 30, 2016 and 2015, respectively. The Company will continue to incur losses until such time as it can bring a sufficient number of approved products to market and sell them with margins sufficient to offset expenses.  

 

To date, the Company’s sole source of funds has been from the issuance of debt and equity.

 

In January 2015, the underwriter for the public offering exercised the overallotment of shares pursuant to the initial public offering, netting another $1,084,000.

 

As discussed in Note 7, the Company issued a promissory note for up to $2,000,000 of convertible debt on November 9, 2015 to Steve Gorlin, a director and father of Jarrett Gorlin, the Company’s CEO. The Company received $970,000 in cash and the elimination of $30,000 of future directors’ fees upon execution of the agreement. A second installment of $1,000,000 is expected to be made by Mr. Steve Gorlin by December 1, 2016.

 

 

As discussed in Note 5, in April 2016 and August 2016, a private placement of common stock raised approximately $1,176,000 for the Company, net of fees.

 

As discussed in Note 5, in September 2016, the Company raised $1,000,000 in cash in the form of a secured short term note payable.

 

The Company is exploring additional fundraising options for the remainder of 2016. However, if the Company is unable to raise sufficient financing, it could be required to undertake initiatives to conserve its capital resources, including delaying or suspending the development of its technology. There can be no assurances such efforts to raise funding will be successful. These matters raise substantial doubt about the Company’s ability to continue as a going concern.

 

The financial statements do not include any adjustments to the carrying amounts of its assets or liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Note 15 - Subsequent Events

 

On November 1, 2016, the executive committee of the Board of Directors unanimously approved a written consent extending the date Mr. Steve Gorlin is to make the second installment of $1,000,000 to December 1, 2016. See Note 7.

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes thereto appearing in Part I, Item 1 of this Quarterly Report. Historical results and trends that might appear in this Quarterly Report should not be interpreted as being indicative of future operations.

 

Overview

 

MedoveX Corp. (the “Company”) was incorporated in Nevada on July 30, 2013 as Spinez Corp. MedoveX is the parent company of Debride Inc., 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 1-for-2 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.

 

DenerveX

 

Our first acquisition was the DenerveX device.  We believe that the DenerveX device can be developed for pain relief.  

 

The Company acquired the DenerveX patent on January 31, 2013 from Scott Haufe, M.D., 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, 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 kit. In addition to the DenerveX device itself, we are developing a dedicated Electro Surgical Generator to power the DenerveX device. The generator would be provided to customers agreeing to purchase the DenerveX device kit 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 build and final 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 September 30, 2016, we have paid approximately $1,406,000 to Devicix.

 

In November 2014, we selected Nortech Systems Inc. (“Nortech”), a Minneapolis, Minnesota based FDA registered contract manufacturer, to produce approximately 1,200 DenerveX devices from the prototype supplied by Devicix for use in final development and testing. 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 September 30, 2016, we have paid approximately $651,000 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 will amount to $295,000 upon completion of all the deliverables. Through September 30, 2016, we have paid approximately $312,000 to Bovie towards the $295,000 total.  Development fees beyond the predetermined estimate of $295,000 were incurred to further customize the DenerveX device. Additional costs could be incurred in the future if further customization is necessary.

 

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 products 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.

 

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 September 30, 2016, we have paid approximately $9,500 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.

 

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 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 the Americas, 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 September 30, 2016, we have paid approximately $2,500 to Mr. Davila.

 

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.

 

The Company has entered into some of the final stages of the development and verification of the DenerveX Device and the DenerveX power generator as a system. Final development, testing and verification to set standards is the main focus for these final stages. Additionally, the company will be testing 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 power generator will also be safety tested by a world leader in safety performance testing. SGS, a highly respected testing and verification firm will test the DenerveX System using an extensive set of testing standards.

 

 

Critical Accounting Policies

 

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 (“GAAP”).

 

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.

 

Factors Which May Influence Future Results of Operations

 

The following is a description of factors that may influence our future results of operations, and that we believe are important to an understanding of our business and results of operations.

 

Revenue; Cost of Revenue and Gross Profit

 

The Company’s only sales of the Streamline ISS IV poles occurred in December 2015. Customers placed purchase orders for the IV Poles directly with the Company, which the Company subsequently placed the order with Comdel to manufacture and assemble the IV Poles. Cost of sales as a percentage of revenue was approximately 75%. These sales are included in discontinued operations.

 

The Company did not sell any of the Streamline ISS IV poles during the three and nine months ended September 30, 2016 or 2015.

