ITEM 1. INTERIM FINANCIAL STATEMENTS
Notes to Condensed Consolidated Financial Statements
Three Months Ended June 30, 2018 and 2017
(Unaudited)
INTERIM FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES
Nemaura Medical Inc. (“Nemaura” or the “Company”), through its operating subsidiaries, performs medical device research and manufacturing of a continuous glucose monitoring system (“CGM”), named
sugarBEAT
. The
sugarBEAT device
is a non-invasive, wireless device for use by persons with Type I and Type II diabetes and may also be used to screen pre-diabetic patients. The
sugarBEAT device
extracts analytes, such as glucose, to the surface of the skin in a non-invasive manner where it is measured using unique sensors and interpreted using a unique algorithm.
Nemaura is a Nevada holding company organized in 2013. Nemaura owns one hundred percent (100%) of Region Green Limited, a British Virgin Islands corporation (“RGL”) formed on December 12, 2013. RGL owns one hundred percent (100%) of the stock in Dermal Diagnostic (Holdings) Limited, an England and Wales corporation (“DDHL”) formed on December 11, 2013, which in turn owns one hundred percent (100%) of Dermal Diagnostics Limited, an England and Wales corporation formed on January 20, 2009 (“DDL”), and one hundred percent (100%) of Trial Clinic Limited, an England and Wales corporation formed on January 12, 2011 (“TCL”).
DDL is a diagnostic medical device company headquartered in Loughborough, Leicestershire, England, and is engaged in the discovery, development and commercialization of diagnostic medical devices. The Company’s initial focus has been on the development of the
sugarBEAT device
, which consists of a disposable patch containing a sensor, and a non-disposable miniature electronic watch with a re-chargeable power source, which is designed to enable trending or tracking of blood glucose levels. All the Company’s operations and assets are located in England.
The following diagram illustrates Nemaura’s corporate structure as of June 30, 2018:
NEMAURA MEDICAL INC.
Notes to Condensed Consolidated Financial Statements
Three Months Ended June 30, 2018 and 2017
(Unaudited)
The Company has a limited operating history, recurring losses from operations and an accumulated deficit as of June 30, 2018. The Company expects to continue to incur losses from operations at least until clinical trials are completed later this year, when management expects that the product will become available to be marketed. Management has evaluated the expected expenses to be incurred along with its available cash and has determined that there is not substantial doubt as to its ability to continue as a going
concern for at least one year subsequent to the date of issuance of these condensed consolidated financial statements. The Company has approximately $320,000 of readily available cash on
hand at
June 30, 2018 and approximately $4.6 million that will become available in December 2018 (Note 3b). Early withdrawal may generally be made for liquidity needs.
Management's strategic plans include the following:
- continuing to advance commercialization of the Company's principal product, in the UK, European and other international markets;
- pursuing additional capital raising opportunities; and
- continuing to explore and execute prospective partnering or distribution opportunities.
NOTE 2 -- BASIS OF PRESENTATION
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(a)
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Basis of presentation:
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The accompanying consolidated financial statements include the accounts of the Company and the Company’s subsidiaries, DDL, TCL, DDHL and RGL. The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, and all significant intercompany balances and transactions have been eliminated on consolidation.
The functional currency for the majority of the Company’s operations is the Great Britain Pound Sterling (“GBP”), and the reporting currency is the US Dollar.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
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Cash and cash equivalents
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The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Cash and cash equivalents consist primarily of cash deposits maintained in the United Kingdom. From time to time, the Company's cash account balances exceed amounts covered by the Financial Services Compensation Scheme. The Company has never suffered a loss due to such excess balances.
(b)
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Fixed rate cash accounts
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From time to time the Company invests funds in fixed rate cash savings accounts. These accounts, at the time of the initial investment, provide a higher interest rate than other bank accounts, and also require the Company to maintain the funds in the accounts for a period of time, currently $4.6 million through December 2018. Early withdrawal may generally be made for liquidity needs.
NEMAURA MEDICAL INC.
