INTRAOP MEDICAL CORPORATION
CONSOLIDATED FINANCIAL REPORT
SEPTEMBER 30, 2022
INTRAOP MEDICAL CORPORATION
CONTENTS
Page | |
INDEPENDENT AUDITOR’S REPORT | 1 – 2 |
CONSOLIDATED FINANCIAL STATEMENTS | |
Consolidated Balance Sheets | 3 |
Consolidated Statements of Operations | 4 |
Consolidated Statements of Stockholders’ Deficit | 5 |
Consolidated Statements of Cash Flows | 6 |
Notes to Consolidated Financial Statements | 7 – 36 |
INDEPENDENT AUDITOR'S REPORT
Board of Directors
IntraOp Medical Corporation
Opinion
We have audited the consolidated financial statements of IntraOp Medical Corporation (the Company), which comprise the consolidated balance sheets as of September 30, 2022 and 2021, the related consolidated statements of operations, stockholders’ deficit and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements).
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2022 and 2021, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Substantial Doubt About the Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations, has a net capital deficiency and has stated that substantial doubt exists about the company’s ability to continue as a going concern. Management's evaluation of the events and conditions and management's plans regarding these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.
Responsibilities of Management for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued or available to be issued.
160 West Santa Clara Street, Suite 600, San Jose, CA 95113 T: 408.294.3924 F: 408.295.3925
877.754.4557 |
1 |
Board of Directors
IntraOp Medical Corporation
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.
In performing an audit in accordance with GAAS, we:
· | Exercise professional judgment and maintain professional skepticism throughout the audit. |
· | Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. |
· | Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, no such opinion is expressed. |
· | Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements. |
· | Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time. |
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit.
SingerLewak LLP
March 24, 2023
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INTRAOP MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, 2022 and 2021
ASSETS | ||||||||
2022 | 2021 | |||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 4,022,289 | $ | 4,034,670 | ||||
Accounts receivable | 1,984,524 | 416,080 | ||||||
Inventories | 3,560,876 | 1,134,870 | ||||||
Prepaid expenses and other current assets | 807,965 | 563,485 | ||||||
Total current assets | 10,375,654 | 6,149,105 | ||||||
Property and equipment, net | 2,019,580 | 5,393,594 | ||||||
Property leased to others under operating leases | 2,190,789 | 2,079,153 | ||||||
Restricted cash | 44,244 | 44,190 | ||||||
Intangible assets, net | 80,000 | 1,382,224 | ||||||
Goodwill | 4,746,994 | 4,746,994 | ||||||
Total assets | $ | 19,457,261 | $ | 19,795,260 | ||||
LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
Current liabilities | ||||||||
Related party notes payable, short-term | $ | 5,000,000 | $ | 5,000,000 | ||||
Related party convertible promissory notes, net of debt discount, short-term | 22,511,141 | 18,557,665 | ||||||
Capital lease obligation, short-term | 2,553,033 | 1,281,164 | ||||||
Accounts payable | 1,836,564 | 1,770,991 | ||||||
Accrued expenses | 12,428,070 | 7,653,018 | ||||||
Customer deposits | - | 637,768 | ||||||
Deferred revenue | 758,147 | 617,718 | ||||||
Deferred profit on sale leaseback, short-term | 491,571 | 963,938 | ||||||
Derivative liability, short-term | 9,132,497 | 6,412,484 | ||||||
Total current liabilities | 54,711,023 | 42,894,746 | ||||||
Convertible promissory note, net of debt discount, long-term | 2,288,691 | 2,154,135 | ||||||
Capital lease obligation, long-term | 10,104,071 | 4,765,653 | ||||||
Deferred profit on sale leaseback, long-term | 800,887 | 1,882,806 | ||||||
Deferred rent, long-term | 37,002 | 2,957 | ||||||
Derivative liability, long-term | - | 675,000 | ||||||
Deferred tax liabilities | 118,925 | 105,516 | ||||||
Total liabilities | 68,060,599 | 52,480,813 | ||||||
Commitments and Contingencies (Note 9) | ||||||||
Stockholders' deficit | ||||||||
Convertible preferred stock, $0.00001 par value: 76,856,187 shares authorized: | ||||||||
29,759,583 shares issued and outstanding (liquidation preference of $30,921,113) | 298 | 298 | ||||||
Common stock, $0.00001 par value: 100,000,000 shares authorized; | ||||||||
1,782,087 and 1,631,462 shares issued and outstanding, respectively | 18 | 17 | ||||||
Additional paid-in capital | 31,582,406 | 31,576,661 | ||||||
Accumulated deficit | (82,845,991 | ) | (67,388,605 | ) | ||||
Non-controlling interest in UK joint venture | 2,659,931 | 3,126,076 | ||||||
Total stockholders' deficit | (48,603,338 | ) | (32,685,553 | ) | ||||
Total liabilities and stockholders' deficit | $ | 19,457,261 | $ | 19,795,260 |
See notes to financial statements.
