COGENTIX MEDICAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1.
|
Summary of Significant Accounting Policies
|
Basis of Presentation
Cogentix Medical, Inc., headquartered in Minnetonka, Minnesota, with additional operations in New York, Massachusetts, The Netherlands and the United Kingdom, is a global medical device company. We design, develop, manufacture and market a robust line of high performance fiberoptic and video endoscopy products under the PrimeSight
TM
brand that are used across multiple surgical specialties in diagnostic and treatment procedures. The FDA-cleared and CE marked PrimeSight Endoscopy Systems and EndoSheath Protective Barrier combine state-of-the-art endoscopic technology with a sterile, disposable microbial barrier, providing practitioners and healthcare facilities with a solution to meet the growing need for safe, efficient and cost-effective flexible endoscopy. We also offer the Urgent
®
PC Neuromodulation System, a device that delivers percutaneous tibial nerve stimulation, for the office-based treatment of overactive bladder (“OAB”). The Urgent® PC Neuromodulation System has FDA clearance in the United States and has regulatory approvals for the treatment of OAB and fecal incontinence (FI) in various international markets. The Company also offers Macroplastique®, a urethral bulking agent for the treatment of stress urinary incontinence. Outside the U.S., the Company markets additional bulking agents: PTQ® for the treatment of fecal incontinence and VOX® for vocal cord augmentation and vesicourethral reflux.
The Company is the result of the Merger effective as of March 31, 2015, of two medical device companies, Uroplasty, Inc. (“UPI”) and Vision-Sciences, Inc. (“VSCI”). On the effective date of the Merger, the two companies completed an all-stock merger, pursuant to which UPI merged with and into Merger Sub, a wholly owned subsidiary of VSCI. VSCI continued to be the sole member of the surviving company. After the Merger, VSCI changed its name to Cogentix Medical, Inc.
Upon closing of the Merger, the former UPI stockholders owned approximately 62.5% and the VSCI shareholders retained approximately 37.5% of the Company. Accordingly, while VSCI was the legal acquirer and issued its shares in the Merger, UPI is the acquiring company in the Merger for accounting purposes and the Merger has been accounted for as a reverse acquisition under the acquisition method of accounting for business combinations. As a result, the financial statements of the Company prior to the effective date of the Merger are the historical financial statements of UPI, whereas the financial statements of the Company after the effective date of the Merger reflect the results of the operations of UPI and VSCI on a combined basis. See additional disclosure provided in Note 2.
All share amounts and price per share amounts for all periods presented relate to VSCI shares with UPI shares and price per share converted to VSCI amounts based on the conversion ratio in the acquisition agreement and the one for five reverse stock split that occurred on March 31, 2015.
We have prepared our Condensed Consolidated Financial Statements included in this quarterly report on Form 10-Q, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, have been condensed or omitted, pursuant to such rules and regulations, although we believe that our disclosures are adequate to make the information not misleading. The consolidated results of operations for any interim period are not necessarily indicative of results for a full fiscal year. These Condensed Consolidated Financial Statements, presented herein, should be read in conjunction with the audited consolidated financial statements and related notes included in our annual report on Form 10-KT for the nine-months ended
December 31, 2015.
The Condensed Consolidated Financial Statements presented herein as of September 30, 2016 and for the three and nine month periods ended September 30, 2016 and 2015, reflect, in the opinion of management, all material adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the consolidated financial condition, results of operations and cash flows for the interim periods.
We have identified certain accounting policies that we consider particularly important for the portrayal of our results of operations and financial condition and which may require the application of a higher level of judgment by our management, and as a result are subject to an inherent level of uncertainty. These are characterized as “critical accounting policies” and address revenue recognition, accounts receivable, valuation of inventory, foreign currency translation/transactions, purchase price allocation on acquisition, the determination of recoverability of long-lived and intangible assets, long-term incentive plans, share-based compensation, defined benefit pension plans and income taxes, each of which is described in our annual report on Form 10-KT for the nine-months ended December 31, 2015. Based upon our review, we have determined that these policies remain our most critical accounting policies for the nine months ended September 30, 2016 and we have made no changes to these policies during 2016.
