NON INVASIVE MONITORING SYSTEMS INC /FL/ - Quarter Report: 2018 October (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-Q
(Mark One)
| [X] | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period ended October 31, 2018 |
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 000-13176
NON-INVASIVE MONITORING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
| Florida | 59-2007840 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. employer identification no.) |
4400 Biscayne Blvd., Suite 180, Miami, Florida 33137
(Address of principal executive offices) (Zip code)
Registrant’s telephone number, including area code: (305) 575-4207
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 [X] 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, 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.
| Large accelerated filer | [ ] | Accelerated filer | [ ] | |
| Non-accelerated filer | [ ] | Smaller reporting company | [X] | |
| Emerging growth company | [ ] |
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 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 [ ] No [X]
79,007,423 shares of the Company’s common stock, par value $0.01 per share, were outstanding as of December 17, 2018.
NON-INVASIVE MONITORING SYSTEMS, INC.
TABLE OF CONTENTS FOR FORM 10-Q
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NON-INVASIVE MONITORING SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| October 31, 2018 | July 31, 2018 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 39 | $ | 90 | ||||
| Prepaid expenses, deposits, and other current assets | 26 | 20 | ||||||
| Total current assets | 65 | 110 | ||||||
| Total assets | $ | 65 | $ | 110 | ||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 1,821 | $ | 1,659 | ||||
| Customer deposits | 4 | 4 | ||||||
| Total current liabilities | 1,825 | 1,663 | ||||||
| Long Term liabilities | ||||||||
| Notes payable – Related Parties | 2,075 | 2,075 | ||||||
| Notes payable – Other | 50 | 50 | ||||||
| Total long term liabilities | 2,125 | 2,125 | ||||||
| Total liabilities | 3,950 | 3,788 | ||||||
| Commitments and Contingencies (Note 8) | ||||||||
| Shareholders’ deficit | ||||||||
| Series B Preferred Stock, par value $1.00 per share; 100 shares authorized, issued and outstanding; liquidation preference $10 | - | - | ||||||
| Series C Convertible Preferred Stock, par value $1.00 per share; 62,048 shares authorized, issued and outstanding; liquidation preference $62 | 62 | 62 | ||||||
| Series D Convertible Preferred Stock, par value $1.00 per share; 5,500 shares authorized; 2,782 shares issued and outstanding; liquidation preference $4,173 | 3 | 3 | ||||||
| Common Stock, par value $0.01 per share; 400,000,000 shares authorized; 79,007,423 shares issued and outstanding | 790 | 790 | ||||||
| Additional paid in capital | 21,930 | 21,930 | ||||||
| Accumulated deficit | (26,670 | ) | (26,463 | ) | ||||
| Total shareholders’ deficit | (3,885 | ) | (3,678 | ) | ||||
| Total liabilities and shareholders’ deficit | $ | 65 | $ | 110 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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NON-INVASIVE MONITORING SYSTEMS, INC.
CONDENSED CONSOLIDATED COMPREHENSIVE STATEMENTS OF OPERATIONS - Unaudited
(In thousands, except per share data)
| Three months ended October 31, | ||||||||
| 2018 | 2017 | |||||||
| Operating costs and expenses | ||||||||
| Selling, general and administrative | $ | 148 | $ | 76 | ||||
| Total operating costs and expenses | 148 | 76 | ||||||
| Operating loss | (148 | ) | (76 | ) | ||||
| Interest expense, net | (59 | ) | (52 | ) | ||||
| Net loss | $ | (207 | ) | $ | (128 | ) | ||
| Weighted average number of common shares outstanding - Basic and diluted | 79,007 | 79,007 | ||||||
| Basic and diluted loss per common share | $ | (0.00 | ) | $ | (0.00 | ) | ||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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NON-INVASIVE MONITORING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT - Unaudited
For the year ended July 31, 2018 and the three months ended October 31, 2018
(Dollars in thousands, except share amounts)
| Preferred Stock | Additional | |||||||||||||||||||||||||||||||||||||||||||
| Series B | Series C | Series D | Common Stock | Paid-in- | Accumulated | |||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||||||||||||||
| Balance at July 31, 2017 | 100 | $ | – | 62,048 | $ | 62 | 2,782 | $ | 3 | 79,007,423 | $ | 790 | $ | 21,930 | $ | (26,018 | ) | $ | (3,233 | ) | ||||||||||||||||||||||||
| Net loss | – | – | – | – | – | – | – | – | – | (445 | ) | (445 | ) | |||||||||||||||||||||||||||||||
| Balance at July 31, 2018 | 100 | $ | – | 62,048 | $ | 62 | 2,782 | $ | 3 | 79,007,423 | $ | 790 | $ | 21,930 | $ | (26,463 | ) | $ | (3,678 | ) | ||||||||||||||||||||||||
| Net loss | – | – | – | – | – | – | – | – | – | (207 | ) | (207 | ) | |||||||||||||||||||||||||||||||
| Balance at October 31, 2018 | 100 | $ | - | 62,048 | $ | 62 | 2,782 | $ | 3 | 79,007,423 | $ | 790 | $ | 21,930 | $ | (26,670 | ) | $ | (3,885 | ) | ||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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NON-INVASIVE MONITORING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Unaudited
(Dollars in thousands)
Three months ended October 31, 2018 and 2017
| 2018 | 2017 | |||||||
| Operating activities | ||||||||
| Net Loss | $ | (207 | ) | $ | (128 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Changes in operating assets and liabilities | ||||||||
| Prepaid expenses, deposits and other current assets | (6 | ) | - | |||||
| Accounts payable and accrued expenses | 162 | 93 | ||||||
| Net cash used in operating activities | (51 | ) | (35 | ) | ||||
| Financing activities | ||||||||
| Proceeds from note payable – related parties | - | 100 | ||||||
| Net cash provided by financing activities | - | 100 | ||||||
| Net decrease in cash | (51 | ) | 65 | |||||
| Cash, beginning of period | 90 | 11 | ||||||
| Cash, end of period | $ | 39 | $ | 76 | ||||
| Supplemental disclosure of cash flow information | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | - | $ | - | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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NON-INVASIVE MONITORING SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
October 31, 2018
The following (a) condensed consolidated balance sheet at July 31, 2018 was derived from audited annual financial statements, but do not contain all of the footnote disclosures from the annual financial statements, and (b) the unaudited condensed consolidated interim financial statements included herein have been prepared by Non-Invasive Monitoring Systems, Inc. (together with its consolidated subsidiaries, the “Company” or “NIMS”) in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to the quarterly report on Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These statements reflect adjustments, all of which are of a normal, recurring nature, and which are, in the opinion of management, necessary to present fairly the Company’s financial position as of October 31, 2018, and results of operations and cash flows for the interim periods ended October 31, 2018 and 2017. The results of operations for the three months ended October 31, 2018, are not necessarily indicative of the results for a full year. Certain information and footnote disclosure normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. The Company’s accounting policies continue unchanged from July 31, 2018. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended July 31, 2018.
