UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2018

 

or

 

☐  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to _________

 

Commission file number 000-53298

 

MYOS RENS TECHNOLOGY INC.

(Exact name of registrant as specified in its charter)

 

Nevada   90-0772394

(State or other jurisdiction of

incorporation or organization)

  (I.R.S. Employer
Identification No.)
 
45 Horsehill Road, Suite 106
Cedar Knolls, New Jersey 07927
(Address of principal executive offices, including zip code)

 

(973) 509-0444

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the Registrant (1) has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
    Emerging growth company

 

If an emerging growth company indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒

 

As of May 9, 2018, the registrant had 7,473,723 shares of common stock outstanding. 

 

 

 

 

 

 

MYOS RENS TECHNOLOGY INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2018

INDEX

 

    PAGE
PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements: 1
     
  Condensed Consolidated Balance Sheets as of March 31, 2018 (unaudited) and  December 31, 2017 1
     
  Condensed Consolidated Statements of Operations (unaudited)  for the Three Months Ended March 31, 2018 and 2017 2
     
  Condensed Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2018 and 2017 3
     
  Notes to Condensed Consolidated Financial Statements 4
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 21
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 30
     
Item 4. Controls and Procedures 30
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 31
     
Item 1A. Risk Factors 31
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31
     
Item 3. Defaults Upon Senior Securities 32
     
Item 4. Mine Safety Disclosures 32
     
Item 5. Other Information 32
     
Item 6. Exhibits 32
     
Signatures   33

 

 

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

MYOS RENS TECHNOLOGY INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

 

   March 31,   December 31, 
   2018   2017 
   (Unaudited)     
ASSETS        
Current assets:        
Cash  $230   $923 
Accounts receivable, net   1    4 
Inventories, net   1,782    1,779 
Prepaid expenses and other current assets   161    163 
Total current assets   2,174    2,869 
Deferred offering costs   96    102 
Fixed assets, net   173    184 
Intangible assets, net   1,568    1,640 
Total assets  $4,011   $4,795 
           
LIABILITIES AND STOCKHOLDERS EQUITY          
Current liabilities:          
Accounts payable  $184   $176 
Accrued expenses and other current liabilities   263    255 
Total current liabilities   447    431 
           
Total liabilities   447    431 
           
Commitments and contingencies   -    - 
           
Stockholders' equity:          
Preferred stock, $.001 par value; 500,000 shares authorized; no shares issued and outstanding   -    - 
Common stock, $.001 par value; 12,000,000 shares authorized at March 31, 2018 and at December 31, 2017; 6,536,046 and 6,340,604 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively   7    6 
Additional paid-in capital   36,614    36,202 
Accumulated deficit   (33,057)   (31,844)
Total stockholders' equity   3,564    4,364 
           
Total liabilities and stockholders' equity  $4,011   $4,795 

 

See accompanying notes to condensed consolidated financial statements

 

1

 

 

MYOS RENS TECHNOLOGY INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; in thousands, except share and per share amounts)

 

   Three Months Ended 
   March 31, 
   2018   2017 
         
Net revenues  $57   $150 
Cost of sales   31    135 
Gross profit   26    15 
           
Selling, marketing and research   394    300 
Personnel and benefits   417    333 
General and administrative   427    504 
Total operating expenses   1,238    1,137 
Operating loss   (1,212)   (1,122)
Other (expense) income, net   (1)   5 
Net loss  $(1,213)  $(1,117)
           
Net loss per share attributable to common shareholders:          
Basic and diluted  $(0.19)  $(0.20)
           
Weighted average number of common shares outstanding:          
Basic and diluted   6,504,590    5,627,705 

  

See accompanying notes to condensed consolidated financial statements

 

2

 

 

MYOS RENS TECHNOLOGY INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)

 

   Three Months Ended 
   March 31, 
   2018   2017 
Cash Flows From Operating Activities:        
Net loss  $(1,213)  $(1,117)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation   11    13 
Amortization   72    53 
Stock-based compensation   123    41 
Changes in operating assets and liabilities:          
Decrease (increase) in accounts receivable   3    (57)
Increase in inventories   (3)   (3)
Decrease (increase) in prepaid expenses   2    (181)
Decrease in deferred revenue   -    (56)
Increase (decrease) in accounts payable and accrued expenses   16    (121)
Net cash used in operating activities   (989)   (1,428)
           
Cash Flows From Financing Activities:          
Deferred offering costs from at the market transaction   -    (125)
Proceeds from registered direct offering of common stock   296    1,926 
Net cash provided by financing activities   296    1,801 
           
Net (decrease) increase in cash   (693)   373 
Cash at beginning of period   923    1,866 
Cash at end of period  $230   $2,239 
           
Supplemental schedule of non-cash investing and financing activities:        
Recognition of deferred offering costs   6    - 

 

See accompanying notes to condensed consolidated financial statements

 

3

 

 

MYOS RENS TECHNOLOGY INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

(Unaudited; amounts in thousands, except share and per share amounts, unless otherwise indicated)

 

NOTE 1 – NATURE OF OPERATIONS, BASIS OF PRESENTATION AND LIQUIDITY

 

Basis of Presentation

 

The accompanying condensed consolidated balance sheet as of December 31, 2017, which has been derived from audited consolidated financial statements, and the unaudited interim condensed consolidated financial statements as of March 31, 2018 have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and disclosures required by U.S. GAAP for complete consolidated financial statements have been condensed or omitted herein. The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 27, 2018. The unaudited interim condensed consolidated financial statements presented herein reflect all normal adjustments that are, in the opinion of management, necessary for a fair presentation of the statement of the financial position, results of operations and cash flows for the periods presented. The Company is responsible for the unaudited interim condensed consolidated financial statements included in this report. The results of any interim period are not necessarily indicative of the results for the full year.

 

Nature of Operations

 

MYOS RENS Technology Inc. is an emerging bionutrition and biotherapeutics company focused on the discovery, development and commercialization of products that improve muscle health and function. The Company was incorporated under the laws of the State of Nevada on April 11, 2007. On March 17, 2016, the Company merged with its wholly-owned subsidiary and changed its name from MYOS Corporation to MYOS RENS Technology Inc. As used in these financial statements, the terms “the Company”, “MYOS”, “our”, or “we”, refers to MYOS RENS Technology Inc. and its subsidiary, unless the context indicates otherwise.

 

We continue to pursue additional distribution and branded sales opportunities. We expect to continue developing our own core branded products in markets such as functional foods, sports and fitness nutrition and rehab and restorative health and to pursue international sales opportunities. There can be no assurance that we will be able to secure distribution arrangements on terms acceptable to the Company, or that we will be able to generate significant sales of our current and future branded products.

 

4

 

 

MYOS RENS TECHNOLOGY INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

(Unaudited; amounts in thousands, except share and per share amounts, unless otherwise indicated)

 

Strategic Investment Transaction

 

On December 17, 2015, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with RENS Technology Inc. (the “Purchaser”), pursuant to which the Purchaser agreed to invest $20.25 million in the Company in three tranches (the “Financing”) in exchange for an aggregate of 3,537,037 shares (the “Shares”) of the Company’s common stock, par value $0.001 per share (“Common Stock”).

 

In the first tranche which closed on March 3, 2016 the Purchaser acquired 1,500,000 Shares and a warrant to purchase 375,000 shares of Common Stock (the “Initial Warrant”) for $5.25 million.

 

On August 19, 2016, the Purchaser notified the Company that it did not intend to fulfill its obligation to fund the second tranche of the Financing, notwithstanding its confirmation to the Company in June 2016 that the Purchaser would provide such funding in accordance with the terms of the Purchase Agreement.

 

On January 6, 2017, in connection with the financing contemplated by the Purchase Agreement, the Company commenced an action in the Supreme Court of New York, County of New York (the “Court”), against RENS Agriculture, the parent company of the Purchaser, and Ren Ren, a principal in both entities and one of our directors, arising from the Purchaser’s breach of the aforementioned agreement. See NOTE 13-LEGAL PROCEEDINGS.

 

5

 

 

MYOS RENS TECHNOLOGY INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

(Unaudited; amounts in thousands, except share and per share amounts, unless otherwise indicated)

 

Going Concern and Liquidity

 

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. GAAP, which contemplates the continuation of the Company as a going concern. The Company has suffered recurring losses from operations and incurred a net loss of approximately $1,213 for the three months ended March 31, 2018 and $4,058 for the year ended December 31, 2017.

 

As of March 31, 2018 the Company had cash of $230 and working capital of $1,727 (current assets of $2,174 less current liabilities of $447). For the three months ended March 31, 2018 and 2017 our net loss was $1,213 and $1,117, respectively. For the three months ended March 31, 2018 and 2017 net cash used in operating activities was $989 and $1,428 respectively.

 

As of the filing date of this Form 10-Q, management believes that there may not be sufficient capital resources from operations and existing financing arrangements in order to meet operating expenses and working capital requirements for the next twelve months, primarily due to the failure of RENS Technology Inc. to fund the required amounts. (See Note 13 – Legal Proceedings) These circumstances raise substantial doubt about the Company’s ability to continue as a going concern.