Liquidity and Capital Resources
We have incurred substantial operating losses since our inception. As of September 30, 2016, we had cash and cash equivalents totaling approximately $4.2 million. This report covers the quarter ended September 30, 2016, and as a result, this amount excludes $25.0 million in proceeds from our issuance of 16,219,033 shares of our common stock to Accelmed on November 3, 2016. See Note 13 for additional details. On September 18, 2015, we entered into a $7.0 million line of credit with Venture Bank to provide non-dilutive resources to execute management’s growth strategies for the PrimeSight
TM
and Urgent
®
PC product lines and for general corporate purposes. Note 6 contains further information regarding the line of credit. If operations do not generate sufficient cash in the future and if we were to seek additional financing, there can be no assurance that any such additional financing will be available on terms acceptable to us, if at all. If required, we believe we would be able to reduce our expenses to a sufficient level to continue to operate as a going concern.
Note 2.
|
Business Combination - Merger Between Uroplasty, Inc. and Vision-Sciences, Inc.
|
The Merger has been accounted for as an acquisition of VSCI by UPI, in accordance with Accounting Standards Codification (ASC) Topic 805, "Business Combinations," using the acquisition method of accounting with UPI as the accounting acquirer. Since the Company (formerly known as Vision-Sciences), as the parent company of UPI after the Merger, is the legal acquirer, the Merger has been accounted for as a reverse acquisition. Under these accounting standards, UPI’s total purchase price of $16.5 million is calculated as if UPI had issued its shares to VSCI stockholders and converted options and warrants to purchase VSCI shares to options and warrants to purchase UPI’s common stock.
Under the acquisition method of accounting, the total purchase price was allocated to the net tangible and intangible assets of VSCI acquired in the Merger, based on their fair values at the effective date of the Merger. The allocation was finalized without any change to the preliminary allocation and is as follows:
Cash and cash equivalents
|
|
$
|
2,020,000
|
|
Accounts receivable
|
|
|
4,249,000
|
|
Inventories
|
|
|
4,462,000
|
|
Other current assets
|
|
|
369,000
|
|
Property, plant and equipment
|
|
|
817,000
|
|
Goodwill
|
|
|
18,750,000
|
|
Other intangibles
|
|
|
13,660,000
|
|
Other non-current assets
|
|
|
97,000
|
|
Total assets acquired
|
|
$
|
44,424,000
|
|
|
|
|
|
|
Accounts payable and other liabilities
|
|
$
|
5,209,000
|
|
Deferred revenue
|
|
|
176,000
|
|
Convertible debt – related party
|
|
|
22,530,000
|
|
Other non-current liabilities
|
|
|
40,000
|
|
Total liabilities assumed
|
|
|
27,955,000
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
16,469,000
|
|
The allocation of the purchase price to the net assets acquired and liabilities assumed resulted in the recognition of the following intangible assets:
|
|
Amount
|
|
|
Weighted Average Life-Years
|
|
Developed technology
|
|
$
|
6,200,000
|
|
|
|
7
|
|
Customer relationships
|
|
|
7,270,000
|
|
|
|
5
|
|
Trade names
|
|
|
190,000
|
|
|
|
10
|
|
|
|
$
|
13,660,000
|
|
|
|
|
|
The supplemental unaudited pro forma net sales and net loss of the combined entity had the acquisition been completed on January 1, 2015:
|
|
Nine months
ended
September 30,
2015
(unaudited)
|
|
|
|
|
|
Supplemental pro forma combined results of operations:
|
|
|
|
Net sales
|
|
$
|
35,669,538
|
|
Net loss
|
|
$
|
(12,164,228
|
)
|
Net loss per share – basic and diluted
|
|
$
|
(0.47
|
)
|
Adjustments to the supplemental pro forma combined results of operations are as follows:
|
|
Nine months ended
September 30,
2015
(unaudited)
|
|
|
|
|
|
Increase in amortization of intangibles
|
|
$
|
594,000
|
|
Interest amortization on related party debt
|
|
|
282,000
|
|
Increase in net loss
|
|
$
|
876,000
|
|
These unaudited pro forma condensed consolidated financial results have been prepared for illustrative purposes only and do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on January 1, 2015, or of future results of the consolidated entities. The unaudited pro forma condensed consolidated financial information does not reflect any operating efficiencies and cost savings that may be realized from the integration of the acquisition.