1. ORGANIZATION AND BUSINESS
Organization. Non-Invasive Monitoring Systems, Inc., a Florida corporation (together with its consolidated subsidiaries, the “Company” or “NIMS”), began business as a medical diagnostic monitoring company to develop computer-aided continuous monitoring devices to detect abnormal respiratory and cardiac events using sensors on the human body’s surface. The Company is now focused on developing and marketing its Exer-Rest® line of acceleration therapeutic platforms based upon unique, patented whole body periodic acceleration (“WBPA”) technology. The Exer-Rest line of acceleration therapeutic platforms currently includes the Exer-Rest AT, AT3800 and AT4700 models.
Business. The Company is developing and marketing its Exer-Rest® line of acceleration therapeutic platforms based upon unique, patented whole body periodic acceleration (“WBPA”) technology. The Exer-Rest line of acceleration therapeutic platforms currently includes the Exer-Rest AT, AT3800 and AT4700 models.
During the calendar years 2005 to 2007, the Company designed, developed and manufactured the first Exer-Rest platform (now the Exer-Rest AT), a second generation acceleration therapeutics platform, and updated its operations to promote the Exer-Rest AT overseas as an aid to improve circulation and joint mobility and to relieve minor aches and pains.
The Company has developed a third generation of Exer-Rest acceleration therapeutic platforms (designated the Exer-Rest AT3800 and the Exer-Rest AT4700) that has been manufactured by Sing Lin Technologies Co. Ltd. (“Sing Lin”) based in Taichung, Taiwan (see Note 9).
The Company’s condensed financial statements have been prepared and presented on a basis assuming it will continue as a going concern. As reflected in the accompanying unaudited condensed consolidated financial statements, the Company had net losses of $207,000 and $128,000 for the three month periods ended October 31, 2018 and 2017, respectively, and has experienced cash outflows from operating activities. The Company also has an accumulated deficit of $26.7 million as of October 31, 2018 and has potential purchase obligations at October 31, 2018 (see note 8). The Company had $39,000 of cash at October 31, 2018 and negative working capital of approximately $1,760,000. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
The Company is continuing its business activities without any significant revenues from product sales. Absent any significant revenues from product sales, the Company is seeking debt or equity financing or a strategic collaboration. There is no assurance that the Company will be successful in this regard, and, if not successful, that it will be able to continue its business activities. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary from the outcome of this uncertainty.
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Non-Invasive Monitoring Systems of Florida, Inc., which has no current operations, and NIMS of Canada, Inc., a Canadian corporation, which has no current operations. All inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions, such as warranty accrual and deferred taxes as estimates, that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and reported amounts of expenses during the reporting period. Actual results could differ materially from these estimates.
Cash and Cash Equivalents. The Company considers all highly liquid short-term investments purchased with an original maturity date of three months or less to be cash equivalents. The Company had approximately $39,000 and $90,000, on deposit in bank operating accounts at October 31, 2018 and July 31, 2018, respectively.
Inventories. Inventories are stated at lower of cost or net realizable value using the first-in, first-out method, and are evaluated at least annually for impairment. Inventories at October 31, 2018 and July 31, 2018 primarily consist of finished Exer-Rest units, spare parts and accessories. Provisions for potentially obsolete or slow-moving inventory are made based on management’s analysis of inventory levels, historical obsolescence and future sales forecasts. The Company had fully written down its inventory during the year ended July 31, 2018 and had no inventory value at October 31, 2018 and July 31, 2018.
Tooling and Equipment. These assets are stated at cost and depreciated or amortized using the straight-line method, over their estimated useful lives.
Long-lived Assets. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In performing the review for recoverability, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows is less than the carrying amount of the assets, an impairment loss is recognized as the difference between the fair value and the carrying amount of the asset.
Taxes Assessed on Revenue-Producing Transactions. The Company presents sales taxes assessed on revenue-producing transactions between a seller and customer using the net presentation; thus, sales and cost of revenues are not affected by such taxes.
Income Taxes. The Company provides for income taxes using an asset and liability based approach. Deferred income tax assets and liabilities are recorded to reflect the tax consequences in future years of temporary differences between the carrying amounts of assets and liabilities for financial statement and income tax purposes. The deferred tax asset for loss carryforwards and other potential future tax benefits has been fully offset by a valuation allowance since it is uncertain whether any future benefit will be realized. The utilization of the loss carryforward is limited to future taxable earnings of the Company and may be subject to severe limitations if the Company undergoes an ownership change pursuant to the Internal Revenue Code Section 382 (see note 10).
The Company files its tax returns as prescribed by the laws of the jurisdictions in which it operates. Tax years ranging from 2015 to 2018 remain open to examination by various taxing jurisdictions as the statute of limitations has not expired. It is the Company’s policy to include income tax interest and penalty expense in its tax provision.
As a result of the valuation allowance, the enactment of the Tax Cuts and Jobs Act of 2017 had no effect on the statement of operations. Due to the timing of the enactment and complexity involved in applying the provisions of the Tax Act, the Company based our provisions on reasonable estimates of the Act’s effects in our financial statements as of October 31, 2018.
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Revenue Recognition. The Company adopted ASC Topic 606, Revenue from Contracts with Customers, on January 1, 2018. The Company’s revenue consists of product sales and parts. The Company accounts for a contract with a customer when there is a legally enforceable contract between the Company and the customer, the rights of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable. The Company’s revenues are measured based on consideration specified in the contract with each customer, net of any sales incentives and taxes collected from customers that are remitted to government authorities.
Segments The Company operates in only one segment. Management uses cash flow as the primary measure to manage its business and does not segment its business for internal reporting or decision-making.
Comprehensive Income (Loss). Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources, including foreign currency translations. There were no transactions that resulted in comprehensive income or losses during the three months ended October 31, 2018 or 2017.
Warranties. The Company’s warranties are two years on all Exer-Rest® products sold domestically and one year for products sold outside of the U.S. and are accrued based on management’s estimates and the history of warranty costs incurred. Warranty accrual of approximately $12,000 is included in accounts payable and accrued liabilities as of October 31, 2018 and July 31, 2018. There were no material warranty costs incurred during the three months ended October 31, 2018 and 2017, and management estimates that the Company’s accrued warranty expense at October 31, 2018 will be sufficient to offset claims made for units under warranty.
Stock-based compensation. The Company recognizes all share-based payments, including grants of stock options, as operating costs and expenses, based on their grant date fair values. Stock-based compensation expense is recognized over the vesting life of the underlying stock options and is included in selling, general and administrative costs and expenses in the condensed consolidated comprehensive statements of operations for all periods presented.
Fair Value of Financial Instruments. Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of October 31, 2018 and July 31, 2018. The respective carrying value of certain on-balance-sheet financial instruments such as cash, prepaid expenses, deposits, other current assets, accounts payable and accrued expenses approximate fair values because they are short term in nature or they bear current market interest rates. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
Level 1 — quoted prices in active markets for identical assets or liabilities.
Level 2 — other significant observable inputs for the assets or liabilities through corroboration with market data at the measurement date.
Level 3 — significant unobservable inputs that reflect management’s best estimate of what market participants would use to price the assets or liabilities at the measurement date.
