NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2019
(Unaudited)
The
accompanying unaudited consolidated financial statements of Vycor Medical, Inc. (the “Company” or “Vycor”)
have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim
financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities Exchange Commission.
In accordance with those rules and regulations certain information and footnote disclosures normally included in consolidated
financial statements have been omitted pursuant to such rules and regulations. The consolidated balance sheet as of December 31,
2018 derives from the audited financial statements at that date, but does not include all the information and footnotes required
by GAAP. These financial statements should be read in conjunction with the audited financial statements and notes thereto included
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
The
unaudited consolidated financial statements as of and for the three months ended March 31, 2019 and 2018, in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s
financial condition, results of operations and cash flows. The results of operations for the three months ended
March 31, 2019 and 2018 are not necessarily indicative of the results to be expected for any other interim period or for the entire
year.
Ability
to continue as a Going Concern
The
accompanying unaudited consolidated financial statements have been prepared assuming that the Company will continue as a going
concern. The Company has incurred losses since its inception, including a net loss of $180,298 for the three months ended March
31, 2019 and has not generated cash flows from operations. As of March 31, 2019 the Company had a working capital deficiency of
$328,799, excluding related party liabilities of $1,050,831. As a result these conditions, among others, raise substantial doubt
regarding our ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result
from the outcome of this uncertainty.
The
Company is executing on a plan to achieve a reduction in cash operating losses for both the Vycor Medical and NovaVision divisions.
Included within the working capital deficiency above is a term note for $300,000 to EuroAmerican Investment Corp. (“EuroAmerican”),
together with accrued interest of $244,601, which has a maturity date of December 31, 2019, having been extended on a number of
occasions from its initial due date of June 11, 2011. The Company will intend to seek an extension to the note, although it is
not known whether the note will be extended or the terms of any extension. However, the Company believes it may not have sufficient
cash to meet its various cash needs through May 31, 2020 unless the Company is able to obtain additional cash from the issuance
of debt or equity securities. Fountainhead, the Company’s largest shareholder, is currently providing working capital funding
to the Company on an as-needed basis, although there is no guarantee that this will continue to be the case. The Company may consider
seeking additional equity or debt funding, although there is no assurance that this would be available on acceptable terms or
at all. If adequate funds are not available, the Company may have to delay or curtail development or commercialization of products,
or cease some of its operations.
2.
|
SIGNIFICANT
ACCOUNTING POLICIES
|
Principles
of Consolidation
The
unaudited consolidated financial statements include the accounts of Vycor Medical, Inc., and its wholly-owned subsidiaries, NovaVision,
Inc. (a Delaware corporation), NovaVision GmbH (a German corporation) and Sight Science Limited (a UK corporation), both wholly
owned subsidiaries of NovaVision, Inc. The Company is headquartered in Boca Raton, FL. All material inter-company accounts, transactions,
and profits have been eliminated in consolidation.
Recent
Accounting Pronouncements
The
Company adopted Accounting Standards Codification 842, Leases ("ASC 842") in the first quarter of 2019. As a result
the Company updated its significant accounting policies for leases below. Refer to Note 4 for additional information related to
the Company's lease arrangements and the impact of the adoption of ASC 842 on the Company's consolidated financial statements.
From
time to time new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies
that may have an impact on the Company’s accounting and reporting. The Company believes that, other than as disclosed
above, such recently issued accounting pronouncements and other authoritative guidance for which the effective date is in
the future will not have an impact on its accounting or reporting or that such impact will not be material to its financial position,
results of operations and cash flows when implemented.
Leases
The
Company has one leased buildings in Boca Raton, Florida that is classified as operating lease right-of use ("ROU") assets
and operating lease liabilities in the Company's consolidated balance sheet. ROU assets and lease liabilities are recognized based
on the present value of the future minimum lease payments over the lease term at the commencement date for leases exceeding 12
months. Minimum lease payments include only the fixed lease component of the agreement. Operating lease expense is recognized
on a straight-line basis over the lease term and is included in cost of Selling, General and Administrative expenses.