 

Accordingly, the Company is evaluating various alternatives, including reducing operating expenses, securing additional financing through debt or equity securities to fund future business activities and other strategic alternatives. There can be no assurance that the Company will be able to generate the level of operating revenues in its business plan, or if additional sources of financing will be available on acceptable terms, if at all. If no additional sources of financing are available, our future operating prospects may be adversely affected. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

 

At-the-Market Offering

 

On February 21, 2017, the Company entered into a sales agreement with H.C. Wainwright & Co., LLC (“H.C. Wainwright”) which established an at-the-market equity program pursuant to which the Company may offer and sell up to $6.0 million of its shares of common stock from time to time through H.C. Wainwright. The Company incurred $125 of deferred offering costs in connection with this program which it has recorded as a long term other asset on the accompanying balance sheet. Since the Company has continued to sell securities in connection with this program, management has concluded that the program is ongoing and any remaining deferred offering costs is reflected as a reduction in equity, as the Company incurs sales of its stock pursuant to this program. Management continues to evaluate the ongoing progress of this program and its related outstanding deferred offering costs.

 

On January 19, 2018, the Company sold 140,295 shares of common stock for $2.111 per share for gross proceeds of $296 in an at-the-market offering.

 

Subsequent to quarter end, in April 2018, the Company sold an aggregate of 131,225 shares of common stock at various prices for aggregate gross proceeds of $176 under the Company’s existing at-the-market program.

 

As of the filing date of this Form 10-Q, a total of 771,520 shares have been sold under this program for aggregate gross proceeds of $1,544 under the Company’s existing at-the-market program.

 

6

 

 

MYOS RENS TECHNOLOGY INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

(Unaudited; amounts in thousands, except share and per share amounts, unless otherwise indicated)

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of MYOS RENS Technology Inc. and its wholly-owned subsidiary, Atlas Acquisition Corp. All material intercompany balances and transactions have been eliminated in consolidation.

 

Reclassification of Prior Period Presentation

 

Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications did not have a material impact on the reported results of operations.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, equity and the disclosures of contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues and expenses during the reporting period. Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future non-conforming events. Accordingly, the actual results could differ significantly from estimates. Significant items subject to such estimates include but are not limited to the valuation of stock-based awards, measurement of allowances for doubtful accounts and inventory reserves, the amount of deferred offering costs recognized, the selection of asset useful lives, fair value estimations used to test long-lived assets, including intangibles, impairments and provisions necessary for assets and liabilities. 

 

The Company has historically recorded minimal sales to its distributors during the past fifteen consecutive quarters, and launched its QURR portfolio of branded products in March 2017. Management’s estimates, including evaluation of impairment of long-lived assets and inventory reserves are based in part on forecasted future results. A variety of factors could cause actual results to differ from forecasted results and these differences could have a significant effect on asset carrying amounts.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments purchased with a maturity of three months or less and money market accounts to be cash equivalents. At March 31, 2018 and December 31, 2017 the Company had no cash equivalents.

 

As part of our ongoing liquidity assessments, management evaluates our cash and cash equivalents. The Company maintains its bank accounts with high credit quality financial institutions and has never experienced any losses related to these bank accounts. The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its financial institutions. The amount of funds held in these accounts can fluctuate due to the timing of receipts and payments in the ordinary course of business and due to other reasons, such as business-development activities so the Company may at times have exposure to cash in excess of FDIC insured limits.

 

7

 

MYOS RENS TECHNOLOGY INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

(Unaudited; amounts in thousands, except share and per share amounts, unless otherwise indicated)

 

Inventories, net

 

Inventories are valued at the lower of cost or net realizable value, with cost determined on a first in, first-out basis. Each quarter the Company evaluates the need for a change in the inventory reserve based on projected future sales and expiration dates of products.

 

Deferred Offering Costs

 

The Company defers as other assets the direct incremental costs of raising capital until such time as the offering is completed. At the time of the completion of the offering, the costs are charged against the capital raised. Should the offering not be completed, deferred offering costs are charged to operations during the period in accordance with SEC guidance. Deferred offering costs as of March 31, 2018 were $96 relating to legal and accounting fees for the at the market transaction.

 

Impairment of Long-lived Assets

 

We perform impairment testing of fixed assets and intangible assets subject to amortization by comparing the carrying amount of the asset to the forecasted undiscounted future cash flows whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. In the event the carrying value of the asset exceeds the undiscounted future cash flows, the carrying value is considered not recoverable and an impairment exists. An impairment loss is measured as the excess of the asset’s carrying value over its fair value, calculated using a discounted future cash flow method. The computed impairment loss is recognized in the period that the impairment occurs. Assets which are not impaired may require an adjustment to the remaining useful lives for which to amortize the asset. Impairment testing requires the development of significant estimates and assumptions involving the determination of estimated net cash flows, selection of the appropriate discount rate to measure the risk inherent in future cash flow streams, assessment of an asset’s life cycle, competitive trends impacting the asset as well as other factors. Changes in these underlying assumptions could significantly impact the asset’s estimated fair value. No impairment charges were recorded during the three month periods ended March 31, 2018 and 2017.

 

Fixed Assets

 

Fixed assets are stated at cost and depreciated to their estimated residual value over their estimated useful lives of 3 to 7 years. Leasehold improvements are amortized over the lesser of the asset's useful life or the contractual remaining lease term including expected renewals. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation are reversed from the accounts and the resulting gains or losses are included in the Consolidated Statements of Operations.

 

Depreciation is provided using the straight-line method for all fixed assets. 

 

Intangible Assets

 

The Company’s intangible assets consist primarily of intellectual property pertaining to Fortetropin, including its formula, trademarks, trade secrets, patent application and domain names, which were determined to have a fair value of $2,000 as of December 31, 2011. Based on expansion into new markets and introduction of new formulas, management determined that the intellectual property had a finite useful life of ten (10) years and began amortizing the asset over its estimated useful life beginning April 2014.

 

In July 2014, the Company acquired the United States patent application for the manufacture of Fortetropin from Deutsches Institut fur Lebensmitteltechnik e.V. - the German Institute for Food Technologies (“DIL”). The cost of the patent application, which was capitalized as an intangible asset, was determined to be $101, based on the present value of the minimum guaranteed royalty payable to DIL using a discount rate of 10%. The intangible asset is being amortized over an estimated useful life of ten (10) years. The remaining contingent royalty payments will be recorded as the contingency is resolved and the royalty becomes payable under the arrangement. For additional information on the amended supply agreement with DIL refer to “NOTE 11 – COMMITMENTS AND CONTINGENCIES - Supply Agreement.”

 

Intangible assets also includes patent costs associated with applying for a patent and being issued a patent. Costs to defend a patent and costs to invalidate a competitor’s patent or patent application are expensed as incurred. Upon issuance of the patent, capitalized patent costs are reclassified from intangibles with indefinite lives to intangibles with finite lives and amortized on a straight-line basis over the shorter of the estimated economic life or the initial term of the patent, generally 20 years.

 

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MYOS RENS TECHNOLOGY INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

(Unaudited; amounts in thousands, except share and per share amounts, unless otherwise indicated)

 

There were no impairment charges for the three months ended March 31, 2018 and the year ended December 31, 2017.

 

Intangible assets at March 31, 2018 and December 31, 2017 consisted of the following:

 

   March 31,   December 31, 
   2018   2017 
Intangibles with finite lives:        
Intellectual property  $2,101   $2,101 
Website - qurr.com   380    380 
Less: accumulated amortization – intellectual property   (837)   (784)
Less: accumulated amortization - website   (76)   (57)
Total intangible assets, net  $1,568   $1,640 

 

Assuming no additions, disposals or adjustments are made to the carrying values and/or useful lives of the intangible assets, annual amortization expense for intangible assets is estimated to be $216 for the remaining nine months in 2018 and approximately $286 in each of the next four years.

 

Revenue

 

Effective January 1, 2018, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), as amended, using the modified retrospective method. ASU 2014-09, which is codified in the FASB Accounting Standards Codification as Topic 606, Revenue from Contracts with Customers, supersedes nearly all previous revenue recognition guidance under U.S. GAAP and requires revenue to be recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract.

 

The adoption of ASU 2014-09 did not have impact the Company’s timing or amounts of revenue recognition. As such, the Company recorded no transition adjustment as of January 1, 2018. However, the additional required qualitative and quantitative disclosures to Topic 606 are provided below.

 

Revenue Recognition

 

Net revenues include products and shipping and handling charges, net of estimates for incentives and other sales allowances or discounts. Our product sales generally do not provide for rights of return. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products. All revenue is recognized when we satisfy our performance obligations under the contract. We recognize revenue by transferring the promised products to the customer, with revenue recognized at the point in time the customer obtains control of the products. We consider charges associated with shipping and handling activities as costs to fulfill our performance obligations. Using probability assessments, we estimate sales incentives expected to be paid over the term of the contract. The majority of our contracts have a single performance obligation and are short term in nature. Sales taxes that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales.

 

Accounts Receivable

 

Credit is extended based upon an evaluation of the customer’s financial condition. Accounts receivable are stated at their estimated net realizable value. Any allowance for doubtful accounts is based on an analysis of customer accounts and historical experience.

 

Contract Liabilities

 

Contract liabilities, may include deferred revenue related customer payments made in advance of the customer obtaining control of the product or liabilities associated with sales incentives. At March 31, 2018 and December 31, 2017, the Company had no contract liability balances.

 

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MYOS RENS TECHNOLOGY INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

(Unaudited; amounts in thousands, except share and per share amounts, unless otherwise indicated)

 

Disaggregation of Revenue

 

Our product sales by product type are presented below for the three months ended March 31, 2018 and 2017.

