UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended DecemberMarch 31, 2017 2019
OR
OR☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from __________________ to ______________________.from__________to__________.
Commission file number 001-35527
MYnd Analytics, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 87-0419387 |
(State or other jurisdiction of | |
incorporation or organization) | (I.R.S. Employer Identification No.) |
26522 La Alameda, Suite 290
Mission Viejo, California 92691
(Address of principal executive offices) (Zip Code)
(949) 420-4400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered |
Common Stock, $0.001 par value | The Nasdaq Stock Market LLC |
Warrants to Purchase Common Stock | The Nasdaq Stock Market LLC |
Securities registered under Section 12(g) of the Exchange Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
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 has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
☐
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 | ☐ | (Do not check if smaller reporting company) | 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 Act.) Yes ☐ No ☒
AsIndicate the number of February 20, 2018,shares outstanding of each of the registrant had 4,363,061 sharesissuer’s classes of Common Stock, $0.001 par value, issuedcommon stock and outstanding.preferred stock, as of the latest practicable date.
Class | Outstanding as of May 10, 2019 |
Common Stock, $0.001 par value per share | 9,479,081 shares |
Series A Preferred Stock, $0.001 par value per share | 550,000 shares |
Series A-1 Preferred Stock, $0.001 par value per share | 500,000 shares |
MYnd Analytics, Inc. and its subsidiaries
INDEX
2
MYND ANALYTICS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
As of December 31, 2017 | As of September 30, 2017 | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 2,658,300 | $ | 5,449,000 | ||||
Accounts receivable, net | 81,100 | 6,500 | ||||||
Prepaid insurance | 23,900 | 57,200 | ||||||
Note receivable - related party | — | 159,500 | ||||||
Prepaid other assets | 67,000 | 22,000 | ||||||
Total current assets | 2,830,300 | 5,694,200 | ||||||
Property and equipment, net | 136,400 | 120,700 | ||||||
Intangible assets, net | 158,300 | 60,200 | ||||||
Goodwill | 1,386,800 | — | ||||||
Investment in Arcadian Services | — | 195,900 | ||||||
Other assets | 31,300 | 25,100 | ||||||
TOTAL ASSETS | $ | 4,543,100 | $ | 6,096,100 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY: | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable (including $56,000 and $10,000 to related parties as of December 31, 2017 and September 30, 2017, respectively) | $ | 1,015,800 | $ | 736,900 | ||||
Accrued liabilities | 22,900 | 55,200 | ||||||
Accrued compensation | 397,100 | 466,000 | ||||||
Accrued compensation – related parties | 237,200 | 204,600 | ||||||
Accrued interest and other | 3,900 | 3,900 | ||||||
Deferred revenue - grant funds | 45,900 | 45,900 | ||||||
Current portion of note payable | 16,900 | 31,500 | ||||||
Note payable - finance company | 5,600 | — | ||||||
Current portion of capital lease | 1,300 | 1,300 | ||||||
Total current liabilities | 1,746,600 | 1,545,300 | ||||||
LONG-TERM LIABILITIES | ||||||||
Long - term borrowing, net | 559,700 | — | ||||||
Accrued interest on long - term borrowing | 104,200 | — | ||||||
Long-term portion of capital lease | 3,100 | 3,400 | ||||||
Total long-term liabilities | 667,000 | 3,400 | ||||||
TOTAL LIABILITIES | 2,413,600 | 1,548,700 | ||||||
STOCKHOLDERS’ EQUITY: | ||||||||
Preferred stock, $0.001 par value; authorized 15,000,000 shares, no shares issued and outstanding as of December 31, 2017 and September 30, 2017, respectively | — | — | ||||||
Common stock, $0.001 par value; 250,000,000 shares and 500,000,000 shares authorized as of December 31, 2017 and September 30, 2017 respectively, 4,360,561 and 4,299,311 shares issued and outstanding as of December 31, 2017 and September 30, 2017, respectively | 4,400 | 4,300 | ||||||
Additional paid-in capital | 80,541,000 | 80,189,700 | ||||||
Accumulated deficit | (78,415,900 | ) | (75,646,600 | ) | ||||
Total stockholders’ equity | 2,129,500 | 4,547,400 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 4,543,100 | $ | 6,096,100 |
As of March 31, 2019 (Unaudited) | As of September 30, 2018 | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 1,203,200 | $ | 3,254,700 | ||||
Accounts receivable, net | 154,400 | 63,300 | ||||||
Prepaid insurance | 9,700 | 57,900 | ||||||
Prepaid expenses and other current assets | 181,200 | 134,700 | ||||||
Total current assets | 1,548,500 | 3,510,600 | ||||||
Property and equipment, net | 87,700 | 110,800 | ||||||
Intangible assets, net | 88,400 | 116,500 | ||||||
Goodwill | 1,386,800 | 1,386,800 | ||||||
Other assets | 29,600 | 27,100 | ||||||
TOTAL ASSETS | $ | 3,141,000 | $ | 5,151,800 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY: | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable (including $36,400 and $30,350 to related parties as of March 31, 2019 and September 30, 2018, respectively) | $ | 970,700 | $ | 346,900 | ||||
Accrued liabilities | 204,700 | 268,900 | ||||||
Accrued compensation | 244,900 | 175,400 | ||||||
Accrued compensation – related parties | 322,800 | 209,300 | ||||||
Accrued interest and other liabilities | 3,900 | 3,900 | ||||||
Deferred revenue | 152,100 | 159,700 | ||||||
Current portion of leases | 1,400 | 1,300 | ||||||
Total current liabilities | 1,900,500 | 1,165,400 | ||||||
LONG-TERM LIABILITIES | ||||||||
Long-term borrowing, net | 606,500 | 587,700 | ||||||
Accrued interest on long-term borrowing | 120,500 | 110,100 | ||||||
Long-term portion of capital lease | 1,400 | 2,100 | ||||||
Total long-term liabilities | 728,400 | 699,900 | ||||||
TOTAL LIABILITIES | 2,628,900 | 1,865,300 | ||||||
STOCKHOLDERS’ EQUITY: | ||||||||
Preferred stock, $0.001 par value; 15,000,000 authorized; 1,500,000 shares of Series A Preferred Stock and 500,000 shares of Series A-1 authorized; 550,000 shares of Series A Preferred Stock and 500,000 shares of Series A-1 issued and outstanding as of March 31, 2019 and as of September 30, 2018; aggregate liquidation preference of $1,968,750 as of March 31, 2019 and as of September 30, 2018; | 1,100 | 1,100 | ||||||
Common stock, $0.001 par value; 250,000,000 shares authorized as of March 31, 2019 and September 30, 2018 respectively, 8,936,695 and 7,407,254 shares issued and outstanding as of March 31, 2019 and September 30, 2018, respectively; | 8,900 | 7,400 | ||||||
Additional paid-in capital | 91,895,900 | 89,257,700 | ||||||
Accumulated deficit | (89,881,400 | ) | (85,245,300 | ) | ||||
2,024,500 | 4,020,900 | |||||||
Non controlling interest | (1,512,400 | ) | (734,400 | ) | ||||
Total stockholders’ equity | 512,100 | 3,286,500 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 3,141,000 | $ | 5,151,800 |
See accompanying notes to unaudited condensed consolidated financial statements.
MYND ANALYTICS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended December 31, | Three Months Ended March 31, | Six Months Ended March 31, | ||||||||||||||||||||||
2017 | 2016 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||
REVENUES | ||||||||||||||||||||||||
Neurometric Services | $ | 53,300 | $ | 22,200 | ||||||||||||||||||||
Telepsychiatry Services | 68,700 | — | ||||||||||||||||||||||
Total Revenues | $ | 122,000 | $ | 22,200 | ||||||||||||||||||||
Neurometric services | $ | 44,800 | $ | 79,800 | $ | 124,000 | $ | 133,100 | ||||||||||||||||
Telepsychiatry services | 415,300 | 380,100 | 723,200 | 448,800 | ||||||||||||||||||||
Total revenues | 460,100 | 459,900 | 847,200 | 581,900 | ||||||||||||||||||||
COST OF REVENUES | ||||||||||||||||||||||||
Neurometric services | 5,100 | 69,700 | 11,500 | 118,800 | ||||||||||||||||||||
Telepsychiatry services | 291,200 | 228,600 | 509,900 | 264,400 | ||||||||||||||||||||
296,300 | 298,300 | 521,400 | 383,200 | |||||||||||||||||||||
GROSS MARGIN | 163,800 | 161,600 | 325,800 | 198,700 | ||||||||||||||||||||
OPERATING EXPENSES | ||||||||||||||||||||||||
Cost of revenue | 84,900 | 3,700 | ||||||||||||||||||||||
Research | 81,500 | 31,600 | 60,800 | 73,400 | 141,600 | 154,900 | ||||||||||||||||||
Product development | 269,200 | 295,300 | 237,300 | 342,200 | 474,300 | 611,400 | ||||||||||||||||||
Sales and marketing | 667,200 | 105,700 | 199,400 | 638,000 | 351,300 | 1,305,200 | ||||||||||||||||||
General and administrative | 1,774,800 | 1,021,800 | 2,350,300 | 1,740,900 | 4,724,100 | 3,515,800 | ||||||||||||||||||
Total operating expenses | 2,877,600 | 1,458,100 | 2,847,800 | 2,794,500 | 5,691,300 | 5,587,300 | ||||||||||||||||||
OPERATING LOSS | (2,755,600 | ) | (1,435,900 | ) | (2,684,000 | ) | (2,632,900 | ) | (5,365,500 | ) | (5,388,600 | ) | ||||||||||||
OTHER INCOME (EXPENSE): | ||||||||||||||||||||||||
Interest expense, net | (13,700 | ) | (2,500 | ) | (23,400 | ) | (24,800 | ) | (46,300 | ) | (38,500 | ) | ||||||||||||
Total other income (expense) | (23,400 | ) | (24,800 | ) | (46,300 | ) | (38,500 | ) | ||||||||||||||||
LOSS BEFORE PROVISION FOR INCOME TAXES | (2,769,300 | ) | (1,438,400 | ) | (2,707,400 | ) | (2,657,700 | ) | (5,411,800 | ) | (5,427,100 | ) | ||||||||||||
Income taxes | — | 1,800 | 2,300 | 1,900 | 2,300 | 1,900 | ||||||||||||||||||
NET LOSS | $ | (2,769,300 | ) | $ | (1,440,200 | ) | $ | (2,709,700 | ) | $ | (2,659,600 | ) | $ | (5,414,100 | ) | $ | (5,429,000 | ) | ||||||
Net loss attributable to noncontrolling interest | (451,100 | ) | (72,300 | ) | (778,000 | ) | (72,300 | ) | ||||||||||||||||
Net Loss attributable to MYnd Analytics, Inc. | $ | (2,258,600 | ) | $ | (2,587,300 | ) | $ | (4,636,100 | ) | $ | (5,356,700 | ) | ||||||||||||
BASIC AND DILUTED LOSS PER SHARE: | $ | (0.64 | ) | $ | (0.69 | ) | $ | (0.27 | ) | $ | (0.59 | ) | $ | (0.58 | ) | $ | (1.23 | ) | ||||||
WEIGHTED AVERAGE SHARES OUTSTANDING: | ||||||||||||||||||||||||
Basic and Diluted | 4,332,927 | 2,101,061 | 8,399,443 | 4,362,564 | 7,964,021 | 4,347,745 |
See accompanying notes to unaudited condensed consolidated financial statements.
MYND ANALYTICS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
for the three and six months ended March 31, 2019 and 2018
Common Stock | Preferred Stock | ||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Additional Paid-in Capital | Accumulated Deficit | Sub-total MYnd Stockholders’ Equity | Non- controlling Interest | Total | |||||||||||||||||||||||||||
Balance at September 30, 2018 | 7,407,254 | $ | 7,400 | 1,050,000 | $ | 1,100 | $ | 89,257,700 | $ | (85,245,300 | ) | $ | 4,020,900 | $ | (734,400 | ) | $ | 3,286,500 | |||||||||||||||||
Shares issued to Aspire Capital Purchase Agreement | 144,000 | 200 | 517,100 | — | 517,300 | 517,300 | |||||||||||||||||||||||||||||
Common Stock issued to vendors for services | 3,750 | — | — | — | 5,600 | — | 5,600 | — | 5,600 | ||||||||||||||||||||||||||
Net loss | — | — | — | — | — | (2,377,500 | ) | (2,377,500 | ) | (326,900 | ) | (2,704,400 | ) | ||||||||||||||||||||||
Balance at December 31, 2018 | 7,555,004 | $ | 7,600 | 1,050,000 | $ | 1,100 | $ | 89,780,400 | $ | (87,622,800 | ) | $ | 2,166,300 | $ | (1,061,300 | ) | $ | 1,105,000 | |||||||||||||||||
Stock-based compensation | 30,000 | — | — | — | 258,000 | — | 258,000 | — | 258,000 | ||||||||||||||||||||||||||
Shares issued to Aspire Capital Purchase Agreement | 1,315,429 | 1,300 | 1,810,500 | — | 1,811,800 | 1,811,800 | |||||||||||||||||||||||||||||
Common Stock issued to vendors for services | 36,262 | — | — | — | 47,000 | — | 47,000 | — | 47,000 | ||||||||||||||||||||||||||
Net loss | — | — | — | — | — | (2,258,600 | ) | (2,258,600 | ) | (451,100 | ) | (2,709,700 | ) | ||||||||||||||||||||||
Balance at March 31, 2019 | 8,936,695 | $ | 8,900 | 1,050,000 | $ | 1,100 | $ | 91,895,900 | $ | (89,881,400 | ) | $ | 2,024,500 | $ | (1,512,400 | ) | $ | 512,100 | |||||||||||||||||
Balance at September 30, 2017 | 4,299,311 | $ | 4,300 | — | $ | — | $ | 80,189,700 | $ | (75,646,600 | ) | $ | 4,547,400 | — | $ | 4,547,400 | |||||||||||||||||||
Stock-based compensation | 37,500 | 100 | 336,500 | 336,600 | — | 336,600 | |||||||||||||||||||||||||||||
Common Stock issued to vendors for services | 23,750 | — | 14,800 | 14,800 | 14,800 | ||||||||||||||||||||||||||||||
Net loss | (2,769,300 | ) | (2,769,300 | ) | — | (2,769,300 | ) | ||||||||||||||||||||||||||||
Balance at December 31, 2017 | 4,360,561 | $ | 4,400 | — | $ | — | $ | 80,541,000 | $ | (78,415,900 | ) | $ | 2,129,500 | $ | — | $ | 2,129,500 | ||||||||||||||||||
Stock-based compensation | 20,000 | — | 256,400 | — | 256,400 | — | 256,400 | ||||||||||||||||||||||||||||
Common Stock issued to vendors for services | (16,250 | ) | — | 11,000 | — | 11,000 | — | 11,000 | |||||||||||||||||||||||||||
Stock issued for preferred shares | — | — | 1,050,000 | 1,100 | 2,098,900 | — | 2,100,000 | — | 2,100,000 | ||||||||||||||||||||||||||
Net loss | — | — | (2,659,700 | ) | (2,659,700 | ) | (72,300 | ) | (2,732,000 | ) | |||||||||||||||||||||||||
Balance at March 31, 2018 | 4,364,311 | $ | 4,400 | 1,050,000 | $ | 1,100 | $ | 82,907,300 | $ | (81,075,600 | ) | $ | 1,837,200 | $ | (72,300 | ) | $ | 1,764,900 |
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
MYND ANALYTICS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended December 31, | Six Months Ended March 31, | |||||||||||||||
2017 | 2016 | 2019 | 2018 | |||||||||||||
OPERATING ACTIVITIES: | ||||||||||||||||
Net loss | $ | (2,769,300 | ) | $ | (1,440,200 | ) | $ | (5,414,100 | ) | $ | (5,429,000 | ) | ||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
Depreciation and amortization | 23,300 | 8,000 | 60,300 | 57,500 | ||||||||||||
Provision for doubtful accounts | 600 | — | ||||||||||||||
Change in provision for doubtful accounts | 6,300 | 1,200 | ||||||||||||||
Stock-based compensation | 336,600 | 501,000 | 775,300 | 593,000 | ||||||||||||
Common stock issued to vendors for services | 14,800 | — | 52,600 | 25,800 | ||||||||||||
Accretion of debt discount | 4,700 | — | 46,700 | 35,500 | ||||||||||||
Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | |||||||||||||||
Accounts receivable | (18,100 | ) | 1,900 | (97,400 | ) | (156,200 | ) | |||||||||
Prepaid expenses and other assets | 6,100 | 36,400 | (800 | ) | (97,200 | ) | ||||||||||
Accounts payable and accrued liabilities | (38,600 | ) | 88,300 | 559,600 | 112,400 | |||||||||||
Accrued compensation | — | 38,800 | ||||||||||||||
Deferred revenue | (7,600 | ) | 125,000 | |||||||||||||
Deferred compensation | 183,000 | (8,300 | ) | |||||||||||||
Net cash used in operating activities | (2,439,900 | ) | (765,800 | ) | (3,836,100 | ) | (4,740,300 | ) | ||||||||
INVESTING ACTIVITIES: | ||||||||||||||||
INVESTING ACTIVITES: | ||||||||||||||||
Purchase of furniture and equipment | (28,100 | ) | (1,600 | ) | (9,100 | ) | (55,200 | ) | ||||||||
Payment for acquisition of business, net of cash acquired | (306,600 | ) | — | — | (306,600 | ) | ||||||||||
Costs incurred to develop intangible assets | — | (2,100 | ) | |||||||||||||
Net cash used in investing activities | (334,700 | ) | (3,700 | ) | (9,100 | ) | (361,800 | ) | ||||||||
FINANCING ACTIVITIES: | ||||||||||||||||
Principal payments on note payable | (15,800 | ) | — | (17,500 | ) | (34,100 | ) | |||||||||
Principal payments on capital lease | (300 | ) | (300 | ) | (600 | ) | (600 | ) | ||||||||
Proceeds from sale of common stock | — | 1,500,000 | ||||||||||||||
Net cash provided by (used in) financing activities | (16,100 | ) | 1,499,700 | |||||||||||||
NET INCREASE(DECREASE) IN CASH | (2,790,700 | ) | 730,200 | |||||||||||||
Proceeds from sale of common stock, net of costs | 1,811,800 | 2,100,000 | ||||||||||||||
Net cash provided by financing activities | 1,793,700 | 2,065,300 | ||||||||||||||
NET INCREASE (DECREASE) IN CASH | (2,051,500 | ) | (3,036,800 | ) | ||||||||||||
CASH AND CASH EQUIVALENTS - BEGINNING OF THE PERIOD | 5,449,000 | 318,200 | 3,254,700 | 5,449,000 | ||||||||||||
CASH AND CASH EQUIVALENTS - END OF THE PERIOD | $ | 2,658,300 | $ | 1,048,400 | $ | 1,203,200 | $ | 2,412,200 | ||||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||||||||||
Cash paid during the period for: | ||||||||||||||||
Interest | $ | 3,000 | $ | 2,500 | $ | 2,000 | $ | 4,700 | ||||||||
Income taxes | $ | — | $ | 1,800 | $ | 2,300 | $ | 1,900 | ||||||||
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING & FINANCING ACTIVITIES: | ||||||||||||||||
Long-term borrowings assumed in business combination | $ | 651,700 | $ | — | $ | — | $ | 651,700 |
See accompanying notes to unaudited condensed consolidated financial statements
MYND ANALYTICS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. | Organization, |
MYnd Analytics, Inc. (“MYnd,” “CNS,” “we,” “us,” “our,” or the “Company”), formerly known as CNS Response Inc., was incorporated in Delaware on March 20, 1987, under the name Age Research, Inc. Prior to January 16, 2007, the Company (then called Strativation, Inc.) was a “shell company” with nominal assets and our sole business was to identify, evaluate and investigate various companies to acquire or with which to merge. On January 16, 2007, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with CNS Response, Inc., a California corporation formed on January 11, 2000 (“CNS California”), and CNS Merger Corporation, a California corporation and the Company’s wholly-owned subsidiary (“MergerCo”) pursuant to which the Company agreed to acquire CNS California in a merger transaction wherein MergerCo would merge with and into CNS California, with CNS California being the surviving corporation (the “Merger”). On March 7, 2007, the Merger closed, CNS California became a wholly-owned subsidiary of the Company, and on the same date the corporate name was changed from Strativation, Inc. to CNS Response, Inc. At the annual meeting held on October 28, 2015, shareholders approved a change in our name from CNS Response, Inc. to MYnd Analytics, Inc. On November 2, 2015, the Company filed an amendment to its Articles of Incorporation which, among other things, effected the name change to MYnd Analytics, Inc.
The Company is a predictive analytics company that has developed a decision support tool to help physicians reduce trial and error treatment in mental health and provide more personalized care to patients. The Company provides objective clinical decisionemploys a clinically validated scalable technology platform to support to healthcare providerspersonalized care for mental health patients. The Company utilizes its patented machine learning, artificial intelligence, data analytics platform for the personalized treatmentdelivery of behavioral disorders, including depression, anxiety, bipolar disorder, post-traumatic stress disordertelebehavioral health services and its PEER predictive analytics product offering. On November 13, 2017, the Company acquired Arcadian Telepsychiatry Services LLC (“PTSD”Arcadian”), which manages the delivery of telepsychiatry and other non-psychotic disorders.telebehavioral health services through a nationwide network of licensed and credentialed psychiatrists, psychologists and master’s-level therapists. The Company usesis commercializing its proprietary neurometricPEER predictive analytics tool to help physicians reduce trial and error treatment in mental health. MYnd’s patented, clinically validated technology platform (“PEER Online,Online”) utilizes complex algorithms to analyze electroencephalograms (“EEGs”) to generate Psychiatric EEG Evaluation Registry (“PEER”) Reports to predict the likelihood of response by an individual responses to a range of medications prescribed for the treatment of behavioral disorders. The Company continues to be focused on military personnel and their family members who are suffering fromdisorders including depression, anxiety, bipolar disorder, PTSD and other disorders through the military, Veterans Administration, and Canadian Forces. Commercial expansion is focused on payer and self-insured markets, provider direct sales to multi-physician and multi-practice provider groups, and patient direct referrals to these groups. The Company continues to expand its database, including younger adults and adolescents.
Arcadian Telepsychiatry Services LLC (“Arcadian Services”), our wholly owned subsidiary acquired in November 2017, manages the delivery of telebehavioral health services through a multi-state network of licensed and credentialed psychiatrists, psychologists and other behavioral health therapists (“Providers”). Although many companies provide broad telehealth services within the U.S., only a few companies have a primary focus on telepsychiatry and telebehavioral health. Arcadian Services’ business model is unique, because it has access to a broad network of licensed behavioral health professionals exclusively focused on telepsychiatry and telebehavioral health. These Providers collectively offer a full suite of behavioral health and wellness services, including short-term (urgent), medium-term (rehabilitation) and long-term (management) behavioral care.
Private Placements
Between September 30, 2016, and March 20, 2017, the Company sold and issued an aggregate of 477,000 shares of its Common Stock, at a per share price of $6.25, in private placements to 13 accredited investors, for which it received gross cash proceeds of $2,981,300. Five of the 13 accredited investors were affiliates of the Company which represented 70% of such cash proceeds.
Public Offering
In July 2017, the Company completed an underwritten public offering of its Common Stock and warrants, raising gross proceeds of approximately $8,790,000. In the offering, the Company sold 1,675,000 shares of Common Stock and accompanying warrants to purchase up to 1,675,000 shares of Common Stock (the “Warrants”), at a combined public offering price of $5.25 per share and accompanying Warrant. The Warrants were immediately exercisable for one share of Common Stock at an exercise price of $5.25 per share, and will expire five years after the issuance date.
In connection with the offering, the Company granted the representative of the underwriters a 45-day option to purchase up to an 251,250 additional shares of Common Stock and/or Warrants to cover over-allotments, if any. On August 24, 2017 the underwriters exercised their option and purchased 213,800 common stock warrants for $0.01 per warrant.
Acquisition
On November 13, 2017, Arcadian Telepsychiatry LLC (“Arcadian”), MYnd and certain third-party physicians entered into a number of transactions to reorganize the operations of Arcadian and implement a new ownership and management structure. Arcadian converted into a Pennsylvania professional corporation after the equity interests in Arcadian were sold to a third - party physician for nominal consideration. On that same date, Arcadian entered into a Management Services Agreement with Arcadian Telepsychiatry Services LLC (“Arcadian Services”) and transferred certain assets and liabilities to Arcadian Services including its debt obligations. MYnd subsequently acquired 100% of the equity interests in Arcadian Services and in consideration for the transfer of the equity interests in Arcadian Services, MYnd entered into an employment agreement with the founder of Arcadian, pursuant to which MYnd will continue to employ the former founder of Arcadian as the CEO of Arcadian Services for an annual salary of $215,000 and granted him options to purchase 35,000 shares of common stock of MYnd. In addition, MYnd agreed to guarantee Arcadian Services’ assumed debt.
Arcadian Services manages the delivery of telebehavioral health services through a multi–state network of licensed and credentialed psychiatrists, psychologists and other behavioral health therapists (“Providers”). As a result of certain state regulations, Arcadian Services entered into several management services agreements with professional entities owned by physicians who are licensed in those states to provide telepsychiatry services directly to patients. Arcadian Services will collect revenue based on management fees charged to the doctors who own the professional entities through which the telepsychiatry services are being delivered. Arcadian Services is not capital intensive and had a limited number of employees, therefore their balance sheet consisted primarily of working capital accounts and a limited amount of property and equipment primarily office furniture and computer equipment. Working capital and property equipment (no value assigned) were deemed to be at their fair value due to their short–term nature. The Company hired an independent third–party Valuation Services firm to assist the Company in its accounting for the intangibles and non–compete in accordance with Financial Accounting Standards Board Accounting Standards (“FASB”) Codification 805, Business Combinations (“ASC 805”).non-psychotic disorders.
Going Concern Uncertainty
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”), which contemplate continuation of the Company as a going concern. The Company has a limited operating history and itsCompany’s operations are subject to certain problems, expenses, difficulties, delays, complications, risks and uncertainties frequently encountered in the operation of a business with a limited operating history.business. These risks include the ability to obtain adequate financing on a timely basis, if at all, the failure to develop or supply technology or services to meet the demands of the marketplace, the failure to attract and retain qualified personnel, competition within the industry, government regulation and the general strength of regional and national economies.
The Company’s recurring net losses and negative cash flows from operations raise substantial doubt about its ability to continue as a going concern. During threethe six months ended DecemberMarch 31, 2017,2019, the Company incurred a net loss of $2.8$5.4 million and used $2.4$3.8 million of net cash in operating activities. As of DecemberMarch 31, 2017,2019, the Company’s accumulated deficit was $78.4$89.9 million. In connection with these unaudited condensed consolidated financial statements, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about the Company’s ability to meet its obligations as they become due for the next twelve months from the date of issuance of these financial statements. Management assessed that there were such conditions and events, including a history of recurring operating losses, and negative cash flows from operating activities.
If the Company raises additional funds by issuing additional equity or convertible debt securities, the fully diluted ownership percentages of existing stockholders will be reduced. In addition, any equity or debt securities that the Company would issue may have rights, preferences or privileges senior to those of the holders of its common stock.
To date, the Company has financed its cash requirements primarily from debtequity financings. As of March 31, 2019, the Company’s principal sources of liquidity were its cash balance of $1.2 million and equity financings.the remaining amount available under the Aspire Equity Line of Credit of $6.3 million. The Company will need to raise additional funds immediately to continue its operations and needs to raise substantial additional funds before the Company can increase demand for its PEER Online and telepsychiatry services. Until it can generate sufficient revenues to meet its cash requirements, which it may never do, the Company must continue to finance future cash needs primarily through public or private equity offerings, debt financings borrowings or strategic collaborations. The Company’s liquidity and capital requirements depend on several factors, including the rate of market acceptance of its services, the future profitability of the Company, the rate of growth of the Company’s business and other factors described elsewhere in this Quarterly Report on Form 10-Q. The Company continues to explore additional sources of capital, but there is substantial doubt as to whether any financing arrangement will be available in amounts and on terms acceptable to the Company to permit it to continue operations. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
The Aspire Capital Equity Line of Credit2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On December 6, 2016, the Company, entered into a common stock Purchase Agreement (the “Purchase Agreement”) with Aspire Capital Fund, LLC (“Aspire Capital”) which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $10.0 million of shares of the Company’s common stock over the 30-month term of the Purchase Agreement.