3 |
INTRAOP MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended September 30, 2022 and 2021
2022 | 2021 | |||||||
Revenues | $ | 10,132,434 | $ | 7,193,417 | ||||
Cost of revenues | 6,752,886 | 5,846,320 | ||||||
Gross profit | 3,379,548 | 1,347,097 | ||||||
Operating expenses | ||||||||
Research and development | 1,926,676 | 1,760,924 | ||||||
Sales and marketing | 3,671,228 | 3,811,432 | ||||||
General and administrative | 4,864,391 | 4,963,246 | ||||||
Total operating expenses | 10,462,295 | 10,535,602 | ||||||
Loss from operations | (7,082,747 | ) | (9,188,505 | ) | ||||
Other income (expense): | ||||||||
Other (expense)/income | (854,802 | ) | 25,692 | |||||
Loss on sale of property leased to others | (286,831 | ) | - | |||||
Loss on sale leaseback modification | (635,593 | ) | - | |||||
Profit on sale leaseback | 986,594 | 1,449,057 | ||||||
Change in fair value of derivative liability | (1,070,013 | ) | (778,742 | ) | ||||
Payroll Protection Program loan forgiveness | - | 493,600 | ||||||
Interest expense | (6,965,411 | ) | (5,135,060 | ) | ||||
Total other expense | (8,826,056 | ) | (3,945,453 | ) | ||||
Loss before provision for income taxes | (15,908,803 | ) | (13,133,958 | ) | ||||
Income tax provision | (14,728 | ) | (14,558 | ) | ||||
Net loss | $ | (15,923,531 | ) | $ | (13,148,516 | ) | ||
Net loss attributable to non-controlling interest | $ | (466,145 | ) | $ | (39,847 | ) | ||
Net loss attributable to controlling interest | $ | (15,457,386 | ) | $ | (13,108,669 | ) |
See notes to financial statements.
4 |
INTRAOP MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Years Ended September 30, 2022 and 2021
Convertible Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Non controlling | Total Stockholders' | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Deficit | |||||||||||||||||||||||||
Balance, September 30, 2020 | 29,759,583 | $ | 298 | 1,450,212 | $ | 15 | $ | 31,558,972 | $ | (54,279,936 | ) | $ | 3,165,923 | $ | (19,554,728 | ) | ||||||||||||||||
Exercise of stock options | - | - | 181,250 | 2 | 7,242 | - | - | 7,244 | ||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | 10,447 | - | - | 10,447 | ||||||||||||||||||||||||
Net loss | - | - | - | - | - | (13,108,669 | ) | (39,847 | ) | (13,148,516 | ) | |||||||||||||||||||||
Balance, September 30, 2021 | 29,759,583 | $ | 298 | 1,631,462 | $ | 17 | $ | 31,576,661 | $ | (67,388,605 | ) | $ | 3,126,076 | $ | (32,685,553 | ) | ||||||||||||||||
Exercise of stock options | - | - | 150,625 | 1 | 902 | - | - | 903 | ||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | 4,843 | - | - | 4,843 | ||||||||||||||||||||||||
Net loss | - | - | - | - | - | (15,457,386 | ) | (466,145 | ) | (15,923,531 | ) | |||||||||||||||||||||
Balance, September 30, 2022 | 29,759,583 | $ | 298 | $ | 1,782,087 | $ | 18 | $ | 31,582,406 | $ | (82,845,991 | ) | $ | 2,659,931 | $ | (48,603,338 | ) |
See notes to financial statements.