 

   Three-month Period 
Product Type  March 31, 2018   March 31, 2017 
Egg Yolk Powder  $#   $116 
QURR   57    * 
Rē Muscle Health   #    34 
Total  $57   $150 

 

* Qurr product launched in April 2017

 

 # Egg Yolk Powder and Re product no longer available after May 2017

 

Advertising

 

The Company charges the costs of advertising to selling, marketing and research expenses as incurred. Advertising and promotional costs were $150 and $32 for the three months ended March 31, 2018 and 2017, respectively.

 

Research and Development

 

Research and development expenses consist primarily of salaries, benefits, and other related costs, including stock-based compensation, for personnel serving in our research and development functions, and other internal operating expenses, the cost of manufacturing our product for clinical study, the cost of conducting clinical studies and the cost of conducting preclinical and research activities. Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities are initially capitalized and are then recognized as an expense as the related goods are consumed or the services are performed. Research and development costs were $186 for the three months ended March 31, 2018. There was no research and development expense for the three months ended March 31, 2017.

 

Shipping and Handling Costs

 

The Company records costs for shipping and handling of products to our customers in cost of sales. These expenses were $5 and $5 for the three months ended March 31, 2018 and 2017.

 

Stock-based Compensation

 

Stock-based payments are measured at their estimated fair value on the date of grant. Stock-based awards to non-employees are re-measured at fair value each financial reporting date until performance is completed. Stock-based compensation expense recognized during a period is based on the estimated number of awards that are ultimately expected to vest. For stock options and restricted stock that do not vest immediately but which contain only a service vesting feature, we recognize compensation cost on the unvested shares and options on a straight-line basis over the remaining vesting period.

 

The Company uses the Black-Scholes option-pricing model to estimate the fair value of options and the market price of our common stock on the date of grant for the fair value of restricted stock issued. Our determination of fair value of stock-based awards is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, and certain other market variables such as the risk-free interest rate.

  

Segment Information

 

ASC 280, Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information about operating segments and requires selected information for those segments to be presented in the financial statements. It also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance. Management has determined that the Company operates in one segment.

 

Fair Value Measurement

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby observable and unobservable inputs, used in valuation techniques, are assigned a hierarchical level.

 

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MYOS RENS TECHNOLOGY INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

(Unaudited; amounts in thousands, except share and per share amounts, unless otherwise indicated)

 

The following are the hierarchy levels of inputs to measure fair value:

 

  Level 1: Inputs that utilize quoted prices (unadjusted) in active markets for identical assets or liabilities.
  Level 2: Inputs that utilize observable quoted prices for similar assets and liabilities in active markets and observable quoted prices for identical or similar assets in markets that are not very active.
  Level 3: Inputs that utilize unobservable inputs and include valuations of assets or liabilities for which there is little, if any, market activity.

 

A financial asset or liability’s classification within the above hierarchy is determined based on the lowest level input that is significant to the fair value measurement. At March 31, 2018 and December 31, 2017 the Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses. Due to their short-term nature, the carrying amounts of the Company’s financial instruments approximated their fair values.

 

Basic and Diluted Loss Per Share   

 

Basic net loss per share is computed by dividing net loss available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing net loss for the period by the weighted average number of common shares outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if potential dilutive securities outstanding had been issued. The Company uses the “treasury stock” method to determine the dilutive effect of common stock equivalents such as options, warrants and restricted stock. For the three months ended March 31, 2018 and 2017, the Company incurred a net loss. Accordingly, the potential dilutive securities were excluded from the calculation of diluted loss per share of common stock because their inclusion would have been antidilutive. As a result, diluted loss per common share is the same as basic loss per common share for all periods presented.

 

The aggregate number of potentially dilutive common stock equivalents outstanding at March 31, 2018 excluded from the diluted net loss per share computation because their inclusion would be anti-dilutive were 1,439,942, which includes warrants to purchase an aggregate of 821,202 shares of common stock and options to purchase an aggregate of 618,740 shares of common stock. 

 

The aggregate number of potentially dilutive common stock equivalents outstanding at March 31, 2017 excluded from the diluted net loss per share computation because their inclusion would be anti-dilutive were 1,142,682, which includes warrants to purchase an aggregate of 821,202 shares of common stock, options to purchase an aggregate of 300,340 shares of common stock, and unvested restricted stock awards of 21,140 shares of common stock. 

 

Income Taxes

 

Income taxes are accounted for under the asset and liability method in accordance with ASC 740, Accounting for Income Taxes (“ASC 740”). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial carrying amounts of existing assets and liabilities and their respective tax bases as well as operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the periods in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance to the extent that the recoverability of the asset is unlikely to be recognized. The Company follows ASC 740 rules governing uncertain tax positions, which provides guidance for recognition and measurement. This prescribes a threshold condition that a tax position must meet for any of the benefits of the uncertain tax position to be recognized in the financial statements. It also provides accounting guidance on recognition, classification and disclosure of these uncertain tax positions. The Company has no uncertain income tax positions.

 

The Tax Cut and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. The Tax Act contains several key provisions including, among other things, reducing the U.S. federal corporate tax rate from thirty-five percent to twenty-one percent. Since the Company has a net deferred tax asset which has been fully reserved with a valuation allowance, the change in the enacted rate did not have an impact on the Company’s net deferred tax assets. Changes in tax law are accounted for in the period of enactment. In addition, Federal net operating losses (“NOL”) generated during future periods will be carried forward indefinitely, but will be subject to an eighty percent utilization against taxable income. The carryback provision has been revoked for NOL after January 1, 2018. 

 

Interest costs and penalties related to income taxes are classified as interest expense and operating expenses, respectively, in the Company's financial statements. For the three months ended March 31, 2018 and 2017, the Company did not recognize any interest or penalty expense related to income taxes. The Company files income tax returns in the U.S. federal jurisdiction and states in which it does business.

 

11

 

 

 

MYOS RENS TECHNOLOGY INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

(Unaudited; amounts in thousands, except share and per share amounts, unless otherwise indicated)

 

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS

 

In March 2018, the FASB issued a new accounting standard to incorporate Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 118 (“SAB 118”), which addresses the accounting implications of the major tax reform legislation, the Tax Act, enacted on December 22, 2017. SAB 118 allows a company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date and was effective upon issuance. We continue to analyze the Tax Act, and in certain areas, have made reasonable estimates of the effects on our condensed consolidated financial statements and tax disclosures. See Note 5, Income taxes, in the accompanying condensed financial statements.

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718). The amendments in this Update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This update is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. The adoption of ASU 2017-09, effective January 1, 2018, did not have a significant impact on its consolidated financial statements. 

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by leases with lease terms of more than 12 months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will continue to primarily depend on its classification as a finance or operating lease. However, unlike U.S. GAAP, which requires only capital leases to be recognized on the balance sheet, ASU 2016-02 will require both types of leases to be recognized on the balance sheet. ASU 2016-02 also requires disclosures about the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. ASU 2016-02 is effective beginning January 1, 2019, with early application permitted. We have evaluated the adoption of ASU 2016-12 and determined that the standard will not have a significant impact on the Company’s consolidated financial statements.

 

NOTE 4 – INVENTORIES, NET

 

Inventories, net at March 31, 2018 and December 31, 2017 consisted of the following:

 

   March 31,
2018
   December 31,
2017
 
Raw materials  $1,871   $2,223 
Work in process   61    64 
Finished goods   208    203 
    2,140    2,490 
Less: inventory reserves   (358)   (711)
Inventories, net  $1,782   $1,779 

 

12

 

 

MYOS RENS TECHNOLOGY INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

(Unaudited; amounts in thousands, except share and per share amounts, unless otherwise indicated)

 

NOTE 5 – FIXED ASSETS

 

Fixed assets at March 31, 2018 and December 31, 2017 consisted of the following:

 

   March 31,
2018
   December 31,
2017
 
Furniture, fixtures and equipment  $116   $116 
Computers and software   68    68 
Leasehold improvements   239    239 
 Other   7    7 
Total fixed assets   430    430 
Less: accumulated depreciation   (257)   (246)
Net book value of fixed assets  $173   $184 

 

Depreciation expense was $11 and $13 for the three months ended March 31, 2018 and 2017, respectively. Repairs and maintenance costs are expensed as incurred.

 

NOTE 6 – PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets consist of various payments that the Company has made in advance for goods or services to be received in the future. Prepaid expenses and other current assets at March 31, 2018 and December 31, 2017 consisted of the following:

 

   March 31,
2018
   December 31,
2017
 
Prepaid insurance  $52   $88 
Prepaid consulting   -    10 
Other   109    65 
Total prepaid expenses and other current assets  $161   $163 

 

13

 

 

MYOS RENS TECHNOLOGY INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

(Unaudited; amounts in thousands, except share and per share amounts, unless otherwise indicated)

 

NOTE 7 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

Accrued expenses and other current liabilities consist of estimated future payments that relate to the current and prior accounting periods. Management reviews these estimates regularly to determine their reasonableness. Accrued expenses and other current liabilities at March 31, 2018 and December 31, 2017 consisted of the following:

 

   March 31,
2018
   December 31,
2017
 
Audit fees  $73   $82 
Legal fees   18    71 
Deferred rent   15    19 
Payroll   17    17 
Insurance financing   38    66 
Research   102    - 
Total accrued expenses  $263   $255 

 

   

Note 8 – Stockholders’ Equity

 

Changes in stockholders’ equity for the three months ended March 31, 2018 were as follows:

 

           Additional       Total 
   Common Stock   paid-in   Accumulated   stockholders’ 
   Shares   Amount   capital   deficit   equity 
Balance at December 31, 2017   6,340,604   $6   $36,202   $(31,844)  $4,364 
Net proceeds from sale of common stock   140,295    1    289    -    290 
Stock-based compensation expense   55,147    -    123    -    123 
Net loss   -    -    -    (1,213)   (1,213)
Balance at March 31, 2018   6,536,046   $7   $36,614   $(33,057)  $3,564 

 

Preferred Stock Purchase Rights

 

Effective February 14, 2017, the Board of Directors declared a dividend of one Right for each of the Company’s issued and outstanding shares of common stock. The Rights were granted to the stockholders of record at the close of business on February 24, 2017. Each Right entitles the registered holder, upon the occurrence of certain events specified in the Rights Agreement, to purchase from the Company one one-thousandth of a share of the Company’s Series A Preferred Stock at a price of $7.00, subject to certain adjustments.