Financial instruments recognized in the consolidated balance sheet consist of cash, prepaid expenses, deposits, and other current assets. The Company believes that the carrying value of its current financial instruments approximates their fair values due to the short-term nature of these instruments. The Company does not hold any derivative financial instruments.
As of October 31, 2018, the respective carrying value of the notes payable – related party and notes payable – other approximate our current borrowing rate for similar debt instruments of comparable maturity and are considered Level 3 measurements within the fair value hierarchy.
The following table presents changes in Level 3 financial liabilities measured at fair value on a recurring basis:
| Level 3 | ||||
| Fair value of promissory notes at July 31, 2018 | $ | 2,125,000 | ||
| Additions: | - | |||
| Reductions: | - | |||
| Changes in fair value | - | |||
| Fair value of contingent consideration at October 31, 2018 | $ | 2,125,000 | ||
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Recent Accounting Pronouncements. The Company considers the applicability and impact of all Accounting Standard Updates (“ASU’s”). ASU’s not discussed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated balance sheets or consolidated comprehensive statement of operations.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230). This standard addresses the classification of eight specific cash flow issues with the objective of reducing the existing diversity in practice. ASU 2016-15 will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The Company implemented this ASU on October 1, 2018. The adoption of this update did not have an impact on the Company’s consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-09 – Compensation – Stock Compensation (Topic 718). The amendments in this update affect all entities that issue share-based payment awards to their employees. The areas for simplification in this update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Changes introduced by this relates to the timing of when unrecognized tax benefits are recognized, minimum statutory withholding requirements, and forfeitures. The Company accounts for forfeitures as they occur. The Company implemented this ASU on August 1, 2017. The adoption of this update did not have an impact on the Company’s consolidated financial statements.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). ASU 2016-02 impacts any entity that enters into a lease with some specified scope exceptions. This new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations. The guidance updates and supersedes Topic 840, Leases. For public entities, ASU 2016-02 is effective for fiscal years, and interim periods with those years, beginning after December 15, 2018, and early adoption is permitted. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company has not yet implemented this guidance.
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09, as amended and codified into Topic 606, clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP that removes inconsistencies and weaknesses in revenue requirements, provides a more robust framework for addressing revenue issues, improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, provides more useful information to users of financial statements through improved disclosure requirements and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. As required, we adopted ASU 2014-09 using the modified retrospective approach on January 1, 2018.
3. STOCK-BASED COMPENSATION
The Company measures the cost of employee, officer and director services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The fair value of the Company’s stock option awards is expensed over the vesting life of the underlying stock options using the graded vesting method, with each tranche of vesting options valued separately. The Company did not record stock-based compensation for the three months ended October 31, 2018 and 2017.
In November 2010, the Company’s Board and Compensation Committee approved the Non-Invasive Monitoring Systems, Inc. 2011 Stock Incentive Plan (the “2011 Plan”). Awards granted under the 2011 Plan may consist of incentive stock options, stock appreciation rights (SAR), restricted stock grants, restricted stock units (RSU) performance shares, performance units or cash awards. Subject to adjustment in certain circumstances, the 2011 Plan `authorizes up to 4,000,000 shares of the Company’s common stock for issuance pursuant to the terms of the 2011 Plan. The 2011 Plan was approved by our shareholders in March 2012 and no awards have been granted under the 2011 Plan as of October 31, 2018.
As of October 31, 2018, there were no outstanding stock options and there were no unrecognized costs related to outstanding stock options. The Company did not grant any stock options during the three months ended October 31, 2018 or 2017.
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4. NOTES PAYABLE
2010 Credit Facility. On March 31, 2010, the Company entered into a new Note and Security Agreement with Frost Gamma Investments Trust, a trust controlled by Dr. Phillip Frost, which beneficially owns in excess of 10% of the Company’s common stock (“Frost Gamma”), and Hsu Gamma Investments, LP, an entity controlled by the Company’s Chairman and Interim CEO (“Hsu Gamma” and together with Frost Gamma, the “Lenders”), pursuant to which the Lenders have provided a revolving credit line (the “Credit Facility”) in the aggregate principal amount of up to $1.0 million, secured by all of the Company’s personal property. The Company is permitted to borrow and reborrow from time to time under the Credit Facility until July 31, 2020 (the “Credit Facility Maturity Date”). The Company received a waiver from the lenders relating to the covenant prohibiting aggregate borrowings in excess of $100,000. The interest rate payable on amounts outstanding under the Credit Facility is 11% per annum and increases to 16% per annum after the Credit Facility Maturity Date or after an event of default. All amounts owing under the Credit Facility are required to be repaid by the Credit Facility Maturity Date and amounts outstanding are prepayable at any time without premium or penalty. As of October 31, 2018, the Company had drawn an aggregate of $1,000,000 under the Credit Facility and there is no available balance remaining.
2011 Promissory Notes. On September 12, 2011, the Company entered into two promissory notes in the principal amount of $50,000 each with Frost Gamma, a trust controlled by Dr. Phillip Frost, which beneficially owns in excess of 10% of the Company’s common stock, and with an unrelated third party for a total of $100,000. The interest rate payable by NIMS on both the Frost Gamma Note and the unrelated third party note is 11% per annum, payable on the maturity date of July 31, 2020 (the “Promissory Notes Maturity Date”). The Company may prepay either or both notes in advance of the Promissory Notes Maturity Date without premium or penalty.