As of December 31, 2017, approximately $9.9 million under the Purchase Agreement remains available for sale to Aspire Capital.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with GAAP and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals and adjustments) necessary to present fairly the financial position, changes in stockholders’ equity, results of operations and cash flows of the Company at the dates and for the periods indicated. The interim results for the quarter ended DecemberMarch 31, 20172019 are not necessarily indicative of results for the full 20182019 fiscal year or any other future interim periods. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Form 10-K10- K for the year ended September 30, 2017.2018.
Basis of Consolidation
The unaudited condensed consolidated financial statements include the results of Mynd,the Company, its wholly owned subsidiary, Arcadian, Services, onetwo professional association,associations, Arcadian Telepsychiatry PA (“Texas PA”) which is locatedincorporated in Texas, Arcadian Telepsychiatry Florida P.A. (“Florida PA”) incorporated in Florida, and onetwo professional corporation,corporations, Arcadian Telepsychiatry P.C. (“(” Pennsylvania PC”) which is locatedincorporated in Pennsylvania collectivelyand Arcadian Telepsychiatry of California, P.C. incorporated in California (“California PC” and together with the “entities.Pennsylvania PC, Florida PA and Texas PA, the “Arcadian Entities.”)
Arcadian Services is party to Management Services Agreements by and among it and the entitiesArcadian Entities, pursuant to which each entityArcadian provides management and administrative services to each of the Arcadian Services.Entities. Each entity is established pursuant to the requirements of its respective domestic jurisdiction governing the corporate practice of medicine.
All intercompany balances and transactions have been eliminated upon consolidation.
Segments
We view our operations and manage our business as one operating segment.
Variable Interest Entities (VIE)
On November 13, 2017, Arcadian Services entered into a management and administrative services agreement with Arcadian TelepsychiatryTexas PA (“PA”) which is located in Texas,and with Pennsylvania PC, for an initial fixed term of 20 years. In accordance with relevant accounting guidance, Texas PA isand Pennsylvania PC are each determined to be a Variable Interest Entity (“VIE”) as MYnd is the primary beneficiary with the ability to direct the activities (excluding clinical decisions) that most significantly affect Texas PA’s and Pennsylvania PC’s economic performance through its majority representation of the Texas PA and Pennsylvania PC; therefore, Texas PA and Pennsylvania PC are consolidated by MYnd. On January 19, 2018, Arcadian entered into a management and administrative services agreement with California PC, for an initial fixed term of 20 years. In accordance with relevant accounting guidance, California PC is determined to be a VIE and MYnd is the primary beneficiary with the ability to direct the activities (excluding clinical decisions) that most significantly affect PA’sCalifornia PC’s economic performance through its majority representation of the PA;California PC; therefore, PACalifornia PC is consolidated by MYND.
MYnd. On November 13, 2017,March 27, 2018, Arcadian Services entered into a management and administrative services agreement with Arcadian Telepsychiatry P.C. (“PC”) which is located in Pennsylvania,Florida PA, for an initial fixed term of 20 years. In accordance with relevant accounting guidance, PCFlorida PA is determined to be a Variable Interest EntityVIE and MYnd is the primary beneficiary with the ability to direct the activities (excluding clinical decisions) that most significantly affect PC’sFlorida PA’s economic performance through its majority representation of PC;Florida PA; therefore, PCFlorida PA is consolidated by MYND.MYnd.
The Company holds a variable interest in the entities which contract with physicians and other health professionals in order to provide telepsychiatry services to Arcadian Services.Arcadian. The entities are considered variable interest entityentities since they do not have sufficient equity to finance their activities without additional subordinated financial support. An enterprise having a controlling financial interest in a VIE must consolidate the VIE if it has both power and benefits—thatbenefits-that is, it has (1) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance (power) and (2) the obligation to absorb losses of the VIE that potentially could be significant to the VIE or the right to receive benefits from the VIE that potentially could be significant to the VIE (benefits). The Company has the power and rights to control all activities of the entities and funds and absorbs all losses of the VIE.
In accordance with management service agreements entered into between the Company and medical professional corporations and associations in compliance with regulatory requirements within certain states, the Company has the power to direct activities of the VIE’s and may transfer the assets from the individual VIEs. Therefore, the Company considers that there are no assets in any of the consolidated VIEs that may be relied upon to settle obligations of these entities. Furthermore, creditors of the VIEs do not have recourse to the general credit of the Company for any of the liabilities of the VIEs. Finally, none of the professional corporations or associations have purchased equipment nor are they responsible for handling cash or accounts receivable.
There is no either explicit or implicit arrangement that requires the Company to provide financial support to the VIE, including events or circumstances that could expose the Company to a loss. For the six months ended March 31, 2019 and 2018, the Company did not provide, nor does it intend to provide in the future, any financial or other support either explicitly or implicitly during the periods presented to its variable interest entities. In addition, there are no restrictions on the net income earned by the VIEs. The Company allocates all of the net income earned to the primary owner of the VIE. As part of the operating agreement with the VIE, the Company will be reimbursed for all cost incurred related to operating the VIE in addition to a management fee charged for oversight. For the six months ended March 31, 2019 and 2018, no net income was allocated to the VIEs nor have any dividends been paid from the Company to the VIEs from inception to date, respectively.
In addition, to the extent that the VIE is not a shareholder of the Company, the Company has not paid any dividends to the VIEs from inception to date and there are no dividend obligations within the management services agreement entered into with the medical professional corporations and associations.
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expense, and related disclosure of assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, allowance for doubtful accounts, useful lives of furniture and equipment, intangible assets, valuation allowance on deferred taxes, valuation of equity instruments, and accrued liabilities. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates.
Cash and Cash Equivalents
The Company considers all liquid instruments purchased with a maturity of three months or less to be cash equivalents. The Company deposits its cash with major financial institutions and may at times exceed the federally insured limit of $250,000. At DecemberMarch 31, 20172019 cash exceeds the federally insured limit by $2,346,600.$1.1 million. The Company believes that the risk of loss is minimal. To date, the Company has not experienced any losses related to cash deposits with financial institutions.
Debt Instruments
Debt instruments are initially recorded at fair value, with coupon interest and amortization of debt issuance discounts recognized in the statement of operations as interest expense at each period end while such instruments are outstanding.
Fair Value of Financial Instruments
Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, ASC 825-10 - Recognition and Measurement of Financial Assets and Financial Liabilities defines financial instruments and requires disclosure of the fair value of financial instruments held by the Company. The Company considers the carrying amount of cash, accounts receivable, other receivables, accounts payable and accrued liabilities, to approximate their fair values because of the short period of time between the origination of such instruments and their expected realization.
The Company also analyzes all financial instruments with features of both liabilities and equity under ASC 480-10, ASC 815-10 and ASC 815-40.
The Company adopted ASC 820-10 on January 1, 2008. ASC 820-10 definesFASB has established a framework for measuring fair value establishesusing generally accepted accounting principles. That framework provides a three-level valuation hierarchy for disclosures of fair value measurementhierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and enhances disclosure requirements for fair value measures.the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are defineddescribed as follows:
● | Level I inputs to the valuation methodology are unadjusted quoted prices |
● | Level II inputs to the valuation methodology |
○ | Quoted prices for similar assets |
○ | Quoted prices for identical or similar assets or liabilities in inactive markets; Inputs other than quoted prices that are observable for the |
○ | Inputs that are derived principally from or |
If the asset or liability has a specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability.
● | Level III inputs to the valuation methodology are unobservable and significant to the fair |
The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need tomust maximize the use of observable inputs and minimize the use of unobservable inputs.
The following table summarizes fair value measurements by level at December 31, 2017 for assets and liabilities measured at fair value on a recurring basis:
Level I | Level II | Level III | Total | |||||||||||||
Long-term borrowings | $ | — | 559,700 | $ | — | 559,700 |
The changes in carrying amounts of the debt for the three months ended December 31, 2017 and December 31, 2016 were as follows:
December 31, 2017 | December 31, 2016 | |||||||
Beginning balance | $ | — | $ | — | ||||
Debt acquired through acquisition | 555,000 | — | ||||||
Accretion of debt discount | 4,700 | — | ||||||
Ending balance | $ | 559,700 | $ | — |
Liabilities were fair valued in connection with the business combination will not be fair valued going forward.
Accounts Receivable, net
The Company estimates the collectability of customer receivables on an ongoing basis by reviewing past-due invoices and assessing the current creditworthiness of each customer. Allowances are provided for specific receivables deemed to be at risk for collection which as of DecemberMarch 31, 20172019 and September 30, 2017 are $1,6002018 were $8,100 and $1,000,$1,800, respectively.
Property and Equipment
Property and Equipment,equipment, which are recorded at cost, consist of office furniture and equipment which are depreciated, over their estimated useful lifelives on a straight-line basis. The useful lifelives of these assets isare estimated to be between three and five years. Depreciation expense on furniture and equipment for the three months ended DecemberMarch 31, 20172019 and 20162018 was $12,400$16,100 and $700,$15,600, respectively. Depreciation expense on furniture and equipment for the six months ended March 31, 2019 and 2018 was 32,300 and 28,000, respectively. Accumulated depreciation at DecemberMarch 31, 20172019 and September 30, 20172018 was $96,600$181,500 and $84,200,149,200, respectively.
Long-Lived Assets
As required by ASC 350-30 - Intangibles — Goodwill and other (formerly SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets), the Company reviews the carrying value of its long-lived assets at least annually or whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of the asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and fair value. No impairment loss was recorded for the three months ended December 31, 2017 and 2016.
Intangible Assets
Costs for software developed for internal use are accounted for through the capitalization of those costs incurred in connection with developing or obtaining internal-use software. Capitalized costs for internal-use software are included in intangible assets in the unaudited condensed consolidated balance sheets. Capitalized software development costs are amortized over three years. Costs incurred during the preliminary project along with post-implementation stages of internal use computer software development and costs incurred to maintain existing product offerings are expensed as incurred. The capitalization and ongoing assessment of recoverability of development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, technological and economic feasibility and estimated economic life. At December 31, 2017, the Company had $80,500 in capitalized software development costs. The Company started amortizing the software over its estimated economic life once it was placed into service in September 2016. Amortization was $6,700 for the three months ended December 31, 2017 and $6,700 for the three months ended December 31, 2016. Accumulated amortization on the intellectual property was $35,800 and $29,100 at December 31, 2017 and September 30, 2017 respectively.
On November 23, 2011, the Company acquired intellectual property in the form of transcranial magnetic stimulation (TMS) biomarkers at a cost of $21,200 which was recorded at cost and is being amortized over its estimated useful life of 10 years on a straight-line basis. Amortization was $500 for the three months ended December 31, 2017 and $500 for the three months ended December 31, 2016. Accumulated amortization on the intellectual property was $12,900 and $12,400 at December 31, 2017 and at September 30, 2017, respectively.
On November 13, 2017, the Company acquired customer relationship and tradename intangibles in connection with the Arcadian Services acquisition at $109,000 which waswere recorded at fair value and isare being amortized over itsan estimated useful life of four years on a straight-line basis.
Amortization was $3,700 for the three months ended DecemberMarch 31, 20172019 and $02018 was $14,000 and $13,800, respectively. Amortization for the threesix months ended DecemberMarch 31, 2016.2019 and 2018 was 28,000 and 24,700, respectively. Accumulated amortization on the intellectual property was $3,700$122,300 and $0$94,200 at DecemberMarch 31, 20172019 and at September 30, 2017,2018 respectively.
The expected amortization of the intangible assets, as of DecemberMarch 31, 2017, for each of the next five years and thereafter2019, is as follows:
For the fiscal years ending September 30, | |||||
2018 (for the remaining nine months) | $ | 44,300 | |||
2019 | 51,700 | ||||
2020 | 29,400 | ||||
2021 | 29,400 | ||||
2022 | 3,500 | ||||
Total | $ | 158,300 |
For the year ended September 30, | Intangible assets | |||||
2019 (for the remaining six months) | $ | 26,100 | ||||
2020 | 29,400 | |||||
2021 | 29,400 | |||||
2022 | 3,500 | |||||
Total | $ | 88,400 |
Goodwill
Goodwill isrepresents the excess of the aggregate purchase price paid over the fair value of identifiedthe net assets acquired in our business combinations. Goodwill is not amortized and is tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Events or changes in circumstances that could trigger an impairment review include a significant adverse change in business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of businesses acquired. Intangible assets with indefinite useful lives are measured at their respective fair values askey personnel, significant changes in the manner of our use of the acquisition date.acquired assets or the strategy for our overall business, significant negative industry or economic trends, or significant under performance relative to expected historical or projected future results of operations. The Company doeshas the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not amortizethat the fair value of a reporting unit is less than its carrying value, including goodwill. If, after assessing the totality of events or circumstances, the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, additional impairment testing is not required. The Company tests for goodwill and intangible assets with indefinite useful lives.impairment annually on September 30.
The Company reviewsperformed a qualitative goodwill assessment at least annually, or atSeptember 30, 2018 and concluded there was no impairment based on consideration of a number of factors, including the time a triggering event is identified for possible impairment. Goodwill is reviewed for possible impairment between annual tests if an event occurs or circumstances changeimprovement in the Company’s key operating metrics over the prior year, improvement in the strength of the general economy and the Company’s continued execution against its overall strategic objectives.
Based on the foregoing, the Company determined that wouldit was not more likely than not reducethat the fair value of theits reporting unit belowis less than its carrying value. The Company tests its goodwill each year on September 30th. The Company reviewsamount and therefore that no further impairment testing was required.
During the carrying value of goodwill utilizing an income approach model, and, where appropriate, a market value approach is also utilized to supplement the discounted cash flow model. The Company makes assumptions regarding estimated future cash flows, discount rates, long-term growth rates and market values to determine each reporting unit’s estimated fair value. If these estimates or related assumptions change in the future, the Company may be required to record impairment charges. At Decembersix months ended March 31, 2017,2019, the Company did not record any Goodwill impairment. The Goodwill balance was $1,386,800 as of December 31, 2017 and $0 as of December 31, 2016, respectively.
Accrued Compensation
Accrued compensation consists of accrued vacation pay, accrued bonusescompensation granted by the Board but not paid, and accrued pay due to staff members.
Accrued compensation – related parties consists of accrued vacation pay, accrued bonuses granted by the Board but not paid for officers and directors.
Deferred Revenue
Deferred revenue represents cash collected in advance of services being rendered but not earned as of DecemberMarch 31, 20172019 and September 30, 2017.2018. This represents a philanthropic grant for the payment of PEER Reports ordered in a clinical trial for a member of the U.S. Military, a veteran or their family members, the cost of which is not covered by other sources. On August 1, 2017, the Company entered into a Research Study Funding Agreement with Horizon Healthcare Services, Inc. dba Horizon Blue Cross Blue Shield of New Jersey and its subsidiaries (collectively “Horizon”) and Cota, Inc. (“Cota”). On February 6, 2018, Horizon prepaid for part of the study in the amount of $125,000 and the Company paid Cota $15,000 out of this payment for its services under the Study.
These deferred revenue grant funds total $45,900$152,100 and $159,700 as of DecemberMarch 31, 20172019 and at September 30, 2017.2018, respectively.
RevenuesRevenue Recognition
Neurometric services - gross service revenue is recorded in the accounting records at the time the services are provided on an accrual basis at the provider’s established rates, regardless of whether the provider expects to collect that amount. The Company recognizesreserves a provision for contractual adjustment and discounts that are deducted from gross service revenue. The Company reports revenues net of any sales, use and value added taxes.
Telepsychiatry services - The Company satisfies its performance obligation to stand ready to provide telepsychiatry services which occurs when the Company’s clients have access to the telepsychiatry service. The Company generally bills for the telepsychiatry services on a monthly basis with payment terms generally being 30 days. There are not significant differences between the timing of revenue recognition and billing. Consequently, the Company has determined that client contracts do not include a financing component. Revenue is recognized in an amount that reflects the consideration that is expected in exchange for the service and this may include a variable transaction price as the number of members may vary from the initial billing. Based on historical experience, the Company estimates this amount which is recorded as a component of revenue.
Accounting Standards Update (“ASU”) No. 2014-09,Revenue from Contracts with Customers(“Topic 606”), became effective for the Company on October 1, 2018. The Company’s revenue recognition disclosure reflects its updated accounting policies that are affected by this new standard. The Company applied the “modified retrospective” transition method for open contracts for the implementation of Topic 606.As sales are and have been primarily from providing healthcare services, and the Company has no significant post-delivery obligations, this new standard did not result in a material recognition of revenue on services,the Company’s accompanying consolidated financial statements for the cumulative impact of applying this new standard. The Company made no adjustments to its previously-reported total revenues, as those periods continue to be presented in accordance with the ASC No.its historical accounting practices under Topic 605, “Revenue Recognition”. Revenue is recognized when we have persuasive evidence of an arrangement, a determinable fee, collection is considered to be reasonably assured and the services are delivered.Recognition.
Revenue from providing neurometric and telepsychiatry services are recognized under Topic 606 in a manner that reasonably reflects the delivery of its services to customers in return for expected consideration and includes the following elements:
○ | executed contracts with the Company’s customers that it believes are legally enforceable; |
○ | identification of performance obligations in the respective contract; |
○ | determination of the transaction price for each performance obligation in the respective contract; |
○ | allocation the transaction price to each performance obligation; and |
○ | recognition of revenue only when the Company satisfies each performance obligation. |
Research and Development Expenses
The Company charges research and development expenses to operations as incurred.
Advertising Expenses
The Company charges all advertising expenses to operations as incurred. For the three months ended DecemberMarch 31, 20172019 and 20162018 advertising expenses were $151,000$4,800 and $0,$97,500, respectively. For the six months ended March 31, 2019 and 2018 advertising expenses were $4,800 and $248,500, respectively
Stock-Based Compensation
The Company has adopted ASC 718-20 and related interpretations which establish the accounting for equity instruments exchangedaccounts for employee services. Understock options in accordance with ASC 718-20, share-based compensation cost718, Compensation-Stock Compensation. For stock options issued to employees and directors we use the Black-Scholes option valuation model for employees, directors and consultants is measuredestimating fair value at the date of grant. For stock options issued for services rendered by non-employees, we recognize compensation expense in accordance with the requirements of ASC 505-50, Equity, as amended. Non-employee option grants that do not vest immediately upon grant date based onare recorded as an expense over the vesting period. At the end of each financial reporting period prior to performance, the value of these options, as calculated using the Black-Scholes option valuation model, is determined, and compensation expense recognized or recovered during the period is adjusted accordingly. Since the fair value of options granted to non-employees is subject to change in the award. Thefuture, the amount of the future compensation expense is recognized oversubject to adjustment until the common stock options or warrants are fully vested.
Warrants
From time to time, the Company has issued warrants to purchase shares of common stock. These warrants have been issued in connection with the Company’s financing transactions. The Company’s warrants are subject to standard anti-dilution provisions applicable to shares of our common stock. The Company estimates the fair value of warrants using the Black-Scholes option grantees’ requisite service period, generallyvaluation model with the vesting periodfollowing inputs: market prices of the award.stock, time to maturity, volatility, zero expected dividend rate and risk free rate all at the date of the warrant issuance.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the 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. Valuation allowances are recorded, when necessary, to reduce deferred tax assets to the amount expected to be realized.
On December 22, 2017, new legislation was adopted that significantly revises the Tax Cuts and Jobs Act was signed into legislation.Internal Revenue Code of 1986, as amended, or the Code. The Company is currently evaluating the impactnewly enacted federal income tax law, among other things, contains significant changes to corporate taxation, including reduction of the Tax Cuts and Job Act on its condensed consolidated financial statements and related disclosures for Fiscal 2018 and cannot be determined with certainty at this time becausecorporate tax rate from a top marginal rate of 35 percent to a blended rate. Any impact against the Company’s gross deferred tax asset will be offset by a 100% valuation allowance, therefore the Company expects no material impact on its condensed consolidated financial statements. The Company will continue to review the componentsflat rate of 21 percent, limitation of the Tax Cutstax deduction for interest expense to 30 percent of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80 percent of current-year taxable income and Job Actelimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, immediate deductions for certain new investments instead of deductions for depreciation expense over time, and its related regulationsmodifying or repealing many business deductions and evaluate their impact to its condensed consolidated financial statements and related disclosures for Fiscal 2018.credits.
As a result of the implementation of certain provisions of FASB ASC 740, Income Taxes,, which clarifies the accounting and disclosure for uncertainty in tax positions, the Company has analyzed filing positions in each of the federal and state jurisdictions where required to file income tax returns, as well as all open tax years in these jurisdictions. We have identified U.S. Federal and California as our major tax jurisdictions. Generally, we remainthe Company remains subject to Internal Revenue Service examination of our 20132014 through 2016 U.S. federal income tax returns, and remain subject to California Franchise Tax Board examination of our 20122013 through 2016 California Franchise Tax Returns. We haveThe Company has certain tax attribute carryforwards which will remain subject to review and adjustment by the relevant tax authorities until the statute of limitations closes with respect to the year in which such attributes are utilized.
We believeThe Company believes that ourits income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change to ourits financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740. Our policy for recording interest and penalties associated with income-based tax audits is to record such items as a component of income taxes.
Deferred taxes have been recorded on a net basis in the accompanying balance sheet. The Act reduces the U.S. statutory tax rate from 35% to 21%, effective January 1, 2018. As of September 30, 2018, the Company had gross Federal net operating loss carryforwards of approximately $60.2 million and State gross net operating loss carryforwards of approximately $33.8 million. Both the Federal and State net operating loss carryforwards will begin to expire in 2022 and 2023 respectively. The Company's ability to utilize net operating loss carryforwards may be limited in the event that a change in ownership, as defined in the Internal Revenue Code, occurs in the future.
The Company has placed a valuation allowance against the deferred tax assets in excess of deferred tax liabilities due to the uncertainty surrounding the realization of such excess tax assets. Management periodically evaluates the recoverability of the deferred tax assets and the level of the valuation allowance. At such time as it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be reduced accordingly.
Noncontrolling Interest
The Company consolidates entities in which the Company has a controlling financial interest. The Company consolidates subsidiaries in which the Company holds, directly or indirectly, more than 50% of the voting rights, and variable interest entities (VIEs) inVIEs for which the Company is the primary beneficiary. Noncontrolling interests represent third-party equity ownership interests in the Company’s consolidated entities. The amount of net incomeloss attributable to noncontrolling interests for the three months ended DecemberMarch 31, 20172019 and 2018 was $0. There was no equity or losses$451,100 and $72,300, respectively. The amount of net loss attributable to noncontrolling interests for the threesix months ended DecemberMarch 31, 2017.2019 and 2018 was $778,000 and $72,300, respectively.
Earnings (Loss) per Share
Basic and diluted earnings (loss) per share areis presented in conformity with the two-class method. Under the two-class method, basic net loss per share is computed by dividing income (loss) available to common stockholders by the weighted average common shares outstanding during the period. Net loss per share is calculated as the net loss less the current period preferred stock dividends. Diluted earnings (loss) per share takes into account the potential dilution that could occur if securities or other contracts to issue Common Stock were exercised and converted into Common Stock.
Recent Accounting Pronouncements
Apart from the below-mentioned recent accounting pronouncements, there are no new accounting pronouncements that are currently applicable to the Company.
In May 2014,June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting Standards(Topic 718). The amendments in this Update ASU, ASU 2014-9, “Revenueexpand the scope of Topic 718 to include share based payment transactions for acquiring goods and services from Contracts with Customers” (ASU 2014-9)nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and has subsequently issuedthe attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a number of amendments to ASU 2014-9. The new standard, as amended, provides a single comprehensive modelgrantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the accounting for revenue arising from contractsissuer or (2) awards granted in conjunction with customers and supersedes current revenue recognition guidance, including industry-specific guidance. The standard’s stated core principle is that an entity should recognize revenue to depict the transfer of promisedselling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The amendments in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard will bethis Update are effective for uspublic business entities for fiscal years beginning October 1,after December 15, 2018, and permits two methods of adoption: the full retrospective method, which requires the standard to be applied to each prior period presented, or the modified retrospective method, which requires the cumulative effect of adoption to be recognized as an adjustment to opening retained earnings in the period of adoption.including interim periods within that fiscal year. The Company is currently evaluating the impact of the pending adoption of ASU 2014-9 on its consolidated financial statements and has not yet selected the transition method. The Company is currently evaluating the method and timing of its adoption and impact of adopting this new standard on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-2, Leases (Topic 842). This ASU requires that a lessee recognize lease assets and lease liabilities for those leases classified as operating leases. The guidance is effective for interim and annual periods beginning after December 15, 2018 and will be applied at the beginning of the earliest period presented using a modified retrospective approach. This ASU may have a material impact on the Company’s financial statements. The impact on the Company’s results of operations is currently being evaluated.
In March 2016, the FASB issued ASU 2016-9, Improvements to Employee Share-Based Payment Accounting. This ASU simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, accounting for forfeitures, and classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2016, with early adoption permitted. The guidance will be applied prospectively, retrospectively, or by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted, dependent upon the specific amendment that is adopted within the ASU. The adoption of this new guidance did not have a material effect on the consolidated results of operations, cash flows, and financial position. The Company adopted the guidance on October 1, 2017 and chosestandard to prospectively apply the guidance in its financial statements.
In December 2016, the FASB issued
ASU 2016-18, Statement2016-15, “Statement of Cash Flows (Topic 230). Restricted Cash: Classification of Certain Cash Receipts and Payments” was issued by the Financial Accounting Standards Board (FASB) in August 2016. The purpose of this update clarifies howamendment is to address eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this Update are effective for public business entities should present restricted cash and restricted cash equivalents in the statement of cash flows. The new guidance requires a reconciliation of totals in the statement of cash flows to the related cash and cash equivalents and restricted cash captions in the balance sheet. The new standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017 with early2017. Early adoption is permitted. The Company adopted the guidance on October 1, 2017.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition2016-15 during our first quarter of a Business. This guidance narrows the definition of a business. This standard provides guidance to assist entities with evaluating when a set of transferred assets and activities is a business. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017, and early adoption is permitted. This guidance must be applied prospectively to transactions occurring within the period of adoption. The Company adopted ASU 2017-01 for the three months ended December 31, 2017, and prospectively applied ASU 2017-01 as required withfiscal year 2019, which had no impact on itsour consolidated financial position, results of operations or cash flows.statements, and will apply the new guidance in future periods.
In January 2017,ASU 2016-02, “Leases (Topic 842)” was issued by the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. Thisin February 2016. The guidance eliminates Step 2 from the goodwill impairment test, instead requiring an entityrequires lessees to recognize a goodwill impairment charge for the amount by whichassets and liabilities that arise from leases on the goodwill carrying amount exceeds the reporting unit’s fair value. This guidance is effective for interim and annual goodwill impairment tests in fiscal years beginning after December 15, 2019, and early adoption is permitted. This guidance must be applied on a prospective basis. The Company adoptedbalance sheet. ASU 2017-04 for the three months ended December 31, 2017, and prospectively applied ASU 2017-04 as required with no impact on its consolidated financial position, results of operations or cash flows.
In May 2017, the FASB issued ASU 2017-9, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting,” to provide clarity and reduce both diversity in practice and cost complexity when applying the guidance in Topic 718 to a change to the terms and conditions of a stock-based payment award. ASU 2017-9 also provides guidance about the types of changes to the terms or conditions of a share-based payment award that require an entity to apply modification accounting in accordance with Topic 718. For all entities, including emerging growth companies, the standard2016-02 is effective for annual periods beginning after December 15, 2017, and for interim periods therein. Early adoption is permitted. The Company adopted the guidance on October 1, 2017 and there is no impact on the financial statements.