 

The Rights are not exercisable until the occurrence of certain events, including a person acquiring or obtaining the right to acquire beneficial ownership of 10% or more of the Company’s outstanding common stock. The Rights are evidenced by certificates for the common stock and automatically transfer with the common stock unless they become exercisable. If the Rights become exercisable, separate certificates evidencing the Rights will be distributed to each holder of common stock. Holders of the preferred stock will be entitled to certain dividend, liquidation and voting rights. The rights are redeemable by us at a fixed price as determined by the Board, after certain defined events.

 

As of March 31, 2018 the Rights have no dilutive effect on the earnings per common share calculation and no shares of preferred stock have been issued. The Company has determined that these rights have a de minimis fair value. The description and terms of the Rights are set forth in the Rights Agreement dated as of February 14, 2017 between the Company and Island Stock Transfer, as Rights Agent.

 

14

 

 

MYOS RENS TECHNOLOGY INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

(Unaudited; amounts in thousands, except share and per share amounts, unless otherwise indicated)

 

Issuance of Common Stock

 

The Company has periodically issued common stock in connection with certain private and public offerings. For the three months ended March 31, 2018 and March 31, 2017 the Company has received aggregate gross proceeds of $296 and $2,125 from these offerings:

 

       Gross 
Date  Shares   Proceeds 
January 19, 2018   140,295(1)  $296 
February 8, 2017   500,000(2)   2,125 

 

(1) Shares of common stock sold for $2.111 per share in an at-the-market offering.
(2) Shares  issued pursuant to a registered direct offering with an institutional investor.

 

Note 9 – Warrants

   

The following table summarizes information about outstanding and exercisable warrants at March 31, 2018:

 

              Shares                  
        Number of     Underlying     Shares            
        Shares     Warrants     Underlying            
        Underlying     Exchanged,     Warrants            
        Warrants     Exercised     Outstanding           Expiration
        Originally     or     and     Exercise     Term
Description   Grant Date   Granted     Expired     Exercisable     Price     in years
Series B(1)   January 27, 2014     157,846       -       157,846     $ 45.00     2.07
Series C(2)   November 19, 2014     145,399       (142,957 )     2,442     $ 12.00     3.38
Repricing Series C(2)   November 19, 2014              142,957       142,957     $ 9.00     3.38
Repricing Series E(2)   November 19, 2014              142,957       142,957     $ 9.00     5.38
Rens(3)   March 3, 2016     375,000       -       375,000     $ 7.00     2.31
          678,245       142,957       821,202              

  

(1) Issued in connection with the January 27, 2014 private placement transaction.
(2) Issued in connection with the November 19, 2014 registered-direct public offering, and subsequently revised pursuant to Warrant Exercise Agreements entered into on May 18, 2015.
(3) Shares issued pursuant to the closing of the first tranche of the financing with RENS Technology Inc.

 

15

 

 

MYOS RENS TECHNOLOGY INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

(Unaudited; amounts in thousands, except share and per share amounts, unless otherwise indicated)

 

The following table summarizes the activities in warrants for the three months ended March 31, 2018:

 

   Shares Underlying Warrants   Average
Exercise
Price
 
Balance at December 31, 2017   821,202   $15.02 
Warrants expired   -      
Balance at March 31, 2018   821,202   $15.02 

 

NOTE 10 – STOCK COMPENSATION

 

Equity Incentive Plan

 

In November 2016, the Company increased the number of shares available for issuance under its 2012 Equity Incentive Plan (as amended, the “Plan”) from 550,000 to 850,000, which was approved by the Company’s shareholders in December 2016. The Plan provides for grants of stock options, stock appreciation rights, restricted stock, other stock-based awards and other cash-based awards. As of March 31, 2018, the remaining shares of common stock available for future issuances of awards was 231,260. The Company granted an aggregate of 30,000 options to purchase restricted common stock to certain directors prior to the adoption of the Plan. Stock options generally vest and become exercisable with respect to 100% of the common stock subject to such stock option on the third (3rd) anniversary of the date of grant. Any unvested portion of a stock option shall expire upon termination of employment or service of the participant granted the stock option, and the vested portion shall remain exercisable in accordance with the provisions of the Plan.

 

16

 

  

MYOS RENS TECHNOLOGY INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

(Unaudited; amounts in thousands, except share and per share amounts, unless otherwise indicated)

 

Stock Options

 

The following table summarizes stock option activity for the three months ended March 31, 2018:

 

           Weighted 
       Weighted   Average 
   Shares   Average   Remaining 
   Under   Exercise   Contractual 
   Options   Price   Term (Years) 
Balance at December 31, 2017   561,740   $7.32    5.61 
Options granted   57,000    4.00    9.75 
Balance at March 31, 2018   618,740   $6.65    7.29 

 

At March 31, 2018 and December 31, 2017, the exercisable options had no intrinsic value.

  

As of March 31, 2018, 562,321 options have vested and 56,419 options remain unvested. The vesting terms range from zero to 9.8 years and the vested options have a weighted average remaining term of 6.65 years and a weighted average exercise price of $15.87 per share.

 

Restricted Stock

 

The following table summarizes unvested restricted stock awards activity for the three months ended March 31, 2018:

 

       Weighted 
       Average 
       Grant Date 
   Shares   Share Price 
Restricted stock awards unvested at December 31, 2017   1,250   $2.74 
Granted   55,147    1.36 
Vested   (55,147)   1.36 
Restricted stock awards unvested at March 31, 2018   -      

  

17

 

 

MYOS RENS TECHNOLOGY INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

(Unaudited; amounts in thousands, except share and per share amounts, unless otherwise indicated)

 

Stock-Based Compensation:

 

Stock-based compensation was $123 and $41 for the three months ended March 31, 2018 and 2017, respectively. Stock-based compensation consists of expenses related to the issuance of stock options and restricted stock.

 

The aggregate unrecognized compensation expense of stock options and restricted stock at March 31, 2018 was $145, which will be recognized through January 2022.

 

Note 11 – Commitments and Contingencies   

 

Supply Agreement

 

On November 18, 2016, the Company entered into an Amended Supply Agreement with DIL Technologie GmbH (“DIL”). Pursuant to the agreement (and so long as the agreement is effective), DIL will manufacture and supply the Company with Fortetropin®, the active ingredient for its products, and the Company will purchase quantities of Fortetropin® from DIL in its discretion. DIL will manufacture the formula exclusively for the Company in perpetuity, and may not manufacture the formula for other entities (but may manufacture it for its own non-commercial research). The Company agreed, commencing January 2017, to pay DIL €10 (approximately $13) per month for collaborative research. The monthly payments terminate upon the earlier of: (a) the date that the Company orders additional product in accordance with the terms of the agreement and (b) December 31, 2018, and the Company has no further financial obligations to DIL thereafter. The agreement expires on December 31, 2018, and the Company has the unilateral right to renew the agreement for subsequent one-year terms. At March 31, 2018, the future minimum payments under the supply agreement was $117.

 

Operating Lease

 

The Company leases its corporate offices under an operating lease. The term of the lease is five years commencing on January 1, 2015 and expiring on December 31, 2019. We have two options to renew our lease for an additional three years each. At March 31, 2018, the future minimum lease payments under the non-cancellable operating lease in excess of one year is as follows:  

     
Years Ended December 31,  Amount 
2018 (remaining nine months)  $54 
2019   72 
Total  $126 

 

Rent expense including common area maintenance charges and taxes for the three months ended March 31, 2018 and 2017 was $19 and $21, respectively.

 

18

 

 

MYOS RENS TECHNOLOGY INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

(Unaudited; amounts in thousands, except share and per share amounts, unless otherwise indicated)

 

 

Defined Contribution Plan

 

The Company established a 401(K) Plan (the “401(K) Plan”) for eligible employees of the Company effective April 1, 2014. Generally, all employees of the Company who are at least twenty-one years of age and who have completed three months of service are eligible to participate in the 401(K) Plan. The 401(K) Plan is a defined contribution plan that provides that participants may make salary deferral contributions, of up to the statutory maximum allowed by law (subject to catch-up contributions) in the form of voluntary payroll deductions. The Company’s matching contribution is equal to 100 percent on the first four percent of a participant’s compensation which is deferred as an elective deferral. The Company’s aggregate matching contributions were $8 and $5 for the three months ended March 31, 2018 and 2017, respectively.