Note 3.
|
Goodwill and Other Intangible Assets
|
Goodwill
As described in Note 2, on March 31, 2015, for accounting purposes, UPI was deemed to have acquired VSCI for a purchase price of $16.5 million, and as a result, the Company recognized $18.8 million in goodwill. There was no change in the goodwill balance as of September 30, 2016.
Other Intangible Assets
Other intangible assets consisted of the following at September 30, 2016 and December 31 2015:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
Developed technology
|
|
$
|
6,200,000
|
|
|
$
|
2,230,000
|
|
|
$
|
6,200,000
|
|
|
$
|
664,000
|
|
Patents
|
|
|
5,653,000
|
|
|
|
5,608,000
|
|
|
|
5,653,000
|
|
|
|
5,586,000
|
|
Trademarks and trade names
|
|
|
190,000
|
|
|
|
73,000
|
|
|
|
190,000
|
|
|
|
67,000
|
|
Customer relationships
|
|
|
7,270,000
|
|
|
|
1,329,000
|
|
|
|
7,270,000
|
|
|
|
1,150,000
|
|
|
|
$
|
19,313,000
|
|
|
$
|
9,240,000
|
|
|
$
|
19,313,000
|
|
|
$
|
7,467,000
|
|
Accumulated amortization
|
|
|
9,240,000
|
|
|
|
|
|
|
|
7,467,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value of amortizable intangible assets
|
|
$
|
10,073,000
|
|
|
|
|
|
|
$
|
11,846,000
|
|
|
|
|
|
For the nine months ended September, 2016 and 2015, amortization of intangible assets charged to operations was approximately $1,773,000 and $1,276,000, respectively. The weighted average remaining amortization period for intangible assets as of September 30, 2016 was approximately 4.48 years.
Note 4
.
|
New Accounting Pronouncements
|
In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
. This ASU is in response to diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows and provides guidance on eight specific cash flow classification issues. It will be effective for reporting periods beginning after December 15, 2017, and interim periods within that reporting period. Early adoption is permitted, including adoption in an interim period. We do not believe the adoption of this update will have a material impact on our consolidated financial statements.
In March 2016, FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
. This ASU simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This new standard is effective for annual periods beginning after December 15, 2016, and interim periods within that reporting period. Early adoption is permitted in any interim or annual period, with adjustments reflected as of the beginning of the fiscal year of adoption. We are evaluating the effect that this guidance will have on our consolidated financial statements and related disclosures.
In February 2016, FASB issued ASU 2016-2,
Leases
, under which lessees will recognize most leases on-balance sheet. This will generally increase reported assets and liabilities. For public entities, this ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2018. ASU 2016-2 mandates a modified retrospective transition method for all entities. The Company will begin the process of determining the impact this ASU will have on the Company’s consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,
which amends the guidance requiring companies to separate deferred income tax liabilities and assets into current and non-current amounts in a classified statement of financial position. This accounting guidance simplifies the presentation of deferred income taxes, such that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. This accounting guidance is effective for the Company beginning in the first quarter of 2017. We do not believe the adoption of this update will have a material impact on our consolidated financial statements.
In September 2015, the
FASB issued ASU No. 2015-16,
Business Combinations (Topic 805)
. The amendments in this update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Under the new guidance, the acquirer should record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. On the face of the income statement or in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods need to be reflected as if the adjustment to the provisional amounts had been recognized as of the acquisition date.
The amendments in ASU No. 2016-16 are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.
We do not believe the adoption of this update will have a material impact on our financial statements.
In July 2015,
the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory (Topic 330).” Under the current guidance (i.e., ASC 330-10-352 before the ASU), an entity subsequently measures inventory at the lower of cost or market, with market defined as replacement cost, net realizable value (NRV), or NRV less a normal profit margin. An entity uses current replacement cost provided that it is not above NRV (i.e., the ceiling) or below NRV less an “approximately normal profit margin” (i.e., the floor). The new guidance requires entities to measure most inventory “at the lower of cost and net realizable value,” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market (market in this context is defined as one of three different measures). The ASU will not apply to inventories that are measured by using either the last-in, first-out method or the retail inventory method.