In July 2017, the FASB issued a two-part ASU 2017-11, I. Accounting for Certain Financial Instruments With Down Round Features and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). ASU 2017-11 amends guidance in FASB ASC 260, Earnings Per Share, FASB ASC 480, Distinguishing Liabilities from Equity, and FASB ASC 815, Derivatives and Hedging. The amendments in Part I of ASU 2017-11 change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. The amendments in Part II of ASU 2017-11 re-characterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. ASU 2017-11 is effective for public business entities for fiscal years, and2018, including interim periods within those fiscal years, beginning after December 15, 2018. Early adoptionannual periods, and should be applied using a modified retrospective approach. The guidance is permitted.effective for the Company on October 1, 2019. The Company adopted ASU 2017-11 forwill elect the three months ended December 31, 2017, and retrospectively applied ASU 2017-11prospective transition method with the effects of adoption recognized as requireda cumulative effect adjustment to the opening balance of retained earnings in the Company's fiscal 2020 financial statements, with no restatement of comparative periods. The Company will also elect the package of three practical expedients permitted under the transition guidance within the new standard, which among other things, allows the Company to carryforward the historical lease classification. The Company is currently assessing the impact of adopting this guidance on its consolidated financial position orstatements and related disclosures. The Company expects to record right of use assets and lease liabilities, which may be material, on its consolidated balance sheet upon adoption of this standard and is still assessing the impact to its results of operations.operations and cash flows.
Accounting Standards Update (“ASU”) No. 2014-09,Revenue from Contracts with Customers(“Topic 606”), became effective for the Company on October 1, 2018. The Company’s revenue recognition disclosure reflects its updated accounting policies that are affected by this new standard. The Company applied the “modified retrospective” transition method for open contracts for the implementation of Topic 606.As sales are and have been primarily from providing healthcare services, and the Company has no significant post-delivery obligations, this new standard this new standard did not result in a change to revenue recognition on the Company’s accompanying condensed consolidated financial statements for the cumulative impact of applying this new standard. The Company made no adjustments to its previously-reported total revenues, as those periods continue to be presented in accordance with its historical accounting practices under Topic 605,Revenue Recognition.
3. | REVENUE RECOGNITION |
At the adoption of Topic 606, the cumulative effect of initially applying the new revenue standard is required to be presented as an adjustment to the opening balance of retained earnings. The Company determined there was no impact to opening retained earnings based on applying the new revenue standard.
The Company operates as one reportable segment, the healthcare delivery segment. The Company disaggregates revenue from contracts by service type and by payor. This level of detail provides useful information pertaining to how the Company generates revenue by significant revenue stream and by type of direct contracts. The condensed consolidated statements of operations present disaggregated revenue by service type. The following table presents disaggregated revenue for the three and six months ended March 31, 2019 and 2018:
Three months ended March 31, | Six months ended March 31, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Neurometric services | $ | 44,800 | $ | 79,800 | $ | 124,000 | $ | 133,100 | ||||||||
Telepsychiatry services | 415,300 | 380,100 | 723,200 | 448,800 | ||||||||||||
Revenue | 460,100 | 459,900 | 847,200 | 581,900 |
As of March 31, 2019, accounts receivable, net of allowance for doubtful accounts, was $154,400. The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. The Company determines the allowance based on historical experience, specific account information and other currently available evidence.
The Company receives payments from the following sources for services rendered: (i) commercial insurers; (ii) the federal government under the Medicare program administered by CMS; (iii) state governments under the Medicaid and other programs; (iv) other third party payors (e.g., hospitals); and (v) individual patients and clients. As the period between the time of service and time of payment is typically one year or less, the Company elected the practical expedient under ASC 606-10-32-18 and did not adjust for the effects of a significant financing component.
The Company derives a significant portion of its revenue from Medicare, Medicaid and other payors that receive discounts from established billing rates. The Medicare and Medicaid regulations and various managed care contracts under which these discounts must be calculated are complex, subject to interpretation and adjustment, and may include multiple reimbursement mechanisms for different types of services provided and cost settlement provisions. Management estimates the transaction price on a payor-specific basis given its interpretation of the applicable regulations or contract terms. The services authorized and provided and related reimbursements are often subject to interpretation that could result in payments that differ from the Company’s estimates. Additionally, updated regulations and contract renegotiations occur frequently, necessitating regular review and assessment of the estimation process by management.
Settlements under cost reimbursement agreements with third-party payors are estimated and recorded in the period in which the related services are rendered and are adjusted in future periods as final settlements are determined. Final determination of amounts earned under the Medicare and Medicaid programs often occurs in subsequent years because of audits by such programs, rights of appeal and the application of numerous technical provisions.
Under the new revenue standard, the Company has elected to apply the following practical expedients and optional exemptions:
● | Recognize incremental costs of obtaining a contract with amortization periods of one year or less as expense when incurred. These costs are recorded within general and administrative expenses. |
● | Recognize revenue in the amount of consideration to which the Company has a right to invoice the customer if that amount corresponds directly with the value to the customer of the Company’s services completed to date. |
● | Exemptions from disclosing the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less, (ii) contracts for which revenue is recognized in the amount of consideration to which the Company has a right to invoice for services performed, and (iii) contracts for which variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct service that forms part of a single performance obligation. |
● | Use a portfolio approach for the fee-for-service (FFS) revenue stream to group contracts with similar characteristics and analyze historical cash collections trends. |
● | No adjustment is made for the effects of a significant financing component as the period between the time of service and time of payment is typically one year or less. |
Contract Assets
Typically, revenues and receivables are recognized once the Company has satisfied its performance obligation. Accordingly, the Company’s contract assets are comprised of accounts receivable. Generally, the Company does not have material amounts of other contract assets.
Contract Liabilities (Deferred Revenue)
Contract liabilities are recorded when cash payments are received in advance of the Company’s performance. The Company’s contract liability balance was $152,100 and $159,700 as of March 31, 2019 and September 30, 2018 and is presented within the “Deferred Revenue” line item of the condensed consolidated balance sheets. $7,600 of the amounts recorded as of September 30, 2018 was recognized as revenue for the six months ended March 31, 2019. The Company has elected the optional exemption to not disclose the remaining performance obligations of its contracts since substantially all of its contracts have a duration of one year or less.
ACCOUNTS RECEIVABLE |
Accounts receivable, net, is as follows:
December 31, 2017 | September 30, 2017 | |||||||
Accounts receivable | $ | 82,700 | $ | 7,500 | ||||
Allowance for doubtful accounts | (1,600 | ) | (1,000 | ) | ||||
Accounts receivable, net | $ | 81,100 | $ | 6,500 |
March 31, 2019 | September 30, 2018 | |||||||
Accounts receivable | $ | 162,500 | $ | 65,100 | ||||
Allowance for doubtful accounts | (8,100 | ) | (1,800 | ) | ||||
Accounts receivable, net | $ | 154,400 | $ | 63,300 |
5. LONG - TERM BORROWINGS AND OTHER NOTES PAYABLE
Debt assumed from Arcadian Services
As a result of the acquisition of with Arcadian, Services, the Company guaranteed Arcadian Services’Arcadian's then outstanding debt obligations totalling $700,000totaling
$700,000 owed to Ben Franklin Technology Partners of Southeastern Pennsylvania (“BFTP”("BFTP"). The maturity date for the debt is September 30, 2021 and interest accrues at an 8% annual rate. Unpaid interest of $104,200was $120,500 as of DecemberMarch 31, 2017 is classified as long-term in the accompanying condensed consolidated balance sheet because interest is not due until maturity.2019. The Company recorded the debt at its fair value as result ofand recorded a discount of $145,000$93,500 as of March 31, 2019 attributable to the difference between the market interest rate and the stated interest rate on the debt. Interest expense of $4,700 was recorded for the three months ended December 31, 2017 related to the accretion of debt discount. There were nodiscount for the three months ended March 31, 2019 and 2018 was $9,400 and 9,400, respectively. Interest expense related to the accretion of debt covenants associated withdiscount for the debt.six months ended March 31, 2019 and 2018 was $18,800 and $14,000, respectively.
A balloon payment of $700,000 plus interest will be made on the scheduled maturity date of September 30, 2021.
Other Notes PayableThe changes in carrying amounts of the debt acquired through acquisition for the six months ended March 31, 2019 were as follows:
Note Payable - finance company, principal is payable over thirty-six equal payments of $1,200 through May 2018. Interest is payable monthly on the unpaid balance at 19% per annum.
Beginning balance (September 30, 2018) | $ | 587,700 | ||
Accretion of debt discount | 18,800 | |||
Ending balance (March 31, 2019) | $ | 606,500 |
Loan payable to a vendor, principal payments of $5,000 per month, together with interest computed at 6% per annum. Maturity date is April 2018.
ACQUISITION |
On November 13, 2017, the Company acquired Arcadian. The Company accounted for the acquisition of Arcadian Services using the acquisition method of accounting for business combinations under ASC 805, Business Combinations. The total purchase price is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date.
As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price adjustments may be recorded during the measurement period (a period not to exceed 12 months). Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives and the expected future cash flows and related discount rates, can materiality impact our results of operations. Significant inputs used for the model included the amount of cash flows, the expected period of the cash flows and the discount rates. The finalization of the purchase accounting assessment may result in a change in the fair value of the debt assumed and intangible assets, which may have a material impact on our results of operations and financial position.
On November 13, 2017, the Company acquired Arcadian Services. The purchase price, including the value of the indebtedness and payables of Arcadian, Services, is $1,339,600 based upon a deemed acquisition of all of the assets and liabilities of Arcadian, Services, including the equity interests in Arcadian Services.Arcadian. The aggregate purchase price consists of (i) initial investment in Arcadian of $195,900 (ii) $317,000 of forgiveness of a note receivable with the primary member of Arcadian (iii) assumption by Arcadian Services of subordinated debt (“Arcadian Notes”Note”) with a fair value of $555,000, plus accrued interest of $96,700 (iv) $175,000 payment for the redemption and cancellation of two warrants to purchase equity interests in Arcadian Services. The Arcadian NotesNote bears interest at an annual rate of 8% and matures on September 30, 2021.
Unaudited Pro Forma Financial Information
The following table summarizesunaudited pro forma statement of operations data presents the allocationcombined results of operations for the purchase consideration and the estimated fair value of the assets acquired and the liabilities assumed forsix months ended March 31, 2018 as if the acquisition of Arcadian Services made byhad taken place on October 1, 2017. The unaudited pro forma financial information includes the Company:
Assets acquired: | ||||
Cash | $ | 25,900 | ||
Accounts receivable | 57,100 | |||
Other assets | 24,000 | |||
Intangibles | 109,000 | |||
Goodwill | 1,386,800 | |||
Total assets acquired | $ | 1,602,800 | ||
Liabilities assumed | ||||
Accounts payable | $ | 147,700 | ||
Accrued other liabilities | 108,700 | |||
Notes payable | 6,800 | |||
Total liabilities assumed | $ | 263,200 | ||
Net assets acquired | $ | 1,339,600 | ||
Consideration paid: | ||||
Initial investment in Arcadian Services | 195,900 | |||
Long-term debt | 555,000 | |||
Accrued interest | 96,700 | |||
Payment on warrant outstanding | 175,000 | |||
Forgiveness of loan in relation of acquisition | 317,000 | |||
Total consideration | $ | 1,339,600 |
The weighted average useful lifeeffects of all identifiedcertain adjustments, including the amortization of acquired intangible assets is 3.9 years. The weighted average useful lives for trade names and customer relationships are 1.0 years and 4.0 years. Identifiable intangible assets with definite lives are amortized over the period of estimated benefit using the straight-line methodintangibles and the estimated useful livesassociated tax effect and the elimination of one to four years. The straight-line method of amortization represents the Company’s best estimate ofand the distribution of the economic value of the identifiable intangible assets.
As a result of theacquiree’s non-recurring acquisition the Company recorded $1,386,800 of goodwill. The goodwill balance is primarily attributed to the anticipated synergies from the acquisition and expanded market opportunities with respect to the integration of Arcadian Services’ products with the Company’s other solutions. The Company believes that the factors listed above support the amount of goodwill recorded as a result of the purchase price paid.
For the three months ended December 31, 2017, the Company incurred transaction costs of $438,600 in connection with the Arcadian Services acquisition, which were expensed as incurred and included in general and administrative expenses within the accompanying consolidated statements of operations.
Unaudited Pro Forma Financial Information related expenses.
The unaudited pro forma information presented does not purport to be indicative of the results that would have been achieved had the acquisitions been consummated at October 1, 20162017 nor of the results which may occur in the future. The pro forma adjustments are based upon available information and certain assumptions that the Company believes are reasonable.
For Three Months Ended December 31, | ||||||||
2017 | 2016 | |||||||
Revenues | $ | 267,200 | $ | 259,200 | ||||
Net income (loss) | $ | (2,949,100 | ) | $ | (1,789,000 | ) | ||
Net income (loss) per common share: | ||||||||
Basic and diluted | $ | (0.68 | ) | $ | (0.85 | ) | ||
Outstanding at Weighted average shares outstanding | 4,332,927 | 2,101,061 |
Pro Forma | Three Months Ended March 31, 2018 | Six Months Ended March 31, 2018 | ||||||
Revenues | $ | 459,900 | $ | 727,100 | ||||
Net income (loss) | (2,659,600 | ) | (5,605,300 | ) | ||||
Basic and diluted loss per share: | $ | (0.61 | ) | $ | (1.29 | ) | ||
Outstanding at weighted average shares outstanding | 4,362,564 | 4,347,745 |
Merger Agreement
On January 4, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, the Company’s wholly owned subsidiary, Athena Merger Subsidiary, Inc., a Delaware corporation (“Merger Sub”), and Emmaus Life Sciences, Inc., a Delaware corporation (“Emmaus”). Under the terms of the Merger Agreement, pending stockholder approval of the transaction, Merger Sub will merge with and into Emmaus with Emmaus surviving the merger and becoming a wholly-owned subsidiary of MYnd (the “Merger”). Subject to the terms of the Merger Agreement, at the effective time of the Merger, Emmaus stockholders will receive a number of newly issued shares of MYnd common stock determined using the exchange ratio described below in exchange for their shares of Emmaus stock. Following the Merger, stockholders of Emmaus will become the majority owners of MYnd.
The exchange ratio will be determined prior to closing and will cause the MYnd securityholders (including holders of options and warrants) prior to the effective time to collectively own 5.9% of the post-merger company on a fully diluted basis and Emmaus securityholders (including holders of options, warrants and convertible notes) prior to the effective time to collectively own 94.1% of the post-merger company on a fully diluted basis. The exchange ratio will reflect any dilution that may result from securities sold by MYnd or Emmaus prior to the closing of the Merger and any changes to the number of outstanding convertible securities of each company. The Merger Agreement provides that if Emmaus converts certain debt obligations into equity within six months of the completion of the Merger, Emmaus will issue additional shares (equal to 5.9% of the shares issued in connection with the debt conversion to third parties) to an existing subsidiary of MYnd which is expected to be spun-off to stockholders of MYnd prior to the effective time of the merger, as described below.
The post-merger company, led by Emmaus’ management team, is expected to be named “Emmaus Life Sciences, Inc.” Prior to the closing of the Merger, MYnd will seek shareholder approval to conduct a reverse split of its outstanding shares if necessary to satisfy listing requirements of the Nasdaq Capital Market (the “NasdaqCM”). The post-merger company is expected to trade on the NasdaqCM under a new ticker symbol. At the closing, the post-merger company’s board of directors is expected to consist of one member from MYnd and up to six members from Emmaus. The Merger has been unanimously approved by the Board of Directors of each company. The transaction is expected to close no later than July 31, 2019, subject to approvals by the stockholders of MYnd and Emmaus, and other closing conditions, including but not limited to the approval of the continued listing of the post-merger company’s common stock on the NasdaqCM, conversion of MYnd’s preferred stock into common stock, satisfaction of certain cash and debt conversion conditions and consummation of the MYnd spin-off described below.
The parties to the Merger Agreement have made representations and warranties to each other as of specific dates for the purpose of allocating risk and not for the purpose of establishing facts. Accordingly, the representations and warranties should not be relied on as characterizations of the actual state of facts.
The Merger Agreement contains certain termination rights for each of MYnd and Emmaus, and further provides that, upon certain terminations of the Merger Agreement, MYnd may be required to pay Emmaus a termination fee of $750,000 and Emmaus may be required to pay MYnd a termination fee of $750,000; provided that if the termination results from the failure to obtain the approval of the continued listing of the post-merger company’s common stock on the NasdaqCM, this fee payable by Emmaus will be $1,600,000. In connection with the termination of the Merger Agreement upon certain circumstances, either party also may be required to pay the other party’s third party expenses up to $600,000. The termination of the Merger Agreement will not relieve any party thereto from any liability or damages resulting from or arising out of any fraud or willful or intentional breach of any representation, warranty, covenant, obligation or other provision contained in the Merger Agreement.
Spin-Off
Prior to the closing of the Merger, we intend, subject to obtaining any required regulatory approvals and the completion of certain tax analyses, to transfer all of our businesses, assets and liabilities not assumed by Emmaus to our existing wholly-owned subsidiary, Telemynd, Inc., a Delaware corporation (“Telemynd”), pursuant to the terms of the Amended and Restated Separation and Distribution Agreement (the “Separation Agreement”) entered into on March 27, 2019 by us, Telemynd and MYnd Analytics, Inc., a California corporation (“MYnd California”). We intend to distribute all shares of Telemynd held by us to our stockholders of record as a future record date will be determined for such potential distribution.
The Separation Agreement: (i) amended and restated in its entirety that certain Separation and Distribution Agreement dated as of January 4, 2019, by and between MYnd and MYnd California (the “Prior Agreement”) and (ii) caused Telemynd to assume all of the rights and obligations of MYnd California under the Prior Agreement.
Pursuant to the Separation Agreement, the Telemynd Business (as defined in the Separation Agreement) would be separated from the Company upon, and subject to, the closing of the transactions contemplated by the Separation Agreement (provided that such transactions occur at all), and the Company intends to distribute all shares of Telemynd held by it to the Company’s stockholders of record as of a future record date to be determined for such potential distribution. The Separation Agreement includes the terms of the proposed spin-off and the distribution to the Company’s stockholders and includes representations and warranties, covenants and conditions, which would impact the terms of the proposed spin-off and distribution. The proposed spin-off will be subject to conditions and regulatory approvals not entirely under the control of the Company and the terms of the proposed spin-off, if and when completed, are subject to change. The foregoing summary of the Separation Agreement is not complete and qualified in its entirety by reference to the text of the Separation Agreement filed herewith.
Amendment to Merger Agreement
On May 10, 2019, the parties executed amendment no. 1 to the Merger Agreement. By executing amendment no. 1, MYnd, Emmaus and Merger Sub agreed that: (i) the definition "Parent California Subsidiary" should be amended to refer to Telemynd, Inc., the newly formed wholly-owned corporation, (ii) MYnd would not adopt a new equity incentive plan at closing, which had been contemplated previously and determined to be unnecessary at this time, (iii) MYnd would be entitled to receive credit in its Net Liabilities calculation for certain agreed upon prepaid costs, (iv) Telemynd would be entitled to receive shares of Emmaus after closing if the exchange ratio applicable to any Company Warrants, Company Convertible Notes or Company Debentures is reduced during the six (6) month period after the closing of the Merger for any reason, and (v) the outside termination date was extended from May 31, 2019 to July 31, 2019.
8. | STOCKHOLDERS’ EQUITY |
The Aspire Capital Equity Line Credit Lines
On December 6, 2016, the Company, entered into athe first common stock purchase agreement (the “Purchase“First Purchase Agreement”) with Aspire Capital Fund, LLC (“Aspire Capital”) which providesprovided that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital was committed to purchase up to an aggregate of $10.0 million of shares of the Company’s Common Stock over the 30-month term of the First Purchase Agreement. Concurrently with entering into the First Purchase Agreement, the Company also entered into a registration rights agreement with Aspire Capital (the “Registration Rights Agreement”), pursuant to which the Company maintained an effective registration statement registering the sale of the shares of Common Stock that were issued to Aspire under the First Purchase Agreement. Under the First Purchase Agreement, on any trading day selected by the Company on which the closing sale price of its Common Stock is equal to or greater than $0.50 per share, the Company had the right, in its sole discretion, to present Aspire Capital with a purchase notice, directing Aspire Capital (as principal) to purchase up to 50,000 shares of Common Stock per business day, up to $10.0 million of the Company’s common stock in the aggregate at a per share purchase price equal to the lesser of:
a) | the lowest sale price of Common Stock on the purchase date; or |
b) | the arithmetic average of the three (3) lowest closing sale prices for Common Stock during the twelve (12) consecutive trading days ending on the trading day immediately preceding the purchase date. |
In addition, on any date on which the Company submitted a purchase notice to Aspire Capital in an amount equal to 50,000 shares, and the closing sale price of its Common Stock is equal to or greater than $0.50 per share, the Company also had the right, in its sole discretion, to present Aspire Capital with a volume-weighted average price purchase notice (each, a “VWAP Purchase Notice”) directing Aspire Capital to purchase an amount of stock equal to up to 30% of the aggregate shares of Common Stock traded on its principal market on the next trading day (the “VWAP Purchase Date”), subject to a maximum number of shares the Company may determine. The purchase price per share pursuant to such VWAP Purchase Notice is generally 95% of the volume-weighted average price for Common Stock traded on its principal market on the VWAP Purchase Date.
The purchase price was subject to adjustment for any reorganization, recapitalization, non-cash dividend, stock split, or other similar transaction occurring during the period(s) used to compute the First Purchase Price. The Company could deliver multiple Purchase Notices and VWAP Purchase Notices to Aspire Capital from time to time during the term of the Purchase Agreement, so long as the most recent purchase has been completed.
The First Purchase Agreement provided that the Company and Aspire Capital would not effect any sales under the First Purchase Agreement on any purchase date where the closing sale price of the Company’s common stock was less than $0.50. There were no trading volume requirements or restrictions under the First Purchase Agreement, and the Company could control the timing and amount of sales of Common Stock to Aspire Capital. Aspire Capital had no right to require any sales by the Company, but was obligated to make purchases from the Company as directed by the Company in accordance with the First Purchase Agreement. There were no limitations on use of proceeds, financial or business covenants, restrictions on future fundings, rights of first refusal, participation rights, penalties or liquidated damages in the First Purchase Agreement. In consideration for entering into the Purchase Agreement, concurrently with the execution of the First Purchase Agreement, the Company issued to Aspire Capital 80,000 shares of Common Stock (the “ First Commitment Shares”). The First Purchase Agreement was terminated and replaced by the Second Purchase Agreement defined below on May 15, 2018. Aspire Capital has agreed that neither it nor any of its agents, representatives and affiliates shall engage in any direct or indirect short-selling or hedging of Common Stock during any time prior to the termination of the Purchase Agreement. Any proceeds from the Company receives under the First Purchase Agreement are expected to be used for working capital and general corporate purposes. The Company cannot request Aspire to purchase more than $100,000 per business day.
As of March 31, 2019, the Company has issued purchase notices to Aspire Capital under the First Purchase Agreement to purchase an aggregate of 1,180,000 shares of common stock, at a per share price of $2.00, resulting in gross cash proceeds of approximately $2.4 million. The issuance of shares of common stock that were issued from time to time to Aspire Capital under the First Purchase Agreement were exempt from registration under the Securities Act, pursuant to the exemption for transactions by an issuer not involving any public offering under Section 4(a)(2) of the Securities Act.
The Second Purchase Agreement with Aspire Capital
On May 15, 2018, the Company terminated the First Purchase Agreement, and entered into a second common stock purchase agreement (the “Second Purchase Agreement”) with Aspire Capital under substantially the same terms, conditions and limitations as the First Purchase Agreement which are: Aspire Capital is committed to purchase up to an aggregate of $10.0 million of shares of the Company’s Common Stock over the 30-month term of the Second Purchase Agreement. Concurrently with entering into the Second Purchase Agreement, the Company also entered into a registration rights agreement with Aspire Capital (the “Registration Rights Agreement”), pursuant to which the Company maintains an effective registration statement registering the sale of the shares of Common Stock that have and may be issued to Aspire under the Second Purchase Agreement. Under the Second Purchase Agreement, on any trading day selected by the Company on which the closing sale price of its Common Stock is equal to or greater than $0.50 per share, the Company has the right, in its sole discretion, to present Aspire Capital with a purchase notice, directing Aspire Capital (as principal) to purchase up to 50,000 shares of Common Stock per business day, up to $10.0 million of the Company’s common stock in the aggregate at a per share purchase price equal to the lesser of:
a) the lowest sale price of Common Stock on the purchase date; or
b) the arithmetic average of the three (3) lowest closing sale prices for Common Stock during the twelve (12) consecutive trading days ending on the trading day immediately preceding the purchase date.
In addition, on any date on which the Company submits a purchase notice to Aspire Capital in an amount equal to 50,000 shares, and the closing sale price of its Common Stock is equal to or greater than $0.50 per share, the Company also has the right, in its sole discretion, to present Aspire Capital with a volume-weighted average price purchase notice (each, a “VWAP Purchase Notice”) directing Aspire Capital to purchase an amount of stock equal to up to 30% of the aggregate shares of Common Stock traded on its principal market on the next trading day (the “VWAP Purchase Date”), subject to a maximum number of shares the Company may determine. The purchase price per share pursuant to such VWAP Purchase Notice is generally 95% of the volume-weighted average price for Common Stock traded on its principal market on the VWAP Purchase Date.
The purchase price will be adjusted for any reorganization, recapitalization, non-cash dividend, stock split, or other similar transaction occurring during the period(s) used to compute the Purchase Price. The Company may deliver multiple Purchase Notices and VWAP Purchase Notices to Aspire Capital from time to time during the term of the Second Purchase Agreement, so long as the most recent purchase has been completed.
The Second Purchase Agreement provides that the Company and Aspire Capital will not effect any sales under the Second Purchase Agreement on any purchase date where the closing sale price of the Company’s common stock is less than $0.50. There are no trading volume requirements or restrictions under the Second Purchase Agreement, and the Company will control the timing and amount of sales of Common Stock to Aspire Capital. Aspire Capital has no right to require any sales by the Company, but is obligated to make purchases from the Company as directed by the Company in accordance with the Second Purchase Agreement. There are no limitations on use of proceeds, financial or business covenants, restrictions on future fundings, rights of first refusal, participation rights, penalties or liquidated damages in the Second Purchase Agreement. In consideration for entering into the Second Purchase Agreement, concurrently with the execution of the Second Purchase Agreement, the Company issued to Aspire Capital 80,000250,000 shares of Common Stock (the “Commitment“Second Commitment Shares”). The Second Purchase Agreement may be terminated by the Company at any time, at its discretion, without any cost to the Company. Aspire Capital has agreed that neither it nor any of its agents, representatives and affiliates shall engage in any direct or indirect short-selling or hedging of Common Stock during any time prior to the termination of the Second Purchase Agreement. Any proceeds from the Company receives under the Second Purchase Agreement are expected to be used for working capital and general corporate purposes. The Company cannot request Aspire to purchase more than $100,000$300,000 per business day.
On February 23, 2017,As of March 31, 2019, the Company has issued purchase notices to Aspire Capital purchased 20,000under the Second Purchase Agreement to purchase an aggregate of 2,200,100 shares of Common Stock, at a per share price of $7.25,common stock, resulting in gross cash proceeds to the Company of $145,000.
approximately $3.7 million. The issuance of shares of common stock that may bewere issued from time to time to Aspire Capital under the Second Purchase Agreement arewere exempt from registration under the Securities Act, pursuant to the exemption for transactions by an issuer not involving any public offering under Section 4(a)(2) of the Securities Act.