The
standard was effective for us beginning January 1, 2019. The Company elected the available practical expedients on adoption. The
adoption had a material impact on our consolidated balance sheets, but did not have a material impact on our consolidated income
statements. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases. Finance
leases are not material to the Company and were not impacted by the adoption of ASC 842, as finance lease liabilities and the
corresponding assets were already recorded in the balance sheet under the previous guidance, ASC 840.
Net
Loss Per Share
Basic
net loss per share is computed by dividing net loss available to common shareholders by the weighted-average number of common
shares outstanding during the period. Diluted net loss per share is computed giving effect to all dilutive potential common shares
that were outstanding during the period. Dilutive potential common shares consist of incremental shares issuable upon exercise
of stock options and warrants and conversion of preferred stock and convertible debt. Such potentially dilutive shares are excluded
when the effect would be to reduce a net loss per share. No dilution adjustment has been made to the weighted average outstanding
common shares in the periods presented because the assumed exercise of outstanding options and warrants and the conversion of
preferred stock and debt would be anti-dilutive.
The
following table sets forth the potential shares of common stock that are not included in the calculation of diluted net loss per
share:
|
|
March
31, 2019
|
|
|
March
31, 2018
|
|
Stock options outstanding
|
|
|
700,000
|
|
|
|
720,000
|
|
Warrants to purchase common stock
|
|
|
3,717,826
|
|
|
|
6,829,386
|
|
Debentures convertible into common stock
|
|
|
2,593,337
|
|
|
|
2,364,765
|
|
Preferred shares convertible into common
stock
|
|
|
1,272,052
|
|
|
|
1,272,052
|
|
Directors Deferred
Compensation Plan
|
|
|
875,910
|
|
|
|
558,612
|
|
Total
|
|
|
9,159,125
|
|
|
|
11,744,815
|
|
Related
Parties Notes Payable
Related
Party Notes Payable consists of:
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
On June 25, 2018 the Company
issued promissory notes to Peter Zachariou for $30,000. The notes bear interest at 10% per annum and are payable on the earlier
of one year or five days following the delivery of written demand for payment by the Payee.
|
|
$
|
30,000
|
|
|
$
|
30,000
|
|
In March 2019
and between March 2018 and July 2018 the Company issued various promissory notes to Fountainhead Capital Management Limited
for $180,873. The notes bear interest at 10% per annum and are payable on the earlier of one year or five days following the
delivery of written demand for payment by the Payee. Four notes were extended for another twelve months on their due dates
which will be due between March and May 2020 or on demand by the Payee.
|
|
|
180,873
|
|
|
|
163,000
|
|
Total Related
Party Notes Payable
|
|
$
|
210,873
|
|
|
$
|
193,000
|
|
Other
Notes Payable
Other
Notes Payable consists of:
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
On March 25, 2011 the Company
issued a term note for $300,000 to EuroAmerican Investment Corp. (“EuroAmerican”). The term note bears interest
at 16% per annum and was due June 25, 2011, and has been extended on a number of occasions. On March 19, 2019, the
note was extended to December 31, 2019. See further note below.
|
|
$
|
300,000
|
|
|
$
|
300,000
|
|
Insurance policy
finance agreements.
|
|
|
47,643
|
|
|
|
25,814
|
|
Total Notes Payable:
|
|
$
|
347,643
|
|
|
$
|
325,814
|
|
in
January 2018 the Company entered into an amendment agreement (the “Amendment”) with EuroAmerican Investments (“EuroAmerican”)
regarding its $300,000 loan note (the “Note”). Under the Amendment, the Note was extended until December 31, 2018
and was extended until December 31, 2019 in March 2019. The conversion terms of the Note were reduced to $0.21,
the same as the offering price of the 2018 Offering. Conversion of the Note and accrued interest would result in the issuance
of 2,595,337 shares of Common Stock as of March 31, 2019. Notwithstanding, EuroAmerican agreed that the Note could not be converted
without first offering the Company the right to redeem the Note at principal and accrued interest, and secondly Fountainhead the
right to purchase the Note, which cannot be converted prior to such offer and the failure of the Company and Fountainhead to exercise
such option in accordance with the amendment terms. In addition, the Company agreed to issue warrants to purchase 2,308,405 shares
of Common Stock at $0.27, the same terms as the 2018 Offering, exercisable for three years from January 1, 2018, if and when the
conversion option is exercised. The amendment was recognized as a modification, based on the guidance in ASC 470-50.