The amendments in ASU No. 2015-11 are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.
The adoption of this update will not have a material impact on our financial statements.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
. The guidance in this update supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition.”
In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (for example, assets within the scope of Topic 360,
Property, Plant, and Equipment
, and intangible assets within the scope of Topic 350,
Intangibles—Goodwill and Other
) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this update. Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in ASU No. 2014-09 are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted for annual reporting periods beginning after December 31, 2016.
We are still evaluating whether or not this update is applicable to our business.
Note 5.
|
Fair Value Measurements
|
Estimates of fair value for financial assets and liabilities are based on the framework established in the accounting guidance for fair value measurements. The framework defines fair value, provides guidance for measuring fair value and requires certain disclosures. The framework prioritizes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The following three broad levels of inputs may be used to measure fair value under the fair value hierarchy:
|
·
|
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
·
|
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
|
|
·
|
Level 3: Significant
unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management's estimates of market participant assumptions.
|
If the inputs used to measure the financial assets and liabilities fall within more than one of the different levels described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
On September 30, 2016 and December 31, 2015, the only asset or liability measured at fair value on a recurring basis was the long-term incentive plan accrual with a fair value of $10,000 and $130,000, respectively, considered a level 3 measurement. The long-term incentive plan began on October 2, 2014 and is described in Note 9. The estimated fair value of the accrual is calculated on a quarterly basis using a Monte Carlo valuation model. Vesting is based on the probability of meeting the stock price criteria, the probability of which is considered in determining the estimated fair value.
Remeasurements to fair value on a nonrecurring basis relate primarily to our property, plant and equipment and intangible assets and occur when the derived fair value is below their carrying value on our Consolidated Balance Sheet. As of September 30, 2016 and December 31, 2015 we had no remeasurements of such assets to fair value.
The carrying amounts reported in the Condensed Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, inventories, other current assets, accounts payable, accrued liabilities and convertible debt-related party approximate fair market value.
On September 18, 2015, we entered into a loan agreement with Venture Bank, a Minnesota banking corporation, providing us with a committed $7 million secured revolving credit facility (“Facility”), subject to eligible accounts receivable and inventory. The Facility will expire on March 18, 2017 and any loans outstanding on such date will mature and become payable. The Facility is secured by substantially all of our assets.
Under the Facility, we may borrow the lesser of: (a) the sum of (i) eighty percent (80%) of the value of eligible accounts receivable; and (ii) forty percent (40%) of the value of eligible inventory capped at the lesser of (1) $2 million or (2) fifty percent (50%) of the principal balance outstanding; or (b) $7 million. As of September 30, 2016, based on eligible receivables and inventory, our total available borrowing base was $6,028,000. We did not have any borrowings under the Facility as of September 30, 2016 and December 31, 2015.
Loans under the Facility bear interest at a rate per annum equal to the Wall Street Journal Prime Rate plus 2.25%, provided that in no case will the interest charged be less than 5.5%. In the event that there is an event of default under the Facility, the interest rate will be increased by 6.0% for the entire period that an event of default exists. In addition, we pay a non-usage fee of 0.25% based on the average unused and available portion of the Facility on a monthly basis.
Inventories are stated at the lower of cost (first-in, first-out method) or market (net realizable value). We value at lower of cost or market the slow moving and obsolete inventories based upon current and expected future product sales and the expected impact of product transitions or modifications. Inventories consist of the following:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
3,998,000
|
|
|
$
|
2,385,000
|
|
Work-in-process
|
|
|
779,000
|
|
|
|
793,000
|
|
Finished goods
|
|
|
1,445,000
|
|
|
|
1,407,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,222,000
|
|
|
$
|
4,585,000
|
|
Inventories acquired in a business combination are recorded at their estimated fair value less profit for sales efforts and expensed in cost of sales as that inventory is sold. As of March 31, 2015, the purchase accounting adjustment of $240,000 related to VSCI inventory was recorded in cost of goods sold over approximately the first four months of the transition period ended December 31, 2015.
