Nemaura Medical Inc. - Quarter Report: 2019 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: December 31, 2019

or

¨ TRANSITION REPORT UNDER SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File Number: _______________________

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

Indicate by check mark whether the registrant (1) has filed all reports required 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  þ  No  o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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). Yes þ  No o  

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

The number of shares of common stock, par value $0.001 per share outstanding as of February 3, 2020 was 20,808,348.

NEMAURA MEDICAL INC. 

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

ITEM 1. INTERIM FINANCIAL STATEMENTS

See notes to the unaudited condensed consolidated financial statements

See notes to the unaudited condensed consolidated financial statements

NEMAURA MEDICAL INC.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

Three Months Ended December 31, 2019 and 2018
(Unaudited)

See notes to the unaudited condensed consolidated financial statements

NEMAURA MEDICAL INC.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

Nine Months Ended December 31, 2019 and 2018

(Unaudited)

See notes to the unaudited condensed consolidated financial statements

See notes to the unaudited condensed consolidated financial statements

NEMAURA MEDICAL INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

INTERIM FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES

Nemaura Medical Inc. (“Nemaura” or the “Company”), through its operating subsidiaries, performs medical device research and manufacturing of a continuous glucose monitoring system (“CGM”), named sugarBEAT. The sugarBEAT device is a non-invasive, wireless device for use by persons with Type I and Type II diabetes and may also be used to screen pre-diabetic patients. The sugarBEAT device extracts analytes, such as glucose, to the surface of the skin in a non-invasive manner where it is measured using unique sensors and interpreted using a unique algorithm.

Nemaura is a Nevada holding company organized in 2013. Nemaura owns one hundred percent (100%) of Region Green Limited, a British Virgin Islands corporation (“RGL”) formed on December 12, 2013. RGL owns one hundred percent (100%) of Dermal Diagnostic (Holdings) Limited, an England and Wales corporation (“DDHL”) formed on December 11, 2013, which in turn owns one hundred percent (100%) of Dermal Diagnostics Limited, an England and Wales corporation formed on January 20, 2009 (“DDL”), and one hundred percent (100%) of Trial Clinic Limited, an England and Wales corporation formed on January 12, 2011 (“TCL”).

DDL is a diagnostic medical device company headquartered in Loughborough, Leicestershire, England, and is engaged in the discovery, development and commercialization of diagnostic medical devices. The Company’s initial focus has been on the development of the sugarBEAT device, which consists of a disposable patch containing a sensor, and a non-disposable miniature transmitter device with a re-chargeable power source, which is designed to enable trending or tracking of blood glucose levels. All of the Company’s operations and assets are located in England.

The following diagram illustrates Nemaura’s corporate structure as of December 31, 2019:

The Company was incorporated in 2013, and has reported recurring losses from operations to date and an accumulated deficit of $16,239,191 as of December 31, 2019. These operations have resulted in the successful completion of clinical programs to support a CE mark (European Union approval of the product) approval, as well as a De Novo 510(k) medical device application to the US Food and Drug Administration (“FDA”) submission. The Company expects to continue to incur losses from operations until revenues are generated through licensing fees or product sales. However, given the completion of the requisite clinical programs, these losses are expected to be reduced over time. Management has entered into licensing, supply, or collaboration agreements with unrelated third parties relating to the United Kingdom, Europe, Qatar and all countries in the Gulf Cooperation Council.

Management has evaluated the expected expenses to be incurred along with its available cash and credit facility and has determined that the Company has the ability to continue as a going concern for at least one year subsequent to the date of issuance of these condensed consolidated financial statements.  The Company had an $8 million unsecured senior credit facility made available from certain major stockholders on August 1, 2019. Further details of the terms of this loan are included in Note 4.

The Company has $1,067,663 of readily available cash on hand at December 31, 2019. We believe the cash position as of December 31, 2019, plus the credit facility made available from certain major stockholders, is adequate for our current level of operations through at least February 2021, and for the achievement of certain of our product development milestones. Our plan is to utilize the cash on hand plus loan draw down to continue establishing commercial manufacturing operations for the commercial supply of the sugarBEAT device and patches now that CE mark approval has been received.