Variable Interest Entities (VIE) Shareholder Approval for Removal of Exchange Cap
The Second Purchase Agreement previously restricted the amount of shares that may be sold to Aspire Capital thereunder to 1,134,671 shares of Common Stock (the "Exchange Cap"). On November 13, 2017, Arcadian Services entered into a management and administrative services agreement with Arcadian Telepsychiatry PA, which is located26, 2018, the Company received shareholder approval to remove the Exchange Cap in Texas, for an initial fixed term of 20 years. In accordance with relevant accounting guidance, PA is determined to be a Variable Interest Entity and MYnd is the primary beneficiarycompliance with the ability to direct the activities (excluding clinical decisions) that most significantly affect PA’s economic performance through its majority representationapplicable listing rules of the PA; therefore, PANasdaq Stock Market. Pursuant to Nasdaq Listing Rule 5635(d), shareholder approval is consolidatedrequired prior to the issuance of securities in connection with a transaction other than a public offering involving the sale, issuance or potential issuance by MYND. Asthe Company of Decembercommon stock (or securities convertible into or exercisable common stock) equal to 20% or more of the common stock outstanding before the issuance for less than the greater of book or market value of the stock. Following receipt of shareholder approval, the Company may issue an additional $8.1 million, up to an aggregate of $10 million, of common stock to Aspire Capital under the Second Purchase Agreement, with remaining availability of $6.3 million at March 31, 2017, PA owns no percentage of MYnd.2019.
On November 13, 2017, Arcadian Services entered into a management and administrative services agreement with Arcadian Telepsychiatry P.C., which is located in Pennsylvania, for an initial fixed term of 20 years. In accordance with relevant accounting guidance, PC is determined to be a Variable Interest Entity and MYnd is the primary beneficiary with the ability to direct the activities (excluding clinical decisions) that most significantly affect PC’s economic performance through its majority representation of the PC; therefore, PC is consolidated by MYND. As of December 31, 2017, PC owns no percentage of MYnd.
Common and Preferred Stock
As of September 30, 2017March 31, 2019, the Company wasis authorized to issue 515,000,000 shares of stock, of which 500,000,000 shares were Common Stock, and 15,000,000 shares were preferred stock.
As of December 31, 2017, the Company reduced the amount of stock it was authorized to issue to 265,000,000 shares of stock of which 250,000,000 shares were Common Stock,are common stock, and 15,000,000 shares were preferred stock.
Asshares, with a par value of December 31, 2017, 4,360,561$0.001 per shares of Common Stock were issued and outstanding. No sharesare blank-check preferred stock which the Board is expressly authorized to issue without stockholder approval, for one or more series of preferred stock were issuedand, with respect to each such series, to fix the number of shares constituting such series and the designation of such series, the voting powers, if any, of the shares of such series, and the preferences and relative, participating, optional or other special rights, if any, and any qualifications, limitations or restrictions thereof, of the shares of such series. The powers, preferences and relative, participating, optional and other special rights of each series of preferred stock, and the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding.
See “-2012 Omnibus Incentive Compensation Plan” below for a discussion of equity based awards granted under the Company’s incentive compensation plan.
Private Placement of Common Stock with Directors and Management
On November 30, 2016,September 21, 2018, the Company soldentered into definitive agreements with George C. Carpenter IV, President and issued an aggregate of 160,000 shares of its Common Stock, atthen Chief Executive Officer, Robin L. Smith, Chairman, as well as John Pappajohn, and Peter Unanue, each a per share price of $6.25, in a private placement to six accredited investors, for which it received gross cash proceeds of $1,000,000. Three of the six accredited investors are affiliatesdirector of the Company, and represented 50% of the cash proceeds as follows: Dr. Robin Smith, our Chairman of the Board purchased 16,000 shares for $100,000; John Pappajohn,entities affiliated with Michal Votruba, a member of the Board purchased 32,000 sharesof Directors of MYnd Analytics and Director of Life Sciences for $200,000; and the Tierney Family Trust, of which our former Board member, Thomas Tierney is a trustee, purchased 32,000 shares for $200,000.
On December 21, 2016, the Company sold and issued an additional 48,000 shares of its Common Stock, at a per share price of $6.25, inEuropean-based RSJ-Gradus fund, relating to a private placement to fourteen accredited investors,of an aggregate of 459,458 units for which it received gross cash proceeds$1.85 per unit, with each unit consisting of $300,000.
On December 29, 2016, the Company sold and issued an additional 32,000 shares of its Common Stock, at a perone share price of $6.25, in a private placement to two accredited investors, resulting in gross cash proceeds of $200,000, in which one investor, John Pappajohn, a member of the Board, purchased 16,000 shares for $100,000.
From February 10, 2017 through March 21, 2017, the Company sold and issued an additional 237,000 shares of its Common Stock, at a per share price of $6.25, in private placements to four affiliated and accredited investors, resulting in gross cash proceeds to the Company of $1,481,300. The affiliated investors were as follows: RSJ, purchased 160,000 shares for $1,000,000; John Pappajohn, a member of the Board, purchased 72,000 shares for $450,000; Geoffrey Harris is a member of the Board purchased 5,000 shares for $31,300. RSJ is a greater than 10% stockholder of the Company and Michal Votruba, who serves as a Director for Life Sciences at the RSJ/Gradus Fund, has served as a member of our Board since July 30, 2015. The subscription agreement between the Company and RSJ provided for the grant to RSJ by the Company of a right of first refusal through June 30, 2018, to license or to have distribution rights in Europe with respect to any of the Company’s technology and/or intellectual property.
These private placements were made pursuant to an exemption from registration afforded by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Regulation D thereunder.
Stock Dividend Warrants
On July 13, 2017, the Company declared a special dividend of warrants to purchase shares of the Company’s common stock to record holders of Common Stock as of such date. Warrants to purchase 2,539,061 shares of Common Stock were distributed pro rata to all holders of common stock on the record date. These warrants will be exercisable (in accordance with their terms)and one common stock purchase warrant to purchase one share of common stock, at an exercise price of $5.25Common Stock for $2.00 per share. The warrants will become exercisable commencing not less than 12 months following their July 27, 2017 distribution date and will expire five years thereafter.
The dividend warrant has an exercise price of $5.25 and expires on July 26, 2022. We estimated the fair value of the dividend warrant at issuance date to be $16,375,394 using the Black-Scholes option valuation model with the following assumptions: market price of the stock of $6.55 per share, time to maturity of five years, volatility of 211.6%, zero expected dividend rate and risk-free rate of 1.89%. These warrants qualify for equity treatment. The allocation of the fair value of these warrants was included in additional paid-in capital on the consolidated balance sheet. The Company also recognized a dividend related to the dividend warrants as every shareholder was entitled to receive one warrant for every share of common stock for no consideration given. Accordingly, the Company recognized a $16,375,394 dividend at closing.
Underwritten Public Offering
In July 2017, the Company completed an underwritten public offering of its Common Stock and warrants, raising gross proceeds of approximately $8.79 million. In the offering, the Company sold 1,675,000 shares of Common Stock and accompanying warrants to purchase up to 1,675,000 shares of Common Stock (the “Warrants”), at a combined public offering price of $5.25 per share and accompanying Warrant, for a total offering size of $8,793,750. The Warrants were immediately exercisable for one share of Common Stock at an exercise price of $5.25 per share, subject to adjustments, and will expire five years after the issuance date. In connection with the offering, the Company granted the representative of the underwriters a 45-day option to purchase up to 251,250 additional shares of Common Stock and/or Warrants to cover over-allotments, if any. On August 24, 2017 the underwriters exercised their option and purchased 213,800 common stock warrants for $0.01 per warrant. The warrants were immediately exercisable for one share of common stock at an exercise price of $5.25 per share, subject to adjustments, and will expire five years after the issuance date.
As part of the underwritten public offering on July 19, 2017, the Company issued 134,000 common stock warrants to the underwriters as part of the services performed by them in connection with the underwritten public offering.
On August 23, 2017, the Company issued 213,800 common stock warrants to underwriters as part of the overallotment attributed to the July 2017 underwritten public offering. Gross proceeds amounted to $2,100.
Stock-Option Plans and Stock-Based Compensation
2006 Stock Incentive Plan
On August 3, 2006, CNS CaliforniaResponse, Inc. adopted the CNS California 2006 Stock Incentive Plan (the “2006 Plan”). The 2006 Plan providesprovided for the issuance of awards in the form of restricted shares, stock options (which may constitute incentive stock options (ISO) or non-statutory stock options (NSO), stock appreciation rights and stock unit grants to eligible employees, directors and consultants and is administered by the Board. A total of 3,339 shares of stock were ultimately reserved for issuance under the 2006 Plan. As of DecemberMarch 31, 2017,2019, zero options were exercised and there were 1,5131,435 option shares outstanding under the amended 2006 Plan. The outstanding options have exercise prices to purchase shares of Common Stockcommon stock ranging from $2,400 to $5,760$3,300 per share.
2012 Omnibus Incentive Compensation Plan
On March 22, 2012, our Board approved the MYnd Analytics, Inc. 2012 Omnibus Incentive Compensation Plan (the “2012 Plan”), reserved 1,667 shares of stock for issuance and on December 10, 2012, the Board approved the amendment of the 2012 Plan to increase the shares authorized for issuance from 1,667 shares to 27,500 shares. On March 26, 2013, the Board further approved the amendment of the 2012 Plan to increase the shares authorized for issuance from 27,500 shares to 75,000 shares. The 2012 Plan, as amended, was approved by our stockholders at the 2013 annual meeting held on May 23, 2013.
On April 5, 2016, the Board approved a further amendment of the 2012 Plan to increase the Common Stock authorized for issuance from 75,000 shares to 200,000 shares.
On September 22, 2016 the Board amended the 2012 Plan to: (i) increase the total number of shares of Common Stock available for grant under the 2012 Plan from 200,000 shares to an aggregate of 500,000 shares, (ii) add an “evergreen”"evergreen" provision which, on January 1st of each year through 2022, automatically increases the number of shares subject to the 2012 Plan by the lesser of: (a) a number equal to 10% of the shares of Common Stock authorized under the 2012 Plan as of the preceding December 31st, or (b) an amount, or no amount, as determined by the Board, but in no event may the number of shares of Common Stock authorized under the 2012 Plan exceed 885,781 and (iii) increase the annual individual award limits under the 2012 Plan to 100,000 shares of Common Stock, subject to adjustment in accordance with the 2012 Plan. Per the above mentioned “evergreen” provision, an additional 50,000 shares were automatically allocated for distribution under the 2012 Plan as of January 1, 2017.
At the 2017 Annual Meeting of Stockholders of MYnd Analytics, Inc. (“the Company”),Company, held on August 21, 2017 (the “2017 Annual Meeting”), the holders of the Company’s common stock voted to amend the Company’s 2012 Omnibus Incentive Compensation Plan (the “2012 Plan”) to increase: (i) the total number of shares of common stock, par value $0.001 per share (“("Common Stock”Stock"), available for grant under the 2012 Plan (subject to the overall limits described in clause (ii) below) from 550,000 shares to an aggregate of 975,000 shares; (ii) the aggregate limitation on authorized shares available for grant under the 2012 Plan, following any increases pursuant to the evergreen provision, from 885,781 shares to 1,570,248 shares and (iii) the annual individual award limits under the 2012 Plan to 150,000 shares of Common Stock (subject to adjustment in accordance with the 2012 Plan);
On September 22, 2016, the Board granted options to purchase 144,000 shares of Common Stock under the 2012 Plan at an exercise price of $6.00 to certain directors and officers as follows:
On September 22, 2016, pursuant to the 2012 Plan, the Board granted shares of Common Stock to Board members as follows: 40,000 shares to our Chairman, Dr. Smith, and 20,000 shares to each of our directors, Messrs. Pappajohn, Follman, Harris and Votruba. Mr. Votruba’s shares are assigned to RSJ. These shares, were valued at $6.00 per share, the closing price of the shares on the day of grant, and were valued in aggregate at $720,000. Our outgoing directors, Mr. McAdoo and Mr. Sassine were offered stock, however, elected to each receive 20,000 fully vested options to purchase shares of Common Stock.
On September 29, 2016, pursuant to the 2012 Plan, the Board granted 20,000 shares of Common Stock to Thomas Tierney upon his appointment to the Board. These shares were valued at $6.00 per share, the closing price of the shares on the day of grant, and were valued in aggregate at $120,000.
On October 2, 2016,At the Compensation Committee2018 Annual Meeting of Stockholders of the Board granted options to purchase 102,000 shares ofCompany, held on April 4, 2018 (the “2018 Annual Meeting”), the Company’s Common Stock under the 2012 Plan to staff members. These options vest pro-rata over 12 months starting on the date of grant. Exercise price of the options was the closing price on the OTC-QB of the Company’s Common Stock on the date of grant which was $6.00 per share.
On July 27, 2017, the Compensation Committee of the Board granted options to purchase 5,000 shares of the Company’s Common Stock under the 2012 Plan to a staff member. These options vest based on certain milestones being met. Exercise price of the options was the closing price on the OTC-QB of the Company’s Common Stock on the date of grant which was $7.25 per share.
On March 31, 2017, the Compensation Committee of the Board granted options to our Chief Financial Officer Mr. D’Ambrosio to purchase 18,000 sharesholders of the Company’s common stock at an exercise pricevoted to amend the 2012 Plan to increase (i) the total number of $5.90 per share, which was the closing price on the OTC-QBshares of the Company’s Common Stock on the date ofavailable for grant with: (i) the option to purchase 15,000 shares vesting in equal monthly installments over 36 months from March 31, 2017, and (ii) the option to purchase 3,000 shares which vested upon the Company’s successful listing of its common stock on a national securities exchange.
On May 30, 2017, the Compensation Committee of the Board granted options to purchase 10,000 shares of the Company’s Common Stock under the 2012 Plan (subject to a staff member. These options vest basedthe overall limit described in clause (ii) below) from 1,072,500 shares to an aggregate of 1,500,000 shares and (ii) the aggregate limitation on certain milestones being met. Exercise pricethe authorization shares available for grant under the 2012 Plan, following any increases pursuant to the evergreen provision, from 1,570,248 shares to 2,200,000 shares.
At the Special Meeting of Stockholders of the options wasCompany, held on November 26, 2018, the closing price on the OTC-QBholders of the Company’s Common Stock oncommon and preferred stock voted to (i) amend the date2012 Plan to eliminate the annual individual award limits under the 2012 Plan and (ii) amend 2012 Plan to increase: (a) the total number of grant which was $6.00shares of common stock, par value $0.001 per share as(“Common Stock”), available for grant under the 2012 Plan (subject to the overall limits described in clause (b) below) from 1,500,000 shares to an aggregate of September 30, 2017, 2,000 options are fully vested. 2,250,000 shares and (b) the aggregate limitation on authorized shares available for grant under the 2012 Plan, following any increases pursuant to the evergreen provision (the “Evergreen Provision”), from 2,200,000 shares to 2,950,000 shares.
Amendment to Chief Executive Officer’s Agreement
On July 14, 2017,April 19, 2018, the Company and George C. Carpenter, IV, the former CEO of the Company, entered into a Chairman Services Agreement (the “Agreement”) with Robin L. Smith, M.D., the Chairman of the Company’s board of directors (the “Board”). Pursuant to the Agreement, Dr. Smith is also entitled to receive the following equity awards: (a) on the Effective Date, a grant of 25,000 shares of restricted stock (vesting immediately) under the 2012 Plan; (b) on the Effective Date, options to purchase 75,000 shares of Common Stock under the Plan; and (c) on the date of the Company’s 2017 annual meeting of stockholders, an award of options to purchase 50,000 shares of Common Stock (the “2017 Option Award”) was granted. In addition, at each annual meeting of stockholders of the Company thereafter beginning in 2018 during the Term, Dr. Smith will be entitled to receive a grant of 25,000 shares of restricted stock (vesting immediately) under the Plan and options to purchase 75,000 shares of Common Stock under the Plan. Other than the 2017 Option Award, all options granted under the Agreement will vest 1/3 on the date of grant, 1/3 on the six month anniversary of the date of grant and 1/3 on the twelve month anniversary of the date of grant. The 2017 Option Award will vest on December 1, 2018. Pursuant to the Agreement, all options owned by Dr. Smith will remain exercisable for a period of 10 years from the date of grant, even if Dr. Smith is no longer with the Company.
On July 26, 2017, the Compensation Committee of the Board granted options to purchase 5,000 shares of the Company’s Common Stock under the 2012 Plan to a staff member. These options vest based on certain milestones being met. Exercise price of the options was the closing price on the OTC-QB of the Company’s Common Stock on the date of grant which was $4.15 per share.
On July 31, 2017, the Compensation Committee of the Board granted options to purchase 10,000 shares of the Company’s Common Stock under the 2012 Plan to a staff member. These options vest based on certain milestones being met. Exercise price of the options was the closing price on the OTC-QB of the Company’s Common Stock on the date of grant which was $3.81 per share.
On August 21, 2017, the award (“Option Grant 2”) was granted, and approved by the board of directors of the Registrant, subject to stockholder approval of an amendment to a provisionhis Employment Agreement, dated as of the Registrant’s Plan,September 7, 2007 (the “CEO Amendment"), pursuant to which Mr. Carpenter’s annual salary was reduced from $270,000 to $206,250. This change is retroactive to April 13, 2018. Further, pursuant to the Agreement. The Registrant’s stockholders approved the amendment to the provision of the PlanCEO Amendment, Mr. Carpenter was granted options to purchase 50,000 shares of Common Stock under the 2012 Plan at an exercise price of $4.16 per share to Robin L. Smith, M.D., the Chairman of the Company’s board of directors (the “Board”).
On August 22, 2017, the Compensation Committee of the Board granted options to purchase 5,000 shares of the Company’s Common Stock under the 2012 Plan to a staff member. These options vest based on certain milestones being met. Exercise price of the options was the closing price on the OTC-QB of the Company’s Common Stock on the date of grant which was $4.10 per share.
On September 19, 2017, the Board granted (i) 12,000 shares of34,380 restricted common stock under the 2012 Plan to each of Messrs. Pappajohn, Unanue and Votruba, and (ii) 18,000 shares of restricted common stock under the 2012 Plan to to Mr. Harris, who serves as the Audit Committee chairperson. Mr. Votruba’s shares of restricted common stock are assigned to RSJ.
On September 19, 2017, the Board granted (i) options to purchase 12,000 shares of common stock under the 2012 Plan to each of Messrs. Pappajohn, Unanue and Votruba, and (ii) options to purchase 18,000Plan. The shares of common stockgranted under the 2012 PlanCEO Amendment will vest quarterly. If the employee’s relationship with the Company is terminated, the above grant will be prorated. On or before December 31, 2018, the parties will review this modification to Mr. Harris, who serves asdetermine if the Audit Committee chairperson. All such optionsabove salary reduction adjustment will be renewed. As of May 9, 2019, the parties have an exercise price of $3.60, which wasnot amended the closing price on the date of grant of our common stock on the Nasdaq Capital Market. Mr. Votruba’s options are assigned to RSJ.modification.
On November 5, 2017, the Board granted optionsAppointment of Chief Innovation Officer; Amendment to purchase 20,000 shares of common stock under the 2012 Plan to David Nash, with an exercise price of $3.88, and will vest quarterly over the following year.
On November 13, 2017, the Board granted options to purchase 35,000 shares of common stock under the 2012 Plan to Robert Plotkin, with an exercise price of $3.96, for which 11,667 shares vest immediately, 11,667 shares vest on November 13, 2019, and rest 11,666 shares will vest on the date Arcadian Services achieves aggregate revenues of at least $2.5 million from and after November 13, 2017.
On December 18, 2017, the Board granted options to purchase 5,000 shares of common stock under the 2012 Plan to each of the three staff members, with an exercise price of $3.74, for which 1,000 shares vest upon achieving individual revenues of $150,000; 1,000 shares vest upon achieving individual revenues of $325,000; 1,000 shares vest upon achieving individual revenues of $500,000; 1,000 shares vest upon achieving individual revenues of $625,000; 1,000 shares vest upon achieving individual revenues of $725,000.Former CEO Employment Agreement
As of December 31, 2017,12, 2018, George C. Carpenter, IV no longer served in the position of Chief Executive Officer and became, in addition to President, the Chief Innovation Officer of the Company. In connection therewith, on December 12, 2018, the Company and Mr. Carpenter entered into an amendment to his Employment Agreement, dated as of September 7, 2007 (the “Carpenter Amendment”), pursuant to which Mr. Carpenter was given the title of President and Chief Innovation Officer of the Company. Pursuant to the Carpenter Amendment, Mr. Carpenter received an option to purchase 50,000 shares of common stock of the Company, with such option vesting over a twelve-month period.
Appointment of Patrick Herguth as CEO; Herguth Employment Agreement
Effective December 12, 2018, the Company appointed Patrick Herguth to the position of Chief Executive Officer.
In connection with Mr. Herguth’s appointment to the position of Chief Executive Officer, the Company entered into an employment agreement with Mr. Herguth, dated as of December 12, 2018 (the “Herguth Employment Agreement”). Pursuant to the Herguth Employment Agreement, Mr. Herguth will serve as the Company’s Chief Executive Officer and will receive a base annual compensation of $325,000, subject to periodic increases. For fiscal year 2019, Mr. Herguth is eligible to receive a performance bonus in a target amount of $340,000, with payment of such bonuses subject to achievement of certain performance goals set forth in the Herguth Employment Agreement. The employment agreement also provides that Mr. Herguth will receive an option to purchase up to 200,000 shares of the Company’s common stock, subject to the time-based vesting schedule and up to 200,000 shares of the Company’s common stock subject to a performance-based vesting schedule, both as specified in the Herguth Employment Agreement, with options to purchase 577,54650,000 of such shares vesting on the date of the Herguth Employment Agreement. The time-based options will be subject to vesting upon a change of control of the Company.
Election of Patrick Herguth to the Board of Directors
Effective December 12, 2018, the Board increased the number of directors on the Board by one and elected Mr. Herguth to the Board to serve as a director of the Company to fill the vacancy created by such increase. Mr. Herguth has not been appointed to any committee of the Board.
Stock-based Compensation and Expenses
As of March 31, 2019, options to purchase 1,428,500 shares of Common Stock were outstanding under the 2012 Plan with exercise prices ranging from $3.60$1.20 to $600,$600.00 per share, with a weighted average exercise price of $6.64.$3.05 per share. Additionally, 280,250580,564 restricted shares of Common Stock have been issuedgranted under the 2012 Plan, leaving 117,204465,936 shares of Common Stock available to be awarded. awarded under the 2012 Plan.
Stock-based compensation expenses are generally recognized over the employees’ or service provider’s requisite service period, generally the vesting period of the award. Stock-based compensation expense included in the accompanying unaudited condensed consolidated statements of operations for the threesix months ended DecemberMarch 31, 20172019 and 20162018 is as follows:
Three months ended December 31 | Six months ended March 31, | |||||||||||||||||||||||
2017 | 2016 | 2019 | 2018 | |||||||||||||||||||||
Stock-based compensation expense by type of award: | ||||||||||||||||||||||||
Stock options | $ | 117,400 | $ | 287,600 | ||||||||||||||||||||
Restricted stock | 219,200 | 213,400 | ||||||||||||||||||||||
Total stock-based compensation expenses | $ | 336,600 | $ | 501,000 | ||||||||||||||||||||
Stock-based compensation options | Stock-based compensation expense - restricted shares | Stock-based compensation expense - stock options | Stock-based compensation expense restricted shares | |||||||||||||||||||||
Stock-based compensation expense by line item: | ||||||||||||||||||||||||
Research | $ | — | $ | 6,600 | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Product development | 100 | 97,400 | 29,200 | 17,800 | 100 | — | ||||||||||||||||||
Sales and marketing | 100 | 22,500 | 12,000 | — | 100 | — | ||||||||||||||||||
General and administrative | 336,400 | 374,500 | 404,200 | 312,100 | 302,900 | 289,900 | ||||||||||||||||||
Total | $ | 336,600 | $ | 501,000 | $ | 445,400 | $ | 329,900 | $ | 303,100 | $ | 289,900 |
Total unrecognized stock compensation expense as of DecemberMarch 31, 20172019 amounted to $1,173,000.$334,900.
The following table sets forth the Company’s unrecognized stock-based compensation expense, net of estimated forfeitures, by type of award and the weighted-average period over which that expense is expected to be recognized:
December 31 | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Unrecognized Expense, net of estimated forfeitures | Weighted average Recognition Period (in years) | Unrecognized Expense, net of estimated forfeitures | Weighted average Recognition Period (in years) | |||||||||||||
Type of Award: | ||||||||||||||||
Stock Options | $ | 963,200 | 8.82 | $ | 474,300 | 9.01 | ||||||||||
Restricted Stock | $ | 209,800 | 0.74 | $ | — | 0 | ||||||||||
Total | $ | 1,173,000 | 7.86 | $ | 474,300 | 9.01 |
March 31, | ||||||||||||||||
2019 | 2018 | |||||||||||||||
Type of Award: | Unrecognized Expense, net of estimated forfeitures | Weighted average Recognition Period (in years) | Unrecognized Expense, net of estimated forfeitures | Weighted average Recognition Period (in years) | ||||||||||||
Stock Options | $ | 329,600 | 1.40 | $ | 682,900 | 0.53 | ||||||||||
Restricted Stock | 5,300 | 0.05 | 139,100 | 0.48 | ||||||||||||
Total | $ | 334,900 | 1.38 | $ | 822,000 | 0.52 |
A summary of all stock option activity is as follows:
Number of Shares | Weighted Average Exercise Price | Weighted-Average Remaining Contractual Term (in years) | Intrinsic Value | |||||||||||||
Outstanding at September 30, 2017 | 554,083 | $ | 16.14 | 8.29 | $ | 11,340 | ||||||||||
Granted | 70,000 | 3.85 | — | — | ||||||||||||
Exercised | — | — | — | — | ||||||||||||
Forfeited or expired | (45,024 | ) | 8.69 | |||||||||||||
Outstanding at December 31, 2017 | 579,059 | $ | 15.24 | 8.82 | $ | — |
Number of Shares | Weighted Average Exercise Price | Weighted- Average Remaining Contractual Term (in years) | Intrinsic Value | |||||||||||||
Outstanding at September 30, 2018 | 803,937 | $ | 10.13 | 8.75 | $ | 7,500 | ||||||||||
Granted | 864,758 | 1.34 | — | |||||||||||||
Exercised | — | — | — | |||||||||||||
Forfeited or expired | (38,760 | ) | 2.28 | |||||||||||||
Outstanding at March 31, 2019 | 1,629,935 | $ | 5.65 | 8.89 | $ | 52,600 |
There are 344,934825,100 options vested and 234,125804,835 unvested as of DecemberMarch 31, 2017;2019; there are 352,812531,604 options vested and 201,271272,333 options unvested as of September 30, 2017; 2018;
Following is a summary of the restricted stock activity for the threesix months ended DecemberMarch 31, 2017:2019:
Number of Shares | Weighted Average Grant Date Fair Value | Number of Shares | Weighted Average Grant Date Fair Value | ||||||||||||
Outstanding at September 30, 2017 | 222,750 | $ | 5.31 | ||||||||||||
Outstanding at September 30, 2018 | 406,564 | $ | 4.09 | ||||||||||||
Granted | 57,500 | 3.88 | 174,000 | 1.35 | |||||||||||
Forfeited | — | — | — | — | |||||||||||
Outstanding at December 31, 2017 | 280,250 | $ | 5.02 | ||||||||||||
Outstanding at March 31, 2019 | 580,564 | $ | 3.27 |
There are 219,021567,469 shares of restricted stock vested and 61,22913,095 unvested as of DecemberMarch 31, 2017;2019; there are 167,708351,522 shares of restricted stock vested and 55,042 unvested as of September 30, 2017;
Awards of Restricted Stock
On November 5, 2017, the Board granted 20,000 shares of restricted common stock under the 2012 Plan to David Nash.