 

Product Liability

 

As a manufacturer of nutritional supplements that are ingested by consumers, the Company may be subject to various product liability claims. Although we have not had any claims to date, it is possible that future product liability claims could have a material adverse effect on our business or financial condition, results of operations or cash flows. The Company currently maintains product liability insurance of $5 million per-occurrence and a $10 million annual aggregate coverage. At March 31, 2018 and December 31, 2017, the Company had not recorded any accruals for product liability claims.

 

Note 12 – Related Party Transactions

 

The following is a description of the transactions we have engaged in with our directors, director nominees and officers and beneficial owners of more than five percent of our voting securities and their affiliates:

 

In October 2016, the Company received a purchase order from RENS Agriculture, an affiliate of Rens Technology Inc., and Ren Ren, one of the Company’s directors, to purchase $116 of our product. The Company received a 50% deposit in November 2016 in order to manufacture the product. The goods were shipped in January 2017 and received in China in March 2017. The Company has not received payment for the order to date. As a result of the ongoing litigation (see Note 13), the Company recorded an allowance for bad debt of $59 related to the receivable due from RENS Agriculture.

 

19

 

 

MYOS RENS TECHNOLOGY INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

(Unaudited; amounts in thousands, except share and per share amounts, unless otherwise indicated)

 

Note 13 – legal PROCEEDINGS

 

On October 27, 2016, Cutler Holdings, L.L.C. (“Cutler”) filed a complaint in the Superior Court of New Jersey alleging that the Company failed to make certain rental payments. On March 30, 2017, the Company entered into a settlement agreement with Cutler, pursuant to which Cutler released the Company from any liability for the claims asserted in the complaint.

 

On January 6, 2017, in connection with the financing contemplated by a securities purchase agreement with RENS Technology Inc. (the “Purchaser”), we commenced an action in the Supreme Court of New York, County of New York (the “Court”), against the Purchaser, RENS Agriculture, the parent company of the Purchaser, and Ren Ren, a principal in both entities and one of our directors, arising from the Purchaser’s breach of the agreement under which the Purchaser agreed to invest an aggregate of $20.25 million in our company in exchange for an aggregate of 3,537,037 shares of our common stock and warrants to purchase an aggregate of 884,259 shares of common stock.

  

On April 11, 2017, the Court noted that we had demonstrated a likelihood of success on the merits of the breach of contract claim. Thereafter, a hearing was scheduled on the application by the Purchaser to dismiss the complaint and various pre-trial discovery applications by both parties.

 

In August 2017, before the hearing occurred, the Company amended its complaint repeating most of the initial claims but adding several additional claims against RENS Agriculture, Mr. Ren and two additional Chinese defendants, including a claim against RENS Agriculture for breaching the exclusive distribution agreement, as well as claims against all defendants for theft and misappropriation of our confidential proprietary information and trade secrets, breach of fiduciary duty and duty of loyalty, misappropriation of corporate opportunity, unfair competition and a number of other torts. We are seeking damages and injunctive relief. The Purchaser has filed a motion to dismiss the amended complaint, which is still pending and scheduled for oral argument in June 2018.

 

On August 16, 2017, the Purchaser commenced an action in the District Court of Clark County in the State of Nevada against us and Joseph Mannello, our then interim Chief Executive Officer, alleging that Mr. Mannello had breached his fiduciary duties and was grossly negligent in managing our company. The action seeks monetary damages and injunctive relief from Mr. Mannello as well as the appointment of a receiver over us. Subsequently, the Purchaser submitted a petition to appoint a receiver and we and Mr. Mannello submitted a motion to dismiss the action, both of which are currently pending and are due to be heard in June 2018. An application on consent to adjourn the hearing date on the receiver application and motion to dismiss is pending.

 

The parties are currently in settlement discussions regarding the foregoing matters.

 

The outcome of the aforementioned matters cannot be determined as of the date of these financial statements.

 

Note 15 – Subsequent Events

 

At-the-Market Offering

 

In April 2018 the Company sold an aggregate of 131,225 shares of common stock for aggregate gross proceeds of $159 in an at-the-market transaction pursuant to the sales agreement with H.C. Wainwright & Co., LLC.

 

On April 27, 2018, the Company consummated a private placement of shares of Common Stock pursuant to the terms of a securities purchase agreement dated as of April 25, 2018 at a purchase price of $1.24 per share, the closing price of the Common Stock on the Nasdaq Capital Market on such date. In the private placement, the Company issued 806,452 shares of Common Stock to a group of accredited investors, including two members of the Company’s board of directors, for aggregate gross proceeds of $1.0 million. The Company intends to use the net proceeds from the Private Placement primarily for working capital, research and development, strategic initiatives and other general corporate purposes.

 

In May 2018, the Company entered into a research agreement with Weill Cornell Medical College to study the efficacy of Fortetropin® in preventing weight and muscle loss associated with cancer in a mouse model of lung cancer. Under the terms of the agreement, the Company has quarterly payments to be paid through the first quarter of 2019. It is not expected that these payments will have a material impact on the results and operations of the Company.

 

20

 

 


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our interim condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and related notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2017.

 

Certain statements in this section contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this report and not clearly historical in nature are forward-looking, and the words “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “intends,” “potential,” and similar expressions (as well as other words or expressions referencing future events, conditions or circumstances) generally are intended to identify forward-looking statements. Any statements in this report that are not historical facts are forward-looking statements. Actual results may differ materially from those projected or implied in any forward-looking statements. Such statements involve risks and uncertainties, including but not limited to those relating to product and customer demand, market acceptance of our products, the ability to create new products, the ability to achieve a sustainable profitable business, the effect of economic conditions, the ability to protect our intellectual property rights, competition from other providers and products, risks in product development, our ability to raise capital to fund continuing operations, and other factors discussed from time to time in our filings with the Securities and Exchange Commission. The Company undertakes no obligation to update or revise any forward-looking statement for events or circumstances after the date on which such statement is made except as required by law. Amounts in this section are in thousands, unless otherwise indicated.

 

Overview

 

We are an emerging bionutrition and biotherapeutics company focused on the discovery, development and commercialization of products that improve muscle health and function essential to the management of sarcopenia, cachexia and degenerative muscle diseases, and as an adjunct to the treatment of obesity. As used in this report, the “Company”, “MYOS”, “our”, or “we” refers to MYOS RENS Technology Inc. and its wholly-owned subsidiary, unless the context indicates otherwise.

 

We were incorporated under the laws of the State of Nevada on April 11, 2007. On March 17, 2016, we merged with our wholly-owned subsidiary and changed our name from MYOS Corporation to MYOS RENS Technology Inc. Prior to February 2011, we did not have any operations and did not generate revenues. In February 2011, we entered into an intellectual property purchase agreement pursuant to which our subsidiary purchased from Peak Wellness, Inc., or Peak, the intellectual property pertaining to Fortetropin®, a dietary supplement that has been shown in clinical studies to temporarily decrease the levels of serum myostatin, MYO-T12, a proprietary formulation containing Fortetropin®, certain trademarks, trade secrets, patent applications and certain domain names.

 

Since February 2011, our principal business activities have been to: (i) deepen our scientific understanding of the activity of Fortetropin®, which refers to a proprietary proteo-lipid composition derived from fertilized eggs of specific chicken species processed using a patented methodology which preserves the bioactivity of the constituent proteins and lipids, specifically as a natural, reversible, temporary reducing agent of myostatin, and to leverage this knowledge to strengthen and build our intellectual property; (ii) conduct research and development activities to evaluate myostatin modulation in a range of both wellness and disease states; (iii) identify other products and technologies which may broaden our portfolio and define a business development strategy to protect, enhance and accelerate the growth of our products; (iv) reduce the cost of manufacturing through process improvement; (v) identify contract manufacturing organizations that can fully meet our future growth requirements; (vi) develop a differentiated and advantaged consumer positioning, brand name and iconography; and, (vii) create sales and marketing capabilities to maximize near-term and future revenues.

 

We believe that existing wellness and therapeutic targets, such as myostatin, represent a rational entry point for additional drug discovery efforts and are evaluating a separate, concurrent objective in this area. We continue to pursue additional distribution and branded sales opportunities. We expect to continue developing our own core branded products in markets such as functional foods, sports and fitness nutrition and rehabilitation and restorative health and to pursue international sales opportunities. There can be no assurance that we will be able to secure distribution arrangements on terms acceptable to us, or that we will be able to generate significant sales of our current and future branded products.

 

Our executive offices are currently located at 45 Horsehill Road, Suite 106, Cedar Knolls, New Jersey 07927 and our telephone number is (973) 509-0444. Our corporate website address is http://www.myosrens.com and our new muscle health education and product website is http://www.qurr.com. Neither the information on our current or future website is, nor shall such information be deemed to be, a part of this Report or incorporated in filings we make with the Securities and Exchange Commission.

 

21

 

 

Strategy 

 

Our strategy is to understand the complex genetic and molecular pathways regulating muscle mass and function as well as other disease mechanisms. Understanding the impact of complex regulatory pathways which act to build and maintain healthy lean muscle is central to our biotherapeutic research. We are developing nutritional products that target specific mechanisms to promote muscle health in ways that cannot be met by other diets or lifestyle changes.

 

We will seek to gain market share for our core branded products in functional foods, sports and fitness nutrition and rehabilitation and restorative health verticals by (i) formulating and developing new and complementary product lines, (ii) expanding U.S. distribution by increasing the channels of sale, (iii) expanding distribution geography beyond the U.S. and (iv) seeking strategic relationships with other distributors. Our strategy is to utilize the revenue and awareness generated by the sales and marketing of Fortetropin® to further advance our research and development of therapeutic treatments for muscular disorders, including sarcopenia.