Management's strategic plans include the following:

·         support the UK and EU launch of sugarBEAT;

·         pursuing additional capital raising opportunities;

·         obtaining further regulatory approval for the sugarBEAT device in other countries such as the USA;

·         exploring licensing and partnership opportunities in other territories; and

·         developing the sugarBEAT device for commercialization for other applications.

NOTE 2 – BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”), and do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. However, such information reflects all adjustments consisting of normal recurring accruals which are, in the opinion of management, necessary for a fair statement of the financial condition and results of operations for the interim periods. The results for the three and nine months ended December 31, 2019 are not indicative of annual results. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X.

The accompanying condensed consolidated financial statements include the accounts of the Company and the Company’s subsidiaries. References to “we”, “us”, “our”, or the “Company” refer to Nemaura Medical Inc. and its consolidated subsidiaries. The condensed consolidated financial statements are prepared in accordance with U.S. GAAP, and all significant intercompany balances and transactions have been eliminated in consolidation.

The functional currency for the majority of the Company’s operations is the Great Britain Pound Sterling (“GBP”), and the reporting currency is the US Dollar (“USD”).

There have been no material changes to our significant accounting policies as detailed in our Form 10-K for the year ended March 31, 2019.

The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company's financial reporting, the Company undertakes a study to determine the consequences of the change to its condensed consolidated financial statements and assures that there are proper controls in place to ascertain that the Company's condensed consolidated financial statements properly reflect the change.

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Updates ("ASU") No. 2014-09 (“ASC 606”), Revenue from Contracts with Customers. ASC 606 has been modified multiple times since its initial release. This ASU outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and has replaced most existing revenue recognition guidance in U.S. GAAP when it became effective. ASC 606, as amended, became effective for annual reporting periods beginning after December 15, 2017. Early adoption was permitted. As an Emerging Growth Company, the Company is allowed to adopt new, or updated, accounting standards using the same time frame that applies to private companies. The Company adopted this standard on April 1, 2019.

While the Company is not currently recognizing revenue, we have implemented the guidelines within ASC 606. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

The Company may enter into product development and other agreements with collaborative partners. The terms of the agreements may include non-refundable signing and licensing fees, milestone payments and royalties on any product sales derived from collaborations.

The Company has entered into license agreements and for these, recognizes up front license payments as revenue upon delivery of the license only if the license has stand-alone value to the customer. However, where further performance criteria must be met, revenue is deferred and recognized over the period the Company is expected to complete its performance obligations. Royalty revenue will be recognized upon the sale of the related products provided the Company has no remaining performance obligations under the agreement.

In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, or ASU 2018-07. ASU 2018-07 simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The Company adopted ASU 2018-07 as of April 1, 2019. The adoption of ASU 2018-07 has not had a material impact on the Company’s financial position, results of operations or related disclosures and no transition adjustment at date of adoption was required.

Recent accounting pronouncements

In March 2016, the FASB issued ASU No. 2016-02, Leases. The main difference between the provisions of ASU No. 2016-02 and previous U.S. GAAP is the recognition of right-of-use assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. ASU No. 2016-02 retains a distinction between finance leases and operating leases, and the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous U.S. GAAP. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize right-of-use assets and lease liabilities. The accounting applied by a lessor is largely unchanged from that applied under previous U.S. GAAP. In transition, lessees and lessors have two options: they are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach or recognize a cumulative effect adjustment to the opening balance of retained earnings at their adoption date. This ASU is effective for public business entities in fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 and for private companies ASU 2016-02 is effective beginning after December 15, 2020. Early adoption is permitted as of the beginning of any interim or annual reporting period. As an Emerging Growth Company, the Company is allowed to adopt new, or updated, accounting standards using the same time frame that applies to private companies. The Company will adopt this standard on April 1, 2021. Management is currently evaluating the impact of adoption of this ASU on the Company’s condensed consolidated financial statements but as there are no significant leases, no significant changes to opening retained earnings are expected.

NOTE 3 – LICENSING AGREEMENTS

United Kingdom and the Republic of Ireland, the Channel Islands and the Isle of Man

In March 2014, the Company entered into an Exclusive Marketing Rights Agreement with an unrelated third party, which granted the third party the exclusive right to market and promote the sugarBEAT device and related patches under its own brand in the United Kingdom and the Republic of Ireland, the Channel Islands and the Isle of Man. The Company received a non-refundable, up-front cash payment of GBP 1,000,000 (approximately $1.321 million and $1.303 million as of December 31, 2019 and March 31, 2019, respectively), which is wholly non-refundable, upon signing the agreement.