Notes to Condensed Consolidated Financial Statements
Three Months Ended June 30, 2018 and 2017
(Unaudited)
(c) Fair value of financial instruments
The Company's financial instruments primarily consist of cash, fixed rate cash accounts, accounts payable and other current liabilities. As of the year-end dates, the estimated fair values of non-related party financial instruments were not materially different from their carrying values as presented, due to their short maturities. The fair value of amounts payable to related parties are not practicable to estimate due to the related party nature of the underlying transactions.
(d) Property and equipment
Property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets, generally four years for fixtures and fittings.
(e) Intangible assets
Intangible assets consist of licenses and patents associated with the sugarBEAT device and are amortized on a straight-line basis, generally over their legal lives of up to 20 years and are reviewed for impairment. The Company evaluates its intangible assets (all have finite lives) and other long-lived assets for impairment whenever events or circumstances indicate that they may not be recoverable, or at least annually. Recoverability of finite and other long-lived assets is measured by comparing the carrying amount of an asset group to the future undiscounted net cash flows expected to be generated by that asset group. The Company groups assets for purposes of such review at the lowest level for which identifiable cash flows of the asset group are largely independent of the cash flows of the other groups of assets and liabilities. The amount of impairment to be recognized for finite and other long-lived assets is calculated as the difference between the carrying value and the fair value of the asset group, generally measured by discounting estimated future cash flows. There were no impairment indicators present during the three months ended June 30, 2018 or 2017.
(f) Revenue Recognition
Revenue is recognized when the four basic criteria of revenue recognition are met: (1) a contractual agreement exists; (2) transfer of rights has been completed; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured.
The Company may enter into product development and other agreements with collaborative partners. The terms of the agreements may include nonrefundable signing and licensing fees, milestone payments and royalties on any product sales derived from collaborations.
The Company recognizes up front license payments as revenue upon delivery of the license only if the license has stand alone value to the customer. However, where further performance criteria must be met, revenue is deferred and recognized on a straight line basis over the period the Company is expected to complete its performance obligations.
Royalty revenue will be recognized upon the sale of the related products provided the Company has no remaining performance obligations under the agreement.
(g) Research and development expenses
The Company charges research and development expenses to operations as incurred. Research and development expenses primarily consist of salaries and related expenses for personnel and outside contractor and consulting services. Other research and development expenses include the costs of materials and supplies used in research and development, prototype manufacturing, clinical studies, related information technology and an allocation of facilities costs.
(h) Income taxes
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss carry forwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided to reduce the carrying amount of deferred income tax assets if it is considered more likely than not that some portion, or all, of the deferred income tax assets will not be realized.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company has elected to classify interest and penalties related to unrecognized tax benefits as part of income tax expense in the consolidated statements of comprehensive loss. The Company does not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense related to unrecognized tax benefits recognized for the three months ended June 30, 2018 and 2017.
In December 2017, the US Tax Cuts and Jobs Act (the”Act”) was signed into law. Generally, this Act reduces corporate rates from a top rate of 35% to a top rate of 21%, effective January 1, 2018. As the Company’s US operations are minimal, and all deferred tax assets are fully allowed for, there is no significant impact to the Company as of and for the three month period ended June 30, 2018.
(i) Earnings per share
Basic earnings per share is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period. There were no potentially dilutive securities as of June 30, 2018 and 2017. For the three months ended June 30, 2018 and 2017, warrants to purchase 10 million shares of common stock were anti-dilutive and were excluded from the calculation of diluted loss per share.
(j) Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results may differ from those estimates.
(k) Foreign currency translation
The functional currency of the Company is the Great Britain Pound Sterling ("GBP"). The reporting currency is the United States dollar (US$). Stockholders' equity is translated into United States dollars from GBP at historical exchange rates. Assets and liabilities are translated at the exchange rates as of the balance sheet date. Income and expenditures are translated at the average exchange rates prevailing during the reporting period.
The translation rates are as follows:
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Three months ended
June 30
,
2018
(unaudited)
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Three months ended
June 30
,
2017
(unaudited)
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Twelve months ended
March 31,
2018
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Period end GBP : US$ exchange rate
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1.320
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1.294
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1.403
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Average period/yearly GBP : US$ exchange rate
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1.343
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1.275
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1.331
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Adjustments resulting from translating the financial statements into the United States dollar are recorded as a separate component of accumulated other comprehensive loss in stockholders' equity.