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INTRAOP MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 2022 and 2021
2022 | 2021 | |||||||
Cash flows from operating activities | ||||||||
Net loss | $ | (15,923,531 | ) | $ | (13,148,516 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation | 1,331,172 | 1,859,224 | ||||||
Amortization of intangible assets | 1,302,224 | 1,302,223 | ||||||
Payroll Protection Program loan forgiveness | - | (493,600 | ) | |||||
Loss on sale leaseback modification | 635,593 | - | ||||||
Loss on sale of property leased to others | 286,831 | - | ||||||
Stock-based compensation expense | 4,843 | 10,447 | ||||||
Deferred tax expense | 13,409 | 13,408 | ||||||
Non-cash interest expense | 1,193,618 | 817,835 | ||||||
Change in fair value of derivative liability | 1,070,013 | 778,742 | ||||||
Changes in operating assets and liabilities | ||||||||
Accounts receivable | (1,568,444 | ) | 1,146,427 | |||||
Inventories | (2,426,006 | ) | (2,171,877 | ) | ||||
Prepaid expenses and other current assets | (244,480 | ) | (76,416 | ) | ||||
Property leased to others under operating leases | (398,467 | ) | - | |||||
Accounts payable | 65,573 | (44,686 | ) | |||||
Accrued expenses | 4,775,052 | 3,322,510 | ||||||
Customer deposits | (637,768 | ) | 35,276 | |||||
Deferred revenue | 140,429 | (417,652 | ) | |||||
Deferred profit on sale-leaseback | (130,392 | ) | 100,073 | |||||
Deferred rent | 34,045 | (44,280 | ) | |||||
Net cash used in operating activities | (10,476,286 | ) | (7,010,862 | ) | ||||
Cash flows from investing activities | ||||||||
Purchase of property and equipment | (16,645 | ) | (25,158 | ) | ||||
Net cash used in investing activities | (16,645 | ) | (25,158 | ) | ||||
Cash flows from financing activities | ||||||||
Proceeds from related party convertible promissory notes | 3,900,000 | 2,500,000 | ||||||
Proceeds from convertible promissory note | - | 1,200,000 | ||||||
Proceeds from sale leasebacks | 9,550,000 | 5,500,000 | ||||||
Repayments of capital lease | (2,970,299 | ) | (3,149,209 | ) | ||||
Proceeds from exercise of stock options | 903 | 7,244 | ||||||
Net cash provided by financing activities | 10,480,604 | 6,058,035 | ||||||
Net decrease in cash, cash equivalents and restricted cash | (12,327 | ) | (977,985 | ) | ||||
Cash and cash equivalents, beginning of year | 4,034,670 | 5,012,677 | ||||||
Restricted cash, beginning of year | 44,190 | 44,168 | ||||||
Total cash, cash equivalents and restricted cash, beginning of year | 4,078,860 | 5,056,845 | ||||||
Cash and cash equivalents, end of year | 4,022,289 | 4,034,670 | ||||||
Restricted cash, end of year | 44,244 | 44,190 | ||||||
Total cash, cash equivalents and restricted cash, end of year | $ | 4,066,533 | $ | 4,078,860 | ||||
Supplemental disclosure of cash flow information | ||||||||
Cash paid for interest | $ | 1,067,735 | $ | 1,038,919 | ||||
Cash paid for income taxes | $ | 800 | $ | 800 |
See notes to financial statements.
6 |
INTRAOP MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION OF BUSINESS
IntraOp Medical Corporation (the “Company”), originally incorporated in Delaware in 2013, is a medical device company providing intraoperative radiation to ailing cancer patients.
IntraOperative Electron Radiation Therapy (“IOERT”) is the administration of radiation while a patient is undergoing cancer surgery. The radiation is delivered as part of the surgical procedure directly to a specified area (i.e. any residual breast tumor), while the surrounding healthy tissue is moved aside, when possible. The IOERT is delivered through a device called Mobetron. Mobetron is the intraoperative device sold by the Company. The Company is subject to a number of risks associated with companies at a similar stage including dependence on insurance companies, dependence on a few customers, competition from substitute services and larger competitors.
In April 2016, the Company established a wholly owned subsidiary, IntraOp Europe GmbH, in Germany.