As the Company has continuing performance obligations under the agreement, the up-front fees received from this agreement have been deferred and will be recorded as income over the term of the commercial licensing agreement. As the Company now expects commercialization of the sugarBEAT device to occur in the second quarter ending September 30, 2020, approximately $66,000 and $65,000 of the deferred revenue has been classified as a current liability as of December 31, 2019 and March 31, 2019, respectively.

Further details of licensing agreements are disclosed in the Form 10-K for the year ended March 31, 2019.

NOTE 4 – RELATED PARTY TRANSACTIONS

Nemaura Pharma Limited (“Pharma”), NDM Technologies Limited (“NDM”) and Black and White Health Care Limited (“B&W”) are entities controlled by the Company’s Chief Executive Officer and majority stockholder, Dewan F.H. Chowdhury.

In accordance with the SEC Staff Accounting Bulletin 55, these condensed consolidated financial statements are intended to reflect all costs associated with the operations of DDL and TCL. Pharma has a service agreement with DDL, to undertake development, manufacture and regulatory approvals under Pharma’s ISO13485 Accreditation. In lieu of these services, DDL invoices Pharma on a periodic basis for said services. Services are provided at cost plus a service surcharge amounting to less than 10% of the total costs incurred.

The following is a summary of activity between the Group and Pharma, NDM and B&W for the nine months ended December 31, 2019 and 2018, and the year ended March 31, 2019. These amounts are unsecured, interest free, and payable on demand.

The Company has an $8 million unsecured senior credit facility made available from certain majority stockholders as of August 1, 2019. The first $3.5 million became available immediately for draw down, which will help fund the Company’s European commercial launch. The credit facility is non-dilutive carrying 8% interest with quarterly interest only payments. The principal is due on maturity in 5 years. There has been no draw down to date. No decision to date has been made on when the remaining capital will be needed and will be available for draw down.

The Company routinely reviews its statement of cash flows presentation of related party transactions for financing or operating classification based on the underlying nature of the item and intended repayment.

NOTE 5 – STOCKHOLDERS’ EQUITY

Reverse stock split

The Company was notified by NASDAQ on July 15, 2019 that the Company no longer met the requirements of NASDAQ Rule 5550(a)(2) requiring listed securities to maintain a minimum closing bid price of $1.00 per share. The Company effected:

On December 19, 2019 the Company received confirmation from NASDAQ that the Company has regained compliance with the Minimum Bid Price Rule and the matter is now resolved.

The activity described in these condensed consolidated financial statements reflects this one for ten reverse split. All shares and amounts included have been retroactively restated as required by accounting standards.

Other equity transactions

On October 5, 2017, the Company entered into common stock exchange agreements with each of its three largest stockholders, to exchange, in the aggregate, 13,732,400 shares of the Company’s common stock for 13,732 shares of Series A Convertible Preferred Stock (the “Series A Preferred”).  Each share of Series A Preferred is convertible into 1,000 shares of the Company’s common stock, automatically upon the occurrence of all of certain triggering events, as set forth in the Certificate of Designation for the Series A Preferred, namely (a) the sugarBEAT device to be commercialized has CE mark regulatory approval; (b) retail sales having commenced; and (c) retail sales exceeding $5 million, inclusive of advanced sales or voluntarily by the holder after February 7, 2018, if these triggering events have not occurred.  Each holder of issued and outstanding Series A Preferred is entitled to a number of votes equal to the number of shares of common stock into which the Series A Preferred is convertible. Holders of Series A Preferred are entitled to vote on any and all matters presented to stockholders of the Company, except as provided by law.  The Series A Preferred has no preference to the common stock as to dividends or distributions of assets upon liquidation or winding up of the Company (which has been agreed to by the holders of the Series A Preferred).  The Company determined that the fair value of the shares of Series A Preferred issued for the shares of common stock was equivalent to the fair value of the shares of common stock exchanged.

On November 6, 2017, the transactions contemplated by the exchange agreements were consummated and 13,732,400 shares of common stock were cancelled. As a result, the Company had 6,767,600 shares of common stock issued and outstanding as of March 31, 2018.