(l) Recent accounting pronouncements
The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company's financial reporting, the Company undertakes a study to determine the consequences of the change to its consolidated financial statements and assures that there are proper controls in place to ascertain that the Company's consolidated financial statements properly reflect the change.
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Updates ("ASU") No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 has been modified multiple times since its initial release. This ASU outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. ASU 2014-09, as amended, becomes effective for annual reporting periods beginning after December 15, 2017. Early adoption is permitted. As an Emerging Growth Company, the Company is allowed to adopt new, or updated, accounting standards using the same time frame that applies to private companies. The Company will adopt this standard on April 1, 2019. Management is currently evaluating the impact of adoption of this ASU on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-02, Leases. The main difference between the provisions of ASU No. 2016-02 and previous U.S. GAAP is the recognition of right-of-use assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. ASU No. 2016- 02 retains a distinction between finance leases and operating leases, and the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous U.S. GAAP. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize right-of-use assets and lease liabilities. The accounting applied by a lessor is largely unchanged from that applied under previous U.S. GAAP. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. This ASU is effective for public business entities in fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted as of the beginning of any interim or annual reporting period. As an Emerging Growth Company, the Company is allowed to adopt new, or updated, accounting standards using the same time frame that applies to private companies. The Company will adopt this standard on April 1, 2020. Management is currently evaluating the impact of adoption of this ASU on the Company’s consolidated financial statements.
(m) Risks and Uncertainties
The Company is in the development stage of one primary product that it expects to introduce to the UK market after completion of clinical trials and CE mark approval (European Union approval of the product). The Company has entered into sales and marketing agreements for the product. It has also placed orders for the first commercial batch of transmitter devices with the electronics manufacturer Datalink Limited. It has not entered into exclusive manufacturing agreements with any of its contract manufacturers. Uncertainties still exist with regards to regulatory acceptance of the Company’s primary product development efforts and if acceptance is attained, the cost structure to produce the final product.
(n) Preferred shares
On October 5, 2017, the Company entered into common stock exchange agreements with each of its three largest shareholders, to exchange, in the aggregate, 137,324,000 shares of the Company’s common stock for 137,324 shares of Series A Convertible Preferred Stock. Each share of Series A Convertible Preferred Stock is convertible into 1,000 shares of the Company’s common stock, automatically upon the occurrence of all of certain triggering events, as set forth in the Certificate of Designation, namely (a) the sugarBEAT® device to be commercialized has CE regulatory approval; (b) retail sales having commenced; and (c) retail sales exceeding USD$5 million, inclusive of advanced sales or voluntarily by the holder after February 7, 2018, if these triggering events have not occurred. Each holder of issued and outstanding Series A Convertible Preferred Stock is entitled to a number of votes equal to the number of shares of common stock into which the Series A Convertible Preferred Stock is convertible. Holders of Series A Convertible Preferred Stock are entitled to vote on any and all matters presented to stockholders of the Company, except as provided by law. The Series A Convertible Preferred Stock has no preference to the common stock as to dividends or distributions of assets upon liquidation or winding up of the Company (which has been agreed to by the holders of the Series A Convertible Preferred Stock). The Company determined that the fair value of the preferred shares issued for the common shares was equivalent to the fair value of the common shares exchanged.
On November 6, 2017, the transaction was consummated and 137,324,000 shares of common stock were cancelled. As a result, the Company had 67,676,000 shares of common stock issued and outstanding as of March 31, 2018.
On June 5, 2018, the three holders of our Series A Convertible Preferred Stock (the “Series A Preferred”) each delivered notices of conversion to voluntarily convert their Series A Preferred, in the aggregate amount of 137,324 of Series A Preferred shares, into 137,324,000 shares of our common stock. The holders had the right to voluntarily convert each share of Series A Preferred into 1,000 shares of common stock of the Company. As a result of the conversion, we have 205,000,000 shares of common stock outstanding as of June 30, 2018.