 

Operating Expenses

 

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

 

Research and Development Expenses

 

Research and development 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 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, 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

 

Beginning in October 2013, the Company hired full time management, began sourcing vendors, retained consultants and commenced other activities consistent with a new operation. Prior to that time, most activity focused on the Company’s initial capital raise under Regulation D of the Securities Act of 1933 and in securing its initial product applications. For the three and nine months ended September 30, 2016, the Company paid approximately $392,000 and $1,189,000, respectively, in personnel costs. For the three and nine months ended September 30, 2015, the Company paid approximately $381,000 and $998,000, respectively, in personnel costs.

 

 

For the three and nine months ended September 30, 2016, the Company paid approximately $309,000 and $1,102,000, respectively, in professional fees, of which approximately $207,000 were Streamline professional fees funding the working capital commitment. For the three and nine months ended September 30, 2015, the Company paid approximately $506,000 and $1,967,000, respectively, in professional fees, of which approximately $390,000 and $288,000, respectively, were Streamline acquisition-related legal expenses and professional fees funding the working capital commitment. For the three and nine months ended September 30, 2016, the Company paid approximately $50,000 and $130,000, respectively, in travel expenses, of which approximately $7,000 were Streamline travel expenses funding the working capital commitment. For the three and nine months ended September 30, 2015, the Company paid approximately $76,000 and $243,000, respectively, in travel expenses, of which approximately $19,000 were Streamline travel expenses funding the working capital commitment.

 

We paid less in general and administrative expenses during the nine month period ending September 30, 2016 versus the nine month period ending September 30, 2015 primarily due to the fees incurred as part of the consummation of the acquisition of Streamline as well as the reduced Streamline working capital expenditures as we continue to seek a buyer. We also continued to maintain a concerted effort during the three and nine months ended September 30, 2016 to keep general and administrative expenses down due to lower working capital balances. Outside of acquisition-related costs, general and administrative expenses incurred continue to support research and development activities, commercialization of our product candidate as well as our continued overall costs of operating as a public company. These fees have included increased costs related to the hiring of additional personnel and fees to outside consultants, lawyers and accountants, among other expenses. Additionally, we have continued to incur costs associated with being a public company including expenses related to services associated with maintaining compliance with exchange listing and Securities and Exchange Commission requirements, insurance, and investor relations costs.

 

Sales & Marketing Expenses

 

For the three and nine months ended September 30, 2016, the Company expensed approximately $107,000 and $166,000, respectively in sales and marketing expenses. For the three and nine months ended September 30, 2015, the Company expensed approximately $17,000 and $29,000 respectively in sales and marketing expenses. 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. The Company recognized approximately $2,000 and $6,000, respectively, in depreciation expense for the three and nine months ended September 30, 2016. The Company recognized approximately $1,700 and $4,700, respectively, in depreciation expense for the three and nine months ended September 30, 2015.

 

For the three and nine months ended September 30, 2016, the Company recognized approximately $0 and $190,000, respectively, in amortization expense. The recognition of amortization expense related to amortizable intangible assets ceased in May 2016 when the Board of Directors authorized Management to seek buyers for Streamline. The Company recognized approximately $142,000 and $284,000, respectively, for the three and nine months ended September 30, 2015 in amortization expense.

 

Results of Discontinued Operations

 

Our discontinued operations generated net losses of approximately $2,040,000 and $288,000 for the nine month periods ended September 30, 2016 and 2015, respectively.

 

The results of discontinued operations for the current period ended September 30, 2016 include the write down of intangible assets acquired with the purchase of Streamline Inc. in March 2015 that was recorded in the six month period ended June 30, 2016. The impairment loss recorded included a complete write down of the acquired trademark of $548,000, and approximately $1,036,000 to write-down the acquired developed technology.

 

 

Results of Continuing Operations

 

Three and Nine Months Ended September 30, 2016 Compared to the Three and Nine Months Ended September 30, 2015

 

Total operating expenses increased approximately $388,000, or 29%, to approximately $1,736,000 for the three months ended September 30, 2016, as compared to approximately $1,348,000 for the three months ended September 30, 2015.

 

Total operating expenses increased approximately $6,308,000, or 141%, to approximately $10,784,000 for the nine months ended September 30, 2016, as compared to approximately $4,477,000 for the nine months ended September 30, 2015.

 

The results of continuing operations for the current period ended September 30, 2016 include a complete 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 for same the period is primarily the result of the impairment charges. Impairment charges aside, we continued to incur similar Product development costs associated with the DenerveX device as well as costs incurred related to being a public entity.