The
Company routinely finances all their insurance policies through a third party finance company which requires a down payment and
subsequent monthly payments, the time periods vary from 10 months to 12 equal monthly payments.
The
Company recognized the following related to leases in its Unaudited Consolidated Balance Sheet at March 31, 2019 (in millions):
|
|
Three Months Ended March
31,
|
|
|
|
2019
|
|
|
2018
|
|
Operating Lease Assets
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
50,791
|
|
|
$
|
-
|
|
–Long-term portion
|
|
|
19,145
|
|
|
|
-
|
|
|
|
$
|
69,936
|
|
|
$
|
-
|
|
Operating Lease Liabilities
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
46,857
|
|
|
$
|
-
|
|
Long-term portion
|
|
|
19,145
|
|
|
|
-
|
|
|
|
$
|
66,002
|
|
|
$
|
-
|
|
Long
term lease liabilities are due during 2020.
5
.
|
SEGMENT
REPORTING, GEOGRAPHICAL INFORMATION
|
(a)
Business segments
The
Company operates in two business segments: Vycor Medical, which focuses on devices for neurosurgery; and NovaVision, which focuses
on neuro stimulation therapies and diagnostic devices for the treatment and screening of vision field loss and which includes
Sight Science. Set out below are the revenues, gross profits and total assets for each segment
|
|
Three
Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenue:
|
|
|
|
|
|
|
Vycor
Medical
|
|
$
|
297,106
|
|
|
$
|
277,811
|
|
NovaVision
|
|
|
53,560
|
|
|
|
47,290
|
|
|
|
$
|
350,666
|
|
|
$
|
325,101
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
Vycor Medical
|
|
$
|
266,923
|
|
|
$
|
253,569
|
|
NovaVision
|
|
|
47,545
|
|
|
|
42,189
|
|
|
|
$
|
314,468
|
|
|
$
|
295,758
|
|
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
Total Assets:
|
|
|
|
|
|
|
|
|
Vycor
Medical
|
|
$
|
1,060,319
|
|
|
$
|
981,553
|
|
NovaVision
|
|
|
64,447
|
|
|
|
62,224
|
|
Total
Assets
|
|
$
|
1,124,766
|
|
|
$
|
1,043,777
|
|
(b)
Geographic information
The
Company operates in two geographic segments, the United States and Europe. Set out below are the revenues, gross profits and total
assets for each segment.
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenue:
|
|
|
|
|
|
|
United States
|
|
$
|
320,616
|
|
|
$
|
300,171
|
|
Europe
|
|
|
30,050
|
|
|
|
24,930
|
|
|
|
$
|
350,666
|
|
|
$
|
325,101
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
288,291
|
|
|
$
|
273,581
|
|
Europe
|
|
|
26,177
|
|
|
|
22,177
|
|
|
|
$
|
314,468
|
|
|
$
|
295,758
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
Total
Assets:
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
1,087,869
|
|
|
$
|
1,010,067
|
|
Europe
|
|
|
36,897
|
|
|
|
33,710
|
|
Total
Assets
|
|
$
|
1,124,766
|
|
|
$
|
1,043,777
|
|
Common
Stock and Stock Grants
During
January to March 2019, the Company granted 99,999 shares of Common Stock (valued at $21,000) to non-employee Directors. Under
the terms of the Directors Deferred Compensation Plan, the receipt of these shares is deferred until the January 15
th
following the termination of their services as a director. As of March 31, 2019 these shares have yet to be issued.
During
January to March 2019, the Company issued 535,714 shares of Common Stock to Fountainhead for fees of $112,500 in accordance with
the terms of a consulting agreement.