On November 13, 2017 George C. Carpenter IV, President and Chief Executive Officer of the Company; Donald D’Ambrosio, Chief Financial Officer and the Chairman Robin L. Smith, were each granted 7,500 shares. In addition, the Company granted another 15,000 shares of restricted common stock to various employees as satisfaction of certain performance criteria. 2018;
The range of Black-Scholes option-pricing model assumption inputs for all the valuation dates are in the table below:
Three months ended December 31, 2017 | Six Months Ended March 31, 2019 | |||||||||||||||
Low | High | Low | High | |||||||||||||
Annual dividend yield | — | % | — | % | — | % | — | % | ||||||||
Expected life (years) | 5 | 5 | 3.0 | 5.0 | ||||||||||||
Risk-free interest rate | 1.99 | % | 2.87 | % | 2.23 | % | 2.90 | % | ||||||||
Expected volatility | 209.77 | % | 210.39 | % | 172.89 | % | 200.47 | % |
Expected Dividend Yield. The Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the foreseeable future.
Expected Life. The Company elected to utilize the “simplified” method for “plain vanilla” options to value stock option grants. Under this approach, the weighted-average expected life is presumed to be the average of the vesting term and the contractual term.
Expected Volatility.The expected volatility rate used to value stock option grants is based on the historical volatilities of the Company’s common stock.
Risk-free Interest Rate. The risk-free interest rate assumption was based on U.S. Treasury bill instruments that had terms consistent with the expected term of the Company’s stock option grants.
Warrants to Purchase Common StockThe warrant activity for the six months ended March 31, 2019, are described as follows:
Number of Shares | Weighted Average Exercise Price | |||||||
Outstanding at September 30, 2018 | 6,075,874 | $ | 4.53 | |||||
Expired/ Forfeited | (555 | ) | 55.00 | |||||
Outstanding at March 31, 2019 | 6,075,319 | $ | 4.52 |
As of December 31, 2017 and September 30, 2017, there were 4,567,672 warrants outstanding with a weighted average exercise price of $5.30. There was no warrant activity during the three month period ended December 31, 2017.
Following is a summary of the status of warrants outstanding at DecemberMarch 31, 2017: 2019:
Exercise Price | Exercise Price | Number of Shares | Expiration Date | Weighted Average Exercise Price | Exercise Price | Number of Shares | Expiration Date | Weighted Average Exercise Price | |||||||||||||||||||
$ | 5.25 | 2,539,061 | (1) | 07/2022 | $ | 5.25 | 2.00 | 459,458 | (1) | 09/2023 | $ | 2.00 | |||||||||||||||
5.25 | 1,675,000 | (2) | 07/2022 | 5.25 | 2.34 | 1,050,000 | (2) | 03/2023 | 2.34 | ||||||||||||||||||
5.25 | 213,800 | (3) | 07/2022 | 5.25 | 5.25 | 2,539,061 | (3) | 07/2022 | 5.25 | ||||||||||||||||||
6.04 | 134,000 | (4) | 07/2022 | 6.04 | 5.25 | 1,675,000 | (4) | 07/2022 | 5.25 | ||||||||||||||||||
9.44 | 191 | 03/2018 | 9.44 | 5.25 | 213,800 | (5) | 07/2022 | 5.25 | |||||||||||||||||||
10.00 | 4,000 | (5) | 06/2021 | 10.00 | 6.04 | 134,000 | (6) | 07/2022 | 6.04 | ||||||||||||||||||
$ | 55.00 | 1,620 | 06/2018 – 03/2019 | 55.00 | |||||||||||||||||||||||
Total | 4,567,672 | $ | 5.30 | 10.00 | 4,000 | 06/2021 | 10.00 | ||||||||||||||||||||
Total | 6,075,319 | $ | 4.52 |
(1) | On September 21, 2018, the Company entered into definitive agreements with George C. Carpenter IV, President and former Chief Executive Officer, Robin L. Smith, Chairman, as well as John Pappajohn, and Peter Unanue, each a director of the Company, and entities affiliated with Michal Votruba, a member of the Board of Directors of MYnd Analytics and Director of Life Sciences for the European-based RSJ-Gradus fund, relating to a private placement of an aggregate of 459,458 units for $1.85 per unit, with each unit consisting of one share of Common Stock and one Common Stock Purchase Warrant to purchase one share of Common Stock for $2.00 per share. The closing price per share of the Common Stock on the Nasdaq Stock Market on September 20, 2018 was $1.72 per share. |
On March 29, 2018, the Company sold an aggregate of 1,050,000 units for $2.00 per Unit each consisting of one share of newly-designated Series A Preferred Stock, and one warrant in a private placement to three affiliates of the Company, for gross proceeds of $2.1 million. The private placement closed on March 29, 2018. The closing price per share of the Common Stock on the Nasdaq Stock Market on March 29, 2018 was $1.19 per share. |
(3) | On July 13, 2017, the Company declared a special dividend of warrants to purchase shares of the Company’s common stock to record holders of Common Stock as of such date. Warrants to purchase 2,539,061 shares of Common Stock were distributed pro rata to all holders of common stock on the record date. These warrants |
On July 19, 2017, the Company issued 1,675,000 shares of Common Stock and accompanying Warrants to purchase up to 1,675,000 shares of Common Stock in connection with an underwritten public offering. |
On August 23, 2017, the Company issued warrants to purchase 213,800 shares of common stock |
As part of the underwritten public offering on July 19, 2017, the Company issued warrants to purchase 134,000 shares of common stock |
9. RELATED PARTY TRANSACTIONS
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the 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. Valuation allowances are recorded, when necessary, to reduce deferred tax assets to the amount expected to be realized.
As a result of the implementation of certain provisions of ASC 740,Income Taxes, which clarifies the accounting and disclosure for uncertainty in tax positions, the Company has analyzed filing positions in each of the federal and state jurisdictions where required to file income tax returns, as well as all open tax years in these jurisdictions. We have identified U.S. Federal and California as our major tax jurisdictions. Generally, we remain subject to Internal Revenue Service examination of our 2013 through 2016 U.S. federal income tax returns, and remain subject to California Franchise Tax Board examination of our 2012 through 2016 California Franchise Tax Returns. We have certain tax attribute carryforwards which will remain subject to review and adjustment by the relevant tax authorities until the statute of limitations closes with respect to the year in which such attributes are utilized.
We believe that our income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change to our financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740. Our policy for recording interest and penalties associated with income-based tax audits is to record such items as a component of income taxes.
The Tax Cuts and Jobs Act (the Act) was enacted on December 22, 2017. The Act reduces the US Federal corporate tax rate from 35% to 21%. The reduction in the US Federal tax rate would not have an impact, thus no benefit or expense needs to be recognized in our tax provision for the period ended December 31, 2017. The Company’s Federal net deferred tax assets currently are in a full valuation allowance position and will continue to be in a full valuation allowance position, therefore the rate reduction does not affect the net deferred Federal tax asset balance. Additionally, for the Company’s state net deferred tax asset balance, the state deferred rate has been determined at the full amount without a reduction for the Federal benefit (no benefit recognized in a full valuation allowance), and therefore the state deferred rate and net deferred tax asset balances would not change with the reduction in the Federal tax rate.
Current and non–current deferred taxes have been recorded on a net basis in the accompanying balance sheet. The Act reduces the U.S. statutory tax rate from 35% to 21%, effective January 1, 2018. During the three months ended December 31, 2017, the Company recorded a $6.2 million tax expense representing the detriment of remeasuring its U.S. deferred tax assets at the lower 21% statutory tax rate, as well as a corresponding full valuation allowance for the same amount resulting in no impact to our Statement of Operations. As of December 31, 2017, the Company had Federal net operating loss carryforwards of approximately $10.8 million and State net operating loss carryforwards of approximately $2.0 million, both tax effected. Both the Federal and State net operating loss carryforwards will begin to expire in 2022 and 2018 respectively. Our ability to utilize net operating loss carryforwards may be limited in the event that a change in ownership, as defined in the Internal Revenue Code, occurs in the future.
The Company has placed a valuation allowance against the deferred tax assets in excess of deferred tax liabilities due to the uncertainty surrounding the realization of such excess tax assets. Management periodically evaluates the recoverability of the deferred tax assets and the level of the valuation allowance. At such time as it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be reduced accordingly.
DCA Agreement
On September 25, 2013, the Board approved a consulting agreement effective May 1, 2013, for marketing services provided by Decision Calculus Associates ("DCA"), an entity operated by Mr. Carpenter’s spouse, Jill Carpenter. Effective August 2015, DCA was engaged at a fee of $10,000 per month. From August 2015 through February 2017, DCA has been paid $170,000. The Decision Calculus Associates (“DCA”)DCA contract was renewed at $3,000 a month effective March 1, 2017. On May 1, 2018, the Company amended the agreement with DCA to reduce the monthly fee to $2,000 a month. The amendment provides for a term of one year with a 30 day termination clause. The Company incurred $9,000fees of $6,000 and $25,000$9,000 for the three months ended DecemberMarch 31, 20172019 and 2016,2018, respectively. The Company incurred fees of $12,000 and $18,000 for the six months ended March 31, 2019 and 2018, respectively. The agreement with DCA was terminated on April 20, 2019.
Hooper Holmes Agreement
In 2016, we entered into an agreement with Hooper Holmes Inc, infor which Dr. Smith, our Chairman of the Board, became an advisory member of its board as of March 16, 2017, and in which Mr. Pappajohn, our director, has participated in equity raises to become the beneficial owner of a greater than 10% interest. Hooper Holmes performs EEGs nationwide to patients who wish to obtain a PEER report. The Company incurred $36,400paid $0 and $0$54,300 for these services during the three months ended March 31, 2019 and 2018, respectively. The Company paid $2,600 and $90,700 for these services during the six months ended March 31, 2019 and 2018, respectively. The agreement with Hooper Holmes was deleted on December 31, 2017 and 2016, respectively. 2018.
Investment in Arcadian Telepsychiatry LLC Private Placement with Directors and Management
On April 1, 2017,September 21, 2018, the Company entered into definitive agreements with George C. Carpenter IV, President and then Chief Executive Officer, Robin L. Smith, Chairman, as well as John Pappajohn, and Peter Unanue, each a Master Purchase and Option Agreement with Arcadian Telepsychiatry LLC (“Arcadian”), a Pennsylvania based Limited Liabilitydirector of the Company, and Mr. Robert Plotkin. Consideration paidentities affiliated with Michal Votruba, a member of the Board of Directors of MYnd Analytics and Director of Life Sciences for the European-based RSJ-Gradus fund, relating to a 10% equity interest in Arcadian was in the formprivate placement of (i) a $100,000 capital contributionan aggregate of 459,458 units for $1.85 per unit, with each unit consisting of one share of common stock and one common stock purchase warrant to Arcadian and (ii) the issuance of 1,000 sharespurchase one share of Common Stock to Mr. Plotkin. On June 19, 2017, the Company made an additional $20,000 capital contribution to Arcadian. From July 6, 2017 through September 30, 2017 the Company made an additional $70,000 capital contribution to Arcadian. As of September 30, 2017 the Company’s cumulative equity interest in Arcadian is 19%.
On November 13, 2017, Arcadian, MYnd and certain third party physicians entered into a number of transactions to reorganize the operations of Arcadian and implement a new ownership and management structure. Accordingly, on November 13, 2017, Arcadian converted into a Pennsylvania professional corporation after the equity interests in Arcadian were transferred to a third party physician. On that same date, Arcadian entered into a Management Services Agreement with Arcadian Telepsychiatry Services LLC (“Arcadian Services”) and transferred certain assets and liabilities including its debt obligations to Arcadian in connection therewith. MYnd subsequently acquired 100% of the equity interests in Arcadian Services. In connection with the transfer of the equity interests in Arcadian Services, MYnd entered into an employment agreement with the founder of the Company, pursuant to which MYnd will continue to employ the former founder of the Company as the CEO of Arcadian Services for an annual salary of $215,000, and granted him options to purchase 35,000 shares of common stock of MYnd. In addition, MYnd assumed to guaranty Arcadian Services’ amended debt, seeNote 5. Acquisition.$2.00 per share.
Sublease with BREC 10. LOSS PER SHARE
On November 13, 2017, Arcadian Services assumed a lease with a $2,500 monthly payment through February 28, 2018 for 2250 square feet. Arcadian Services’ operations are located at 7241 Hollywood Road, Fort Washington, Pennsylvania 19034. The lease terminated on December 31, 2017. On January 2, 2018, Arcadian Services was granted a two month extension until February 28, 2018 with a monthly rental rate of $2,500. The sub-landlord BREC and the property owner of Hollywood Road, LLC are both owed by Mr. Plotkin.
In accordance with ASC 260-10 (formerly SFAS 128, “Computation of Earnings Per Share”), basic net incomeBasic earnings (loss) per share is computed by dividing the net income (loss) available to common stockholders forless the current period preferred stock dividend by the weighted average number of common shares outstanding during the period. Diluted net incomeearnings (loss) per share is computed by dividingtakes into account the net income (loss) for the period by the weighted average number of commonpotential dilution that could occur if securities or other contracts to issue Common Stock were exercised and dilutive common equivalent shares outstanding during the period. For the three-month periods ended December 31, 2017 and 2016, the Company has excluded all common equivalent shares from the calculation of diluted net loss per share as such securities are anti-dilutive.converted into Common Stock
A summary of the net income (loss) and shares used to compute net income (loss) per share for the three-month periodsthree and six months ended DecemberMarch 31, 20172019 and 20162018 is as follows:
Three months ended December 31, | ||||||||
2017 | 2016 | |||||||
Net Loss for computation of basic and diluted net loss per share: | ||||||||
Net loss | $ | (2,769,300 | ) | $ | (1,440,200 | ) | ||
Basic and Diluted net loss per share: | ||||||||
Basic and diluted net loss per share | $ | (0.64 | ) | $ | (0.70 | ) | ||
Basic and Diluted weighted average shares outstanding | 4,332,927 | 2,101,061 | ||||||
Anti-dilutive common equivalent shares not included in the computation of dilutive net loss per share: | ||||||||
Warrants | 4,567,672 | 7,155 | ||||||
Restricted Common Stock | 254,333 | 143,750 | ||||||
Options | 559,617 | 325,103 | ||||||
Total warrants and options | 5,381,622 | 476,008 |
Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net loss for computation of basic and diluted net loss per share: | ||||||||||||||||
Net Loss attributable to MYnd Analytics, Inc. | $ | (2,258,600 | ) | $ | (2,587,300 | ) | $ | (4,636,100 | ) | $ | (5,356,700 | ) | ||||
Preferred stock dividends | (24,600 | ) | — | (49,200 | ) | — | ||||||||||
$ | (2,283,200 | ) | $ | (2,587,300 | ) | $ | (4,685,300 | ) | $ | (5,356,700 | ) | |||||
Basic and diluted net loss per share: | ||||||||||||||||
Basic and diluted net loss per share | $ | (0.27 | ) | $ | (0.59 | ) | $ | (0.59 | ) | $ | (1.23 | ) | ||||
Basic and diluted weighted average shares outstanding | 8,399,443 | 4,362,564 | 7,964,021 | 4,347,745 | ||||||||||||
Anti-dilutive common equivalent shares not included in the computation of dilutive net loss per share: | ||||||||||||||||
Warrants | 6,075,319 | 5,617,481 | 6,075,319 | 5,617,481 | ||||||||||||
Restricted common stock | 13,095 | 42,416 | 13,095 | 42,416 | ||||||||||||
Options | 1,629,935 | 554,059 | 1,629,935 | 554,059 | ||||||||||||
Total | 7,718,349 | 6,213,956 | 7,718,349 | 6,213,956 |
10.11. COMMITMENTS AND CONTINGENT LIABILITIES
Litigation
The Company is not currently party to any legal proceedings, the adverse outcome of which, in the Company’s management’s opinion, individually or in the aggregate, would have a material adverse effect on the Company’s results of operations or financial position.
Lease Commitments
The Company’s policy is to accountCompany has entered into operating lease agreements for theits office locations in California, Virginia and Pennsylvania which expire at various times through September 30, 2020. Minimum future lease expense on the straight–line method.payments under these leases are as follows:
Payments due by period | ||||||||||||
Contractual Obligations | Total | 2019 | 2020 | |||||||||
Operating Lease Obligations | $ | 177,300 | $ | 129,800 | $ | 47,500 | ||||||
Total | $ | 177,300 | $ | 129,800 | $ | 47,500 |
12. SUBSEQUENT EVENTS
The Company’s Headquarters and Neurometric Services business is located at 26522 La Alameda, Suite 290, Mission Viejo, CA 92691, which is 2,290 square feet in size. The lease period commenced on February 1, 2016 and terminated on January 31, 2018. The rent for the first four months was $2,290 per month, which was abated by 50%; for months 5 through 12 the rent increased to 4,580 per month and for the final 12 months the rent increased by 5% to 4,809 per month. On October 31, 2017 we signed a First Amendment to our initial lease, lease period commenced on February 1, 2018 and terminates on January 31, 2019. The rent for the twelve month period is $5,267 per month.Aspire Line
Subsequent to March 31, 2019, the Company issued purchase notices to Aspire Capital to purchase 463,636 shares of common stock, at a weighted average per share price of $1.10, resulting in gross cash proceeds of $510,000.
Equity Grant to Chairman of the Board
On February 2, 2016, we signed a 23.5 months lease for 1,092 square feetMay 8, 2019,the Board of office spaceDirectors granted 50,000 restricted shares and 100,000 options to house our EEG testing center.purchase common stock to the Chairman of the Board, Dr. Robin L. Smith, under the Company's Amended and Restated 2012 Omnibus Incentive Compensation Plan. The premises are located at 25201 Paseo De Alicia, Laguna Hills, CA 92653. The lease period commenced on February 15, 2016restricted shares and terminated on January 31, 2018. The rent for first half monthoptions vest immediately and survive the full term. In the event the merger does not close, Dr. Smith will forfeit 25,000 restricted shares and 25,000 shares of February was prorated at $928; forcommon stock to the next 11 months the rent was $1,856 per month, and for the remaining twelve months the rent increased by 3% to $1,911 per month. On November 10, 2017 we signed a First Amendment to our initial lease, lease period commenced on February 1, 2018 and terminates on January 31, 2019. The rent for the twelve-month period is $2,129 per month. Additionally, we expanded into premises which are located at 25231 Paseo De Alicia, Laguna Hills, CA 92653. The lease period commenced on December 1, 2017 and terminates on January 31, 2019. The rent for the fourteen-month period is $3,270 per monthCompany's plan.
On August 1, 2017, we signed a four-month lease for two offices to be used for EEG testing in the New York area. The premises are located at 420 Lexington Avenue, Suite 350, New York, New York 10170. The lease period commenced on August 1, 2017 and terminated on December 31, 2017. The rent for was $4,500 per month, with a first and last month lease fee of $9,000 which was due upon signing. On December 27, 2017 we signed a month to month for two offices to be used for EEG testing in the New York area. The premises are located at 420 Lexington Avenue, Suite 300, New York, New York 10170. The rent will be for $4,995 per month, with security deposit including first month due on signing of $13,483.
On September 14, 2017, we signed a three-year lease for 1,180 square feet. The premises are located at 8000 Westpark Drive, Suite 125, Tysons, Virginia 22102. The lease period commenced on September 15, 2017 and terminates on September 30, 2020. The rent for September 15, 2017 through September 30, 2018 is prorated at $2,508, the next 12 months the rent is prorated at $2,576; and for the remaining twelve months the rent prorated at $2,647, the landlord abated one hundred percent of the base rent for the first two full calendar months of the term, October and November 2017.
On November 13, 2017, Arcadian Services assumed a sublease for a three year term for 2250 square feet. The premises are located at 7241 Hollywood Road, Fort Washington, Pennsylvania 19034. The lease terminated on December 31, 2017 and the rent is $2,500 a month. On January 2, 2018, Arcadian Services was granted a two month extension until February 28, 2018 with a monthly rent rate of $2,500.
On January 29, 2018, Arcadian Services signed a two year lease for 2,338 square feet. The premises are located at 1300 Virginia Drive, Suite 110, Fort Washington, PA 19034. The lease period commences on March 1, 2018 and terminates on February 28, 2020. The rent for the first twelve months of the lease is $3,312 and for the last twelve months of the lease the rent is $3,410. Arcadian Services paid a security deposit of $3,312.16 upon signing.
The Company incurred rent expense of $44,800 and $18,200 for the three months ended December 31, 2017 and 2016, respectively.
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 operation should be read in conjunction with our unaudited condensed consolidated financial statements as of, and for, the three and six months ended DecemberMarch 31, 20172019 and 2016,2018, and our Annual Report on Form 10-K for the year ended September 30, 2017,2018, filed with the U.S. Securities and Exchange Commission on December 29, 2017.11, 2018.
Forward-Looking Statements
This discussion summarizes the significant factors affecting the unaudited condensed consolidated operating results, financial condition and liquidity and cash flows of MYnd Analytics, Inc. (“we,” “us,” “our,” or the “Company”) for the threeandsix month periods ended DecemberMarch 31, 20172019 and 2016.2018. Except for historical information, the matters discussed in this management’s discussion and analysis or plan of operation and elsewhere in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that include information relating to future events, future financial performance, strategies, expectations, competitive environment, regulation and availability of resources. These forward-looking statements include, without limitation, statements regarding: proposed new products or services; our statements concerning litigation or other matters; statements concerning projections, predictions, expectations, estimates or forecasts for our business, financial and operating results and future economic performance; statements of management’s goals and objectives; trends affecting our financial condition, results of operations or future prospects; our financing plans or growth strategies; and other similar expressions concerning matters that are not historical facts. Words such as “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes” and “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking statements.
Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times, or by which, that performance or those results will be achieved. Forward-looking statements are based on information available at the time they are made and/or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause these differences include, but are not limited to:
● | our need for immediate additional funding to support our operations and capital expenditures; |
● | our ability to successfully maintain listing of our shares of common stock on the Nasdaq Capital |
● | our history of operating losses; |
● | our inability to gain widespread acceptance of our PEER Reports; |
● | our inability to prevail in convincing the United States Food and Drug Administration (the “FDA”), that our rEEG or PEER Online service does not constitute a medical device and should, therefore, not be subject to regulations; |
● | the possible imposition of fines or penalties by the FDA for alleged violations of its rules and regulations; |
● | our |
● | our |
● | our |
● |
our business may be subject to additional regulations in the future that could increase our compliance costs; |
● | our operating results may fluctuate significantly and our stock price could decline or fluctuate if our results do not meet the |
● |
our inability to achieve greater and broader market acceptance of our products and services in existing and new market segments; |
● | any negative or unfavorable media coverage; |
● | our inability to generate and commercialize additional products and services; |
● | our inability to comply with the substantial and evolving regulation by state and federal authorities, which could hinder, delay or prevent us from commercializing our products and services; |
● | our inability to successfully compete against existing and future competitors; |
● | delays or failure in clinical trials; |
● | any losses we may incur as a result of litigation; |
● | our inability to manage and maintain the growth of our business; |
● | our inability to protect our intellectual property rights; |
● | employee relations; |
● | possible security breaches; |
● | possible medical liability claims; |
● | our ability to sell common stock to Aspire Capital |
● | our ability to consummate the Merger and other transactions contemplated by the Merger Agreement; |
● | our ability to consummate the transactions contemplated by the Separation Agreement, including the Separation and Distribution (as defined therein); |
● | adverse tax consequences to shareholders of the transactions contemplated by the Merger Agreement and the Separation Agreement; |
● | disruption following the transactions contemplated by the Merger Agreement and the Separation Agreement, if consummated; |
● | possible personal injury claims in the future; and |
● | our limited trading volume. |
Additional risks, uncertainties and other factors that may cause our actual results, performance or achievements to be different from those expressed or implied in our written or oral forward-looking statements may be found and in our Annual Report on Form 10-K for the year ended September 30, 20172018 under the headings “Risk Factors” and “Business,” as updated in this Quarterly Report on Form 10-Q.
Forward-looking statements speak only as of the date they are made. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
Overview
MYnd Analytics, Inc. (the(“MYnd,” “CNS,” “we,” “us,” “our,” or the “Company” or “MYnd”), formerly known as CNS Response Inc., is a predictive analytics company that has developed a decision support tool to help physicians reduce trial and error treatment in mental health and provide more personalized care to patients. The Company employs a clinically validated scalable technology platform to support personalized care for mental health patients. The Company utilizes its patented machine learning, artificial intelligence, data analytics platform for the delivery of telebehavioral health services and its PEER predictive analytics product offering. On November 13, 2017, the Company acquired Arcadian, Telepsychiatry Services LLC (“Arcadian Services”), which manages the delivery of telepsychiatry and telebehavioral health services through a nationwide network of licensed and credentialed psychiatrists, psychologists and master’s-level therapists. The Company is commercializing its PEER predictive analytics tool to help physicians reduce trial and error treatment in mental health. MYnd’s patented, clinically validated technology platform (“("PEER Online”Online") utilizes complex algorithms to analyze electroencephalograms (“EEGs”("EEGs") to generate Psychiatric EEG Evaluation Registry (“PEER”) Reports to predict individual responses to a range of medications prescribed for the treatment of behavioral disorders including depression, anxiety, bipolar disorder, post-traumatic stress disorder (“PTSD”)PTSD and other non-psychotic disorders.
Acquisition of Arcadian Telepsychiatry Services LLCRecent Developments
Merger Agreement
On November 13, 2017, the CompanyJanuary 4, 2019, we entered into an equity purchase agreementAgreement and Plan of Merger (the “Agreement”“Merger Agreement”) with Arcadian Telepsychiatry Services LLCby and among us, our wholly owned subsidiary, Athena Merger Subsidiary, Inc., a Delaware corporation (“Arcadian Services”Merger Sub”), and Mr. Robert Plotkin, pursuant to whichEmmaus Life Sciences, Inc., a Delaware corporation (“Emmaus”). Under the Company acquired allterms of the Merger Agreement, pending stockholder approval of the transaction, Merger Sub will merge with and into Emmaus with Emmaus surviving the merger and becoming a wholly-owned subsidiary of us (the “Merger”). Subject to the terms of the Merger Agreement, at the effective time of the Merger, Emmaus stockholders will receive a number of newly issued and outstanding membership interests (the “Equity Interests”)shares of Arcadian Services from Mr. Plotkin. In consideration for the Equity Interests, the Company entered into an employment agreement with Mr. Plotkin, pursuant to which the Company will continue to employ Mr. Plotkin as the CEO of Arcadian Services for an annual salary of $215,000, and granted him 35,000 options to purchaseour common stock determined using the exchange ratio described below in exchange for their shares of Emmaus stock. Following the Company. In addition,Merger, stockholders of Emmaus will become the Company entered into the Guaranty (as described below).our majority owners.