 

Marketing, Sales and Distribution

 

Our commercial focus is to leverage our clinical data to develop multiple products to target the large, but currently underserved markets focused on muscle health. The sales channels through which we sell our products are evolving. The first product we introduced was MYO-T12, which was sold in the sports nutrition market. MYO T-12 is a proprietary formula containing Fortetropin® and other ingredients. The formula was sold under the brand name MYO-T12 and later as MYO-X through an exclusive distribution agreement with Maximum Human Performance (“MHP”). The exclusive distribution agreement with MHP terminated in March 2015 and there were no subsequent sales to MHP.

 

In February 2014, we expanded our commercial operations into the age management market through a distribution agreement with Cenegenics Product and Lab Services, LLC (“Cenegenics”), under which Cenegenics distributed and promoted a proprietary formulation containing Fortetropin® through its age management centers and its community of physicians focused on treating a growing population of patients focused on proactively addressing age-related health and wellness concerns. The distribution agreement with Cenegenics expired in December 2016. As of December 31, 2016 we recognized all of the deferred revenue. In 2017, we recorded $200 of sales to Cenegenics.

 

During the second quarter of 2015 we launched Rē Muscle HealthTM, our own direct-to-consumer brand with a portfolio of muscle health bars, meal replacement shakes and daily supplement powders each powered by a full 6.6 gram single serving dose of Fortetropin®. Our Rē Muscle Health products were sold through our e-commerce website, remusclehealth.com, and amazon.com until March 2017 when we introduced our new Qurr line of products.

 

In March 2017, we launched Qurr, a Fortetropin®-powered product line formulated to support the vital role of muscle in overall well-being as well as in fitness. Qurr is a line of flavored puddings, powders, and shakes for daily use. Our Qurr line of muscle-focused over-the-counter products are available through a convenient, direct-to-consumer e-commerce platform.

 

In April 2017, the Company entered into an agreement with the College of Veterinary Medicine at Kansas State University to study the impact of Fortetropin on reducing muscle atrophy in dogs after ligament tear repair surgery. The study commenced in the second quarter of 2017, is expected to cost $32 and is expected to be completed by the third quarter of 2018.

 

In April 2018, the Company received the prestigious Certified for Sport® certification from NSF International for our new sports nutrition product line YolkedTM, an advanced nutrition product based on Fortetropin® that will be marketed specifically to competitive athletes.

 

We expect to launch our Fortetropin based pet product in the near future. Two veterinarian hospitals, which performed some informal observational studies with older dogs experiencing muscle atrophy and saw positive results after taking our pet product, are seeking to purchase our product. We believe that the positive feedback we are receiving from these two hospitals, together with the potential results from our Kansas State University study, will enable us to launch and grow our pet business product line.

 

We continue to pursue additional distribution and branded sales opportunities. There can be no assurance that we will be able to secure distribution arrangements on terms acceptable to the Company, or that we will be able to generate significant sales of our current and future branded products. We expect to continue developing our own core branded products in markets such as functional foods, sports and fitness nutrition and rehabilitation and restorative health and to pursue international sales opportunities. The growing awareness of the potential uses of myostatin reducing ingredients supports continued development of our own core products. We remain committed to continuing our focus on various clinical trials in support of enhancing our commercial strategy as well as enhancing our intellectual property assets, to develop product improvements and new products, and to reduce the cost of our products by finding more efficient manufacturing processes and contract manufacturers. 

 

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Clinical and Basic Research Programs

 

We invest in research and development activities externally through academic and industry collaborations aimed at enhancing our products, optimizing manufacturing and broadening the product portfolio. We have developed the following collaborations with various academic centers:

 

 

In May 2018, the Company entered into a research agreement with Weill Cornell Medical College to study the efficacy of Fortetropin® in preventing weight and muscle loss associated with cancer in a mouse model of lung cancer. The Company anticipates that the study will be completed and the results announced in the first quarter of 2019.

     
  In March 2018, we entered into a research agreement with Rutgers University, The State University of New Jersey, to work with Rutgers researchers in a program focused on discovering compounds and products for improving muscle health and performance.

 

  In December 2017, we entered into an agreement with the University of California, Berkeley’s Department of Nutritional Sciences & Toxicology.  The research project will study the effects of Fortetropin® on increasing the fractional rate of skeletal muscle protein synthesis in men and women between 60 and 75 years old. The Principal Investigator for this clinical study is William J. Evans, PhD, Adjunct Professor of Human Nutrition at the Department of Nutritional Sciences & Toxicology at the University of California, Berkeley campus. Professor Evans, a leading authority in muscle health research, will coordinate the activities of a multi-disciplinary team of scientists and physicians. In this randomized, double-blind, placebo-controlled clinical study, 20 subjects, men and women 60 – 75 years of age, will consume either Fortetropin® or a placebo for 21 days along with daily doses of a heavy water tracer.  After 21 days, a micro-biopsy will be collected from each subject to determine the fractional rate of muscle protein synthesis.  MYOS anticipates the clinical study will be completed and its results announced in the second half of 2018.

 

  In April 2017, we entered into an agreement with the College of Veterinary Medicine at Kansas State University to study the impact of Fortetropin® on reducing muscle atrophy in dogs after tibial-plateau-leveling osteotomy (TPLO) surgery to repair the cranial cruciate ligament (CCL). The study is expected to be completed by the end of the second quarter of 2018.

 

  In May 2015, we initiated a dose response clinical study led by Jacob Wilson, Ph.D., CSCS*D, Professor of Health Sciences and Human Performance at the University of Tampa, to examine the effects of Fortetropin® supplementation on plasma myostatin levels at various dosing levels in young adult males and females. This study is intended to help us better define the dose response curve, the minimal effective dose and effects of Fortetropin® on serum myostatin. In this double blind placebo controlled clinical study, 80 male and female subjects ranging in ages between 18 and 22 were randomized into four groups such that no significant differences in serum myostatin concentration existed between groups. Following assignment to one of the four groups, blood samples were collected to establish baseline values. Subjects were subsequently supplemented with three different doses of Fortetropin® (2.0g, 4.0g and 6.6g) and a matching placebo for one week. Following one week of supplementation, blood samples were collected and serum myostatin levels were assayed. Results demonstrated that Fortetropin® is effective as a myostatin reducing agent at daily doses of 4.0g and 6.6g. This research, which continues to build upon our current understanding of Fortetropin®, may result in the formulation of new products. An abstract of this study was presented at the 2016 International Conference on Frailty & Sarcopenia Research (Philadelphia, PA) in April 2016.

 

  In August 2014, we entered into a research agreement with Human Metabolome Technologies America, Inc., (“HMT”), to apply their proprietary, state-of-the-art capillary electrophoresis-mass spectrometry (CE-MS) technologies to characterize the metabolomic profiles of plasma samples obtained from healthy male subjects who used either Fortetropin® or placebo with the goal of identifying metabolites with pro-myogenic activity in the plasma samples of subjects who took Fortetropin® as well as examining the effect on glucose and fat metabolism. HMT used a metabolite database of over 290 lipids and over 900 metabolites to identify potential plasma biomarkers of muscle growth. The study was completed during the fourth quarter of 2014. Initial data from this study indicated that subjects who received Fortetropin® displayed differential metabolomic profiles relative to subjects who received placebo. The results of this study enhance our understanding of the mechanism of action of Fortetropin® and provides guidance for the development of biotherapeutics based on Fortetropin®. Additionally, the early indications of plasma biomarkers may guide future study design for Fortetropin® clinical trials by identifying clinically-relevant endpoints and potential stratification of patient populations. The results from this study were presented at the Sarcopenia, Cachexia and Wasting Disorders Conference (Berlin, Germany) in December 2016.

 

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  In May 2014, we entered into an agreement with the University of Tampa to study the effects of Fortetropin® supplementation in conjunction with modest resistance training in 18-21 year old males. The study was a double-blind, placebo-controlled trial which examined the effects of Fortetropin® on skeletal muscle growth, lean body mass, strength, and power in recreationally trained males. Forty-five subjects were divided into placebo, 6.6g and 19.8g dosing arms of Fortetropin® daily for a period of 12 weeks. Results demonstrated a statistically significant increase in both muscle thickness and lean body mass in subjects taking Fortetropin® but not in subjects taking placebo. The clinical study also analyzed blood myostatin and cytokines levels via high-sensitivity enzyme-linked immunosorbent assay (“ELISA”) based analysis. Serum was analyzed for a plethora of relative cytokine levels via high-sensitivity enhanced chemiluminescent-based methods. The Interferon-Gamma (“IFN-γ”) inflammatory cytokine protocol screening showed no statistically significant changes in serum levels of IFN-γ for subjects in the placebo group. However, subjects in both Fortetropin® daily dosing arms experienced statistically significant decreases (p < 0.05) in serum levels of the IFN-γ inflammatory cytokine. IFN-γ is recognized as a signature pro-inflammatory cytokine protein that plays a central role in inflammation and autoimmune diseases. Excess levels of inflammatory cytokines are associated with muscle-wasting diseases such as sarcopenia and cachexia. The lipid serum safety protocol demonstrated that daily use of Fortetropin® at recommended and three times the recommended dose had no adverse lipid effect and did not adversely affect cholesterol, HDL or triglyceride levels. Data from the study was presented at the American College of Nutrition’s 55th annual conference. A separate mechanism of action study at the University of Tampa demonstrated that in addition to reducing serum myostatin levels, Fortetropin® showed activity in mTOR and Ubiquitin pathways, two other crucial signaling pathways in the growth and maintenance of healthy muscle. Specifically, the preclinical data showed that Fortetropin® up-regulates the mTOR regulatory pathway. The mTOR pathway is responsible for production of a protein kinase related to cell growth and proliferation that increases skeletal muscle mass. Up-regulation of the mTOR pathway is important in preventing muscle atrophy. We believe Fortetropin®’s ability to affect the mTOR pathway may have a significant impact in treating patients suffering from degenerative muscle diseases and suggests that Fortetropin®-based products may help slow muscle loss secondary to immobility and denervation. The preclinical data also demonstrated that Fortetropin® acts to reduce the synthesis of proteins in the Ubiquitin Proteasome Pathway, a highly selective, tightly regulated system that serves to activate muscle breakdown. Over-expression of the Ubiquitin Proteasome Pathway is responsible for muscle degradation. We believe Fortetropin®’s ability to regulate production in the Ubiquitin Proteasome Pathway may have significant implications for repairing age-related muscle loss and for patients suffering from chronic diseases such as cachexia.