2012 Promissory Note. On May 30, 2012, the Company entered into a promissory note in the principal amount of $50,000 with Hsu Gamma, an entity controlled by NIMS’ Chairman of the Board and Interim Chief Executive Officer, Jane H. Hsiao, (the “Hsu Gamma Note”). The interest rate payable by NIMS on the Hsu Gamma Note is 11% per annum, payable on the Promissory Notes Maturity Date. The Hsu Gamma Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
2013 Promissory Note. On February 22, 2013, the Company entered into a promissory note in the amount of $50,000 with Jane Hsiao, the Company’s Chairman of the Board and Interim Chief Executive Officer (the “2013 Hsiao Note”). The interest rate payable by the Company on the 2013 Hsiao Note is 11% per annum, payable on the Promissory Notes Maturity Date. The 2013 Hsiao Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
2014 Promissory Note. On September 24, 2014, the Company entered into a promissory note (the “2014 Hsiao Note”) in the principal amount of $50,000 with Jane Hsiao, NIMS’ Chairman of the Board and Interim Chief Executive Officer. The interest rate payable by NIMS on the 2014 Hsiao Note is 11% per annum, payable on the Promissory Notes Maturity Date. The 2014 Hsiao Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
2015 Promissory Notes. On February 2, 2015, the Company entered into a promissory note (the “2015 Hsiao Note”) in the principal amount of $50,000 with Jane Hsiao, the Company’s Chairman of the Board and Interim Chief Executive Officer. The interest rate payable by the Company on the 2015 Hsiao Note is 11% per annum, payable on the Promissory Notes Maturity Date. The 2015 Hsiao Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
On April 16, 2015, the Company entered into a promissory note (“April 2015 Frost Gamma Note”) in the amount of $100,000 with Frost Gamma”), a trust controlled by Dr. Phillip Frost, which beneficially owns in excess of 10% of the Company’s common stock. The interest rate payable by the Company on the April 2015 Frost Gamma Note is 11% per annum, payable on the Promissory Notes Maturity Date. The April 2015 Frost Gamma Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
On August 12, 2015, the Company entered into a promissory note in the principal amount of $25,000 with Frost Gamma (the “August 2015 Frost Gamma Note”), a trust controlled by Dr. Phillip Frost, which beneficially owns in excess of 10% of the Company’s common stock. The interest rate payable by the Company on the August 2015 Frost Gamma Note is 11% per annum, payable on the Promissory Notes Maturity Date. The August 2015 Frost Gamma Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
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On October 27, 2015, the Company entered into a promissory note in the principal amount of $50,000 with Frost Gamma (the “October 2015 Frost Gamma Note”), a trust controlled by Dr. Phillip Frost, which beneficially owns in excess of 10% of the Company’s common stock. The interest rate payable by the Company on the October 2015 Frost Gamma Note is 11% per annum, payable on the Promissory Notes Maturity Date. The October 2015 Frost Gamma Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
On October 27, 2015, the Company entered into a promissory note in the principal amount of $50,000 with Jane Hsiao, the Company’s Chairman of the Board and Interim Chief Executive Officer (the “October 2015 Hsiao Note”). The interest rate payable by the Company on the October 2015 Hsiao Note is 11% per annum, payable on the Promissory Notes Maturity Date. The October 2015 Hsiao Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
2016 Promissory Notes. On June 1, 2016, the Company entered into a promissory note in the principal amount of $100,000 with Frost Gamma (the “June 2016 Frost Gamma Note”), a trust controlled by Dr. Phillip Frost, which beneficially owns in excess of 10% of the Company’s common stock. The interest rate payable by the Company on the June 2016 Frost Gamma Note is 11% per annum, payable on the Promissory Notes Maturity Date. The June 2016 Frost Gamma Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
On June 1, 2016, the Company entered into a promissory note in the principal amount of $100,000 with Hsu Gamma, an entity controlled by NIMS’ Chairman of the Board and Interim Chief Executive Officer, Jane H. Hsiao, (the “June 2016 Hsu Gamma Note”). The interest rate payable by NIMS on the June 2016 Hsu Gamma Note is 11% per annum, payable on the Promissory Notes Maturity Date. The June 2016 Hsu Gamma Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
2017 Promissory Notes. On April 6, 2017, the Company entered into a promissory note in the principal amount of $50,000 with Frost Gamma (the “2017 Frost Gamma Note”), a trust controlled by Dr. Phillip Frost, which beneficially owns in excess of 10% of the Company’s common stock. The interest rate payable by the Company on the 2017 Frost Gamma Note is 11% per annum, payable on the Promissory Notes Maturity Date. The 2017 Frost Gamma Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
On April 6, 2017, the Company entered into a promissory note in the principal amount of $50,000 with Hsu Gamma, an entity controlled by NIMS’ Chairman of the Board and Interim Chief Executive Officer, Jane H. Hsiao, (the “2017 Hsu Gamma Note”). The interest rate payable by NIMS on the 2017 Hsu Gamma Note is 11% per annum, payable on the Promissory Notes Maturity Date. The 2017 Hsu Gamma Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
On September 22, 2017, the Company entered into a promissory note in the principal amount of $50,000 with Frost Gamma (the “September 2017 Frost Gamma Note”), a trust controlled by Dr. Phillip Frost, which beneficially owns in excess of 10% of the Company’s common stock. The interest rate payable by the Company on the 2017 Frost Gamma Note is 11% per annum, payable on the Promissory Notes Maturity Date. The 2017 Frost Gamma Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
On September 22, 2017, the Company entered into a promissory note in the principal amount of $50,000 with Hsu Gamma, an entity controlled by NIMS’ Chairman of the Board and Interim Chief Executive Officer, Jane H. Hsiao, (the “September 2017 Hsu Gamma Note”). The interest rate payable by NIMS on the 2017 Hsu Gamma Note is 11% per annum, payable on the Promissory Notes Maturity Date. The 2017 Hsu Gamma Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
2018 Promissory Notes.
On February 15, 2018, the Company entered into a promissory note in the principal amount of $100,000 with Frost Gamma Investments Trust (the “February 2018 Frost Gamma Note”), a trust controlled by Dr. Phillip Frost, which beneficially owns in excess of 10% of NIMS’ common stock. The interest rate payable by NIMS on the February 2018 Frost Gamma Note is 11% per annum, payable on the Promissory Notes Maturity Date. The February 2018 Frost Gamma Note may be prepaid in advance of the Maturity Date without penalty.
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On February 15, 2018, NIMS entered into a promissory note in the principal amount of $100,000 with Hsu Gamma Investments, L.P., an entity controlled by the Company’s Chairman and Interim CEO, Jane Hsiao (the “February 2018 Hsu Gamma Note”). The interest rate payable by NIMS on the February 2018 Hsu Gamma Note is 11% per annum, payable on the Promissory Notes Maturity Date. The February 2018 Hsu Gamma Note may be prepaid in advance of the Maturity Date without penalty.
At October 31, 2018, the Company was obligated under the above described Credit Facility and promissory notes to make future principal payments (excluding interest) as follows:
| Period Ending October 31, | ||||
| 2020 | $ | 2,125,000 | ||
5. SHAREHOLDERS’ EQUITY
The Company has three classes of Preferred Stock. Holders of Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock are entitled to vote with the holders of common stock as a single class on all matters.
Series B Preferred Stock is not redeemable by the Company and has a liquidation value of $100 per share, plus declared and unpaid dividends, if any. Dividends are non-cumulative, and are at the rate of $10 per share, if declared.
Series C Preferred Stock is redeemable by the Company at a price of $0.10 per share upon 30 days prior written notice. This series has a liquidation value of $1.00 per share plus declared and unpaid dividends, if any. Dividends are non-cumulative, and are at the rate of $0.10 per share, if declared. Each share of Series C Preferred Stock is convertible into 25 shares of the Company’s common stock upon payment of a conversion premium of $4.20 per share of common stock. The conversion rate and the conversion premium are subject to adjustments in the event of stock splits, stock dividends, reverse stock splits and certain other events.
Series D Preferred Stock is not redeemable by the Company. This series has a liquidation value of $1,500 per share, plus declared and unpaid dividends, if any. Each share of Series D Preferred Stock is convertible into 5,000 shares of the Company’s common stock. The conversion rate is subject to adjustments in the event of stock splits, stock dividends, reverse stock splits and certain other events.
The Company did not issue any shares of the Company’s common stock for the three months ended October 31, 2018 and 2017.
No preferred stock dividends were declared for the three months ended October 31, 2018 and 2017.
6. BASIC AND DILUTED LOSS PER SHARE
Basic net loss per common share is computed by dividing net loss attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed giving effect to all dilutive potential common shares that were outstanding during the period. Diluted potential common shares consist of incremental shares issuable upon exercise of stock options and warrants and conversion of preferred stock. In computing diluted net loss per share for the three months ended October 31, 2018 and 2017, no dilution adjustment has been made to the weighted average outstanding common shares because the assumed exercise of outstanding options and warrants and the conversion of preferred stock would be anti-dilutive.