InThe exchange ratio will be determined prior to closing and will cause our securityholders (including holders of options and warrants) prior to the effective time to collectively own 5.9% of the post-merger company on a fully diluted basis and Emmaus securityholders (including holders of options, warrants and convertible notes) prior to the effective time to collectively own 94.1% of the post-merger company on a fully diluted basis. The exchange ratio will reflect any dilution that may result from securities sold by us or Emmaus prior to the closing of the Merger and any changes to the number of outstanding convertible securities of each company. The Merger Agreement provides that if Emmaus converts certain debt obligations into equity within six months of the completion of the Merger, Emmaus will issue additional shares (equal to 5.9% of the shares issued in connection with the Agreement, Arcadian Telepsychiatry LLC (“Arcadian”) and Arcadian Telepsychiatry Services LLC (“Arcadian Services”), entered into the Side Agreement and Seed Capital Amendment with Ben Franklin Technology Partners of Southeastern Pennsylvania (“BFTP”), pursuantdebt conversion to which BFTP waived its rights (a)third parties) to an equity conversion contemplated by the existing funding agreements (as they maysubsidiary of us which is expected to be amended, supplemented or otherwise modified from timespun-off to time, the “BFTP Loan Documents”) between Arcadian and BFTP, under which BFTP has loaned Arcadian the aggregate principal amount of $700,000 and upon which an aggregate of $96,700 of interest had then accrued (collectively, the “Loan Amount”) and (b) to act as an observer to Arcadian’s board. Under the Side Agreement and Seed Capital Amendment, Arcadian acknowledged and reaffirmed all of BFTP’s claims, encumbrances granted by Arcadian to BFTP, and BFTP’s other rights, interests and remedies pursuantour stockholders prior to the BFTP Loan Documents and otherwise. The effectivenesseffective time of the Side Agreement and Seed Capital Amendment are conditioned upon (i) MYnd making a one-time payment to BFTP of $175,000merger, as payment for the redemption and cancellation of two warrants to purchase equity interests in Arcadian and (ii) the Company entering into a guaranty with respect to Arcadian’s obligations (including the Loan Amount) to BFTP under the BFTP Loan Documents, as amended by the Side Agreement and Seed Capital Amendment.The Side Agreement and Seed Capital Amendment further provides that all of Arcadian’s rights, benefits, title, interests, liabilities and obligations under the BFTP Loan Agreements were assigned to Arcadian Services and the Company will becombe obligated to complete all financial reporting to BFTP required under the BFTP Loan Documents.described below.
In addition,The post-merger company, led by Emmaus’ management team, is expected to be named “Emmaus Life Sciences, Inc.” Prior to the Company executed an absolute, unconditional, irrevocableclosing of the Merger, MYnd will seek shareholder approval to conduct a reverse split of its outstanding shares if necessary to satisfy listing requirements of the Nasdaq Capital Market (the “NasdaqCM”). The post-merger company is expected to trade on the NasdaqCM under a new ticker symbol. At the closing, the post-merger company’s board of directors is expected to consist of one member from us and continuing guarantyup to six members from Emmaus. The Merger has been unanimously approved by the Board of Directors of each company. The transaction is expected to close no later than July 31, 2019, subject to approvals by the stockholders of us and suretyship (the “Guaranty”) in favorEmmaus, and other closing conditions, including but not limited to the approval of BFTP, pursuant to which it unconditionally guaranteed the prompt paymentcontinued listing of the post-merger company’s common stock on the NasdaqCM, conversion of MYnd’s preferred stock into common stock, satisfaction of certain cash and performance, when due,debt conversion conditions and consummation of all loans (including the Loan Amount), advances, debts, liabilities, obligations, covenants and duties owing by Arcadian Services to BFTP under the BFTP Loan Documents. Under the Guaranty, if Arcadian Services defaults under any obligation under the BFTP Loan Documents, the Company will be required to pay the amount then due to BFTP. The Guaranty contains representations, warranties, covenants, conditions, events of default and indemnities that are customary for agreements of this type.MYnd spin-off described below.
Working CapitalSpin-Off
Since our inception,Prior to the closing of the Merger, we have never been profitableintend, subject to obtaining any required regulatory approvals and we have generated significant net losses. Asthe completion of December 31, 2017, we had an accumulated deficit of $78.4 million, comparedcertain tax analyses, to accumulated deficit of $75.6 million as of September 30, 2017. We incurred operating losses of $2.8 million and $1.4 million for the three months ended December 31, 2017 and 2016, respectively, and incurred net losses of $2.8 million and $1.4 million for those respective periods.
We anticipate that a substantial portiontransfer all of our capital resourcesbusinesses, assets and efforts would be focused on conductingliabilities not assumed by Emmaus to our clinical trials, the scale-up of our commercial sales organization, further research, product development and other general corporate purposes, including accrued but unpaid expenses. We also anticipate that some future research and development projects would be funded by grants or third-party sponsorship, along with funding by the Company.
As of December 31, 2017, our current assets of $2.8 million exceeded our current liabilities of $1.7 million by $1.1 million.
On February 23, 2017, pursuant toexisting wholly-owned subsidiary, Telemynd, Inc., a purchase notice issued by the Company to Aspire CapitalDelaware corporation (“Telemynd”), pursuant to the Aspire Purchaseterms of the Amended and Restated Separation and Distribution Agreement Aspire Capital purchased 20,000(the “Separation Agreement”) entered into on March 27, 2019 by us, Telemynd and MYnd Analytics, Inc., a California corporation (“MYnd California”) . We intend to distribute all shares of Telemynd held by us to our stockholders of record as a future record date will be determined for such potential distribution.
The Separation Agreement (i) amended and restated in its Common Stock, at a per share priceentirety that certain Separation and Distribution Agreement dated as of $7.25, resulting in gross cash proceedsJanuary 4, 2019, by and between MYnd and MYnd California (the “Prior Agreement”) and (ii) caused Telemynd to assume all of the rights and obligations of MYnd California under the Prior Agreement.
Pursuant to the Company of $145,000.
In July 2017,Separation Agreement, the Telemynd Business (as defined in the Separation Agreement) would be separated from the Company completed an underwritten public offering of its Common Stock and warrants, raising gross proceeds of $8.79 million.
In November 2017, the Company guaranteed the $700,000 principle loan to Arcadian from BFTP as part of the acquisition of Arcadian Services.
During fiscal year 2016, we raised $2.95 million in the private placement of secured convertible debt convertible at $10.00 per share. For details of these financings see “Private Placement Transactions―Private Placement of Common Stock” below.
On December 6, 2016, the Company, entered into a common stock purchase agreement (the “Purchase Agreement”) with Aspire Capital Fund, LLC, an Illinois limited liability company (“Aspire Capital”) which provides that, upon, the terms and subject to, the closing of the transactions contemplated by the Separation Agreement (provided that such transactions occur at all), and the Company intends to distribute all shares of Telemynd held by it to the Company’s stockholders of record as of a future record date to be determined for such potential distribution. The Separation Agreement includes the terms of the proposed spin-off and the distribution to the Company’s stockholders and includes representations and warranties, covenants and conditions, which would impact the terms of the proposed spin-off and distribution. The proposed spin-off will be subject to conditions and limitations set forth therein, Aspire Capitalregulatory approvals not entirely under the control of the Company and the terms of the proposed spin-off, if and when completed, are subject to change. The foregoing summary of the Separation Agreement is committednot complete and qualified in its entirety by reference to purchase upthe text of the Separation Agreement filed herewith.
Amendment to an aggregateMerger Agreement
On May 10, 2019, the parties executed amendment no. 1 to the Merger Agreement. By executing amendment no. 1, MYnd, Emmaus and Merger Sub agreed that: (i) the definition "Parent California Subsidiary" should be amended to refer to Telemynd, Inc., the newly formed wholly-owned corporation, (ii) MYnd would not adopt a new equity incentive plan at closing, which had been contemplated previously and determined to be unnecessary at this time, (iii) MYnd would be entitled to receive credit in its Net Liabilities calculation for certain agreed upon prepaid costs, (iv) Telemynd would be entitled to receive shares of $10.0Emmaus after closing if the exchange ratio applicable to any Company Warrants, Company Convertible Notes or Company Debentures is reduced during the six (6) month period after the closing of the Merger for any reason, and (v) the outside termination date was extended from May 31, 2019 to July 31, 2019.
Going Concern Uncertainty
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”), which contemplate continuation of the Company as a going concern. The Company has a limited operating history and its operations are subject to certain problems, expenses, difficulties, delays, complications, risks and uncertainties frequently encountered in the operation of a business with a limited operating history. These risks include the ability to obtain adequate financing on a timely basis, if at all, the failure to develop or supply technology or services to meet the demands of the marketplace, the failure to attract and retain qualified personnel, competition within the industry, government regulation and the general strength of regional and national economies.
The Company’s recurring net losses and negative cash flows from operations raise substantial doubt about its ability to continue as a going concern. During the six months ended March 31, 2019, the Company incurred a net loss of approximately $5.4 million and used approximately $3.8 million of sharesnet cash in operating activities. As of March 31, 2019, the Company’s accumulated deficit was approximately $89.9 million. In connection with these consolidated financial statements, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about the Company’s ability to meet its obligations as they become due for the next twelve months from the date of issuance of these financial statements. Management assessed that there were such conditions and events, including a history of recurring operating losses, and negative cash flows from operating activities.
If the Company raises additional funds by issuing additional equity or convertible debt securities, the fully diluted ownership percentages of existing stockholders will be reduced. In addition, any equity or debt securities that the Company would issue may have rights, preferences or privileges senior to those of the holders of its common stock.
To date, the Company has financed its cash requirements primarily from equity financings. The Company will need to raise funds immediately to continue its operations and increase demand for its services. Until it can generate sufficient revenues to meet its cash requirements, which it may never do, the Company must continue to finance future cash needs primarily through public or private equity offerings, debt financings or strategic collaborations. The Company’s liquidity and capital requirements depend on several factors, including the rate of market acceptance of its services, the future profitability of the Company, the rate of growth of the Company’s business and other factors described elsewhere in this Quarterly Report on Form 10-Q . The Company continues to explore additional sources of capital, but there is substantial doubt as to whether any financing arrangement will be available in amounts and on terms acceptable to the Company to permit it to continue operations. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Nasdaq Listing Requirements
As March 31, 2019, we had stockholders’ equity of approximately $512,100, and we are no longer in compliance with such continue listing requirement. If our Common Stock is delisted and we are not able to list our Common Stock on another national securities exchange, we expect our securities would be quoted on an over–the–counter market. If this were to occur, our stockholders could face significant material adverse consequences, including limited availability of market quotations for our Common Stock and reduced liquidity for the trading of our securities. In addition, we could experience a decreased ability to issue additional securities and obtain additional financing in the future. There can be no assurance that an active trading market for our Common Stock will develop or be sustained. We may choose to raise additional capital in order to increase our stockholders’ equity in order to meet the NASDAQ continued listing standards. Any additional equity financings may be financially dilutive to and will be dilutive from an ownership perspective to our stockholders, and such dilution may be significant based upon the size of such financing. Additionally, we cannot assure that such funding will be available on a timely basis, in needed quantities, or on terms favorable to us, if at all. On February 21, 2019, the Company received a letter from The Nasdaq Stock Market ("Nasdaq") indicating that the Company was not compliant with the minimum stockholders’ equity requirement under Nasdaq Listing Rule 5550(b)(1) for continued listing on The Nasdaq Capital Market because the Company’s stockholders’ equity, as reported in the Company’s Quarterly Report on Form 10–Q for the period ended December 31, 2018, was below the required minimum of $2.5 million. Further, as of February 21, 2019, the Company did not meet the alternative compliance standards relating to the market value of listed securities or net income from continuing operations. This notice of noncompliance has had no immediate impact on the continued listing or trading of the Company’s common stock overon The Nasdaq Capital Market. On April 17, 2019, the 30-month termCompany received a letter from Nasdaq granting the Company an extension through August 20, 2019 to regain compliance with Listing Rule 5550(b). The terms of the Purchase Agreement. For detailsextension are as follows:
● On or before June 30, 2019, the Company must provide an update on the closing of the Purchase Agreement financing see “Private Placement Transactions―The Aspire Capital Equity Line” below.merger transaction. If the merger transaction is delayed or terminated for any reason, the Company must provide an updated plan of compliance. Upon review of the updated plan, Staff will determine if a further extension is warranted; and,
We will need additional funding● On or before August 20, 2019, the Company must complete its business combination with Emmaus and the post– merger company must file an application and receive approval to conductlist its securities on the planned clinical trials and to conduct a marketing campaign to significantly increaseNasdaq Stock Market.
No assurance can be given that the demand for our PEER Online services. We are actively exploring additional sources of capital. However, we cannot offer assurances that additional fundingCompany will be available on acceptable terms, or at all. Even if we wereable to raise additional funds, any additional equity funding may result in significant dilutionregain compliance prior to existing stockholders, and, if we incur additional debt financing, a substantial additional portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, thus limiting the funds available for our business activities. If adequate funds are not available, it will likely force us to cease operations or would otherwise have a material adverse effect on our business, financial condition and/or results of operations.
Public Offering
In July 2017, the Company completed an underwritten public offering of its Common Stock and warrants, raising gross proceeds of approximately $8.79 million. In the offering, the Company sold 1,675,000 shares of Common Stock and accompanying warrants to purchase up to 1,675,000 shares of Common Stock (the “Warrants”), at a combined public offering price of $5.25 per share and accompanying Warrant, for a total offering size of $8,793,750. The Warrants were immediately exercisable for one share of Common Stock at an exercise price of $5.25 per share, subject to adjustments, and will expire five years after the issuance date. In connection with the offering, the Company granted the representative of the underwriters a 45-day option to purchase up to an 251,250 additional shares of Common Stock and/or Warrants to cover over-allotments, if any. On August 24, 2017 the underwriters exercised their option and purchased 213,800 common stock warrants for $0.01 per warrant. The warrants were immediately exercisable for one share of common stock at an exercise price of $5.25 per share, subject to adjustments, and will expire five years after the issuance date.
Capitalization
At our annual meeting of stockholders held on October 28, 2015 (the “2015 Stockholder Meeting”), our stockholders approved a proposal to amend the Company’s Certificate of Incorporation in order to increase the number of shares of Common Stock authorized for issuance under our Charter from 180,000,000 to 500,000,000.
Also at our 2015 Stockholder Meeting, our stockholders approved an amendment to amend the Company’s Charter for the purposes of effecting a reverse stock-split of our Common Stock at a later time and at any time until the next meeting of the Company’s stockholders which are entitled to vote on such actions, by a ratio of not less than 1-for-10 and not more than 1-for-200, and to authorize the Board of Directors (“Board”) to determine, at its discretion, the timing of the amendment and the specific ratio of the reverse stock-split.
On August 24, 2016, the Board approved a 1-for-200 reverse stock-split which was effected on September 21, 2016.
On September 19, 2016, pursuant to the Second Omnibus Amendment, the Company exercised the Mandatory Conversion and, on September 21, 2016, (i) converted the entire outstanding principal balance of $6,000,000, plus accrued interest of $317,000 on all of the Notes into 1,263,406 shares of the Company’s common stock at a conversion price of $5.00 per share and (ii) canceled all 600,000 Warrants.
At the 2017 Annual Meeting of Stockholders of MYnd Analytics, Inc. (“the Company”), held on August 21, 2017 (the “2017 Annual Meeting”), the holders of the Company’s common stock voted to amend the Company’s certificate of incorporation (the “Charter”) to reduce the number of shares of Common Stock authorized for issuance under the Charter from 500,000,000 to 250,000,000. The certificate evidencing the resolution reducing the shares was filed with the Delaware Secretary of State.
Shares | ||||
Shares of Common Stock Authorized | 250,000,000 | |||
Shares of Preferred stock Authorized (none issued and outstanding) | 15,000,000 | |||
Total Authorized Shares | 265,000,000 | |||
Shares of Common Stock Issued and Outstanding at December 31, 2017 | 4,360,561 | |||
Common Stock issuable upon the exercise of outstanding stock options at December 31, 2017 | 579,059 | (1) | ||
Common Stock issuable upon the exercise of outstanding warrants at December 31, 2017 | 4,567,672 | (1) | ||
Total securities outstanding and reserved for issuance at December 31, 2017 | 9,507,292 |
(1)For more detail on the exercise prices and expiration dates of the options and warrants please refer to the “Stock Option Plans” and “Warrants to Purchase Common Stock” sections of Note 7. Stockholders’ Equity to the Condensed Consolidated Financial Statements.
Warrants
On July 13, 2017, the Company declared a special dividend of warrants to purchase shares of the Company’s common stock to record holders of Common Stock as of such date. Warrants to purchase 2,539,061 shares of Common Stock were distributed pro rata to all holders of common stock on the record date. These warrants will be exercisable (in accordance with their terms) to purchase one share of common stock, at an exercise price of $5.25 per share. The warrants will become exercisable commencing not less than 12 months following their July 27, 2017 distribution date and will expire five years thereafter.
The dividend warrant has an exercise price of $5.25 and expires on July 26, 2022. We estimated the fair value of the dividend warrant at issuance date to be $16,375,394 using the Black-Scholes option valuation model with the following assumptions: market price of the stock of $6.55 per share, time to maturity of 5 years, volatility of 211.6%, zero expected dividend rate and risk-free rate of 1.89%. These warrants qualify for equity treatment. The allocation of the fair value of these warrants was included in additional paid-in capital on the consolidated balance sheet. The Company also recognized a dividend related to the dividend warrants as every shareholder was entitled to receive one warrant for every share of common stock for no consideration given. Accordingly, the Company recognized a $16,375,394 dividend at closing.
On July 19, 2017, the Company issued 1,675,000 shares of Common Stock and accompanying Warrants to purchase up to 1,675,000 shares of Common Stock in connection with an underwritten public offering. The public offering warrant has an exercise price of $5.25 and expires on July 19, 2022. We estimated the fair value of the public offering warrant at issuance date to be $10,802,728 using the Black-Scholes option valuation model with the following assumptions: market price of the stock of $6.55 per share, time to maturity of 5 years, volatility of 211.6%, zero expected dividend rate and risk-free rate of 1.89%. These warrants qualify for equity treatment. The allocation of the fair value of these warrants was included in additional paid-in capital on the consolidated balance sheet.
As part of the underwritten public offering on July 19, 2017, the Company issued Common Stock warrants to purchase 134,000 shares of common stock to the underwriters as part of the services performed by them in connection with the underwritten public offering. The underwriter warrant has an exercise price of $6.04 and expires on July 19, 2022. We estimated the fair value of the underwriter warrant at issuance date to be $863,225 using the Black-Scholes option valuation model with the following assumptions: market price of the stock of $6.55 per share, time to maturity of 5 years, volatility of 211.6%, zero expected dividend rate and risk-free rate of 1.89%. These warrants qualify for equity treatment. The allocation of the fair value of these warrants was included in additional paid-in capital on the consolidated balance sheet.
On August 23, 2017, the Company issued common stock warrants to purchase 213,800 shares of common stock to the underwriters as part of the overallotment attributed to the July 2017 underwritten public offering. The overallotment warrant has an exercise price of $5.25 and expires on July 19, 2022. We estimated the fair value of the overallotment warrant at issuance date to be $880,710 using the Black-Scholes option valuation model with the following assumptions: market price of the stock of $4.20 per share, time to maturity of 5 years, volatility of 211.6%, zero expected dividend rate and risk-free rate of 1.89%. These warrants qualify for equity treatment. The allocation of the fair value of these warrants was included in additional paid-in capital on the consolidated balance sheet.
(1)For more detail on the exercise prices and expiration dates of the options and warrants please refer to the “Stock Option Plans” and “Warrants to Purchase Common Stock” sections of Note 6. Stockholders’ Equity to the Condensed Consolidated Financial Statements.
Financial Operations Overview
Revenues
Our neurometric services revenues are derived from the salesales of PEER Reports to physicians.and services of Electroencephalographs (EEG) and Quantitative Electroencephalographs (qEEG). Physicians and Customers are generally billed upon delivery of a PEER Report. The list price of our PEER Reports to physicianscustomer’s insurance is $400 per report which excludes the cost of conducting the EEG.billed for EEG and qEEG services. The Company also derives revenue from its subsidiary Arcadian Services who manages the delivery of telepsychiatry and telebehavioral health services which are delivered directly to patients.
Cost of Revenues
Cost of revenues are for services and represent the cost of direct labor, the costs associated with external processing, analysis and consulting services necessary to generate the revenues.
Research and Product Development
Research and Productproduct development expenses are associated with our neurometric and telepsychiatry services and primarily represent costs incurred to design and conduct clinical studies, to recruit patients into the studies, to add data to our database, to improve analytical techniques and advance application of the methodology. We charge all research and development expenses to operations as they are incurred.
Sales and Marketing
For our neurometric and telepsychiatry services, our selling and marketing expenses consist primarily of personnel, media, support and travel costs to inform user organizations and consumers of our products and services. Additional marketing expenses are the costs of advertising, educating physicians, laboratory personnel, other healthcare professionals regarding our products and services.
General and Administrative
Our general and administrative expenses consist primarily of personnel, occupancy, legal, audit, consulting and administrative support costs.
Critical Accounting Policies and Significant Judgments and Estimates
This management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from those estimates under different assumptions or conditions.
There have been no changesOur significant accounting policies are described in Note 2 to our condensed Consolidated Financial Statements included elsewhere in this report. We believe the following critical accounting policies as compared toreflect our more significant estimates and assumptions used in the criticalpreparation of our condensed consolidated financial statements.
Revenue Recognition
Accounting Standards Update (“ASU”) No. 2014-09,Revenue from Contracts with Customers(“Topic 606”), became effective for the Company on October 1, 2018. The Company’s revenue recognition disclosure reflects its updated accounting policies disclosedthat are affected by this new standard. The Company applied the “modified retrospective” transition method for open contracts for the implementation of Topic 606.As sales are and have been primarily from providing healthcare services, and the Company has no significant post-delivery obligations, this new standard did not result in a material recognition of revenue on the Annual Report 10–K filesCompany’s accompanying consolidated financial statements for the cumulative impact of applying this new standard. The Company made no adjustments to its previously-reported total revenues, as those periods continue to be presented in accordance with the SEC on December 29, 2017.its historical accounting practices under Topic 605,Revenue Recognition.
Revenue Recognition
We have generated limited revenues since our inception. Revenues for our Neurometric Service productfrom providing neurometric and telepsychiatry services are recognized whenunder Topic 606 in a PEER Report is delivered to a Client-Physician. The Company also recognizes revenue from its subsidiary, Arcadian Services who managesmanner that reasonably reflects the delivery of telepsychiatryits services to customers in return for expected consideration and telebehavioral health services. Revenue is recognized whenincludes the doctor or clinician performs the services.following elements:
○ | executed contracts with the Company’s customers that it believes are legally enforceable; |
○ | identification of performance obligations in the respective contract; |
○ | determinationof the transaction price for each performance obligation in the respective contract; |
○ | allocationthe transaction price to each performance obligation; and |
○ | recognitionof revenue only when the Company satisfies each performance obligation. |
Stock-based Compensation Expense
Stock-based compensation expense, which is a non-cash charge, results from stock option grants and restricted stockshare awards. Compensation costfor option is measured at the grant date based on the calculated fair value of the award. We recognize stock-based compensation expense on a straight-line basis over the vesting period of the underlying option. The amount of stock-based compensation expense expected to be amortized in future periods may decrease if unvested options are subsequently cancelled or may increase if future option grants are made.
Long-Lived Assets and Intangible Assets
Property and equipment and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying value of the assets may not be recoverable. If the Company determines that the carrying value of the asset is not recoverable, a permanent impairment charge is recorded for the amount by which the carrying value of the long-lived or intangible asset exceeds its fair value. Intangible assets with finite lives are amortized on a straight-line basis over their useful lives.lives of ten years.
Costs for software developed for internal use are accounted for through the capitalization of those costs incurred in connection with developing or obtaining internal-use software. Capitalized costs for internal-use software are included in intangible assets in the consolidated balance sheet. Capitalized software development costs are amortized over three years. Costs incurred during the preliminary project along with post-implementation stages of internal use computer software development and costs incurred to maintain existing product offerings are expensed as incurred. The capitalization and ongoing assessment of recoverability of development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, technological and economic feasibility and estimated economic life. The Company will begin amortizing the software over its estimated economic life once it has been placed into service.
The Company evaluates the recoverability of its long lived assets with finite useful lives for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The Company performs impairment testing at the asset group level that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable and the expected undiscounted future cash flows attributable to the asset group are less than the carrying amount of the asset group, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded. Fair value is determined based upon estimated discounted future cash flows, if any.
Goodwill
Goodwill represents the excess of the aggregate purchase price paid over the fair value of the net assets acquired in our business combinations. Goodwill is not amortized and is tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Events or changes in circumstances that could trigger an impairment review include a significant adverse change in business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, or significant underperformance relative to expected historical or projected future results of operations. The Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill. If, after assessing the totality of events or circumstances, the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, additional impairment testing is not required. However, if the Company concludes otherwise, the Company is required to perform the first step of a two-step impairment test. Alternatively, the Company may elect to proceed directly to the first step of the two-step impairment test and bypass the qualitative assessment. The first step of the impairment test involves comparing the estimated fair value of a reporting unit with its book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary. If, however, the fair value of the reporting unit is less than book value, the carrying amount of the goodwill is compared to its implied fair value. The estimate of implied fair value of goodwill may require valuations of certain internally generated and unrecognized intangible assets. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. The Company tests for goodwill impairment annually on September 30.
Derivative accounting for convertible debt and warrants
The Company evaluates all of its agreements to determine if such instruments have derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses a weighted average Black-Scholes option pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date. As of DecemberMarch 31, 2017,2019, the Company had no financial instruments that contain embedded derivative features.
Inflation
For the three most recent fiscal years of the registrant or for those fiscal years in which the registrant has been engaged in business, whichever period is shortest, discuss the impact of inflation and changing prices on the registrant’s net sales and revenues and on income from continuing operations.
Results of Operations for Three Months Ended DecemberMarch 31, 20172019 and 20162018
MYnd Analytics is focused on research and the commercialization of its PEER Reports through its Neurometric Services, as well as providing telehealth service through scheduling and videoconferencing that being accessiblewhich is accessed through a secure portal.
The following table presents consolidated statement of operations data for each of the periods:
Revenues
Three months ended December 31, | Change | |||||||||||
2017 | 2016 | |||||||||||
Neurometric Services | $ | 53,300 | $ | 22,200 | $ | 31,100 | ||||||
Telepsychiatry Services | 68,700 | — | 68,700 | |||||||||
Total Revenues | $ | 122,000 | $ | 22,200 | $ | 99,800 |
Three months ended March 31, | Change | ||||||||||
2019 | 2018 | ||||||||||
Neurometric services | $ | 44,800 | $ | 79,800 | $ | (35,000 | ) | ||||
Telepsychiatry services | 415,300 | 380,100 | 35,200 | ||||||||
Total Revenues | $ | 460,100 | $ | 459,900 | $ | 200 |
The increaseOur neurometric services revenues decreased by $35,000, or approximately 44%, during the three months ended March 31, 2019. This decrease was primarily due to increaseddecreased sales of PEER reports as well as sales generated from Arcadian Services during the period from November 13, 2017 through Decemberperiod. Our telepsychiatry revenues increased by $35,200, or approximately 9.3% during the three months ended March 31, 2017.
Cost of Revenues
Three months ended December 31, | Change | |||||||||||
2017 | 2016 | |||||||||||
Cost of Revenues | $ | 84,900 | $ | 3,700 | $ | 81,200 |
The increase2019 which was primarily due to our allocation of additional resources to the Arcadian platform during the 2019 period.
Cost of Revenues
Three months ended March 31, | Change | |||||||||||
2019 | 2018 | |||||||||||
Neurometric services | $ | 5,100 | $ | 69,700 | $ | (64,600 | ) | |||||
Telepsychiatry services | 291,200 | 228,600 | 62,600 | |||||||||
Cost of Revenues | $ | 296,300 | $ | 298,300 | $ | (2,000 | ) |
Cost of revenues increased consulting feesduring the three months ended March 31, 2019, primarily due to decreased cost of PEER, reports, offset by increased telepsychiatry service and labor costs. Our cost of revenues for EEG techsneurometric services represents approximately 11% and 23%, respectively, of $47,000neurometric services revenues for the three months ended DecemberMarch 31, 2017, compared2019 and 2018, respectively. The cost for neurometric services fluctuates as the Company pays fees to $3,700third party providers for EEG services as a cost for its Peer reports. In most cases, fees for Peer reports are billed to patients’ insurance carriers for which the three months ended December 31, 2016,Company does not recognize as well as costrevenues until they are ultimately collected. Historically, the Company has experienced a low collection rate while most claims are collected in excess of ninety days from billing. Therefore, there will be timing differences between payment of services generated from Arcadian Services during(cost of revenues) and receipt of payment (revenues) which will not reflect evenly in the period from November 13, 2017 through December 31, 2017.Company’s Statement of Operations.