On June 5, 2018, the three holders of the Company’s Series A Preferred each delivered notices of conversion to voluntarily convert their Series A Preferred, in the aggregate amount of 13,732 of Series A Preferred shares, into 13,732,400 shares of common stock.  The holders had the right to voluntarily convert each share of Series A Preferred into 1,000 shares of common stock of the Company. 

On October 19, 2018, the Company entered into an Equity Distribution Agreement (“Distribution Agreement”) with Maxim Group LLC, as sales agent (“Maxim”), pursuant to which the Company may offer and sell, from time to time, through Maxim (the “Offering”), up to $20,000,000 in shares of its common stock (the “Shares”). Between October 19, 2018, and March 31, 2019, the Company issued 23,500 shares of its common stock through the Distribution Agreement and received gross proceeds of $455,105. $161,103 of costs were incurred in relation to this transaction. For the nine months ended December 31, 2019, a total of 14,339 shares were issued under the Distribution Agreement generating gross proceeds of $152,492 and costs of $9,575. As of December 31, 2019, the Company may sell, from time to time, the remaining $19,392,402 in shares of common stock under the Distribution Agreement. There was no activity in the three months ended December 31, 2019.

On December 18, 2018, the Company entered into a placement agency agreement with Dawson James Securities, Inc. with respect to the issuance and sale of an aggregate of up to 240,000 units, each unit consisting of one share of common stock, par value $0.001 per share, together with one warrant to purchase one share of common stock at an exercise price equal to $10.40 per share, in a public offering. The warrants offered in the public offering will terminate on the fifth anniversary of the date of issuance. The public offering price for each unit was $10.40.

The closing of the offering occurred on December 20, 2018 and at such closing the Company sold 194,206 shares of common stock and 194,206 warrants for gross proceeds of $2,019,743. The net proceeds to the Company from the sale of the shares of common stock and the warrants was $1,691,498, after deducting $328,245 of placement agent commissions and other offering expenses payable by the Company. As of December 31, 2019, 8,636 of the warrants had been exercised, generating $89,811 of additional proceeds. There was no activity in the three month period ended December 31, 2019.

Effective December 18, 2018, the Company issued a unit purchase option to the placement agent to purchase 9,710 shares and 9,710 warrants. The Company has classified this option as equity. The unit purchase option has a term of three years and an exercise price of $13.00.

Earnings (loss) per share

The following table sets forth the computation of basic and diluted earnings (loss) per share (“EPS”) for the periods indicated.

The Company excludes warrants outstanding, which are anti-dilutive given the Company is in a loss position, from the basic and diluted earnings per share calculation.

Basic earnings (loss) per share is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period. For the three and nine month periods ended December 31, 2019 and 2018, warrants to purchase one million shares of common stock were anti-dilutive and were excluded from the calculation of diluted loss per share. For the three and nine month periods ended December 31, 2019, warrants to purchase 185,570 shares of common stock and a unit purchase option to purchase 9,710 shares of common stock as well as 9,710 warrants were considered anti-dilutive and were also excluded from the calculation of diluted loss per share.

NOTE 6 – OTHER ITEMS

(a)    Investor relations agreements

The Company enters into contracts with various investor relations specialists to help support the ongoing financing activities of the business. Further details of historic fees paid and arrangements are detailed in our Form 10-K for the year ended March 31, 2019.

Investor Relations Company 1 - On June 27, 2018, the Company entered into a Master Services Agreement with investor relations company 1. There has been no additional activity with investor relations company 1 during the three and nine months ended December 31, 2019.

Investor Relations Company 2 - On May 1, 2019, we reinstated the existing agreement with investor relations company 2, which remained a rolling monthly contract. The cash fees expensed for the nine month period ended December 31, 2019 were $47,500 with 1,250 shares issued and expensed to investor relations for consideration of $12,376.

During the quarter ended December 31, 2019, no further shares were issued and cash fees of $15,000 were expensed to investor relations.

Investor Relations Company 3 - On March 18, 2019 the Company cancelled its existing agreement with investor relations company 3 and entered into a new agreement. The term of this contract has been agreed to be on a month to month basis. Compensation is partly in cash and partly in restricted common stock. At the beginning of each monthly term a cash payment of $5,000 will be made and 750 shares of restricted stock will be issued. This contract ended in May 2019. Total stock compensation expense for the three and nine months ended December 31, 2019 was $0 and $17,888.