Potential common shares not included in calculating diluted net loss per share are as follows:
| October 31, 2018 | October 31, 2017 | |||||||
| Series C Preferred Stock | 1,551,200 | 1,551,200 | ||||||
| Series D Preferred Stock | 13,910,000 | 13,910,000 | ||||||
| Total | 15,461,200 | 15,461,200 | ||||||
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7. RELATED PARTY TRANSACTIONS
Dr. Hsiao, Dr. Frost and directors Steven Rubin and Rao Uppaluri are each stockholders, current or former officers and/or directors or former directors of TransEnterix, Inc. (formerly SafeStitch Medical, Inc.) (“TransEnterix”), a publicly-traded medical device company. The Company’s Chief Financial Officer also served as the Chief Financial Officer of TransEnterix until October 2, 2013. The Company’s Chief Financial Officer continued as an employee of TransEnterix until March 3, 2014, during which he supervised the Miami based accounting staff of TransEnterix under a cost sharing arrangement whereby the total salaries of the Miami based accounting staff was shared by the Company and TransEnterix. The Chief Financial Officer continues to serve as the Chief Financial Officer of Cocrytal Pharma, Inc., a clinical stage biotechnology company, and in which Steve Rubin and Jane Hsiao, serve on the Board. Since December 2009, the Company’s Chief Legal Officer has served under a similar cost sharing arrangement as the Chief Legal Officer of TransEnterix.
The Company signed a five year lease for office space in Miami, Florida with a company controlled by Dr. Phillip Frost, who is the beneficial owner of more than 10% of the Company’s common stock. The rental payments under the Miami office lease, which commenced January 1, 2008 and expired on December 31, 2012, were approximately $1,250 per month and then continued on a month-to-month basis. In February 2016 the rent was reduced to $0 per month. For the three months ended October 31, 2018 and 2017, the Company did not record any rent expense related to the Miami lease. At October 31, 2018 and July 31, 2018, approximately $76,000 in rent was payable.
The Company signed a three year lease for warehouse space in Hialeah, Florida with a company jointly controlled by Dr. Frost and Dr. Jane Hsiao, the Company’s Chairman and Interim CEO. The rental payments under the Hialeah warehouse lease, which commenced February 1, 2009 and expired on January 31, 2012, were approximately $5,000 per month for the first year and were subsequently on a month-to-month basis following the expiration of the lease. The Company vacated the Hialeah warehouse in September 2014 and entered into a new lease with an unrelated third party. The Company did not record any rent expense related to the Hialeah lease for the three months ended October 31, 2018 and 2017, respectively. At October 31, 2018 and July 31, 2018, approximately $115,000 in rent was payable under the previous Hialeah lease.
The Company has the Credit Facility and multiple notes payable outstanding to related parties, as more fully described in Note 4 to these consolidated financial statements. The Company incurred interest expense related to the Credit Facility and notes payable of approximately $59,000 and $52,000 for the three months ended October 31, 2018 and 2017, respectively. A total of $1.3 million and $1.2 million in accumulated interest payable on the Credit Facility and promissory notes remained outstanding as of October 31, 2018 and July 31, 2017, respectively, and is included in accounts payable and accrued expenses.
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The Company is under common control with multiple entities and the existence of that control could result in operating results or financial position of each individual entity significantly different from those that would have been obtained if the entities were autonomous. One of those related parties, OPKO Health, Inc. (“OPKO”) and the Company are under common control and OPKO has a one percent ownership interest in the Company that OPKO has accounted for as an equity method investment due to the ability to significantly influence the Company.
8. COMMITMENTS AND CONTINGENCIES
Leases.
The Company is under an operating lease agreement for our corporate office space that expired in 2012. The lease currently continues on a month to month basis at no cost.
We house our inventory in approximately 4,000 square feet of warehouse space in Pembroke Park, Florida. The lease commenced September 15, 2014 and originally expired on September 30, 2015 and we have exercised our option to renew the lease and extended the expiration to September 15, 2017. Following the expiration, we have remained on a month-to-month term.
The Pembroke Park lease agreement requires the payment of base rent plus escalations for increases in building operating costs and real estate taxes. Rental expense for operating leases amounted to $11,400 and $11,100 for the three months ended October 31, 2018 and 2017, respectively.
Product Development and Supply Agreement.
On September 4, 2007, the Company entered into a Product Development and Supply Agreement (the “Agreement”) with Sing Lin Technologies Co. Ltd., a company based in Taichung, Taiwan (“Sing Lin”). Pursuant to the Agreement, the Company consigned to Sing Lin the development and design of the next generation Exer-Rest and related devices. The Agreement commenced as of September 3, 2007 and had a term that extended three years from the acceptance by NIMS of the first run of production units. Thereafter, the Agreement automatically renewed for successive one year terms unless either party sent the other a notice of non-renewal. Either party was permitted to terminate the Agreement with ninety days prior written notice. Upon termination, each party’s obligations under the Agreement were to be limited to obligations related to confirm orders placed prior to the termination date.
Pursuant to the Agreement, Sing Lin designed, developed and manufactured the tooling required to manufacture the acceleration therapeutic platforms for a total cost to the Company of $471,000. Sing Lin utilized the tooling in the performance of its production obligations under the Agreement. The Company paid Sing Lin $150,000 of the tooling cost upon execution of the Agreement and $150,000 upon the Company’s approval of the product prototype concepts and designs. The balance of the final tooling cost became due and payable in September 2008 upon acceptance of the first units produced using the tooling and was paid in full during the year ended July 31, 2009.
Under the now-terminated Agreement, the Company also granted Sing Lin the exclusive distribution rights for the products in certain countries in the Far East, including Taiwan, China, Japan, South Korea, Malaysia, Indonesia and certain other countries. Sing Lin agreed not to sell the Products outside its geographic areas in the Far East.
The Agreement provided for the Company to purchase approximately $2.6 million of Exer-Rest units within one year of the September 2008 acceptance of the final product. The Agreement further provided for the Company to purchase $4.1 million and $8.8 million of Exer-Rest products in the second and third years following such acceptance, respectively. These minimum purchase amounts were based upon 2007 product costs multiplied by volume commitments. Through October 31, 2018, the Company had paid Sing Lin $1.7 million in connection with orders placed through that date. Of this amount, $90,000 was previously included as advances to contract manufacturer. As of October 31, 2018, the Company has approximately $41,000 of payables due to Sing Lin. As of October 31, 2018, and July 31, 2018, aggregate minimum future purchases under the Agreement totaled approximately $13.9 million.
As of October 31, 2018, the Company had not placed orders sufficient to meet the first-year or second-year minimum purchase obligations under the Agreement. The Company notified Sing Lin in June 2010 that it was terminating the Agreement effective September 2010 and Sing Lin in July 2010 demanded that the Company place orders sufficient to fulfill the three year minimum purchase obligations in the Agreement. As of October 31, 2018, Sing Lin has not followed up on its July 2010 demand. The Company believes this matter is likely beyond the statute of limitations to enforce. There can be no assurance that Sing Lin will not attempt to enforce its remedies under the Agreement or pursue other potential remedies.