Research expenses
Three months ended December 31, | Change | |||||||||||
2017 | 2016 | |||||||||||
Services Research | $ | 81,500 | $ | 31,600 | $ | 49,900 |
Three months ended March 31, | Change | |||||||||||
2019 | 2018 | |||||||||||
Services Research Expenses | $ | 60,800 | $ | 73,400 | $ | (12,600 | ) |
Research expenses consist of payroll expenses, (including stock-based compensation), consulting fees, travel expenses, conference fees, and other miscellaneous costs listed as following:
Three months ended December 31, | Change | |||||||||||||
2017 | 2016 | |||||||||||||
(1 | ) | Salaries and benefit costs | $ | — | $ | 6,500 | $ | (6,500 | ) | |||||
(2 | ) | Consulting fees | 79,000 | 22,800 | 56,200 | |||||||||
(3 | ) | Other miscellaneous costs | 2,500 | 2,300 | 200 | |||||||||
Total Research | $ | 81,500 | $ | 31,600 | $ | 49,900 |
Three months ended March 31, | Change | ||||||||||||
2019 | 2018 | ||||||||||||
(1) | Consulting fees | 58,500 | 69,800 | (11,300 | ) | ||||||||
(2) | Other miscellaneous costs | 2,300 | 3,600 | (1,300 | ) | ||||||||
Total Research Expenses | $ | 60,800 | $ | 73,400 | $ | (12,600 | ) |
(1) |
(2) |
Other miscellaneous costs for the three months ended |
Product Development
Three months ended December 31, | Change | |||||||||||
2017 | 2016 | |||||||||||
Product Development | $ | 269,200 | $ | 295,300 | $ | (26,100 | ) |
Three months ended March 31, | Change | |||||||||||
2019 | 2018 | |||||||||||
Product Development Expenses | $ | 237,300 | $ | 342,200 | $ | (104,900 | ) |
Product development expenses consist of payroll costs, (including stock-based compensation), consulting fees, system development costs, conference fee, travel expenses, and miscellaneous costs which were as follows:
Three months ended December 31, | Change | |||||||||||||
2017 | 2016 | |||||||||||||
(1 | ) | Salaries and benefit costs | $ | 124,400 | $ | 203,000 | $ | (78,600 | ) | |||||
(2 | ) | Consulting fees | 72,500 | 51,700 | 20,800 | |||||||||
(3 | ) | System development costs | 36,000 | 15,500 | 20,500 | |||||||||
(4 | ) | Conference & Travel | 10,900 | 7,400 | 3,500 | |||||||||
(5 | ) | Other miscellaneous costs | 25,400 | 17,700 | 7,700 | |||||||||
Total Product Development | $ | 269,200 | $ | 295,300 | $ | (26,100 | ) |
Three months ended March 31, | Change | ||||||||||||
2019 | 2018 | ||||||||||||
(1) | Salaries and benefit costs | $ | 152,600 | $ | 140,700 | $ | 11,900 | ||||||
(2) | Consulting fees | 45,700 | 139,200 | (93,500 | ) | ||||||||
(3) | System development costs | 28,400 | 46,800 | (18,400 | ) | ||||||||
(4) | Conference & travel | 2,700 | 3,700 | (1,000 | ) | ||||||||
(5) | Other miscellaneous costs | 7,900 | 11,800 | (3,900 | ) | ||||||||
Total Product Development Expenses | $ | 237,300 | $ | 342,200 | $ | (104,900 | ) |
(1) | Salaries and benefits |
(2) | Consulting fees |
(3) | System development and maintenance costs |
(4) | Conference and travel costs |
(5) | Other miscellaneous costs |
Sales and marketing
Three months ended December 31, | Change | |||||||||||
2017 | 2016 | |||||||||||
Sales and Marketing | $ | 667,200 | $ | 105,700 | $ | 561,500 |
Three months ended March 31, | Change | |||||||||||
2019 | 2018 | |||||||||||
Sales and Marketing Expenses | $ | 199,400 | $ | 638,000 | $ | (438,600 | ) |
Sales and marketing expense for the three months ended December 31, 2017 was $667,200, compared to $105,700 for the three months ended December 31, 2016.
Sales and marketing expenses consist of payroll and benefit costs, (including stock-based compensation), advertising and marketing expenses, consulting fees, and miscellaneous expenses.
Three months ended December 31, | Three months ended March 31, | ||||||||||||||||||||||||
2017 | 2016 | Change | 2019 | 2018 | Change | ||||||||||||||||||||
(1) | Salaries and benefit costs | $ | 247,100 | $ | 48,900 | $ | 198,200 | Salaries and benefit costs | $ | 139,200 | $ | 342,300 | $ | (203,100 | ) | ||||||||||
(2) | Consulting fees | 174,900 | 45,200 | 129,700 | Consulting fees | 31,200 | 95,100 | (63,900 | ) | ||||||||||||||||
(3) | Advertising and marketing costs | 151,100 | — | 151,100 | Advertising and marketing costs | 4,800 | 97,500 | (92,700 | ) | ||||||||||||||||
(4) | Conferences and travel costs | 25,600 | — | 25,600 | Conferences and travel costs | 6,100 | 30,100 | (24,000 | ) | ||||||||||||||||
(5) | Other miscellaneous costs | 68,500 | 11,600 | 56,900 | Other miscellaneous costs | 18,100 | 73,000 | (54,900 | ) | ||||||||||||||||
Total Sales and marketing | $ | 667,200 | $ | 105,700 | $ | 561,500 | Total Sales and marketing expenses | $ | 199,400 | $ | 638,000 | $ | (438,600 | ) |
(1) | Salaries and benefits for the |
(2) | Consulting fees for the three months ended |
(3) | Advertising and marketing expenses for the three months ended |
(4) | Conference and travel expenditures for the three months ended |
(5) | Miscellaneous expenditures for the three months ended |
General and administrative
Three months ended December 31, | |||||||||||
2017 | 2016 | Change | |||||||||
General and administrative expenses | $ | 1,774,800 | $ | 1,021,800 | $ | 753,000 | |||||
Three months ended March 31, | ||||||||||||
2019 | 2018 | Change | ||||||||||
General and administrative expenses | $ | 2,350,300 | $ | 1,740,900 | $ | 609,400 |
General and administrative expenses consist of payroll and benefit costs, (including stock based compensation), legal fees, patent costs, other professional and consulting fees, general administrative and occupancy costs, dues and subscriptions, conference fees, and travel expenses.
Three months ended March 31, | |||||||||||||
2019 | 2018 | Change | |||||||||||
(1) | Salaries and benefit costs | $ | 998,200 | $ | 728,000 | $ | 270,200 | ||||||
(2) | Consulting fees | 336,600 | 364,200 | (27,600 | ) | ||||||||
(3) | Legal fees | 484,600 | 44,300 | 440,300 | |||||||||
(4) | Other professional fees | 108,000 | 246,200 | (138,200 | ) | ||||||||
(5) | Patent costs | 44,800 | 45,800 | (1,000 | ) | ||||||||
(6) | Marketing and investor relations costs | 143,700 | 46,500 | 97,200 | |||||||||
(7) | Conference and travel costs | 36,200 | 26,100 | 10,100 | |||||||||
(8) | Dues & subscriptions fees | 52,600 | 49,700 | 2,900 | |||||||||
(9) | Computer & web services | 20,100 | 40,000 | (19,900 | ) | ||||||||
(10) | General admin and occupancy costs | 125,500 | 150,100 | (24,600 | ) | ||||||||
Total General and administrative expenses | $ | 2,350,300 | $ | 1,740,900 | $ | 609,400 |
(1) | Salaries and benefit expenses increased by $270,200 for the three months ended March 31, 2019 period. This increase was primarily due to increased bonus accrual of $153,000, and increased telepsychiatry management and staff cost due to acquisition of Arcadian on November 13, 2017; |
(2) | Consulting fees decreased by $27,600 for the three months ended March 31, 2019 period, primarily related to decreased operational and consulting fees; |
(3) | Legal fees increased by $440,300 for the three months ended March 31, 2019 period, primarily due to additional legal fees related to the negotiation and execution of the merger agreement and other financing activities; |
(4) | Other professional fees decreased by $138,200 for the three months ended March 31, 2019 period, primarily due to higher audit fees in relation to the acquisition of Arcadian in fiscal 2018; |
(5) | Patent costs decreased by $1,000 primarily due to less volume of patent and trademark applications and maintenance costs; |
(6) | Marketing and investor relations costs increased by $97,200 for the three months ended March 31, 2019 as the Company engaged public relation firms in relation to capital raise and support of NASDAQ matters; |
(7) | Conference and travel costs increased by $10,100 for the three months ended March 31, 2019, primarily due to more conferences attended and travel made during the period; |
(8) | Dues and subscription costs increased by $2,900 for the three months ended March 31, 2019, primarily due to additional licenses for our Salesforce platform; |
(9) | Computer and web services decreased by $19,900 for the three months ended March 31, 2019, primarily due to decreased services related to our telepsychiatry business and cloud hosting fees; and |
(10) | General administrative and occupancy costs decreased by $24,600 for the three months ended March 31, 2019 period, primarily due to decreased Delaware franchise tax at $98,000, offset by increased bad debt write off at $14,000, and increased expenses from acquisition of Arcadian in fiscal 2018. |
Other income (expense)
Three months ended March 31, | Change | |||||||||||
2019 | 2018 | |||||||||||
Interest expense | $ | (23,400 | ) | $ | (24,800 | ) | $ | 1,400 |
37
Interest expense for the three months ended March 31, 2019 and 2018 were relatively unchanged;
Net Loss
Three months ended March 31, | Change | |||||||||||
2019 | 2018 | |||||||||||
Loss, net | $ | (2,709,700 | ) | $ | (2,659,600 | ) | $ | (50,100 | ) |
Our net loss was $2.7 million for the three months ended March 31, 2019, compared to a net loss of approximately $2.7 million for the same period ended March 31, 2018, primarily due to increased revenue from the acquisition of our telepsychiatry business on November 13, 2018, offset by increased costs and expenses respectively.
Results of Operations for Six Months Ended March 31, 2019 and 2018
MYnd Analytics is focused on research and the commercialization of its PEER Reports through its Neurometric Services, as well as providing telehealth service through scheduling and videoconferencing which is accessed through a secure portal.
The following table presents consolidated statement of operations data for each of the periods:
Revenues
Six months ended March 31, | Change | |||||||||||
2019 | 2018 | |||||||||||
Neurometric services | $ | 124,000 | $ | 133,100 | $ | (9,100 | ) | |||||
Telepsychiatry services | 723,200 | 448,800 | 274,400 | |||||||||
Total Revenues | $ | 847,200 | $ | 581,900 | $ | 265,300 |
Our neurometric services revenues decreased by $9,100, or approximately 7% for the six months ended March 31, 2019 The decrease was primarily due to decreased sales of PEER reports during the period. Our telepsychiatry revenues increased by $274,400, or approximately 61% during the six months ended March 31, 2019. Our increase in telepsychiatry services revenues is due to a combination of factors. First, the Company only began operating its Arcadian business during the three months ended December 31, 2017. As a result, the Company only recognized revenues from the Arcadian business (i.e. telepsychiatry services revenues) for a portion of the six-months ended March 31, 2018. In addition, the Company provided additional resources to the Arcadian platform during 2019, which improved its results of operations.
Cost of Revenues
Six months ended March 31, | Change | |||||||||||
2019 | 2018 | |||||||||||
Neurometric services | $ | 11,500 | $ | 118,800 | $ | (107,300 | ) | |||||
Telepsychiatry services | 509,900 | 264,400 | 245,500 | |||||||||
Cost of Revenues | $ | 521,400 | $ | 383,200 | $ | 138,200 |
Overall, the cost of revenues increased during the six months ended March 31, 2019, primarily due to fees paid to service providers as a result of increased sales for telepsychiatry services. Our cost of revenues for neurometric services represents approximately 2% and 31%, respectively, of neurometric services revenues for the six months ended March 31, 2019 and 2018, respectively. The cost for neurometric services fluctuates as the Company pays fees to third party providers for EEG services as a cost for its Peer reports. In most cases Peers are billed to patients’ insurance carriers for which the Company does not recognize as revenues until they are ultimately collected. Historically the Company has experienced a low collection rate while most claims are collected in excess of ninety days from billing. Therefore, there will be timing differences between payment of services (cost of revenues) and receipt of payment (revenues) which will not reflect evenly in the Company’s Statement of Operations.
Research expenses
Six months ended March 31, | Change | |||||||||||
2019 | 2018 | |||||||||||
Services Research Expenses | $ | 141,600 | $ | 154,900 | $ | (13,300 | ) |
Research expenses consist of consulting fees, travel expenses, conference fees, and other miscellaneous costs listed as following:
Six months ended March 31, | Change | ||||||||||||
2019 | 2018 | ||||||||||||
(1) | Consulting fees | 137,000 | 148,800 | (11,800 | ) | ||||||||
(2) | Other miscellaneous costs | 4,600 | 6,100 | (1,500 | ) | ||||||||
Total Research Expenses | $ | 141,600 | $ | 154,900 | $ | (13,300 | ) |
(1) | Consulting costs decreased by $11,800 for the six months ended March 31, 2019 and 2018, primarily due to decreased consulting services during the period; |
(2) | Other miscellaneous costs for the six months ended March 31, 2019 and 2018 were relatively unchanged. |
Product Development
Six months ended March 31, | Change | |||||||||||
2019 | 2018 | |||||||||||
Product Development Expenses | $ | 474,300 | $ | 611,400 | $ | (137,100 | ) |
Product development expenses consist of payroll costs, (including stock-based compensation), consulting fees, system development costs, conference fee, travel expenses, and miscellaneous costs which were as follows:
Six months ended March 31, | Change | ||||||||||||
2019 | 2018 | ||||||||||||
(1) | Salaries and benefit costs | $ | 295,100 | $ | 265,100 | $ | 30,000 | ||||||
(2) | Consulting fees | 97,300 | 211,700 | (114,400 | ) | ||||||||
(3) | System development costs | 63,500 | 82,800 | (19,300 | ) | ||||||||
(4) | Conference & travel | 4,100 | 14,600 | (10,500 | ) | ||||||||
(5) | Other miscellaneous costs | 14,300 | 37,200 | (22,900 | ) | ||||||||
Total Product Development Expenses | $ | 474,300 | $ | 611,400 | $ | (137,100 | ) |
(1) | Salaries and benefits increased by $30,000 for the six months ended March 31, 2019, primarily due to increased stock-based compensation $33,000 recognized during the six months of 2019; |
(2) | Consulting fees decreased by $114,400 for the six months ended March 31, 2019, primarily due to services in relation to the upgrade of the Company's cloud based sales platform and for a data science project to improve the Company's algorithms for the production of an enhanced PEER report during the six months ended March 31, 2018. |
(3) | System development and maintenance costs decreased by $19,300 for the six months ended March 31, 2019, primarily due to no system development cost incurred during the current period; |
(4) | Conference and travel costs decreased by $10,500 during the six months March 31, 2019 and 2018, primarily due to decreased conference attendance and travel expenses; |
(5) | Other miscellaneous costs decreased by $22,900 for the six months ended March 31, 2019, primarily due to decreased computer services and dues subscriptions during the period; |
Sales and marketing
Six months ended March 31, | Change | |||||||||||
2019 | 2018 | |||||||||||
Sales and Marketing Expenses | $ | 351,300 | $ | 1,305,200 | $ | (953,900 | ) |
Sales and marketing expenses consist of payroll and benefit costs, (including stock-based compensation), advertising and marketing expenses, consulting fees, and miscellaneous expenses.
Six months ended March 31, | |||||||||||||
2019 | 2018 | Change | |||||||||||
(1) | Salaries and benefit costs | $ | 230,600 | $ | 589,400 | $ | (358,800 | ) | |||||
(2) | Consulting fees | 58,100 | 270,000 | (211,900 | ) | ||||||||
(3) | Advertising and marketing costs | 4,800 | 248,600 | (243,800 | ) | ||||||||
(4) | Conferences and travel costs | 9,600 | 55,700 | (46,100 | ) | ||||||||
(5) | Other miscellaneous costs | 48,200 | 141,500 | (93,300 | ) | ||||||||
Total Sales and marketing expenses | $ | 351,300 | $ | 1,305,200 | $ | (953,900 | ) |
(1) | Salaries and benefits for the six months ended March 31, 2019 decreased by $358,800 from the 2018 period; primarily due to decreased salaries and commission of marketing and sales staff; |
(2) | Consulting fees for the six months ended March 31, 2019 decreased by $211,900, primarily due to the decrease in the number of marketing consultants; |
(3) | Advertising and marketing expenses for the six months ended March 31, 2019 decreased by $243,800 primarily due to decreased social media advertising; |
(4) | Conference and travel expenditures for the six months ended March 31, 2019 decreased by $46,100, primarily due to decreased travel expense for the sales staff; and |
(5) | Miscellaneous expenditures for the six months ended March 31, 2019 decreased by $93,300, primarily due to decreased rent and office expenses. |
General and administrative
Six months ended March 31, | ||||||||||||
2019 | 2018 | Change | ||||||||||
General and administrative expenses | $ | 4,724,100 | $ | 3,515,800 | $ | 1,208,300 |
General and administrative expenses consist of payroll and benefit costs, (including stock based compensation), legal fees, patent costs, other professional and consulting fees, general administrative and occupancy costs, dues and subscriptions, conference fees, and travel expenses.
Three months ended December 31, | ||||||||||||
2017 | 2016 | Change | ||||||||||
(1) | Salaries and benefit costs | $ | 702,800 | $ | 528,400 | $ | 174,400 | |||||
(2) | Transaction fees | 438,600 | — | 438,600 | ||||||||
(3) | Consulting fees | 198,100 | — | 198,100 | ||||||||
(4) | Legal fees | 34,600 | 219,900 | (185,300 | ) | |||||||
(5) | Other professional fees | 121,100 | 55,500 | 65,600 | ||||||||
(6) | Patent costs | 9,500 | 14,000 | (4,500 | ) | |||||||
(7) | Marketing and investor relations costs | 72,500 | 58,100 | 14,400 | ||||||||
(8) | Conference and travel costs | 56,700 | 30,800 | 25,900 | ||||||||
(9) | Dues & subscriptions fees | 45,300 | 32,900 | 12,400 | ||||||||
(10) | General admin and occupancy costs | 95,600 | 82,200 | 13,400 | ||||||||
Total General and administrative costs | $ | 1,774,800 | $ | 1,021,800 | $ | 753,000 |
Six months ended March 31, | |||||||||||||
2019 | 2018 | Change | |||||||||||
(1) | Salaries and benefit costs | $ | 1,974,900 | $ | 1,430,800 | $ | 544,100 | ||||||
(2) | Transaction fees | — | 438,600 | (438,600 | ) | ||||||||
(2) | Consulting fees | 729,800 | 562,300 | 167,500 | |||||||||
(3) | Legal fees | 926,000 | 78,900 | 847,100 | |||||||||
(4) | Other professional fees | 206,700 | 367,300 | (160,600 | ) | ||||||||
(5) | Patent costs | 46,200 | 55,300 | (9,100 | ) | ||||||||
(6) | Marketing and investor relations costs | 229,700 | 119,000 | 110,700 | |||||||||
(7) | Conference and travel costs | 63,600 | 82,800 | (19,200 | ) | ||||||||
(8) | Dues & subscriptions fees | 109,000 | 95,000 | 14,000 | |||||||||
(9) | Computer & web services | 68,400 | 40,000 | 28,400 | |||||||||
(10) | General admin and occupancy costs | 369,800 | 245,800 | 124,000 | |||||||||
Total General and administrative expenses | $ | 4,724,100 | $ | 3,515,800 | $ | 1,208,300 |
(1) | Salaries and benefit expenses increased by |
(2) | Transaction cost was decreased by $438,600 primarily due to telepsychiatry management and staff cost related from acquisition of Arcadian on November 13, 2017; |
(3) | Consulting fees |
(4) |
(5) | Other professional fees |
(6) | Patent costs decreased by |
(7) | Marketing and investor relations costs increased by |
(8) | Conference and travel costs |
(9) | Dues and subscription costs increased by |
(10) | Computer and web services increased by $28,400 for the six months ended March 31, 2019, primarily due to increased services related to our telepsychiatry business and cloud hosting fees; and |
General administrative and occupancy costs increased by |
Other income (expense)
Three months ended December 31, | Change | ||||||||||
2017 | 2016 | ||||||||||
Interest expense | $ | (13,700 | ) | $ | (2,500 | ) | $ | (11,200 | ) | ||
Six months ended March 31, | Change | |||||||||||
2019 | 2018 | |||||||||||
Interest expense | $ | (46,300 | ) | $ | (38,500 | ) | $ | (7,800 | ) |
Interest expense decreased by $7,800 for the six months ended March 31, 2019, primarily due to interest expense in relation to the acquisition of Arcadian on November 13, 2017.
Net Loss
Three months ended December 31, | Change | ||||||||||
2017 | 2016 | ||||||||||
Loss, net | $ | (2,769,300 | ) | $ | (1,440,200 | ) | $ | (1,329,100 | ) | ||
Six months ended March 31, | Change | |||||||||||
2019 | 2018 | |||||||||||
Loss, net | $ | (5,414,100 | ) | $ | (5,429,000 | ) | $ | 14,900 |
Our net loss was $2.8 million$14,900 less for the threesix months ended DecemberMarch 31, 2017,2019, compared to approximately $1.4 million for the three months of Decembersame period ended March 31, 2016. The change in net loss consists of2018, primarily due to increased general & administrative costs related to the hiring of additional operational staff and consultants. Also, sales and marketing costs increased as a result of additional headcount for sales and call center staff and our social media campaign in 2017. Costs forrevenue from the acquisition of Arcadian Telepsychiatry Services LLC contributed to the increase in the net loss as well.our telepsychiatry business on November 13, 2018, offset by increased costs and expenses respectively.
Liquidity and Capital Resources
The accompanying condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”), which contemplate continuation of the Company as a going concern.
Since our inception, we have never been profitable and we have generated significant losses. The Company has a limited operating history and its operations are subject to certain problems, expenses, difficulties, delays, complications, risks and uncertainties frequently encountered in the operation of a business with a limited operating history. These risks include the ability to obtain adequate financing on a timely basis, if at all, the failure to develop or supply technology or services to meet the demands of the marketplace, the failure to attract and retain qualified personnel, competition within the industry, government regulation and the general strength of regional and national economies.
As of DecemberMarch 31, 2017,2019, we had an accumulated deficit of approximately $78.4$89.9 million compared to our accumulated deficit as of September 30, 2017,2018, of approximately $75.6$85.2 million. Our management expects that with our proposed clinical trials, sales and marketing and general and administrative costs, our expenditures will continue to grow and, as a result, we will need to generate significant product revenues to achieve profitability. The Company continues to explore additional sources of capital but there is substantial doubt as to whether any financing arrangement will be available in amounts and on terms acceptable to the Company to permit it to continue operations.
As of DecemberMarch 31, 2017,2019, we had $2.7approximately $1.2 million in cash and cash equivalents and a working capital surplusdeficit of approximately $1.1 million.$352,000. This is compared to our cash position of $5.4approximately $3.3 million as of September 30, 20172018 and working capital of $4.1approximately $2.3 million.
The Company has been funded through multiple rounds of private placements, primarily from members of our Board or our affiliates.
On November 30, 2016, and December 21, 2016 the Company sold and issued an aggregate of 208,000 shares of its Common Stock, at a per share price of $6.25, in private placements to a total of ten accredited investors, for which it received gross cash proceeds to the Company of $1,300,000. Three of the ten accredited investors were affiliates, who represented 38.5% of the cash proceeds as follows: Dr. Robin Smith, our Chairman of the Board purchased 16,000 shares for $100,000; John Pappajohn, a member of the Board, purchased 32,000 shares for $200,000; and the Tierney Family Trust of which our former Board member, Thomas Tierney is a trustee, purchased 32,000 shares for $200,000. Also on December 29, 2016, the Company sold and issued an additional 32,000 shares of its Common Stock, at a per share price of $6.25, in a private placement to two accredited investors, resulting in gross cash proceeds of $200,000, in which one investor, John Pappajohn, a member of the Board, purchased 16,000 shares for $100,000.
On December 6, 2016, the Company, entered into a Common Stock Purchase Agreement with Aspire Capital which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $10.0 million of shares of the Company’s common stock over the 30-month term of the Purchase Agreement.
From February 10, 2017 through March 21, 2017, the Company sold and issued an additional 237,000 shares of its Common Stock, at a per share price of $6.25, in private placements to four affiliated and accredited investors, resulting in gross cash proceeds to the Company of $1,481,300. The affiliated investors were as follows: RSJ, purchased 160,000 shares for $1,000,000; John Pappajohn, a member of the Board, purchased 72,000 shares for $450,000; Geoffrey Harris is a member of the Board purchased 5,000 shares for $31,300. RSJ is a greater than 10% stockholder of the Company and Michal Votruba, who serves as a Director for Life Sciences at the RSJ/Gradus Fund, has served as a member of our Board since July 30, 2015. The subscription agreement between the Company and RSJ provided for the grant to RSJ by the Company of a right of first refusal through June 30, 2018, to license or to have distribution rights in Europe with respect to any of the Company’s technology and/or intellectual property.
In July 2017, the Company completed an underwritten public offering of its Common Stockcommon stock and warrants, raising gross proceeds of approximately $8.79 million.recently, through our facility with Aspire Capital.
Working Capital, Going Concern, Operating Capital and Capital Expenditure Requirements
As of DecemberMarch 31, 2017,2019, we had approximately $2.7$1.2 million in cash and cash equivalents, compared to $5.4approximately $3.3 million of cash and cash equivalents as of September 30, 2017.2018.
Our recurring net losses and negative cash flows from operations raise substantial doubt about our ability to continue as a going concern. Management’sManagement's assessment of substantial doubt of going concern is based on current estimates and assumptions regarding our programs and business needs. Actual working capital requirements could differ materially from the above working capital projection. We may explore strategic opportunities including partnerships, licensing and acquisitions of other entities, assets or products. If we are unable to continue to identify sources of capital, we may be required to limit our activities, to terminate programs or terminate operations temporarily or permanently. Even if we close the Merger, we will be required to fund our continuing operations.
Our ability to successfully raise sufficient funds through the sale of equity securities, when needed, is subject to many risks and uncertainties and even if we are successful, future equity issuances would result in dilution to our existing stockholders. Our risk factors are described under the heading “Risk Factors” in Part I Item 1A and elsewhere in our Annual Report on Form 10-K and in other reports we file with the SEC.
The amount of capital we will need to conduct our operations and the time at which we will require such capital may vary significantly depending upon a number of factors, such as:
● | the amount and timing of costs we incur in connection with our clinical trials and product development activities, including enhancements to our PEER Online database and costs we incur to further validate the efficacy of our technology; |
● | whether we can receive sufficient business revenues from Arcadian |
● | the amount and timing of costs we incur in connection with the expansion of our commercial operations, including our sales and marketing efforts; |
● | whether we incur additional consulting and legal fees in our efforts in conducting Non-Significant Risk trials within FDA requirements, which will enable us to obtain a 510(k) clearance from the FDA; |
● | if we expand our business by acquiring or investing in complimentary |
● | our continuing access to funding from Aspire Capital. |
Sources of Liquidity
Since our inception, substantially all of our operations have been financed from equity and debt financings.
Private Placement of Common Stock
Between November 2016 through March 2017, the Company sold and issued an aggregate of 477,000 shares of its Common Stock, at a per share price of $6.25, in a private placement to thirteen accredited investors, of which five are affiliated with the Company, for which it received gross cash proceeds to the Company of $2,981,300.
The Aspire Capital Equity LineLines of Credit
On December 6, 2016, the Company, entered into a Common Stockcommon stock purchase agreement (the "First Purchase Agreement") with Aspire Capital which provided that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital was committed to purchase up to an aggregate of $10.0 million of shares of the Company’s common stock over the 30- month term of the First Purchase Agreement. For details of the First Purchase Agreement financing see "Private Placement Transactions - The Aspire Capital Equity Credit Lines” below.