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

To date our operations have been funded with the issuance of debt and equity. On November 9, 2015, we issued a convertible promissory note to Steve Gorlin, a related party, for up to $2,000,000, the principal to be advanced in two installments. We received $970,000 in cash and the reduction in obligation of $30,000 in directors’ fees on November 9, 2015. This $1,000,000 in debt was subsequently converted into equity in January 2016, ultimately in exchange for 552,041 shares of common stock. On March 15, 2016, the Board of Directors approved extending the date for the second installment of $1,000,000 to November 1, 2016.

 

The note payable presented on our September 30, 2016 balance sheet represents a secured nine month term loan for the principal amount of $1,150,000. In September 2016, we entered into a Unit Purchase Agreement with selected accredited investors whereby we had the right to sell units in a private placement to secure the loan. The loan has a default interest rate of 15% per year and a maturity date of June 16, 2017. The Company is required to repay the principal amount of the loan following the Company’s receipt of any financing in aggregate of $1,650,000 in the next six months.

 

The liabilities held for sale presented on our September 30, 2016 balance sheet is comprised of two promissory notes issued by Streamline prior to our acquisition of that entity in March 2015. The two notes total approximately $189,000 at September 30, 2016.

 

Our equity funding stems from both the private sale of common stock and an initial public offering of common stock. Net of transaction costs, we raised approximately $6,732,000 in the initial public offering in December 2014, and approximately $1,084,000 from the exercise of the underwriter’s overallotment in January 2015. In April 2016 the Company raised approximately $1,176,000 in net proceeds upon the closing of a private placement of common stock. In August 2016 the Company raised $1,300,000 in proceeds upon the closing of another private placement of common stock. 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 a combination of debt with an equity component.

 

 

Working Capital	September 30, 2016	December 31, 2015
Current Assets	$1,454,000	$1,775,000
Current Liabilities	1,496,000	590,000
Working Capital (Deficit)	$(42,000)	$1,185,000

 

Cash Flows

 

Cash activity for the nine months ended September, 2016 and 2015 is summarized as follows:

	Nine Months Ended September 30,
	2016	2015
Cash used in operating activities	$(4,010,000)	$(4,814,000)
Cash used in investing activities	(6,000)	(1,160,000)
Cash provided by financing activities	3,360,000	1,061,000
Net decrease in cash and cash equivalents	$(656,000)	$(4,913,000)

 

For the nine months ended September 30, 2016 and 2015, the Company has used approximately $4,010,000 and $4,814,000 respectively, for operating activities. As of September 30, 2016, the Company had approximately $914,000 of cash on hand.

 

Funding Requirements

 

While the DenerveX product is in the final stages of development and testing, we anticipate our cash expenditures will continue to increase as we complete the Device Verification (DV) build and testing of product for the DenerveX device and commencement of the Good Laboratory Practice (GLP) in live tissue testing on our path to submitting for CE mark and eventual FDA approval. Additionally, we anticipate an increase in expenditures of cash to support both a European clinical study to obtain additional clinical data to support marketing goals and to pursue a strategy for an anticipated U.S. clinical trial for eventual U.S. FDA clearance and to support our launch for the product into the European Union.

 

To the extent our available cash is insufficient to satisfy our long-term operating requirements, we will need to seek additional sources of funds from the sale of equity or debt securities or through a credit facility, or we will need to modify our current business plan. There can be no assurances that we will be able to obtain additional financing on commercially reasonable terms, if at all.

 

The sale of additional equity or convertible debt securities would likely result in dilution to our current stockholders.

 

Going Concern

 

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 for the years ended December 31, 2015 and 2014. The presence of the going concern explanatory paragraph suggests that we may not have sufficient liquidity or minimum cash levels to operate the business.   Since our inception, we have incurred losses and anticipate that we will continue to incur losses until such time as our products can generate enough revenue to offset our research and development, general and administrative and sales and marketing expenses. We received $1,398,034 and $1,300,000, respectively, in gross proceeds in private placements of common stock in April and August 2016. We also secured a short term loan in September 2016 for $1,150,000, which contained an original issuance discount of $150,000. From this short term loan, we received net proceeds of $1,000,000. We believe these funds will be sufficient to maintain uninterrupted operations while we pursue our near term operational plans and other fund raising initiatives. There can be no assurance we will be successful in our operational plans. If the sale of Streamline takes longer than anticipated, or we incur higher than anticipated expenses preparing for approval and launch of our DenerveX product, we could need additional funding later in 2016. There can be no assurances we will be successful raising these funds.

 

 

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 a short term contractual obligation for the secured nine month term loan for the principal amount of $1,150,000.

 

The principal face value of the loan is $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 has a default interest rate of 15% per year and a maturity date of June 16, 2017. The Company is required to repay the principal amount of the loan following the Company’s receipt of any financing in aggregate of $1,650,000 in the next six months.