9. RISKS AND UNCERTAINTIES AND CONCENTRATIONS OF RISK
Financial instruments that potentially subject the Company to risk consist principally of purchases and advances to contract manufacturer.
Purchases from and Advances to Contract Manufacturer. Substantially all of the Company’s current inventory has been acquired from Sing Lin pursuant to the now-terminated Agreement. The Company notified Sing Lin in June 2010 that it was terminating the agreement effective September 2010 (see note 9). If the Company is unable to establish a contract and obtain a sufficient alternative supply from Sing Lin or another supplier, it may not be able to procure additional inventory on a timely basis or in the quantities required. Sing Lin and its subcontractors currently maintain custody of the Company’s specialized tooling, which could adversely impact the Company’s ability to reallocate production to other vendors.
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Accounts payable and accrued expenses are summarized in the following table (in thousands):
| October 31, 2018 | July 31, 2018 | |||||||
| Accounts Payable | $ | 498 | $ | 417 | ||||
| Accrued Interest | 1,282 | 1,223 | ||||||
| Accrued Warranty | 12 | 12 | ||||||
| Accrued Other | 29 | 7 | ||||||
| Total | $ | 1,821 | $ | 1,659 | ||||
10. SUBSEQUENT EVENTS
On November 16, 2018, the Company entered into a promissory note in the principal amount of $50,000 with Frost Gamma Investments Trust (the “November 2018 Frost Gamma Note”), a trust controlled by Dr. Phillip Frost, which beneficially owns in excess of 10% of NIMS’ common stock. The interest rate payable by NIMS on the November 2018 Frost Gamma Note is 11% per annum, payable on the Promissory Notes Maturity Date. The 2018 Frost Gamma Note may be prepaid in advance of the Maturity Date without penalty.
On November 16, 2018, the Company entered into a promissory note in the principal amount of $50,000 with Hsu Gamma Investments, L.P., an entity controlled by the Company’s Chairman and Interim CEO, Jane Hsiao (the “November 2018 Hsu Gamma Note”). The interest rate payable by NIMS on the November 2018 Hsu Gamma Note is 11% per annum, payable on the Promissory Notes Maturity Date. The November 2018 Hsu Gamma Note may be prepaid in advance of the Maturity Date without penalty.
On December 3, 2018, the Company entered into an Equity Exchange Agreement (the “Exchange Agreement”) with IRA Financial Trust Company, a South Dakota trust corporation (“IRA Trust”), IRA Financial Group LLC, a Florida limited liability company (“IRAFG” and, together with IRA Trust, “IRA Financial”), and their respective equity holders (the “Equityholders”). Upon the terms and subject to the conditions contained in the Exchange Agreement, the Company will issue to the Equityholders shares of a newly-designated series of its convertible preferred stock (the “Exchange Shares”) in exchange for 100% of the issued and outstanding equity in IRA Financial (the “Exchange”). In addition, the Company’s name is expected to become IRA Financial, Inc. upon completion of the Exchange.
Upon consummation of the Exchange, the Exchange Shares, on an as-converted basis, will comprise 85% of the issued and outstanding shares of the Company’s common stock, par value $0.01 per share, on a fully-diluted basis, after giving effect to the conversion or exchange of substantially all of the Company’s issued and outstanding preferred stock (other than the Exchange Shares) and all of the Company’s indebtedness, in each case for shares of the Company’s common stock, together with the Company’s consummation of $1.25 million in private equity financing, all as contemplated by the terms of the Exchange Agreement.
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
Cautionary Statement Regarding Forward-looking Statements.
This Interim Report on Form 10-Q contains, in addition to historical information, certain forward-looking statements regarding Non-Invasive Monitoring Systems, Inc. (the “Company” or “NIMS,” also referred to as “us”, “we” or “our”). These forward-looking statements represent our expectations or beliefs concerning the Company’s operations, performance, financial condition, business strategies, and other information and that involve substantial risks and uncertainties. For this purpose, any statements contained in this Report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. The Company’s actual results of operations, some of which are beyond the Company’s control, could differ materially from the activities and results implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to the Company’s: history of operating losses and accumulated deficit; immediate need for additional financing; the Company’s inability to repay the Credit Facility currently due on July 31, 2020 or Promissory Notes due on July 31, 2020, dependence on future sales of the Exer-Rest® motion platforms; current and future purchase commitments; competition; dependence on management; changes in healthcare rules and regulations; risks related to proprietary rights; government regulation, including regulatory approvals; other factors described herein as well as the factors contained in “Item 1A - Risk Factors” of our Annual Report on Form 10-K for the year ended July 31, 2018. We do not undertake any obligation to update forward-looking statements, except as required by applicable law. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance.
Overview
We are primarily engaged in the development, manufacture and marketing of non-invasive, whole body periodic acceleration (“WBPA”) therapeutic platforms, which are motorized platforms that move a subject repetitively head to foot. Our acceleration therapeutic platforms are the inventions of Marvin A. Sackner, M.D., our founder, former Chief Executive Officer and a current member of our Board of Directors. Over thirty peer reviewed scientific publications attest to the benefits of whole body periodic acceleration in animal and human research investigations. According to those studies, the application of this technology causes increased release of beneficial substances such as nitric oxide from the inner lining of blood vessels throughout the vasculature for improved circulation and the reduction of inflammation. These findings are not being claimed as an intended use of the device for marketing purposes, but demonstrate a potential mechanism for its benefits.
The development and commercialization of the Exer-Rest has necessitated substantial expenditures and commitments of capital, and we anticipate expenses and associated losses to continue for the foreseeable future. We will be required to raise additional capital to fulfill our business plan, but no commitment to raise such additional capital exists or can be assured. We are also examining strategic alternatives. If we are unsuccessful in our efforts to expand sales and/or raise capital, or some other strategic alternative, we will not be able to continue operations.
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Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations set forth below under “Results of Operations” and “Liquidity and Capital Resources” should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this Form 10-Q. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to inventory, tooling and equipment and contingencies. The Company’s accounting policy for loss contingencies complies with ASC 450-20-25-2. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. A more detailed discussion on the application of these and other accounting policies can be found in Note 2 in the Notes to the Condensed Consolidated Financial Statements set forth in Item 8 of our Annual Report on Form 10-K for the year ended July 31, 2018. Actual results may materially differ from these estimates.
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Results of Operations
Our Exer-Rest AT3800 and AT4700, which we developed under our former agreement with Sing Lin, became available for sale in October 2008. In January 2009, the Exer-Rest line of therapeutic platforms was registered by the FDA in the United States as Class I (Exempt) Medical Devices. We began our U.S. and international sales activity with marketing and promotional pricing beginning in February 2009.
Three months ended October 31, 2018 Compared to Three months Ended October 31, 2017
Selling, general and administrative costs and expenses. Selling, general and administrative (“SG&A”) costs and expenses were $148,000 for the three months ended October 31, 2018 as compared to $76,000 for the three months ended October 31, 2017. The $72,000 increase was primarily due to legal expense related to the Company’s exploration of strategic alternatives.