Note 8.
|
Net Income / Loss per Common Share
|
We calculate basic net income (loss) per common share amounts by dividing net income (loss) by the weighted-average common shares outstanding. For calculating diluted net income (loss) per common share amounts, we add additional shares to the weighted-average common shares outstanding for the assumed exercise of stock options and vesting of restricted shares, if dilutive. Because we had a net loss during the nine months ended September 30, 2016 and 2015, and the three months and nine months ended September 30, 2015, the following options and warrants and outstanding and unvested restricted stock to purchase shares of our common stock were excluded from diluted net loss per common share because of their anti-dilutive effect, and therefore, basic net loss per common share equals dilutive net loss per common share:
|
|
Number of options,
warrants and unvested
restricted stock
|
|
|
Range of stock
option and warrant
exercise prices
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2015
|
|
|
3,762,000
|
|
|
$
|
1.64 to $24.40
|
|
Nine months ended September 30, 2016
|
|
|
2,975,000
|
|
|
$
|
0.88 to $24.40
|
|
Nine months ended September 30, 2015
|
|
|
3,762,000
|
|
|
$
|
1.64 to $24.40
|
|
The following options and warrants are excluded from our EPS calculation because they are antidilutive:
|
|
Number of options,
warrants and unvested
restricted stock
|
|
|
Range of stock
option and warrant
exercise prices
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2016
|
|
|
2,231,000
|
|
|
$
|
1.03 to $24.40
|
|
Note 9.
|
Shareholders’ Equity
|
Share-based compensation.
On September 30, 2016, the Company had one active plan, the Cogentix Medical 2015 Omnibus Incentive Plan, for share-based compensation grants (“the 2015 Plan”). Under the 2015 Plan, if we have a change in control (as defined in the 2015 Plan) and the Company is not the surviving entity, all outstanding grants, including those subject to vesting or other performance targets, fully vest immediately if they are not assumed or replaced with equivalent grants. If the Company is the surviving entity, there is no accelerated vesting of equity grants solely upon a change in control. Under the 2015 Plan, we reserved 2,500,000 shares of our common stock for share-based grants and 1,475,870 shares remain available for grant on September 30, 2016.
We recognize share-based compensation expense in our Condensed Consolidated Statement of Operations based on the fair value at the time of grant of the share-based payment over the requisite service period. We incurred approximately $440,000 and $951,000
in share
-based compensation expense for the nine months ended September 30, 2016 and 2015, respectively.
On September 30, 2016, we had approximately $371,000 of unrecognized share-based compensation expense, net of estimated forfeitures, related to stock options that we expect to recognize over a weighted-average period of approximately 2.25 years.
We grant option awards with an exercise price equal to the closing market price of our stock at the date of the grant. Options granted under this plan generally expire seven years from date of grant and vest at varying rates ranging up to three years.
We determined the fair value of our option awards using the Black-Scholes option pricing model. We used the following weighted-average assumptions to value the options granted during the nine months ended September 30:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Expected life in years
|
|
|
3.90
|
|
|
|
3.84
|
|
Risk-free interest rate
|
|
|
0.98
|
%
|
|
|
1.11
|
%
|
Expected volatility
|
|
|
64.32
|
%
|
|
|
63.94
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Weighted-average grant date fair value
|
|
$
|
0.49
|
|
|
$
|
0.79
|
|
The expected life for options granted represents the period of time we expect options to be outstanding based on historical data of option holder exercise and termination behavior for similar grants. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury rate over the expected life at the time of grant. Expected volatility is based upon historical volatility of our stock. We estimate the forfeiture rate for stock awards to be approximately 15% for executive employees and directors and approximately 20% for non-executive employees for calendar year 2016 awards based on our historical experience.
