NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
October
31, 2019
The
following (a) condensed consolidated balance sheet at July 31, 2019 was derived from audited annual financial statements, but
does 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, 2019, and results of operations and cash flows for the interim periods ended October 31, 2019 and 2018. The results of operations
for the three months ended October 31, 2019, 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, 2019. 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, 2019.
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. It has ceased to operate
in this market. The Company has developed and marketed its Exer-Rest® line of acceleration therapeutic platforms
based upon unique, patented whole body periodic acceleration (“WBPA”) technology of which the Company maintains patents.
The Company currently does not have any operational inventory.
Business.
The Company developed a third generation of Exer-Rest acceleration therapeutic platforms (designated the Exer-Rest AT3800
and the Exer-Rest AT4700). The Company is currently a shell company (as defined in Rule 12b-2 of the Exchange Act).
Discontinued
Operations. On May 3, 2019 the Company exchanged inventory for forgiveness of accrued unpaid rent. The Company has no
inventory, no immediate plans to replenish inventory and has no current plans to develop or market new products.
Accordingly,
the Company determined that the assets and liabilities met the discontinued operations criteria in Accounting Standards Codification
205-20-45 and were classified as discontinued operations at October 31, 2019 and July 31, 2019 and for the three months ended
October 31, 2019 and 2018.
Going Concern. The
Company’s consolidated financial statements have been prepared and presented on a basis assuming it will continue as a
going concern. As reflected in the accompanying consolidated financial statements, the Company had net losses from continuing
operations of approximately $52,000 and $194,000 for the three months ended October 31, 2019 and 2018, respectively, and has
experienced continuous cash outflows from operating activities. The Company also has an accumulated deficit of approximately
$28.1 million as of October 31, 2019. The Company had $333,000 of cash at October 31, 2019 and working capital of
approximately $26,000. These matters raise substantial doubt about the Company’s ability to continue as a going
concern.
The
Company is seeking potential mergers, acquisitions and strategic collaborations. 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
consolidated financial statements do not include any adjustments that might be necessary from the outcome of this uncertainty.
Equity
Exchange Agreement. On December 3, 2018, the Company entered into an Equity Exchange Agreement with IRA Financial Trust
Company, a South Dakota trust corporation, IRA Financial Group LLC, a Florida limited liability company (collectively “IRA
Financial”), and their respective equity holders. The Company, IRA Financial and the equity holders subsequently amended
the Exchange Agreement on three occasions to extend the outside date for consummation of the Exchange, with the last such extension
expiring on July 3, 2019.
On
August 4, 2019, IRAFG delivered to the Company notice of termination of the Exchange Agreement pursuant to Section 8.01(b)(i)
of that agreement due to the failure of the Exchange to have closed on or prior to the Outside Date. No termination fees, penalties
or other amounts are payable by the Company in respect of such termination.
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.
Discontinued
Operations. For the three months ended October 31, 2019 and 2018, results from operations for our Exer-Rest Business are
classified as discontinued operations. The carve out of the discontinued operations (i) were prepared in accordance with the SEC’s
carve out rules under Staff Accounting Bulletin (“SAB”) Topic 1B1 and (ii) are derived from identifying and carving
out the specific assets, liabilities, operating expenses and interest expense associated with the Exer-Rest
Business’s operations.
Discontinued operations expense allocations,
consisting of warehouse rent and other inventory related expenses incurred by us, are directly attributed to discontinued operations
(see Note 3).
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 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 $333,000 and $353,000, on deposit in bank operating
accounts at October 31, 2019 and July 31, 2019, respectively.
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.
The
Company files its tax returns as prescribed by the laws of the jurisdictions in which it operates. Tax years ranging from 2015
to 2019 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.
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, 2019 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.
Loss
Contingencies. We recognize contingent losses that are both probable and estimable. In this context, we define probability
as circumstances under which events are likely to occur. In regard to legal costs, we record such costs as incurred.
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 August 1, 2018. 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 currently has no long-term leases. However, in the event that the Company
should enter any long-term leases it would then evaluate the effect that the new guidance would have on its consolidated financial
statements and related disclosures
3.
DISCONTINUED OPERATIONS
On
May 3, 2019 the Company exchanged its inventory for forgiveness of accrued unpaid rent. Concurrent with the exchange management
with the appropriate level of authority determined to discontinue the operations of the product segment.