Warrants
and Options
The
details of the outstanding warrants and options are as follows:
STOCK
WARRANTS:
|
|
|
|
|
Weighted average
|
|
|
|
Number of shares
|
|
|
exercise price
per share
|
|
Outstanding at December 31, 2018
|
|
|
3,717,826
|
|
|
$
|
0.27
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Cancelled or expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding at March 31, 2019
|
|
|
3,717,826
|
|
|
$
|
0.27
|
|
STOCK
OPTIONS:
|
|
|
|
|
Weighted average
|
|
|
|
Number of shares
|
|
|
exercise price
per share
|
|
Outstanding at December 31, 2018
|
|
|
1,380,000
|
|
|
$
|
0.53
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Cancelled or expired
|
|
|
(680,000
|
)
|
|
|
(0.79
|
)
|
Outstanding at March 31, 2019
|
|
|
700,000
|
|
|
$
|
0.28
|
|
As
of March 31, 2019, the weighted-average remaining contractual life of outstanding warrants and options is 0.87 and 2.21 years,
respectively.
7
.
|
SHARE-BASED
COMPENSATION
|
Stock
Option Plan
Under
ASC Topic 718, the Company estimates the fair value of option awards on the date of grant using an option pricing model. The grant
date fair value is recognized over the option-vesting period, the period during which an employee is required to provide service
in exchange for the award. No compensation cost is recognized for equity instruments for which employees do not render the requisite
service. Under these standards, compensation cost for employee cost for employee stock-based awards is based on the estimated
grant-date fair value and recognized over the vesting period of the applicable award on a straight-line basis.
For
the three months ended March 31, 2019 and 2018, the Company recognized share-based compensation of $0 and $4,871 respectively,
for employee stock options.
Stock
appreciation rights may be granted either on a stand-alone basis or in conjunction with all or part of any other stock options
granted under the plan. As of March 31, 2019 there were no awards of any stock appreciation rights.
Non-Employee
Stock Compensation
The
Company from time to time issues common stock, stock options or common stock warrants to acquire services or goods from non-employees.
Common stock, stock options and common stock warrants issued to other than employees or directors are recorded on the basis of
their fair value, which is measured as of the “measurement date” using an option pricing model. The “measurement
date” for options and warrants related to contracts that have substantial disincentives to non-performance is the date of
the contract, and for all other contracts is the vesting date. Expense related to the options and warrants is recognized on a
straight-line basis over the shorter of the period over which services are to be received or the life of the option or warrant.
Aggregate
stock-based compensation for stock and warrants granted to non-employees for the three months ended March 31, 2019 and 2018 was
$133,500. The expense related to stock not issued during the periods ended March 31, 2019 and 2018 comprise: $21,000, respectively
for both periods, related to stock granted but not issued to directors under the Directors Deferred Compensation Plan. As of March
31, 2019, there was $0 of total unrecognized compensation costs related to warrant and stock awards and non-vested options.
Stock-based
Compensation Valuation Methodology
Stock-based
compensation resulting from the issuance of Common Stock is calculated by reference to the valuation of the Stock on the date
of issuance, the expense being recognized as the compensation is earned. Stock-based compensation expenses related to employee
options and warrants granted to non-employees are recognized as the stock options and warrants are earned. The fair value of the
stock options or warrants granted is estimated at the grant date, using the Black-Scholes option pricing model, and the expense
is recognized on a straight-line basis over the shorter of the period over which services are to be received or the life of the
option or warrant. The grant date fair value of employee share options and similar instruments is estimated using the Black-Scholes
option pricing model on the basis of the fair value of the underlying common stock on the measurement date, adjusted for the unique
characteristics of those equity instruments, using the assumptions noted in the table below. Expected volatility is based on the
historical volatility of a peer group of publicly traded companies. The expected term of options and warrants was based upon the
expected life of the option or warrant, and the risk-free rate is based on the U.S. Treasury Constant Maturity rate.