The following table summarizes the activity related to our stock options during the nine months ended September 30, 2016:
|
|
Number of
shares
|
|
|
Weighted
average
exercise price
|
|
|
Weighted
average
remaining
life in years
|
|
|
Aggregate
intrinsic
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
2,573,640
|
|
|
$
|
4.44
|
|
|
|
4.64
|
|
|
$
|
-
|
|
Options granted
|
|
|
692,400
|
|
|
|
1.05
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Options surrendered
|
|
|
(1,566,135
|
)
|
|
|
3.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2016
|
|
|
1,699,905
|
|
|
$
|
3.54
|
|
|
|
6.79
|
|
|
$
|
578,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2016
|
|
|
818,333
|
|
|
$
|
6.03
|
|
|
|
3.95
|
|
|
$
|
16,062
|
|
The total fair value of stock options that vested during the nine months ended September 30, 2016 and 2015 was approximately $268,000 and $600,000,
r
espectively.
Our 2015 Plan also permits the compensation committee of our board of directors to grant other stock-based benefits, including restricted shares.
The following table summarizes the activity related to our restricted shares during the nine months ended September 30, 2016:
|
|
Number of
Shares
|
|
|
Weighted
average
grant date
fair value
|
|
|
Weighted
average
remaining
life in years
|
|
|
Aggregate
intrinsic
value
|
|
Balance at December 31, 2015
|
|
|
686,910
|
|
|
$
|
2.41
|
|
|
|
1.59
|
|
|
$
|
886,114
|
|
Shares granted
|
|
|
837,858
|
|
|
|
1.06
|
|
|
|
|
|
|
|
|
|
Shares vested
|
|
|
(323,613
|
)
|
|
|
2.19
|
|
|
|
|
|
|
|
|
|
Shares forfeited
|
|
|
(301,822
|
)
|
|
|
2.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2016
|
|
|
899,333
|
|
|
$
|
1.21
|
|
|
|
1.54
|
|
|
$
|
1,636,786
|
|
The aggregate intrinsic value shown above for the restricted shares represents the total pre-tax value based on the closing price of our common stock at the end of each period.
On September 30, 2016, we had $907,000 of unrecognized share-based compensation expense, net of estimated forfeitures, related to restricted shares that we expect to recognize over a weighted-average period of approximately 1.54 years.
Stock Warrants-Related Party.
On September 30, 2016, the Company has warrants outstanding that were issued to Mr. Lewis C. Pell, a member of the Company’s board of directors, to purchase an aggregate of 376,123 shares of our common stock at a weighted average exercise price of $9.31 per share. The duration in which the warrants may be exercised commences on the earlier of (i) March 31, 2018 or (ii) three days prior to the record date established for the declaration of any dividend or distribution of any rights in respect to our common stock in cash or other property other than our common stock, and terminates on the later of (x) the maturity date of the convertible promissory notes held by Mr. Pell and described further in Note 10 or (y) the date the convertible promissory notes are paid in full or converted into shares. In addition, the warrants may be exercised immediately prior to a change in control.
Long-Term Incentive Plan and Awards.
On October 1, 2014, the compensation committee of our board of directors and our board of directors approved and adopted a Performance Award Agreement under the Uroplasty, Inc. 2006 Amended Stock and Incentive Plan, as amended, and on October 2, 2014, grants of Performance Awards (the “Awards”) were made to members of our senior management team.
Performance goals for the Awards are based on the achievement of specified stock price targets during the period beginning on the date of grant and ending on the fourth anniversary of the date of grant or, if earlier, the closing date of a change of control (as defined in the Plan) of the Company (the “Performance Period”). The stock price targets under the Awards are: $7.57 price per share of common stock, $10.32 price per share of common stock and $13.76 price per share of common stock.
A stock price target is considered achieved on the date (a) the average closing price of a share of our common stock equals or exceeds a stock price target for at least 45 consecutive trading days or (b) of the consummation of a change of control of the Company, provided the closing price of a share of our common stock on the last trading day immediately preceding the closing date of the change of control equals or exceeds a stock price target not previously achieved during the Performance Period.
The Awards are accounted for as liability awards under the share-based compensation accounting guidance, as the awards are based on the performance of our common stock and are expected to be settled in cash. Expense for the awards is recognized over the derived service period of approximately 2.4 years. We recorded a liability of approximately $10,000 at September 30, 2016 and related reversal of expense was approximately $57,000 for the nine months ended ending September 30, 2016 for the Awards.