The
detail of the consolidated balance sheets, the consolidated statement of operations and consolidated cash flows for the discontinued
operations is as stated below:
|
|
|
As of
October 31, 2019
|
|
|
As of
July 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Current assets – discontinued operations
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
-
|
|
|
$
|
3
|
|
|
Total current assets – discontinued operations
|
|
|
-
|
|
|
|
3
|
|
|
Total assets – discontinued operations
|
|
$
|
-
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities – discontinued operations
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
55
|
|
|
$
|
55
|
|
|
Total current liabilities – discontinued operations
|
|
|
55
|
|
|
|
55
|
|
|
Total liabilities – discontinued operations
|
|
$
|
55
|
|
|
$
|
55
|
|
|
|
|
For the three months ended
October 31, 2019
|
|
|
For the three months ended
October 31, 2018
|
|
|
Selling, general and administrative expenses
|
|
$
|
(3
|
)
|
|
$
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(3
|
)
|
|
$
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
For
the three months ended
October 31, 2019
|
|
|
For the three months ended
October 31, 2018
|
|
|
Cash used in operations for discontinued operations:
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(3
|
)
|
|
$
|
(13
|
)
|
|
Prepaid expenses
|
|
|
3
|
|
|
|
-
|
|
|
Cash used in discontinued operations
|
|
$
|
-
|
|
|
$
|
(13
|
)
|
4.
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, 2019 and 2018.
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, 2019.
As
of October 31, 2019, 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, 2019 or 2018.
5.
NOTES PAYABLE
The
Company entered into various notes payable with related parties from 2010 to 2018 with an aggregate principal total of $2,175,000
and with an unrelated third party for $50,000 for total principal amount of $2,225,000. The interest rate was 11% and the maturity
date was July 31, 2020. The Company could prepay these notes in advance of the maturity date without premium or penalty.
On
December 21, 2018, the Company issued 50,584,413 shares of Common Stock in exchange for the extinguishment of debt and related
accrued interest totaling approximately $3,541,000. The Company incurred interest expense related to the Credit Facility and notes
payable of $59,000 for the three months ended October 31, 2018 and $0 for the three months ended October 31, 2019.
The
Company maintains a 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 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. 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 balance of the principal due under
the Credit Facility was $0 at July 31, 2019 and October 31, 2019.
6.
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. In February
2019, all outstanding shares of Series C Preferred Stock were redeemed by the Company following 30 days written notice. The redemption
amount for the 62,048 Series C Preferred Stock was approximately $25,000 at a rate of $0.40 per share of which approximately $15,000
was paid and approximately $10,000 is included in accrued expenses at October 31, 2019. The redeemed Series C Preferred Stock
were then cancelled following the redemption.
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. In February 2019, all holders of the 2,782 outstanding shares of Series D Preferred Stock converted their shares
to common stock. As a result, the Company issued 13,910,000 common shares.
No
preferred stock dividends were declared for the three months ended October 31, 2019 and 2018.
The
Company did not issue any shares of the Company’s common stock during the three months ended October 31, 2019 and 2018.
7.
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, 2019 and 2018, 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. There are no options or warrants outstanding as of October 31, 2019
and 2018.
Potential
common shares not included in calculating diluted net loss per share are as follows:
|
|
|
October 31, 2019
|
|
|
October 31, 2018
|
|
|
Series C Preferred Stock
|
|
|
-
|
|
|
|
1,551,200
|
|
|
Series D Preferred Stock
|
|
|
-
|
|
|
|
13,910,000
|
|
|
Total
|
|
|
-
|
|
|
|
15,461,200
|
|
8.
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, 2019 and 2018, the Company
did not record any rent expense related to the Miami lease. At October 31, 2019 and 2018, approximately $0 and $76,000 in rent
was payable, respectively.
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.
9.
COMMITMENTS AND CONTINGENCIES
Leases.
The
Company was 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
housed 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 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. On May 3, 2019 the Company exchanged
inventory for forgiveness of $15,000 of accrued unpaid rent. The Company had previously written off the value of this inventory
resulting in a gain on the forgiveness of approximately $15,000. The Company no longer leases this Pembroke Park warehouse following
the sale of inventory.
Product
Development and Supply Agreement.
In
September 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 confirmed 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, 2019, the Company had paid Sing Lin $1.7 million
in connection with orders placed through that date. As of October 31, 2019, the Company has approximately $41,000 of payables
due to Sing Lin. As of October 31, 2019, aggregate minimum future purchases under the Agreement totaled approximately $13.9 million.
As
of October 31, 2019, 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 December 13, 2019, Sing Lin has not followed up on its July 2010 demand. There can be no assurance that
Sing Lin will not attempt to enforce its remedies under the Agreement, or pursue other potential remedies. The Company believes
that Sing Lin in no longer in business.