Total operating costs and expenses. Total operating costs and expenses were $148,000 for the three months ended October 31, 2018 as compared to $76,000 for the three months ended October 31, 2017. The $72,000 increase is explained above in SG&A.
Interest expense. Net interest expense was $59,000 for the three months ended October 31, 2018 and net interest expense was $52,000 for the three months ended October 31, 2017. The $7,000 increases for the three month periods were related to increased balances outstanding under the Note and Security Agreement and Promissory Notes described in Note 4 to the accompanying unaudited condensed consolidated financial statements.
Liquidity and Capital Resources
The Company’s operations have been primarily financed through private sales of its equity securities and advances under Credit Facility and Promissory Notes. At October 31, 2018, we had approximately $39,000 of cash and negative working capital of approximately $1,760,000. We believe that the cash on hand at October 31, 2018 is not sufficient to meet our anticipated cash requirements for operations and debt service for the next 12 months.
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We expect to incur losses from operations for the foreseeable future. It is likely that we will not be able to generate significant additional revenue and we will be required to obtain additional external financing through public or private equity offerings, debt financings or collaborative agreements to continue operations. No assurance can be given that such additional financing will be available on acceptable terms or at all. We are also examining strategic alternatives and on December 3, 2018, entered into an Equity Exchange Agreement (the “Exchange Agreement”) with IRA Financial Trust Company, a South Dakota trust corporation (“IRA Trust”), IRA Financial Group LLC, a Florida limited liability company (“IRAFG” and, together with IRA Trust, “IRA Financial”), and their respective equity holders (the “Equityholders”). Upon the terms and subject to the conditions contained in the Exchange Agreement, the Company will issue to the Equityholders shares of a newly-designated series of its convertible preferred stock (the “Exchange Shares”) in exchange for 100% of the issued and outstanding equity in IRA Financial (the “Exchange”). Our ability to sell additional shares of our stock and/or borrow cash could be materially adversely affected by the current climate in the global equity and credit markets. Current economic conditions have been, and continue to be, volatile and continued instability in these market conditions may limit our ability to access the capital necessary to fund and grow our business and to replace, in a timely manner, maturing liabilities or to successfully examine strategic alternatives. Additionally, the sales of equity or convertible debt securities may result in dilution to our stockholders.
Net cash used in operating activities was $51,000 and $35,000 for three months ended October 31, 2018 and 2017, respectively. This $16,000 increase was primarily due to an increase in net loss and accounts payable, offset by a decrease in prepaid expenses and other current assets.
2010 Credit Facility. On March 31, 2010, the Company entered into a new Note and Security Agreement with Frost Gamma Investments Trust, a trust controlled by Dr. Phillip Frost, which beneficially owns in excess of 10% of the Company’s common stock (“Frost Gamma”), and Hsu Gamma Investments, LP, an entity controlled by the Company’s Chairman and Interim CEO (“Hsu Gamma” and together with Frost Gamma, the “Lenders”), pursuant to which the Lenders have provided a revolving credit line (the “Credit Facility”) in the aggregate principal amount of up to $1.0 million, secured by all of the Company’s personal property. The Company is permitted to borrow and reborrow from time to time under the Credit Facility until July 31, 2020 (the “Credit Facility Maturity Date”). The Company received a waiver from the lenders relating to the covenant prohibiting aggregate borrowings in excess of $100,000. The interest rate payable on amounts outstanding under the Credit Facility is 11% per annum and increases to 16% per annum after the Credit Facility Maturity Date or after an event of default. All amounts owing under the Credit Facility are required to be repaid by the Credit Facility Maturity Date and amounts outstanding are prepayable at any time without premium or penalty. As of October 31, 2018, the Company had drawn an aggregate of $1,000,000 under the Credit Facility and there is no available balance remaining.
2011 Promissory Notes. On September 12, 2011, the Company entered into two promissory notes in the principal amount of $50,000 each with Frost Gamma, a trust controlled by Dr. Phillip Frost, which beneficially owns in excess of 10% of the Company’s common stock, and with an unrelated third party for a total of $100,000. The interest rate payable by NIMS on both the Frost Gamma Note and the unrelated third party note is 11% per annum, payable on the maturity date of July 31, 2020 (the “Promissory Notes Maturity Date”). The Company may prepay either or both notes in advance of the Promissory Notes Maturity Date without premium or penalty.
2012 Promissory Note. On May 30, 2012, the Company entered into a promissory note in the principal amount of $50,000 with Hsu Gamma, an entity controlled by NIMS’ Chairman of the Board and Interim Chief Executive Officer, Jane H. Hsiao, (the “Hsu Gamma Note”). The interest rate payable by NIMS on the Hsu Gamma Note is 11% per annum, payable on the Promissory Notes Maturity Date. The Hsu Gamma Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
2013 Promissory Note. On February 22, 2013, the Company entered into a promissory note in the amount of $50,000 with Jane Hsiao, the Company’s Chairman of the Board and Interim Chief Executive Officer (the “2013 Hsiao Note”). The interest rate payable by the Company on the 2013 Hsiao Note is 11% per annum, payable on the Promissory Notes Maturity Date. The 2013 Hsiao Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
2014 Promissory Note. On September 24, 2014, the Company entered into a promissory note (the “2014 Hsiao Note”) in the principal amount of $50,000 with Jane Hsiao, NIMS’ Chairman of the Board and Interim Chief Executive Officer. The interest rate payable by NIMS on the 2014 Hsiao Note is 11% per annum, payable on the Promissory Notes Maturity Date. The 2014 Hsiao Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
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2015 Promissory Notes. On February 2, 2015, the Company entered into a promissory note (the “2015 Hsiao Note”) in the principal amount of $50,000 with Jane Hsiao, the Company’s Chairman of the Board and Interim Chief Executive Officer. The interest rate payable by the Company on the 2015 Hsiao Note is 11% per annum, payable on the Promissory Notes Maturity Date. The 2015 Hsiao Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
On April 16, 2015, the Company entered into a promissory note (“April 2015 Frost Gamma Note”) in the amount of $100,000 with Frost Gamma”), a trust controlled by Dr. Phillip Frost, which beneficially owns in excess of 10% of the Company’s common stock. The interest rate payable by the Company on the April 2015 Frost Gamma Note is 11% per annum, payable on the Promissory Notes Maturity Date. The April 2015 Frost Gamma Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
On August 12, 2015, the Company entered into a promissory note in the principal amount of $25,000 with Frost Gamma (the “August 2015 Frost Gamma Note”), a trust controlled by Dr. Phillip Frost, which beneficially owns in excess of 10% of the Company’s common stock. The interest rate payable by the Company on the August 2015 Frost Gamma Note is 11% per annum, payable on the Promissory Notes Maturity Date. The August 2015 Frost Gamma Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
On October 27, 2015, the Company entered into a promissory note in the principal amount of $50,000 with Frost Gamma (the “October 2015 Frost Gamma Note”), a trust controlled by Dr. Phillip Frost, which beneficially owns in excess of 10% of the Company’s common stock. The interest rate payable by the Company on the October 2015 Frost Gamma Note is 11% per annum, payable on the Promissory Notes Maturity Date. The October 2015 Frost Gamma Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