Note 10.
|
Convertible Debt – Related Party
|
The following table is a summary as of September 30, 2016 of our convertible debt issued to a related party:
|
|
Gross
Principal
Amount
|
|
|
Unamortized
Debt
Discount
|
|
|
Net
Amount
|
|
|
|
|
|
|
|
|
|
|
|
Note Payable A
|
|
$
|
20,000,000
|
|
|
$
|
(3,048,813
|
)
|
|
$
|
16,951,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note Payable B
|
|
|
3,500,000
|
|
|
|
(470,720
|
)
|
|
|
3,029,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note Payable C
|
|
|
4,990,000
|
|
|
|
(797,326
|
)
|
|
|
4,192,674
|
|
|
|
$
|
28,490,000
|
|
|
$
|
(4,316,859
|
)
|
|
$
|
24,173,141
|
|
The convertible debt is held by Mr. Lewis C. Pell, a member of the Company’s board of directors, and consists of three convertible promissory notes.
• Note Payable A accrues annual interest at the rate of 0.84%. The outstanding principal amount of Note Payable A is convertible into shares of our common stock at a conversion price of $6.00 per share.
• Note Payable B accrues annual interest at the rate of 1.66%. The outstanding principal amount of Note Payable B is convertible into shares of our common stock at a conversion price of $4.45 per share.
• Note Payable C accrues annual interest at the rate of 1.91%. The outstanding principal amount of Note Payable C is convertible into shares of our common stock at a conversion price of $5.55 per share.
At September 30, 2016, we had an aggregate amount of $1,019,120 in accrued interest under the convertible notes payable, which is shown as interest payable on our condensed consolidated balance sheet.
The convertible promissory notes mature on March 31, 2020 or earlier upon a change of control (as defined therein). The convertible promissory notes generally cannot be converted by Mr. Pell prior to March 31, 2018. The convertible promissory notes may be converted earlier prior to a change in control or in connection with our prepayment of the convertible promissory notes. The convertible promissory notes may be prepaid, at our option and upon 15 days’ notice to Mr. Pell, without other premium or penalty, with a combination of cash and common stock. Interest on the convertible promissory notes is payable on the maturity date or upon repayment or conversion of all or any portion of the principal under the note.
Under purchase accounting for the Merger, the convertible promissory notes were recorded at fair value on the effective date of the Merger, resulting in a discount from their face value of $5,960,000 as of March 31, 2015. The discount is being amortized over the remaining term based on the effective interest rate method with an imputed interest rate of 4.72%.
Note 11.
|
Savings and Retirement Plans
|
We sponsor various retirement plans for eligible employees in the United States, the United Kingdom, and The Netherlands. Our retirement savings plan in the United States conforms to Section 401(k) of the Internal Revenue Code and participation is available to substantially all employees. We may also make discretionary contributions ratably to all eligible employees. We made discretionary contributions to the U.S. plan
of $308,000 and $259,000 for the nine months ended September 30, 2016, and 2015, respectively.
Our international subsidiaries have defined benefit retirement plans for eligible employees. These plans provide benefits based on the employee’s years of service and compensation during the years immediately preceding retirement, termination, disability, or death, as defined in the plans.
The cost for our defined benefit retirement plans in The Netherlands and the United Kingdom includes the following components for the three- and nine-month periods ended September 30:
|
|
Three Months Ended
September 30
|
|
|
Nine Months Ended
September 30
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross service cost
|
|
$
|
28,000
|
|
|
$
|
36,000
|
|
|
$
|
83,000
|
|
|
$
|
102,000
|
|
Interest cost
|
|
|
29,000
|
|
|
|
24,000
|
|
|
|
87,000
|
|
|
|
77,000
|
|
Expected return on assets
|
|
|
(24,000
|
)
|
|
|
(19,000
|
)
|
|
|
(72,000
|
)
|
|
|
(59,000
|
)
|
Amortization
|
|
|
(2,000
|
)
|
|
|
7,000
|
|
|
|
(5,000
|
)
|
|
|
14,000
|
|
Net periodic retirement cost
|
|
$
|
31,000
|
|
|
$
|
48,000
|
|
|
$
|
93,000
|
|
|
$
|
134,000
|
|
Note 12.
|
Business Segment Information
|
ASC 280,
“Segment Reporting,”
establishes disclosure standards for segments of a company based on management’s approach to defining operating segments. Reportable segments are defined primarily by the nature of products and services, the nature of the production processes, and the type of customers for our products and services.