(b)    Management Consultancy Agreements

Management Consulting Company 1 – A number of renewals of the original contracts have been entered into with management consulting company 1 in the current year. Agreements have been for either cash only or a combination of cash and Stock-based compensation.

On October 1, 2019, 5,000 shares were issued to management company 1 in relation to services rendered in the three month period ending December 31, 2019. The total expensed to investor relations was $40,000 in the three month period ended December 31, 2019 calculated on a fair value of $0.80 per share. In addition $61,667 was expensed to investor relations relating to cash fees expensed in the three month period to December 31, 2019. For the nine months cash expense totaled $156,176 and stock based compensation was $84,525.

Management Consulting Company 2 - On January 7, 2019 the Company entered into a six-month contract with management consulting company 2 for the provision of specialist consulting services. 15,000 restricted shares were issued in May 2019, on the fourth month after commencement of the original contract. A fair value of $0.94 per share, which was the share price on May 7, 2019 (the first day of the first amendment of the consulting agreement) was applied as the shares were issued fully and irrecoverably on the first day of the contract.

This contract ended on September 30, 2019 and total stock compensation expense for the three and nine months ended December 31, 2019 was $0 and $141,000 respectively.

Total stock-based compensation recognized during the three and nine months ended December 31, 2019 was $40,000 and $317,664, respectively and $69,167 and $183,667 for the three and nine months ended December 31, 2018, respectively.

(c)    R&D Tax Credit

During the three months ended December 31, 2019, the Company received $614,362 from HMRC (Her Majesty’s Revenue and Customs) in tax credits relating to the reimbursement of research and development expenses incurred during the years ended March 31, 2019 and 2018. This amount is reflected as a credit provision for income taxes in the Company’s condensed consolidated statements of comprehensive loss for the three and nine months ended December 31, 2019.

(d)    Debt Financing

During the three months ended December 31, 2019, the Company entered into an agreement with a bank to finance an invoice payable related to an insurance policy. The principal was $132,342 to be repaid over 9 monthly repayments with interest charged at an annual percentage rate of 13.9%. The remaining balance of $104,135 is included within other liabilities and accrued expenses on the December 31, 2019 condensed consolidated balance sheet.

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview:

The Company has experienced recurring losses and negative cash flows from operations. At December 31, 2019, the Company had cash balances of $1,067,663, working capital of $598,174, total stockholders' deficit of $234,528 and an accumulated deficit of $16,239,191. To date, the Company has in large part relied on equity financing to fund its operations. Additional funding has come from related party contributions. The Company expects to continue to incur losses from operations for the near-term and these losses could be significant as product development, regulatory activities, clinical trials and other commercial and product development related expenses are incurred.

Management's strategic assessment includes the following potential options:

·         support the UK and EU launch of sugarBEAT;

·         pursuing additional capital raising opportunities;

·         obtaining further regulatory approval for the sugarBEAT device in other countries such as the USA;

·         exploring licensing and partnership opportunities in other territories; and

Results of Operations

Comparative Results for the Nine Months Ended December 31, 2019 and 2018

Revenue

There was no revenue recognized in the nine months ended December 31, 2019 and 2018. In 2014, we received an upfront non-refundable cash payment of approximately GBP 1 million (approximately $1.321 million, $1.277 million and $1.303 million as of December 31, 2019, December 31, 2018 and March 31, 2019, respectively) in connection with an Exclusive Marketing Rights Agreement with an unrelated third party that provides the third party the exclusive right to market and promote the sugarBEAT device and related patch under its own brand in the United Kingdom and the Republic of Ireland. We have deferred this licensing revenue until sales are due to commence, and we expect to record the revenue as income over an approximately 10-year term from the date sales commence. Although the revenue is deferred at December 31, 2019, the cash payment became immediately available and has been used to fund our operations, including research and development costs associated with successfully obtaining the CE mark approval.

Research and Development Expenses

Research and development expenses were $1,535,370 and $1,495,201 for the nine months ended December 31, 2019 and 2018, respectively. This amount consisted primarily of expenditures on sub-contractor activities, consultancy fees and wages and continuing expenditures for improvements made to the sugarBEAT device.