 

  In May 2014, we entered into a three-year master service agreement with Rutgers University. The initial phase under the agreement was to develop cell-based assays for high-throughput screening studies of next generation myostatin inhibitors. Additionally, we initiated a second phase of the agreement to develop a secondary assay for measuring myostatin activity using a genetically engineered muscle cell line that fluoresce in the presence of myostatin. Phase I and II were completed in 2015. We believe the assays developed will enable us to elucidate the specific molecules in Fortetropin® that impart activity as it relates to the development of muscle tissue.

 

The foregoing agreements are an integral part of our business strategy and we believe they will provide a clear scientific rationale for Fortetropin®’s role as an advanced nutritional product and support its use in different medical and health applications in the future.

 

We are also building a small molecule and biologics discovery program aimed at regulators of myostatin synthesis and activation and the different pathways that act upon muscle development. In July 2014, we entered into a research and development agreement with Cloud Pharmaceuticals, Inc., (“Cloud”), to discover product candidates related to the inhibition of targets in the myostatin regulatory pathway as well as inflammatory mediators associated with sarcopenia and cachexia. Cloud utilizes cloud computing technology to identify and design small molecule drug candidates based on their proprietary Inverse Design drug discovery platform. The research is focusing on the development of product candidates related to the myostatin pathway. Cloud has identified several peptides that may have myostatin inhibition properties based on computational modeling. We intend to evaluate the physiological activity of these peptides on myostatin.

 

We intend to pursue additional clinical studies and medical research to support differentiated and advantaged marketing claims, to build and enhance our competitive insulation through an aggressive intellectual property strategy, to develop product improvements and new products in consumer preferred dosage forms, to enhance overall marketing, to establish a scientific foundation for therapeutic applications for our technology, and to pursue best in class personnel.

 

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Results of Operations

 

Three Months Ended March 31, 2018 Compared to Three Months Ended March 31, 2017

 

   Three Months Ended March 31,   Change 
   2018   2017   Dollars   % 
                 
Net revenues  $57   $150   $(93)   (62%)
Cost of sales   31    135    (104)   (77%)
Gross profit   26    15    11    73%
Gross profit percentage   46%   10%          
                     
Operating expenses:                    
Selling, research and marketing   394    300    94    31%
Personnel and benefits   417    333    84    25%
General and administrative   427    504    (77)   (15%)
Total operating expenses   1,238    1,137    101    9%
Operating loss   (1,212)   (1,122)   90    8%
Other (expense) income, net   (1)   5    (6)   N/M 
Net loss  $(1,213)  $(1,117)  $96    9%

  

N/M = Percent change not meaningful

  

Net revenues

 

Net revenues for the three months ended March 31, 2018 decreased 62% or $93 compared to net revenues for the three months ended March 31, 2017. The decrease in net revenues was primarily due to a non-recurring sale to a related party of Egg Yolk powder drink of $116 and the sales of Re products of $34 in the three months ended March 31, 2017 offset by new product sales of $57 for Qurr during the three months ended March 31, 2018.

 

Cost of sales 

 

Cost of sales for the three months ended March 31, 2018 decreased 77% or $104 compared to cost of sales for the three months ended March 31, 2017. The decrease was primarily due to lower net revenues in 2018 offset by higher net revenues in 2017.

 

Gross profit 

 

Gross profit for the three months ended March 31, 2018 increased 73% or $11 compared to gross profit for the three months ended March 31, 2017. Gross profit percentage increased to 46% for the three months ended March 31, 2018 compared to 10% for the three months ended March 31, 2017 primarily due to new product launch costs in the first few months of 2017 that did not recur in the three months ended March 31, 2018.

 

Operating expenses

 

Operating expenses for the three months ended March 31, 2018 increased 9% or $101, compared to operating expenses for the three months ended March 31, 2017. The increase is due primarily to an increase in selling, research and marketing of $93 relating to the launch of new clinical studies in 2018 and an increase in personnel and benefits of $46 relating to stock-based compensation for shares issued to directors in the three months ended March 31, 2018, offset by a decrease in general and administrative of $77 due to lower professional fees in the three months ended March 31, 2018.

 

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Liquidity and Capital Resources

 

Working capital at March 31, 2018 and December 31, 2017 is summarized as follows:

 

   March 31,   December 31,   Increase 
   2018   2017   (Decrease) 
Current Assets:            
Cash  $230   $923   $(693)
Accounts receivable, net   1    4    (3)
Inventories, net   1,782    1,779    3 
Prepaid expenses and other assets   161    163    (2)
Total current assets  $2,174   $2,869   $(695)
Current liabilities:               
Accounts payable  $184   $176   $8 
Accrued expenses and other current liabilities   263    255    8 
Total current liabilities  $447   $431   $16 

 

Working capital decreased $711 to $1,727 at March 31, 2018 compared to $2,438 at December 31, 2017.

 

Significant changes in working capital components were as follows:

 

  Cash decreased $693 due to $989 used in operating activities, which was partially offset by net proceeds of $296 from the sale of common stock during the three months ended March 31, 2018.

 

  Accounts receivable, net decreased $3 due to timely payments from customers during the three months ended March 31, 2018.
     

 

 

Inventories, net increased $3 due to production of new product during the three months ended March 31, 2018.

 

 

 

Prepaid expenses and other assets decreased $2 primarily due to a net decrease in insurance premiums and consulting fees of $45 offset by an increase in other prepaid expenses of $43.
     
  Accounts payable increased $8 due to timing of vendor invoices for the three months ended March 31, 2018.

 

  Accrued expenses increased $8 primarily due to an increase in accrued research and development of $102 offset by a decrease in accrued professional fees and other current liabilities of $64 and a decrease in insurance financing of $28.

 

At March 31, 2018, we had cash of $230 and total assets of $4,011 (which includes $1,568 of intangible assets).

 

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Summarized cash flows for the three months ended March 31, 2018 and 2017 are as follows:

 

   Three Months Ended
March 31,
     
   2018   2017   Change 
             
Net cash used in operating activities  $(989)  $(1,428)  $439 
Net cash provided by financing activities   296    1,801    (1,505)
Net (decrease) / increase in cash  $(693)  $373   $(1,066)

 

Net cash used in operating activities represents net loss adjusted for certain non-cash items and changes in operating assets and liabilities.

 

Net cash used in operating activities for the three months ended March 31, 2018 decreased $439 compared to the three months ended March 31, 2017.

 

Net cash provided by financing activities for the three months ended March 31, 2018 decreased $1,505 compared to the three months ended March 31, 2017.

 

For additional information about the changes in operating assets and liabilities refer to the above discussion on working capital.

 

Subsequent to the end of the quarter, the Company consummated a private placement of shares of common stock pursuant to the terms of a securities purchase agreement dated as of April 25, 2018 at a purchase price of $1.24 per share. In the private placement, the Company issued 806,452 shares of common stock to a group of accredited investors, including two members of the Company’s board of directors, for aggregate gross proceeds of $1.0 million. The Company intends to use the net proceeds from the Private Placement primarily for working capital, research and development, strategic initiatives and other general corporate purposes

 

Long-term Contractual Obligations

 

At March 31, 2018, the Company’s enforceable and legally binding contractual obligations include future minimum lease payments under a non-cancellable operating lease and purchase obligations under a long-term supply agreement.

 

Supply Agreement

 

At March 31, 2018, the future minimum payments under the supply agreement for the remaining months of 2018 are approximately $117. The agreement expires on December 31, 2018, and the Company has the unilateral right to renew the agreement for subsequent one-year terms.

 

Operating Lease Agreement

 

At March 31, 2018, the future minimum lease payments under the non-cancellable operating lease were as follows:

 

Years Ended December 31,  Amount 
2018 (remaining nine months)  $54 
2019   72 
Total  $126 

  

For additional information about the operating lease refer to “NOTE 11 – COMMITMENTS AND CONTINGENCIES – Operating Lease” in the notes to condensed consolidated financial statements.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

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Recent Accounting Pronouncements

 

In March 2018, the FASB issued a new accounting standard to incorporate Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 118 (“SAB 118”), which addresses the accounting implications of the major tax reform legislation, Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), enacted on December 22, 2017. SAB 118 allows a company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date and was effective upon issuance. We continue to analyze the Tax Act, and in certain areas, have made reasonable estimates of the effects on our condensed consolidated financial statements and tax disclosures. See Note 5, Income taxes, in the accompanying condensed financial statements.