On October 27, 2015, the Company entered into a promissory note in the principal amount of $50,000 with Jane Hsiao, the Company’s Chairman of the Board and Interim Chief Executive Officer (the “October 2015 Hsiao Note”). The interest rate payable by the Company on the October 2015 Hsiao Note is 11% per annum, payable on the Promissory Notes Maturity Date. The October 2015 Hsiao Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
2016 Promissory Notes. On June 1, 2016, the Company entered into a promissory note in the principal amount of $100,000 with Frost Gamma (the “June 2016 Frost Gamma Note”), a trust controlled by Dr. Phillip Frost, which beneficially owns in excess of 10% of the Company’s common stock. The interest rate payable by the Company on the June 2016 Frost Gamma Note is 11% per annum, payable on the Promissory Notes Maturity Date. The June 2016 Frost Gamma Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
On June 1, 2016, the Company entered into a promissory note in the principal amount of $100,000 with Hsu Gamma, an entity controlled by NIMS’ Chairman of the Board and Interim Chief Executive Officer, Jane H. Hsiao, (the “June 2016 Hsu Gamma Note”). The interest rate payable by NIMS on the June 2016 Hsu Gamma Note is 11% per annum, payable on the Promissory Notes Maturity Date. The June 2016 Hsu Gamma Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
2017 Promissory Notes. On April 6, 2017, the Company entered into a promissory note in the principal amount of $50,000 with Frost Gamma (the “2017 Frost Gamma Note”), a trust controlled by Dr. Phillip Frost, which beneficially owns in excess of 10% of the Company’s common stock. The interest rate payable by the Company on the 2017 Frost Gamma Note is 11% per annum, payable on the Promissory Notes Maturity Date. The 2017 Frost Gamma Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
On April 6, 2017, the Company entered into a promissory note in the principal amount of $50,000 with Hsu Gamma, an entity controlled by NIMS’ Chairman of the Board and Interim Chief Executive Officer, Jane H. Hsiao, (the “2017 Hsu Gamma Note”). The interest rate payable by NIMS on the 2017 Hsu Gamma Note is 11% per annum, payable on the Promissory Notes Maturity Date. The 2017 Hsu Gamma Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
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On September 22, 2017, the Company entered into a promissory note in the principal amount of $50,000 with Frost Gamma (the “September 2017 Frost Gamma Note”), a trust controlled by Dr. Phillip Frost, which beneficially owns in excess of 10% of the Company’s common stock. The interest rate payable by the Company on the 2017 Frost Gamma Note is 11% per annum, payable on the Promissory Notes Maturity Date. The 2017 Frost Gamma Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
On September 22, 2017, the Company entered into a promissory note in the principal amount of $50,000 with Hsu Gamma, an entity controlled by NIMS’ Chairman of the Board and Interim Chief Executive Officer, Jane H. Hsiao, (the “September 2017 Hsu Gamma Note”). The interest rate payable by NIMS on the 2017 Hsu Gamma Note is 11% per annum, payable on the Promissory Notes Maturity Date. The 2017 Hsu Gamma Note may be prepaid in advance of the Promissory Notes Maturity Date without premium or penalty.
2018 Promissory Notes.
On February 15, 2018, the Company entered into a promissory note in the principal amount of $100,000 with Frost Gamma Investments Trust (the “February 2018 Frost Gamma Note”), a trust controlled by Dr. Phillip Frost, which beneficially owns in excess of 10% of NIMS’ common stock. The interest rate payable by NIMS on the February 2018 Frost Gamma Note is 11% per annum, payable on the Promissory Notes Maturity Date. The February 2018 Frost Gamma Note may be prepaid in advance of the Maturity Date without penalty.
On February 15, 2018, NIMS entered into a promissory note in the principal amount of $100,000 with Hsu Gamma Investments, L.P., an entity controlled by the Company’s Chairman and Interim CEO, Jane Hsiao (the “February 2018 Hsu Gamma Note”). The interest rate payable by NIMS on the February 2018 Hsu Gamma Note is 11% per annum, payable on the Promissory Notes Maturity Date. The February 2018 Hsu Gamma Note may be prepaid in advance of the Maturity Date without penalty.
Subsequently, on November 16, 2018, the Company entered into a promissory note in the principal amount of $50,000 with Frost Gamma Investments Trust (the “November 2018 Frost Gamma Note”), a trust controlled by Dr. Phillip Frost, which beneficially owns in excess of 10% of NIMS’ common stock. The interest rate payable by NIMS on the November 2018 Frost Gamma Note is 11% per annum, payable on the Promissory Notes Maturity Date. The 2018 Frost Gamma Note may be prepaid in advance of the Maturity Date without penalty.
Subsequently, on November 16, 2018, NIMS entered into a promissory note in the principal amount of $50,000 with Hsu Gamma Investments, L.P., an entity controlled by the Company’s Chairman and Interim CEO, Jane Hsiao (the “November 2018 Hsu Gamma Note”). The interest rate payable by NIMS on the November 2018 Hsu Gamma Note is 11% per annum, payable on the Promissory Notes Maturity Date. The November 2018 Hsu Gamma Note may be prepaid in advance of the Maturity Date without penalty.
As of October 31, 2018, the Company had cash and cash equivalents of approximately $39,000 and did not have any further funding available under the Credit Facility. If we are unable to generate significant revenues from sales of Exer-Rest platforms, we will have insufficient funds to repay our existing debt and continue operations without raising additional capital. We are also examining strategic alternatives and on December 3, 2018, entered into the Equity Exchange Agreement. There can be no assurance that we will be able to raise such additional capital on terms acceptable to us or at all or that we will be successful in our examination of strategic alternatives. This uncertainty, along with the Company’s limited remaining cash balances, raises substantial doubt about the Company’s ability to continue as a going concern.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Not required for smaller reporting companies as defined in Rule 12b-2 of the Exchange Act.
| ITEM 4. | CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of October 31, 2018 were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
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Changes in Internal Control over Financial Reporting
There were no material changes in our internal controls over financial reporting or in other factors that could materially affect, or are reasonably likely to affect, our internal controls over financial reporting during the quarter ended October 31, 2018. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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.
None.
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
None.
| 31.1 | Certification of Chief Executive Officer pursuant to Rules 13a–14 and 15d-14 under the Securities Exchange Act of 1934. | |
| 31.2 | Certification of Chief Financial Officer pursuant to Rules 13a–14 and 15d-14 under the Securities Exchange Act of 1934. | |
| 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350 as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350 as enacted pursuant to Section 906of the Sarbanes-Oxley Act of 2002. | |
| 101.INS | XBRL Instance Document* | |
| 101.SCH | XBRL Taxonomy Extension Schema Document* | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document* | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document* | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document* | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document* |
| * | Filed herewith |
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NON-INVASIVE MONITORING SYSTEMS, INC
October 31, 2018
In accordance with the requirements of the Exchange Act the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Dated: December 17, 2018 | By: | /s/ Jane H. Hsiao |
| Jane H. Hsiao, Interim Chief Executive Officer | ||
| Dated: December 17, 2018 | By: | /s/ James J. Martin |
| James J. Martin, Chief Financial Officer |
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EXHIBIT INDEX
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