 

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 into the third quarter of 2019. The Company has a commercial building lease agreement with Sugar Oak Kimball Royal, LLC for rent and utility costs for building space at a cost of approximately $3,000 per month through July 2018.

 

The Company has a long term contractual commercial building lease agreement with Sugar Oak Kimball Royal, LLC. The lease agreement provides for the lease of office space through July 2018 at a cost of approximately $2,800 per month.

 

The Company does not have any other long term contractual obligations. The Company currently reimburses its CEO, Jarrett Gorlin, for the lease of executive office space at a cost of $2,000 per month, which it believes is at fair market value. We have employment agreements with each of our executive officers that commit us 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. Mr. Hills wanted to make room for a new director who could devote more time and energy to 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. 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. Mr. Blank stated that his resignation was to allow the Company to appoint another individual that could contribute more to 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.

 

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 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 October 14, 2016, we submitted to NASDAQ a plan of compliance letter outlining our plans to regain and sustain compliance with the stockholders’ equity requirement to sustain continued listing on the NASDAQ capital market.

 

On October 31, 2016, we received a response letter from the listing qualifications department of the NASDAQ stock market indicating they accepted the plan of compliance, and granted the Company an extension to regain compliance. Under the terms of the extension, the Company must on or before February 27, 2017, complete a stockholders' equity raising transaction, or other event, and evidence compliance by furnishing to the SEC and NASDAQ in a publicly available report detailing such actions to regain compliance. In the event that we do not satisfy the terms set forth in the extension, NASDAQ will provide written notification that the Company’s securities will be subject to delisting proceedings. At that time, the Company may appeal NASDAQ’s determination to a listings qualification panel.

 

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

We are a smaller reporting company as defined by 17 CFR 229.10(f)(1). Thus, under Item 305(a) of Regulation S-K, we are not required to provide information under this item.

 

ITEM 4.     CONTROLS AND PROCEDURES.

 

Disclosure Controls and Procedures

 

Because of its inherent limitations, the Company’s internal control over financial reporting may not prevent or detect all material misstatements arising from time to time. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Our management assessed the effectiveness of our internal control over financial reporting as of September 30, 2016. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Based on our assessment, management concluded that a material weakness existed in internal control over financial reporting and our disclosure controls. Specifically, our Chief Financial Officer currently performs almost all of the accounting related functions. In order to obtain proper segregation of accounting related duties, another person will have to be hired and duties allocated so this material weakness can be corrected. 

 

Changes in Internal Control Over Financial Reporting 

 

During the quarter ended September 30, 2016, there were no changes in our internal control over financial reporting that materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

ITEM 1.        LEGAL PROCEEDINGS.

 

We are not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding. None of our directors, officers or affiliates are involved in a proceeding adverse to our business or has a material interest adverse to our business.

 

ITEM 1A.     RISK FACTORS.

 

We are a smaller reporting company as defined by 17 CFR 229.10(f)(1). Thus, we are not required to provide information under this item.

 

 

ITEM 2.        UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None.

 

ITEM 3.        DEFAULTS UPON SENIOR SECURITIES.

 

None. 

  

ITEM 4.        MINE SAFETY DISCLOSURES.

 

Not applicable. 

 

ITEM 5.        OTHER INFORMATION.

 

 

ITEM 6.         EXHIBITS.

 

The exhibits listed in the accompanying Exhibit Index are filed, furnished or incorporated by reference as part of this Quarterly Report on Form 10-Q.

 

  

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: November 17, 2016

 

	MEDOVEX CORP
	By:	/s/ Jarrett Gorlin
		Jarrett Gorlin
		Chief Executive Officer (Principal Executive Officer)
	By:	/s/ Jeffery Wright
		Jeffery Wright
		Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

 

 

 

EXHIBIT INDEX

 

31.1		Section 302 Certification of Principal Executive Officer*
31.2		Section 302 Certification of Principal Financial Officer*
32.1		Section 906 Certification of Principal Executive Officer and Principal Financial Officer***
101.INS		XBRL Instance Document **
101.SCH		XBRL Taxonomy Extension Schema Document **
101.CAL		XBRL Taxonomy Calculation Linkbase Document **
101.LAB		XBRL Taxonomy Labels Linkbase Document **
101.PRE		XBRL Taxonomy Presentation Linkbase Document **
101.DEF		XBRL Definition Linkbase Document **

 

*	Filed herewith.

 

**

Pursuant to Rule 406T of Regulation S-T adopted by the SEC, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise are not subject to liability under these sections.

 

***

This certification is being furnished solely to accompany this Quarterly Report pursuant to 18 U.S.C. Section 1350, and it is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.