From April 3, 2018 to May 7, 2018 the Company sold 1,180,000 shares of common stock to Aspire Capital under the First Purchase Agreement and received total proceeds of $2.4 million.
On May 15, 2018, the Company, entered into the Second Purchase Agreement with Aspire Capital which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $10.0 million of shares of the Company’s common stock over the 30-month term of the Second Purchase Agreement. In consideration for entering into the Purchase Agreement, concurrently with the executionFor details of the Purchase Agreement the Company issued tofinancing see "Private Placement Transactions?The Aspire Capital 80,000 shares of the Company’s common stock.Equity Credit Linea” below.
On February 23, 2017, pursuantFrom May 15, 2018 to a purchase notice issued byMarch 31, 2019, the Company to Aspire Capital pursuant to the Purchase Agreement, Aspire Capital purchased 20,000 shares of Common Stock, at a per share price of $7.25, resulting in gross cash proceeds of $145,000.
The issuance ofsold 2,200,100 shares of common stock that may be issued from time to time to Aspire Capital under the Second Purchase Agreement are exempt from registration under the Securities Act, pursuant to the exemption for transactions by an issuer not involving any public offering under Section 4(a)(2)and received total proceeds of the Securities Act.approximately $3.7 million.
Public Offering
In July 2017, the Company completed an underwritten public offering of its Common Stock and warrants, raising gross proceeds of approximately $8.79 million. In the offering, the Company sold 1,675,000 shares of Common Stock and accompanying warrants to purchase up to 1,675,000 shares of Common Stock (the “Warrants”), at a combined public offering price of $5.25 per share and accompanying Warrant, for a total offering size of $8,793,750. The Warrants were immediately exercisable for one share of Common Stock at an exercise price of $5.25 per share, and will expire five years after the issuance date. In connection with the offering, the Company granted the representative of the underwriters a 45-day option to purchase up to 251,250 additional shares of Common Stock and/or Warrants to cover over-allotments, if any. On August 24, 2017 the underwriters exercised their option and purchased 213,800 common stock warrants for $0.01 per warrant. The warrants were immediately exercisable for one share of common stock at an exercise price of $5.25 per share, subject to adjustments, and will expire five years after the issuance date.
Private Placement of Series A Preferred Stock with Warrant
On March 29, 2018, the Company sold an aggregate of 1,050,000 units for $2.00 per Unit, each consisting of one share of newly-designated Series A Preferred Stock, par value $0.001 per share and one Warrant to purchase one share of Common Stock, par value $0.001 per share for $2.34 per share in a private placement to three affiliates of the Company, for gross proceeds of $2.1 million. The private placement closed on March 29, 2018. The closing price per share of the Common Stock on the Nasdaq Stock Market on March 29, 2018 was $1.19 per share.
On April 30, 2018, the Company entered into the First Amended Subscription Agreement for Shares of Series A Preferred Stock and Common Stock Purchase Warrants (the “Amended Agreement”) with John Pappajohn and Mary Pappajohn (each an “Investor”, and collectively the “Investors”), which provides for the issuance, as of the date of the Original Agreement, of an aggregate of 500,000 Shares of Series A-1 Convertible Preferred Stock, par value $0.001 per share (“Series A-1 Convertible Preferred Stock”), in lieu of the same number of Shares of Series A Convertible Preferred Stock that the Company had originally agreed to issue to the Investors. The Series A-1 Convertible Preferred Stock will have substantially the same rights and preferences as the Shares of Series A Preferred Stock, except that the Shares of Series A-1 Convertible Preferred Stock are non-voting and cannot be converted into Common Stock by an Investor if, as a result of such conversion, such Investor would beneficially own greater than 19.9% of the outstanding shares of Common Stock. Additionally, the Warrants were amended to provide that they would not be exercisable by an Investor if, following any such exercise, such Investor would beneficially own greater than 19.9% of the outstanding shares of Common Stock.
Shares of the Company’s Series A and Series A-1 Preferred Stock are entitled to receive cash dividends at the rate of five percent (5.00%) of the Original Series A and Series A-1 Issue Price per annum, payable out of funds legally available therefor. Dividends will only payable when and if declared or upon certain events.
The Warrants are exercisable for a period of five years for an exercise price of $2.34. The exercise price is subject to adjustment for stock splits, stock dividends, combinations or similar events. The Warrants may not be exercised on a cashless basis.
Cash Flows
Net cash used in operating activities was $2,439,900approximately $3.8 million for the threesix months ended DecemberMarch 31, 2017,2019, compared to $765,800approximately $4.7 million for the same period in 2016.2018. The $1.7approximate $0.9 million net increasedecrease in cash used for operations was primarily due to an increase in net lossaccounts payable of $1,329,100.approximately $0.4 million, and increased stock based compensation at $0.2 million.
During the threesix months ended ended DecemberMarch 31, 2017,2019, the Company used $334,700$9,100 in investing activities related to the purchase of furniture and equipment. During the six months ended March 31, 2018, the Company used $361,800 in investing activities, including $28,100$55,200 for the purchase of office equipment and $306,600 related to the acquisition of Arcadian Services.Arcadian.
Net Cash used inprovided by financing activities for the threesix months ended DecemberMarch 31, 20172019 was $16,100, and relate to payments$1.8 million, consisting $1.8 million of gross proceeds received from Aspire purchase, offset by $17,500 repayments on notes payable and $600 repayments on a capital leases. Financinglease. Net Cash provided by financing activities for the quartersix months ended DecemberMarch 31, 2016, consisted2018 was $2.1 million, consisting$2.1 million of $1.5 million in cashgross proceeds received from private placements, of equity from 11 accredited investors, of which three are affiliated with the Company.offset by $34,100 repayments on notes payable and $600 repayments on a capital lease.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements or financing activities with special purpose entities.
Private Placement Transactions
Private Placement of Common Stock
On November 30, 2016, the Company sold and issued an aggregate of 160,000 shares of its Common Stock, at a per share price of $6.25, in a private placement to six accredited investors, for which it received gross cash proceeds of $1,000,000. Three of the six accredited investors were affiliates and represented 50% of the cash proceeds as follows: Dr. Robin Smith, our Chairman of the Board, purchased 16,000 shares for $100,000; John Pappajohn, a member of the Board, purchased 32,000 shares for $200,000; and the Tierney Family Trust, of which our former Board member, Thomas Tierney is a trustee, purchased 32,000 shares for $200,000. In connection with this private placement, certain investors (comprised of our executive officers, current and certain former directors) agreed to a 180-day “lock-up”, commencing on November 30, 2016, with respect to shares of Common Stock and other of our securities that they beneficially own, including securities that are convertible into shares of Common Stock and securities that are exchangeable or exercisable for shares of Common Stock. As a result, subject to certain exceptions, for a period of 180 days following November 30, 2016, such persons may not offer, sell, pledge or otherwise dispose of these securities without the Company’s prior written consent.The “lock-up” period expired without any persons requesting the Company’s consent or dispose of these securities.
On December 21, 2016, the Company sold and issued an aggregate of 48,000 shares of its Common Stock, at a per share price of $6.25, in private placements to four accredited investors who were new to the Company.for which it received gross cash proceeds to the Company of $300,000.
On December 29, 2016, the Company sold and issued an additional 32,000 shares of its Common Stock, at a per share price of $6.25, in a private placement to two accredited investors, resulting in gross cash proceeds of $200,000, in which one investor, John Pappajohn, a member of the Board, purchased 16,000 shares for $100,000.
From February 10, 2017 through March 21, 2017, the Company sold and issued an additional 237,000 shares of its Common Stock, at a per share price of $6.25, in a private placement to four affiliated accredited investors, resulting in gross cash proceeds to the Company of $1,481,250. The affiliated investors were as follows: RSJ PE a greater than 10% shareholder and where Mr. Votruba (a member of our Board) is Director for Life Sciences for the RSJ/Gradus Fund, purchased 160,000 shares for $1,000,000; John Pappajohn, a member of the Board, purchased 72,000 shares for $450,000; and Geoffrey Harris, a member of the Board purchased 5,000 shares for $31,250, representing the aggregate gross proceeds to the Company. The subscription agreement between the Company and RSJ provided for the grant to RSJ by the Company of a right of first refusal through June 30, 2018, to license or to have distribution rights in Europe with respect to any of the Company’s technology and/or intellectual property.
These private placements were made pursuant to an exemption from registration afforded by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Regulation D thereunder.
The Aspire Capital Equity LineCredit Lines
On December 6, 2016, the Company entered into the First Purchase Agreement with Aspire Capital which provided that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital was committed to purchase up to an aggregate of $10.0 million of shares of the Company’s common stock over the 30-month term of the First Purchase Agreement. In consideration for entering into the First Purchase Agreement, concurrently with the execution of the First Purchase Agreement, the Company issued to Aspire Capital 80,000 shares of the Company’s common stock. SeeNote 7. Stockholders’ Equity”,Consolidated Financial Statements for additional detail.
Under the First Purchase Agreement, after the SEC declared effective the registration statement referred to above, on any trading day selected by the Company on which the closing sale price of its Common Stock was equal or greater than $0.50 per share, the Company had the right, in its sole discretion, to present Aspire Capital with a purchase notice, directing Aspire Capital (as principal) to purchase up to 50,000 shares of Common Stock per business day, up to $10.0 million of the Company’s common stock in the aggregate at a per share purchase price equal to the lesser of:
a) the lowest sale price of Common Stock on the purchase date; or
b) the arithmetic average of the three (3) lowest closing sale prices for Common Stock during the twelve (12) consecutive trading days ending on the trading day immediately preceding the purchase date.
The Company had the right, in its sole discretion, to present Aspire Capital with a volume-weighted average price purchase notice (each, a “VWAP Purchase Notice”) directing Aspire Capital to purchase an amount of stock equal to up to 30% of the aggregate shares of Common Stock traded on its principal market on the next trading day (the “VWAP Purchase Date”), subject to a maximum number of shares the Company may determine. The purchase price per share pursuant to such VWAP Purchase Notice was generally 95% of the volume-weighted average price for Common Stock traded on its principal market on the VWAP Purchase Date.
The purchase price was to be adjusted for any reorganization, recapitalization, non-cash dividend, stock split, or other similar transaction occurring during the period(s) used to compute the Purchase Price. The Company could deliver multiple Purchase Notices and VWAP Purchase Notices to Aspire Capital from time to time during the term of the Purchase Agreement, so long as the most recent purchase has been completed.
The Purchase Agreement provides that the Company and Aspire Capital would not effect any sales under the First Purchase Agreement on any purchase day selected where the closing sale price of the Company’s common stock was less than $0.50. There are no trading volume requirements or restrictions under the First Purchase Agreement, and the Company could control the timing and amount of sales of Common Stock to Aspire Capital. Aspire Capital had no right to require any sales by the Company, but was obligated to make purchases from the Company as directed by the Company in accordance with the First Purchase Agreement. There were no limitations on use of proceeds, financial or business covenants, restrictions on future fundings, rights of first refusal, participation rights, penalties or liquidated damages in the First Purchase Agreement. In consideration for entering into the Purchase Agreement, concurrently with the execution of the First Purchase Agreement, the Company issued to Aspire Capital 80,000 shares of Common Stock (the “ First Commitment Shares”). The First Purchase Agreement was terminated and replace by the Second Purchase Agreement, defined below on May 15, 2018. Aspire Capital had agreed that neither it nor any of its agents, representatives and affiliates shall engage in any direct or indirect short-selling or hedging of Common Stock during any time prior to the termination of the First Purchase Agreement. Any proceeds from the Company receives under the First Purchase Agreement were expected to be used for working capital and general corporate purposes.
On May 15, 2018 the Company terminated the First Purchase Agreement and entered into the Second Purchase Agreement with Aspire Capital which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $10.0 million of shares of the Company’s common stock over the 30-month term of the Purchase Agreement. In consideration for entering into the Purchase Agreement, concurrently with the execution of the Purchase Agreement, the Company issued to Aspire Capital 80,000250,000 shares of the Company’s common stock.stock ( the "Second Commitment Shares"). SeeNote 7. Stockholders’ Equity”,6. Stockholders’Equity of the Condensed Consolidated Financial Statements for additional detail.
Under the Second Purchase Agreement, after the SEC declared effective the registration statement referred to above, on any trading day selected by the Company on which the closing sale price of its Common Stock is equal or greater than $0.50 per share, the Company has the right, in its sole discretion, to present Aspire Capital with a purchase notice, directing Aspire Capital (as principal) to purchase up to 50,000 shares of Common Stock per business day, up to $10.0 million of the Company’s common stock in the aggregate at a per share purchase price equal to the lesser of:
a) the lowest sale price of Common Stock on the purchase date; or
b) the arithmetic average of the three (3) lowest closing sale prices for Common Stock during the twelve (12) consecutive trading days ending on the trading day immediately preceding the purchase date.
The Company has the right, in its sole discretion, to present Aspire Capital with a volume-weighted average price purchase notice (each, a “VWAP Purchase Notice”) directing Aspire Capital to purchase an amount of stock equal to up to 30% of the aggregate shares of Common Stock traded on its principal market on the next trading day (the “VWAP Purchase Date”), subject to a maximum number of shares the Company may determine. The purchase price per share pursuant to such VWAP Purchase Notice is generally 95% of the volume-weighted average price for Common Stock traded on its principal market on the VWAP Purchase Date.
The purchase price will be adjusted for any reorganization, recapitalization, non-cash dividend, stock split, or other similar transaction occurring during the period(s) used to compute the Purchase Price. The Company may deliver multiple Purchase Notices and VWAP Purchase Notices to Aspire Capital from time to time during the term of the Purchase Agreement, so long as the most recent purchase has been completed.
The Second Purchase Agreement provides that the Company and Aspire Capital will not effect any sales under the Second Purchase Agreement on any purchase day selected where the closing sale price of the Company’s common stock is less than $0.50. There are no trading volume requirements or restrictions under the Second Purchase Agreement, and the Company will control the timing and amount of sales of Common Stock to Aspire Capital. Aspire Capital has no right to require any sales by the Company, but is obligated to make purchases from the Company as directed by the Company in accordance with the Second Purchase Agreement. There are no limitations on use of proceeds, financial or business covenants, restrictions on future fundings, rights of first refusal, participation rights, penalties or liquidated damages in the Second Purchase Agreement. In consideration for entering into the Second Purchase Agreement, concurrently with the execution of the Second Purchase Agreement, the Company issued to Aspire Capital 80,000250,000 shares of Common Stock (the “Commitment“Second Commitment Shares”). The Second Purchase Agreement may be terminated by the Company at any time, at its discretion, without any cost to the Company. Aspire Capital has agreed that neither it nor any of its agents, representatives and affiliates shall engage in any direct or indirect short-selling or hedging of Common Stock during any time prior to the termination of the Second Purchase Agreement. Any proceeds from the Company receives under the Second Purchase Agreement are expected to be used for working capital and general corporate purposes.
On February 23, 2017, pursuant to aAs of March 31, 2019, the Company has issued purchase notice issued by the Companynotices to Aspire Capital pursuant tounder the First Purchase Agreement Aspire Capital purchased 20,000to purchase 1,180,000 shares of Common Stock,common stock, at a per share price of $7.25,$2.00, resulting in gross cash proceeds of $145,000.approximately$2.4 million.
From May 15, 2018 to March 31, 2019, the Company sold 2,200,100 shares of common stock to Aspire Capital under the Second Purchase Agreement and received total proceeds of approximately $3.7 million.
The Second Purchase Agreement previously restricted the amount of shares that may be sold to Aspire Capital thereunder to 1,134,671 shares of Common Stock (the “Exchange Cap”). On November 26, 2018, the Company received shareholder approval to remove the Exchange Cap in compliance with the applicable listing rules of the Nasdaq Stock Market. Pursuant to Nasdaq Listing Rule 5635(d), shareholder approval is required prior to the issuance of securities in connection with a transaction other than a public offering involving the sale, issuance or potential issuance by the Company of common stock (or securities convertible into or exercisable common stock) equal to 20% or more of the common stock outstanding before the issuance for less than the greater of book or market value of the stock. Following receipt of shareholder approval, the Company may issue an additional $8.1 million, up to an aggregate of $10 million, of common stock to Aspire Capital under the Second Purchase Agreement, with availability of $6.3 million at March 31, 2019.
Private Placement of Series A Preferred Stock with Warrant
On March 29, 2018, the Company sold an aggregate of 1,050,000 units for $2.00 per Unit, each consisting of one share of newly-designated Series A Preferred Stock, par value $0.001 per share and one Warrant to purchase one share of Common Stock, par value $0.001 per share for $2.34 per share in a private placement to three affiliates of the Company, for gross proceeds of $2.1 million ("the Financing"). The private placement closed on March 29, 2018. The closing price per share of the Common Stock on the Nasdaq Stock Market on March 29, 2018 was $1.19 per share.
On April 30, 2018, the Company entered into the First Amended Subscription Agreement for Shares of Series A Preferred Stock and Common Stock Purchase Warrants (the “Amended Agreement”) with John Pappajohn and Mary Pappajohn (each an “Investor”, and collectively the “Investors”), which provides for the issuance, as of the date of the Original Agreement, of an aggregate of 500,000 Shares of Series A-1 Convertible Preferred Stock, par value $0.001 per share (“Series A-1 Convertible Preferred Stock”), in lieu of the same number of Shares of Series A Convertible Preferred Stock that the Company had originally agreed to issue to the Investors. The Series A-1 Convertible Preferred Stock will have substantially the same rights and preferences as the Shares of Series A Preferred Stock, except that the Shares of Series A-1 Convertible Preferred Stock are non-voting and cannot be converted into Common Stock by an Investor if, as a result of such conversion, such Investor would beneficially own greater than 19.9% of the outstanding shares of Common Stock. Additionally, the Warrants were amended to provide that they would not be exercisable by an Investor if, following any such exercise, such Investor would beneficially own greater than 19.9% of the outstanding shares of Common Stock.
Shares of the Company’s Series A and Series A-1 Preferred Stock are entitled to receive cash dividends at the rate of five percent (5.00%) of the Original Series A and Series A-1 Issue Price per annum, payable out of funds legally available therefor. Dividends will only payable when and if declared or upon certain events.
The Warrants are exercisable for a period of five years for an exercise price of $2.34. The exercise price is subject to adjustment for stock splits, stock dividends, combinations or similar events. The Warrants may not be exercised on a cashless basis.
In connection with the Financing, the Company also entered into the Registration Rights Agreement with the investors, requiring the Company to register the resale of the shares of Common Stock underlying the preferred stock and the Warrants. Under the Registration Rights Agreement, the Majority Holders may by a written Demand Notice to the Company commencing six (6) months from the closing date, request the Company to effect the registration of all or part of the registrable securities owned by such Majority Holders and their respective affiliates on a Registration Statement on Form S-3. The Company has agreed to use its reasonable best efforts to cause such registration and/or qualification to be complete as soon as practicable, but in no event later than sixty (60) days, after receipt of the Demand Notice.
The shares of Series A and Series A-1 Preferred Stock were offered and sold in reliance upon the exemption from the registration requirements of the Securities Act, set forth under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act, relating to sales by an issuer not involving any public offering and in reliance on similar exemptions under applicable state laws. Each purchaser represented that it is an accredited investor and that it acquired the Series A and Series A-1 Preferred Stock and Warrants for investment purposes only and not with a view to any resale, distribution or other disposition of such securities in violation of the United States federal securities laws.
On September 21, 2018, the Company entered into definitive agreements with George C. Carpenter IV, President and Chief Executive Officer, Robin L. Smith, Chairman, as well as John Pappajohn, and Peter Unanue, each a director of the Company, and entities affiliated with Michal Votruba, a member of the Board of Directors of MYnd Analytics and Director of Life Sciences for the European-based RSJ-Gradus fund, relating to a private placement (the “September Private Placement”) of an aggregate of 459,458 units for $1.85 per unit, with each unit consisting of one share of common stock and one common stock purchase warrant to purchase one share of Common Stock for $2.00 per share.
The Company has used the proceeds of the above financings for general corporate purposes.
These private placements were made pursuant to an exemption from registration afforded by Section 4(a)(2) of the Securities Act, and Regulation D thereunder.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk. |
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 4. | Controls and Procedures. |
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.
In connection with the preparation of this Quarterly Report, we carried outOur management conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer, who is our principal executive officer, and Principalour Chief Financial Officer, who is our principal financial and Accounting Officer,accounting officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of December 31, 2017, in accordance with Rules 13a-15(b) and 15d-15(b)the end of the Exchange Act.
period covered by this Quarterly Report on Form 10–Q. Based onupon that evaluation, our President, Chief Executive Officer and PrincipalChief Financial and Accounting Officer have concluded that as a result of the material weakness in our internal control over financial reporting, our disclosure controls and procedures were not effective as of DecemberMarch 31, 2017.2019.
We have identified a material weaknesses in our disclosure controls and procedures. The Company did not maintain effective controls over certain aspects of the financial reporting process because we lacked a sufficient complement of personnel with a level of accounting expertise that is commensurate with our financial reporting requirements. We do not have adequate review and supervision procedures for financial reporting functions. The review and supervision function of internal control relates to the accuracy of financial information reported. The failure to adequately review and supervise could allow the reporting of inaccurate or incomplete financial information. Due to our size and nature, review and supervision may not always be possible or economically feasible.
Based on the foregoing material weaknesses, we have determined that, as of December 31, 2017, our internal controls over our financial reporting are not effective. We are developing a remediation plan outlining the steps and resources necessary to address each material weakness. Additionally, we continue to add employees and consultants to address these issues and we will continue to broaden the scope of our accounting and realign responsibilities in our financial and accounting review functions. The Company does not believe that the material weakness has resulted in any material inaccuracies in the financial statements included in its Quarterly Report on Form 10-Q for the quarter ended December 31, 2017 or any prior periods.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable and not absolute assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of certain events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
Changes in Internal Controls over Financial Reporting
There has beenEffective October 1, 2018, we adopted the new revenue standard. While the new revenue standard is expected to have an immaterial impact on our ongoing revenue and net income, it will require management to make significant judgments and estimates. As a result, we implemented changes to our internal controls related to revenue recognition for the quarter ended March 31, 2019. These changes include updated accounting policies affected by the new revenue standard, redesigned internal controls over financial reporting related to the new revenue standard, expanded data gathering to comply with the additional disclosure requirements, training of individuals responsible for implementation of, and continuing compliance with, the new revenue standard, as well as ongoing contract review requirements.
Other than the material weakness in our internal control over financial reporting and adoption of the new revenue standard described above, there was no change in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three-month periodthree months ended DecemberMarch 31, 20172019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
OTHER INFORMATION
Item 1. | Legal Proceedings |
The Company is not currently party to any legal proceedings, the adverse outcome of which, in the Company’s management’s opinion, individually or in the aggregate, would have a material adverse effect on the Company’s results of operations or financial position.
Item 1A. | Risk Factors |
Except as set forth below, there have been no material changesAs a smaller reporting company, we are not required to provide the information required by this item. However, we direct you to the risk factors included in the Risk Factors section in our Annual Report on Form 10-K for the year ended September 30, 2017.2018 filed with the Securities and Exchange Commission on December 11, 2018 and in our registration statement on Form S-4 filed with the Securities and Exchange Commission on February 13, 2019.
The risk factor capitioned “Ifcaptioned “If we cannot continue to satisfy NASDAQ’s continuing listing criteria, NASDAQ may subsequently delist our Common Stock”Stock, particularity given recent notice that our stockholder equity is below the required level” is hereby amended as follows:
NASDAQ requires us to meet certain financial, public float, bid price and liquidity standards on an ongoing basis in order to continue the listing of our Common Stock. Generally, we must maintain a minimum amount of stockholdersstockholder’s equity (generally $2.5 million) and a minimum number of holders of our securities (generally 300 round lot holders). If we fail to meet any of the continuing listing requirements, our Common Stock may be subject to delisting. As DecemberMarch 31, 2017,2019, we had stockholders’ equitystockholders’equity of approximately $2.1 million,$512,100, and we are no longer in compliance with such continue listing requirement. If our Common Stock is delisted and we are not able to list our Common Stock on another national securities exchange, we expect our securities would be quoted on an over-the-counter market. If this were to occur, our stockholders could face significant material adverse consequences, including limited availability of market quotations for our Common Stock and reduced liquidity for the trading of our securities. In addition, we could experience a decreased ability to issue additional securities and obtain additional financing in the future. There can be no assurance that an active trading market for our Common Stock will develop or be sustained.We may choose to raise additional capital in order to increase our stockholders’ equity in order to meet the NASDAQ continued listing standards. Any additional equity financings may be financially dilutive to and will be dilutive from an ownership perspective to our stockholders, and such dilution may be significant based upon the size of such financing. Additionally, we cannot assure that such funding will be available on a timely basis, in needed quantities, or on terms favorable to us, if at all. On February 21, 2019, the Company received a letter from The Nasdaq Stock Market ("Nasdaq") indicating that the Company was not compliant with the minimum stockholders' equity requirement under Nasdaq Listing Rule 5550(b)(1) for continued listing on The Nasdaq Capital Market because the Company's stockholders' equity, as reported in the Company's Quarterly Report on Form 10-Q for the period ended December 31, 2018, was below the required minimum of $2.5 million. Further, as of February 21, 2019, the Company did not meet the alternative compliance standards relating to the market value of listed securities or net income from continuing operations. This notice of noncompliance has had no immediate impact on the continued listing or trading of the Company’s common stock on The Nasdaq Capital Market. On April 17, 2019, the Company received a letter from Nasdaq granting the Company an extension through August 20, 2019 to regain compliance with Listing Rule 5550(b). The terms of the extension are as follows:
● | On or before June 30, 2019, the Company must provide an update on the closing of the merger transaction. If the merger transaction is delayed or terminated for any reason, the Company must provide an updated plan of compliance. Upon review of the updated plan, Staff will determine if a further extension is warranted; and, |
● | On or before August 20, 2019, the Company must complete its business combination with Emmaus and the post-merger company must file an application and receive approval to list its securities on the Nasdaq Stock Market. |
No assurance can be given that the Company will be able to regain compliance prior to such date.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | Mine Safety Disclosures |
Not applicable.
Item 5. | Other Information |
Massachusetts Lease Agreement
None On March 13, 2019, the Company entered into a lease for 1,800 square feet of office space in Shirley, Massachusetts. The lease is month to month terminating on September 30, 2018. The rent is pro-rated through March 31, 2019 for $1,505 and is then increased to $2,100, per month. The security deposit is $2,100.
Amendment to Merger Agreement
On May 10, 2019, the parties executed amendment no. 1 to the Merger Agreement. By executing amendment no. 1, MYnd, Emmaus and Merger Sub agreed that: (i) the definition "Parent California Subsidiary" should be amended to refer to Telemynd, Inc., the newly formed wholly-owned corporation, (ii) MYnd would not adopt a new equity incentive plan at closing, which had been contemplated previously and determined to be unnecessary at this time, (iii) MYnd would be entitled to receive credit in its Net Liabilities calculation for certain agreed upon prepaid costs, (iv) Telemynd would be entitled to receive shares of Emmaus after closing if the exchange ratio applicable to any Company Warrants, Company Convertible Notes or Company Debentures is reduced during the six (6) month period after the closing of the Merger for any reason, and (v) the outside termination date was extended from May 31, 2019 to July 31, 2019.
Item 6. | Exhibits |
The following exhibits are filed as part of this report or incorporated by reference herein:
+ filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MYnd Analytics, Inc. | ||
Date: | /s/ | |
By: | ||
Its: | Chief Executive Officer (Principal Executive Officer) | |
/s/ Donald D’Ambrosio | ||
By: | Donald D’Ambrosio | |
Its: | Chief Financial Officer (Principal Financial Officer) | |