(
o) Subsequent event
On June 27, 2018, the Company entered into a Master Services Agreement with World Wide Holdings, LLC DBA Invictus Resources, pursuant to which for an initial three month term, Invictus shall provide services related to advising and assisting company in developing and implementing appropriate plans and materials for presenting the Company and its business plans, strategy and personnel to the financial community, introducing the Company to the financial community through the use of social media, digital media and other online awareness campaigns. The aggregate fees in the amount of $160,000 are payable to Invictus during the initial three month term. On July 23, 2018 the Board of Directors approved the issuance of a warrant to Invictus exercisable for 75,000 shares of common stock at an exercise price of $0.01 per share.
NEMAURA MEDICAL INC.
Notes to Condensed Consolidated Financial Statements
Three Months Ended June 30, 2018 and 2017
(Unaudited)
NOTE 4 – LICENSING AGREEMENT
In March 2014, the Company entered into an Exclusive Marketing Rights Agreement with an unrelated third party, that granted to the third party the exclusive right to market and promote the sugarBEAT device and related patches under its own brand in the United Kingdom and the Republic of Ireland, the Channel Islands and the Isle of Man. The Company received a non-refundable, up front cash payment of GBP 1,000,000 (approximately $1.320 million and $1.294 million as of June 30, 2018 and March 31, 2018 respectively) which is wholly non-refundable, upon signing the agreement.
As the Company has continuing performance obligations under the agreement, the up front fees received from this agreement have been deferred and will be recorded as income over the term of the commercial licensing agreement beginning from the date of clinical evaluation approval. As the Company expects commercialization of the sugarBEAT device to occur in the year ending March 31, 2019, approximately $66,000 of the deferred revenue has been classified as a current liability.
In April 2014, a Letter of Intent was signed with the third party which specified a 10 year term and in November 2015, a Licence, Supply and Distribution agreement with an initial 5 year term was executed. The Company grants the exclusive right to market and promote its product in the United Kingdom and purchase the product at specified prices.
In May 2018, the Company signed a full commercial agreement with Dallas Burston Ethitronix Limited
for all other European territories as part of an equal joint venture agreement. The joint venture intends to seek sub-license rights opportunities to one or more leading companies in the diabetes monitoring space, to leverage their network, infrastructure and resources.
NOTE 5 – RELATED PARTY TRANSACTIONS
Nemaura Pharma Limited (Pharma) and NDM Technologies Limited (NDM) are entities controlled by the Company’s majority shareholder,
D
F.H. Chowdhury.
In accordance with the United States Securities and Exchange Commission (SEC) Staff Accounting Bulletin 55, these financial statements are intended to reflect all costs associated with the operations of DDL and TCL. Pharma has invoiced DDL and TCL for research and development services. In addition, certain operating expenses of DDL and TCL were incurred and paid by Pharma and NDM which have been invoiced to the Company. Certain costs incurred by Pharma and NDM are directly attributable to DDL and TCL and such costs were billed to the Company. Management believes the allocation methodologies used are reasonable. DDL and TCL advanced Pharma certain amounts to cover a portion of the costs.
Following is a summary of activity between the Company and Pharma and NDM for the three months ended June 30, 2018 and 2017. These amounts are unsecured, interest free, and payable on demand.
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Three Months Ended
June 30, 2018
(unaudited)
($)
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Three Months Ended
June 30, 2017
(unaudited)
($)
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Balance due from (to) Pharma and NDM at beginning of period
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(613,818
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)
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(687,609
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)
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Amounts invoiced by Pharma to DDL and TCL (1)
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(521,085
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)
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(95,617
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)
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Amounts repaid by DDL to Pharma
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308,434
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-
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Foreign exchange differences
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68,920
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(29,003
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)
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Balance due to Pharma and NDM at end of the period
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(757,549
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)
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(812,229
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)
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(1)
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These amounts are included primarily in research and development expenses charged to the Company by Pharma.
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The Company routinely reviews its statement of cashflows presentation of related party transactions for financing or operating classification based on the underlying nature of the item and intended repayment.
Total amounts charged to the Company by Pharma and NDM were $521,085 and $95,617 for the three months ended June 30, 2018 and 2017 respectively.