General and Administrative Expenses

General and administrative expenses were $1,896,230 and $1,357,044 for the nine months ended December 31, 2019 and 2018, respectively. These consisted of fees for legal, professional, audit services, investor relations, insurance and wages. The increase of $539,186 was due to increases in investor relations activities and insurance expenses, and an increased level of insurance purchased. We expect general and administrative expenses to remain at similar levels going forward in the long term, as most of these costs will need to be incurred for the day to day running of the Company.

Other Comprehensive Loss

For the nine months ended December 31, 2019 and 2018, other comprehensive loss was $48,986 and $311,718, respectively, arising from foreign currency translation adjustments.

Comparative Results for the Three Months Ended December 31, 2019 and 2018

Revenue

There was no revenue recognized in the three months ended December 31, 2019 and 2018. In 2014, we received an upfront non-refundable cash payment of approximately GBP 1 million (approximately $1.321 million, $1.277 million and $1.303 million as of December 31, 2019, December 31, 2018 and March 31, 2019, respectively) in connection with an Exclusive Marketing Rights Agreement with an unrelated third party that provides the third party the exclusive right to market and promote the sugarBEAT device and related patch under its own brand in the United Kingdom and the Republic of Ireland. We have deferred this licensing revenue until sales are due to commence, and we expect to record the revenue as income over an approximately 10-year term from the date sales commence. Although the revenue is deferred at December 31, 2019, the cash payment became immediately available and has been used to fund our operations, including research and development costs associated with successfully obtaining the CE mark approval.

Research and Development Expenses

Research and development expenses were $516,672 and $443,380 for the three months ended December 31, 2019 and 2018, respectively. This amount consisted primarily of expenditures on sub-contractor activities, consultancy fees and wages and continuing expenditures for improvements made to the sugarBEAT device.

General and Administrative Expenses

General and administrative expenses were $542,697 and $489,545 for the three months ended December 31, 2019 and 2018, respectively. These consisted of fees for legal, professional, audit services, investor relations, insurance and wages. The increase of $53,152 was due to increases in investor relations activities and insurance expenses, due to an increased level of insurance purchased. We expect general and administrative expenses to remain at similar levels going forward in the long term, as most of these costs will need to be incurred for the day to day running of the Company.

Other Comprehensive Loss

For the three months ended December 31, 2019 and 2018, other comprehensive loss was $25,834 and $38,626, respectively, arising from foreign currency translation adjustments.

Liquidity and Capital Resources

We have experienced net losses and negative cash flows from operations since our inception. We have sustained cumulative losses of $16,239,191 through December 31, 2019. We have historically financed our operations through the issuances of equity and contributions of services from related entities.

At December 31, 2019, the Company had net working capital of $598,174 which included cash balances of $1,067,663. The Company reported a net loss of $445,007 for the three months ended December 31, 2019.

We do not currently have any major research programs underway, and are focused on commercialization and revenue generation and therefore we expect that research and development costs for glucose monitoring will be reduced in the future. The Company has an $8 million unsecured senior credit facility made available from certain major stockholders as of August 1, 2019. The first $3.5 million became available immediately for draw down, which will help fund the Company’s European commercial launch. The credit facility is non-dilutive carrying 8% interest with quarterly interest only payments. The principal is due on maturity in 5 years. There has been no draw down to date.

We believe the cash position as of December 31, 2019, plus the $8 million credit facility made available from certain major stockholders, is adequate for our current level of operations through at least February 2021, and for the achievement of certain of our product development milestones. Our plan is to utilize the cash on hand plus loan draw down to continue establishing commercial manufacturing operations for the commercial supply of the sugarBEAT device and patches now that CE mark approval has been received.

Cash Flows

Net cash used in operating activities for the nine months ended December 31, 2019 was $2,563,963 which reflected our net loss of $2,813,312, a decrease in prepayments of $206,716, an increase in accruals of $110,780, non-cash stock-based compensation of $317,664, a decrease in liability due to related parties of $268,483 and an increase in accounts payable of $21,259.

Net cash used in operating activities for the nine months ended December 31, 2018 was $2,318,366 which reflected our net loss of $2,828,318, an increase in prepayments of $236,976, a decrease in accruals of $44,318, non-cash stock-based compensation of $183,667, an increase in liability due to related parties of $359,842, a decrease in accrued interest receivable of $70,527 and an increase in accounts payable of $155,286.