The
following assumptions were used in calculations of the Black-Scholes option pricing model for the three months ended March 31,
2019 and 2018:
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Risk-free interest rates
|
|
|
-
|
%
|
|
|
2.41
|
%
|
Expected life
|
|
|
-
|
|
|
|
1.5 years
|
|
Expected dividends
|
|
|
-
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
-
|
%
|
|
|
107
|
%
|
Vycor Common Stock fair value
|
|
$
|
-
|
|
|
$
|
0.49
|
|
8
.
|
COMMITMENTS
AND CONTINGENCIES
|
Lease
The
Company leases office space located at 951 Broken Sound Parkway, Suite 320, Boca Raton, FL 33487 from WPT Land 2 L.P., for a gross
rent of approximately $5,700 plus sales tax per month. The lease terminates September 30, 2020. The Company’s subsidiary
in Germany occupies premises on a short-term lease agreement. Rent expense for the three months ended March 31, 2019 and 2018
was $24,706 and $25,168 respectively.
Potential
German tax liability
In
June 2012 the Company’s German subsidiary received a preliminary assessment for Magdeburg City trade tax of approximately
€75,000 (approximately $85,000). This assessment is for the 2010 fiscal year and relates to the Company’s acquisition
of the assets of the former NovaVision, Inc. An initial assessment for corporate tax for the same period has been preliminarily
reduced to zero. The Company has not accepted this trade tax assessment and is in discussion with the relevant tax authorities
with a view to its reduction. The tax authorities have agreed to suspend the assessment pending the outcome of certain court hearings,
and the Company has agreed to make limited monthly payments on account which were completed in October 2016. Accordingly, the
Company has made no provision for this liability in the three months ended March 31, 2019 and the year ended December 31, 2018
respectively.
9
.
|
CONSULTING
AND OTHER AGREEMENTS
|
The
following agreements were entered into or remained in force during the period ended March 31, 2019:
Consulting
Agreement with Fountainhead
In
March 2017 and effective April 1, 2017, the Company amended the Fountainhead Consulting Agreement (“the Amended Agreement”).
Under the Amended Agreement, fees of $450,000 are payable to Fountainhead, with an option to receive $5,000 per month in cash
and the remainder payable in Company Common Stock issued at the higher of $0.21 and the average price for the 30 days prior to
issuance, and deliverable at the end of each fiscal quarter. The Consulting Agreement also contains provisions for Fountainhead
to receive a higher proportion of its fees in cash subject to certain future liquidity events and Board approval.
During
the three months ended March 31, 2019, under the terms of the Amended Agreement, Fountainhead received total fees of $112,500,
which were paid through the issuance of 535,714 shares of Company Common Stock.
10
.
|
RELATED
PARTY TRANSACTIONS
|
Peter
Zachariou and David Cantor, directors of the Company, are investment managers of Fountainhead which owned, at March 31, 2019,
54% of the Company’s Common Stock and 70% of the Company’s Preferred D Stock. Adrian Liddell, Chairman, is a consultant
for Fountainhead.
During
the three months ended March 31, 2019, under the terms of the Consulting Agreement referred to in note 8, the Company issued 535,714
shares of Common Stock to Fountainhead for fees of $112,500.
During the three months ended March 31, 2019
and 2018, the Company accrued an aggregate of $162,185 of Preferred D Stock dividends, of which an aggregate of $154,712
Preferred D Stock dividends were in respect of related parties for both periods.
During the three
months ended March 31, 2019 and 2018 the Company issued unsecured loan notes to Fountainhead for a total of $17,873 and
$30,000, respectively. The loan notes bear interest at a rate of 10% and are due on demand or by their one-year anniversary.
During the three months ended March 31,
2018, under the terms of the Consulting Agreement referred to in note 8, the Company issued 250,000 shares of Common Stock to
Fountainhead for fees of $92,500 accrued at December 31, 2017 and accrued fees of $112,500, which were paid after the period end
through the issuance of 234,375 shares of Company Common Stock.
Vycor
Medical sells its neurosurgical devices in the US primarily direct to hospitals, and internationally through distributors who
in turn sell to hospitals. For the three months ended March 31, 2019 sales to no customer represented over 10% of total sales
and for the three months ended March 31, 2018 sales to one customer represented 14% of total sales.
The
Company has evaluated the existence of events and transactions subsequent to the balance sheet date through the date the consolidated
financial statements were issued and has determined that there were no significant subsequent events or transactions which would
require recognition or disclosure in the financial statements.