We operate in two markets, the medical market and the industrial market.
Within the medical market, we have a number of product lines, endoscopy-based products, including our PrimeSight flexible fiber and video endoscopes used in the practices of urology, pulmonology, trans-nasal esophagoscopy and ENT (ear, nose and throat) and a proprietary sterile disposable microbial barrier, known as EndoSheath Protective Barrier, the Urgent
®
PC Neuromodulation System (“Urgent PC System”) a minimally-invasive, neuromodulation system that delivers percutaneous tibial nerve stimulation for office-based treatment of overactive bladder and associated symptoms; and Macroplastique® Implants (“Macroplastique”), an injectable, urethral bulking agent for the treatment of adult female stress urinary incontinence.
None of the industrial market sales, net losses or assets are more than 10% of our total sales, losses or assets. Therefore, we aggregate our operating segments into one reportable segment in accordance with the objectives and principles of the applicable guidance.
For the three and nine months ended September 30, no country other than the United States represented more than 10% of our consolidated revenue. Information regarding net sales to customers by geographic area for the three and nine months ended September 30 is as follows:
|
|
United
States
|
|
|
United
Kingdom
|
|
|
All Other
Foreign
Countries (1)
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2016
|
|
$
|
10,701,000
|
|
|
$
|
851,000
|
|
|
$
|
1,856,000
|
|
|
$
|
13,408,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2015
|
|
$
|
8,828,000
|
|
|
$
|
596,000
|
|
|
$
|
2,410,000
|
|
|
$
|
11,834,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2016
|
|
$
|
28,877,000
|
|
|
$
|
3,036,000
|
|
|
$
|
6,706,000
|
|
|
$
|
38,619,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2015
|
|
$
|
21,520,000
|
|
|
$
|
2,954,000
|
|
|
$
|
5,530,000
|
|
|
$
|
30,004,000
|
|
|
(1)
|
No other country accounts for 10% or more of the consolidated net sales.
|
Information regarding geographic area in which we maintain long-lived assets is as follows:
|
|
United
States
|
|
|
United
Kingdom
|
|
|
The
Netherlands
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
$
|
1,738,000
|
|
|
$
|
2,000
|
|
|
$
|
462,000
|
|
|
$
|
2,202,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
$
|
2,089,000
|
|
|
$
|
3,000
|
|
|
$
|
463,000
|
|
|
$
|
2,555,000
|
|
Accounting policies of the operations in the various geographic areas are the same as those described in Note 1. Net sales attributed to each geographic area are net of intercompany
sales. No single customer represents 10% or more of our consolidated net sales. Long-lived assets consist of property, plant and
equipment.
Note 13.
|
Subsequent Event
|
On September 7, 2016, we entered into a securities purchase agreement (the “Purchase Agreement”) with Accelmed Growth Partners, L.P. (“Accelmed”). Under the terms of the Purchase Agreement, Accelmed purchased 16,219,033 shares of our common stock at $1.55 per share, for an aggregate price of $25 million. As a condition to Accelmed closing the equity investment, the Company converted into common shares all the outstanding debt and accrued interest (see Note 10) owed to Lewis C. Pell. On September 7, 2016, the Company and Mr. Pell entered into a definitive agreement (the “Note Exchange Agreement”) under which the debt owed by Cogentix to Mr. Pell was converted into Cogentix common stock at a price per share of $1.67 prior to closing the Purchase Agreement. The Note Exchange Agreement also provides that, simultaneously with the conversion of such debt, all outstanding warrants (see Note 9) to purchase Cogentix common stock held by Mr. Pell were cancelled.
On November 3, 2016, the shareholders of the Company approved the transactions described above and these transactions closed on November 3, 2016. As such, we converted all of the outstanding principal amount, approximately $28.5 million, and accrued interest, approximately $1.0 million, on our promissory notes held by Mr. Pell into 17,688,423 shares of our common stock. We also issued 16,219,033 shares of our common stock to Accelmed in exchange for $25 million.