Net cash used in investing activities was $213,185 for the nine months ended December 31, 2019, which reflected patent filing costs of $50,570 and the purchase of property and equipment of $162,615.

Net cash provided by investing activities was $4,412,090 for the nine months ended December 31, 2018, which reflected $4,469,150 returned from the maturity of a fixed rate savings account but reduced by the expenditures made in developing intellectual property, primarily related to patent filings of $13,844 and the purchase of capital equipment of $43,216.

Net cash provided by financing activities for the nine months ended December 31, 2019 was $140,710. The ATM facility delivered gross proceeds of $152,492. In addition, $26,000 was raised in relation to the exercise of 2,500 warrants. The Company also incurred direct costs of $9,575 related to the ATM financing. A debt facility was entered into in the three months ended December 31, 2019 to finance an invoice. Repayments to date total $28,207.

Net cash provided by financing activities for the nine months ended December 31, 2018 was $2,135,646. Proceeds from the sale of the Company’s equity were $2,475,448, the majority of this reflected the December 2018 public offering which generated gross proceeds of $2,019,743 and the ATM facility which delivered gross proceeds of $455,105. In addition, $600 was raised in relation to the exercise of 5,000 warrants and a unit purchase option.  Cash costs relating to these offerings were $339,802, $217,922 of cash costs related to the December public offering and $121,880 related to the ATM. There are $39,222 of costs relating to the ATM and $110,422 relating to the December public offering which are not yet invoiced and therefore have been recognized as accrued costs.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements, including unrecorded derivative instruments that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies

When we prepare our condensed consolidated financial statements and accompanying notes in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”), we must make estimates and assumptions about future events that affect the amounts we report. Certain of these estimates result from judgements that can be subjective and complex. As a result of that subjectivity and complexity, and because we continuously evaluate these estimates and assumptions based on a variety of factors, actual results could materially differ from our estimates and assumptions if changes in one or more factors require us to make accounting adjustments. During the nine months ended December 31, 2019, we have made no material changes or additions with regard to such policies and estimates.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Exchange Risk

Our foreign currency exposure gives rise to market risk associated with exchange rate movements against the US dollar, our reporting currency. Currently, the majority of our expenses and cash are denominated in Great Britain Pounds Sterling (“GBP”), with the remaining portion denominated in US dollars. Fluctuations in exchange rates, primarily the US dollar against the Pound Sterling, will affect our financial position. At December 31, 2019, the Company held approximately $888,400 in GBP-denominated bank accounts. Based on this balance, a 1% depreciation of the GBP against the US dollar would cause an approximate $9,000 reduction in cash account balances.

We have not utilized any hedging instruments in order to mitigate the foreign currency risk. In addition, following the UK’s Brexit vote to leave the EU, there has been a weakening of GBP against many currencies. We expect to have to pay some of our service providers and vendors in USD and we will pay approximately 10% more at present than we would have done prior to the Brexit vote. The currency exchange rate continues to be very unstable and therefore the future impact or further weakening of GBP is not known at this time.

Inflation

With UK inflation rates having been low in recent years, inflation has not had a significant effect on our business in the UK, where substantially all of our operating activities take place.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Dr. Dewan F.H. Chowdhury, our Chief Executive Officer and Interim Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to a company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures. Based on this evaluation, management concluded that our disclosure controls and procedures were not effective as of December 31, 2019, at the reasonable assurance level due to material weaknesses in our internal control over financial reporting. A full description of our weaknesses and remediation plan is disclosed in our Form 10-K for the year ended March 31, 2019.

Changes in Internal Control over Financial Reporting

In our Form 10-K for the year ended March 31, 2019, we identified the following areas requiring attention in the current financial year:

During the nine month period ended December 31, 2019, we have made significant improvements on IT controls, payment processing and month end close. These will be tested once all changes have been implemented. We have been working on the above areas in conjunction with a third party advisor and with their assistance, we are making improvements to our internal controls over financial reporting including, but not only, the areas mentioned above. We are also looking ahead to the processes that will be adopted as we expand activities.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

Not Applicable.

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

None.

ITEM 6. EXHIBITS

The exhibits listed on the Exhibit Index below are provided as part of this report.

(1) Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be filed by the Company for purposes of Section 18 or any other provision of the Exchange Act of 1934, as amended.

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.

EXHIBIT INDEX