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718). The amendments in this Update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This update is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. The adoption of ASU 2017-09, effective January 1, 2018, did not have a significant impact on its consolidated financial statements. 

  

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by leases with lease terms of more than 12 months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will continue to primarily depend on its classification as a finance or operating lease. However, unlike U.S. GAAP, which requires only capital leases to be recognized on the balance sheet, ASU 2016-02 will require both types of leases to be recognized on the balance sheet. ASU 2016-02 also requires disclosures about the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. ASU 2016-02 is effective beginning January 1, 2019, with early application permitted. We have evaluated the adoption of ASU 2016-12 and determined that the standard will not have a significant impact on our consolidated financial statements.

 

Critical Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, equity and the disclosures of contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues and expenses during the reporting period. Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future non-conforming events. Accordingly, the actual results could differ significantly from estimates. Significant items subject to such estimates include but are not limited to the valuation of stock-based awards, measurement of allowances for doubtful accounts and inventory reserves, the amount of deferred offering costs recognized, the selection of asset useful lives, fair value estimations used to test long-lived assets, including intangibles, impairments, and provisions necessary for assets and liabilities.

 

The Company has historically recorded minimal sales to its distributors during the past fifteen consecutive quarters, and launched its QURR portfolio of branded products in March 2017. Management’s estimates, including evaluation of impairment of long-lived assets and inventory reserves are based in part on forecasted future results. A variety of factors could cause actual results to differ from forecasted results and these differences could have a significant effect on asset carrying amounts.

 

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Concentrations of Credit Risk

 

Management regularly reviews accounts receivable, and if necessary, establishes an allowance for doubtful accounts that reflects management’s best estimate of amounts that may not be collectible based on historical collection experience and specific customer information. Bad debt expense recognized as a result of an allowance for doubtful accounts is classified under general and administrative expenses in the statements of operations. If we are unable to collect our outstanding accounts receivable from our distributors, or if our distributors are unable or unwilling to purchase our products, our operating results and financial condition will be adversely affected.

 

Fair Value of Long-Lived Assets

 

We test long-lived assets, including fixed assets and intangibles with finite lives, for recoverability when events or changes in circumstances indicate that the net carrying amount is greater than its fair value. Assets are grouped and evaluated at the lowest level for their identifiable cash flows that are largely independent of the cash flows of other groups of assets. We consider historical performance and future estimated results in our evaluation of potential impairment and then compare the carrying amount of the asset to the future estimated cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, we measure the amount of impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally measured by discounting expected future cash flows at the rate we utilize to evaluate potential investments. We estimate fair value based on the information available in making the necessary estimates, judgments and projections. Intangible assets include patent costs associated with applying for a patent and being issued a patent. Costs to defend a patent and costs to invalidate a competitor’s patent or patent application are expensed as incurred. Upon issuance of the patent, capitalized patent costs are reclassified from intangibles with indefinite lives to intangibles with finite lives and amortized on a straight-line basis over the shorter of the estimated economic life or the initial term of the patent, generally 20 years.

 

Our policy is to evaluate intangible assets subject to amortization for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Impairment testing of intangible assets subject to amortization involves comparing the carrying amount of the asset to the forecasted undiscounted future cash flows. In the event the carrying value of the asset exceeds the undiscounted future cash flows, the carrying value is considered not recoverable and an impairment exists. An impairment loss is measured as the excess of the asset’s carrying value over its fair value, calculated using a discounted future cash flow method. The computed impairment loss is recognized in the period that the impairment occurs. Assets which are not impaired may require an adjustment to the remaining useful lives for which to amortize the asset.

 

Stock-based Compensation

 

Stock-based payments are measured at their estimated fair value on the date of grant. Stock-based awards to non-employees are re-measured at fair value each financial reporting date until performance is completed. Stock-based compensation expense recognized during a period is based on the estimated number of awards that are ultimately expected to vest. For stock options and restricted stock that do not vest immediately but which contain only a service vesting feature, we recognize compensation cost on the unvested shares and options on a straight-line basis over the remaining vesting period.

 

The Company uses the Black-Scholes option-pricing model to estimate the fair value of options and the market price of our common stock on the date of grant for the fair value of restricted stock issued. Our determination of the fair value of stock-based awards is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to our expected stock price volatility over the term of the awards, and certain other market variables such as the risk free interest rate.

 

Income Taxes

 

We account for income taxes using an asset and liability approach which allows for the recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before we are able to realize their benefits, or that future deductibility is uncertain.

 

We record a valuation allowance for deferred tax assets, if any, based on our estimates of future taxable income as well as tax planning strategies when it is more likely than not that a portion or all of its deferred tax assets will not be realized. If we are able to utilize more of our deferred tax assets than the net amount previously recorded when unanticipated events occur, an adjustment to deferred tax assets would increase our net income when those events occur.

 

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Inventory Reserves

 

Inventories are valued at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis.  Our policy is to recognize an inventory reserve as a loss in earnings in the period in which evidence exists that the net realizable value of inventory is less than its cost due to damage, physical deterioration, obsolescence, and changes in inventory reserve estimates, changes in price levels or other causes. Net realizable value is the estimated selling price in the ordinary course of business, less costs to complete and sell finished goods, including direct selling costs such as transportation and sales commissions as well as inventory write-offs.  The multiple possible outcomes that can result from applying lower of cost or net realizable value can make inventory valuation highly complex.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

We are a smaller reporting company, and therefore, we are not required to provide information required by this Item of Form 10-Q.

 

Item 4. Controls and Procedures 

 

Evaluation of Disclosure Controls and Procedures

 

Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that is designed to provide reasonable assurance that information we are required to disclose in the reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedure include, without limitations, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

In accordance with Exchange Act Rules 13a-15 and 15d-15, an evaluation was completed by our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2018. Based on that evaluation management concluded that due to a material weakness in our internal control over financial reporting our disclosure controls and procedures were not effective. We are implementing remedial measures designed to address the material weakness.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II-OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

On January 6, 2017, in connection with the financing contemplated by a securities purchase agreement with RENS Technology Inc. (the “Purchaser”), we commenced an action in the Supreme Court of New York, County of New York (the “Court”), against the Purchaser, RENS Agriculture, the parent company of the Purchaser, and Ren Ren, a principal in both entities and one of our directors, arising from the Purchaser’s breach of the agreement under which the Purchaser agreed to invest an aggregate of $20.25 million in our company in exchange for an aggregate of 3,537,037 shares of our common stock and warrants to purchase an aggregate of 884,259 shares of common stock.

  

On April 11, 2017, the Court noted that we had demonstrated a likelihood of success on the merits of the breach of contract claim. Thereafter, a hearing was scheduled on the application by the Purchaser to dismiss the complaint and various pre-trial discovery applications by both parties.

 

In August 2017, before the hearing occurred, the Company amended its complaint repeating most of the initial claims but adding several additional claims against RENS Agriculture, Mr. Ren and two additional Chinese defendants, including a claim against RENS Agriculture for breaching the exclusive distribution agreement, as well as claims against all defendants for theft and misappropriation of our confidential proprietary information and trade secrets, breach of fiduciary duty and duty of loyalty, misappropriation of corporate opportunity, unfair competition and a number of other torts. We are seeking damages and injunctive relief. The Purchaser has filed a motion to dismiss the amended complaint, which is still pending and scheduled for oral argument in June 2018.

 

On August 16, 2017, the Purchaser commenced an action in the District Court of Clark County in the State of Nevada against us and Joseph Mannello, our then interim Chief Executive Officer, alleging that Mr. Mannello had breached his fiduciary duties and was grossly negligent in managing our company. The action seeks monetary damages and injunctive relief from Mr. Mannello as well as the appointment of a receiver over us. Subsequently, the Purchaser submitted a petition to appoint a receiver and we and Mr. Mannello submitted a motion to dismiss the action, both of which are currently pending and are due to be heard in June 2018. An application on consent to adjourn the hearing date on the receiver application and motion to dismiss is pending.

 

The parties are currently in settlement discussions regarding the foregoing matters

 

Item1A. Risk Factors.

 

Factors that could cause our actual results to differ materially from those in this report are any of the risks described in our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 31, 2018. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations.

 

As of the date of this report, other than as set forth below, there have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC, except we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.

 

We have identified a material weakness in our internal control over financial reporting which could, if not remediated, result in material misstatements in our financial statements.

 

Our management has identified a material weakness in our internal controls over financial reporting. A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness that we identified was the lack of segregation of duties within our accounting and finance group as a result of our limited financial resources. We are remediating this weakness, primarily through supplementing our accounting and finance staff with an outside financial expert to review our financial statements and periodic reports. If our remedial measures are insufficient to address the material weakness, or if additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, our financial statements may contain material misstatements and we could be required to restate our financial results, which could lead to substantial additional costs for accounting and legal fees and shareholder litigation.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None

 

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Item 3. Defaults Upon Senior Securities.

 

None

 

Item 4. Mine Safety Disclosures.

 

None

 

Item 5. Other Information.

 

None

 

Item 6. Exhibits.

 

No.   Description
31.1   Certification of Principal Executive Officer and Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*   Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   XBRL Taxonomy Extension Labels Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Furnished herewith

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

  MYOS RENS TECHNOLOGY INC.
     
Date: May 9, 2018 By: /s/ Joseph Mannello
    Name: Joseph Mannello
    Title: Chief Executive Officer

 

 

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