In December 2018, the Company entered into a joint venture with El Seif Holding UK Limited (El Seif) to form IntraOp UK Ltd. (the JV), incorporated in England and Wales. Ownership is 50/50. The initial investment was 4,000,000 Great British Pounds (GBP) of which 1,000,000 was paid by the Company and 3,000,000 was paid by El Seif Holding UK Limited. The JV will be the exclusive distributor of the Company in the UK. The Company evaluated the JV and determined that consolidation of the JV was the proper treatment in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), as the JV qualifies as a Variable Interest Entity (VIE) for which the Company was determined to be the primary beneficiary. In connection with its investment in the JV, the Company recorded a bargain purchase gain of $651,986 representing the difference between its investment amount of 1 million GBP and its 50% share of the equity of the JV at formation. Included in the non-controlling interest of El Seif is a 1 million GBP non-voting interest with priority in liquidation over the common shares. The consolidated financial statements include the financial statements of the joint venture.
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INTRAOP MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – GOING CONCERN
As shown in the accompanying consolidated financial statements, the Company has suffered operating losses and negative cash flows from operations and as of September 30, 2022, had an accumulated deficit of $82,845,991. The Company is dependent upon continued equity or debt financing to continue as a going concern until such time as it can generate sufficient revenues and cash flows from operations.
Management’s plans in regard to this matter consist principally of securing additional debt or equity funding combined with planned improvements in cash flows from operations through revenue growth and cost controls. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared on the accrual basis in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Reclassifications
Certain prior year amounts have been reclassified in order to conform to the current year presentation. These reclassifications had no effect on the previously reported net loss or accumulated deficit.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s most significant estimates relate to: (i) the valuation of its common stock, stock options and warrants, (ii) derivative liabilities, (iii) inventory valuation, (iv) accrual for warranty obligations and (v) the valuation of acquired assets, including goodwill and intangibles.
8 |
INTRAOP MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Consolidation
The consolidated financial statements include the financial statements of IntraOp Medical Corporation, its wholly owned subsidiary IntraOp Europe GmbH, and the joint venture IntraOp UK Ltd. All significant intercompany transactions and balances have been eliminated in consolidation.
Foreign Currency
The functional currency of IntraOp Europe GmbH and IntraOp UK Ltd. is the U.S. Dollar. Foreign currency transaction gains and losses are the result of exchange rate changes on transactions denominated in currencies other than the functional currency. Monetary balances are remeasured at year end exchange rates and non-monetary balances are remeasured at historical exchange rates. Revenues and expenses are translated at the average rates of exchange prevailing during the year. Remeasurement and foreign currency transaction gains/(losses) of ($854,802) and $25,692 for the years ended September 30, 2022 and 2021, respectively, are included in other income (expense), net, in the accompanying consolidated statements of operations.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three (3) months or less from the date of purchase to be cash equivalents. The carrying amount of cash and cash equivalents approximates its fair value.
Restricted Cash
At September 30, 2022 and 2021, the Company had restricted cash of $44,244 and $44,190, respectively, which consisted of cash deposited in a money market account held to secure the Company’s credit card for both years.
Stock-based Compensation
Stock-based compensation cost for stock options is measured at the grant date based on the fair value of the award, determined using the Black-Scholes option pricing model, and is recognized as expense over the applicable vesting period of the stock award using the straight-line method for awards that are expected to vest.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash and cash equivalents are deposited with federally insured commercial banks and cash balances may be in excess of federal insurance limits. Management believes that the financial risks associated with its cash and cash equivalents are minimal as the Company’s cash deposits are held at creditworthy commercial banks.
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INTRAOP MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentrations of Credit Risk (Continued)
The Company generally does not require collateral or other security in support of accounts receivable and does not charge interest on past due balances. The Company performs ongoing credit evaluations of its customers and maintains an allowance for doubtful accounts to ensure accounts receivables are not overstated due to uncollectibility. Allowances are provided for individual accounts receivable when the Company becomes aware of a customer’s inability to meet its financial obligations, such as in the case of bankruptcy, deterioration in the customer’s operating results or change in financial position. If circumstances related to customers change, estimates of the recoverability of accounts receivable are further adjusted. The Company also considers broader factors in evaluating the sufficiency of its allowances for doubtful accounts, including the length of time receivables are past due, macroeconomic conditions, significant one-time events and historical experience. The Company charges off uncollectible accounts receivable once all efforts to collect have been exhausted. As of September 30, 2022 and 2021, there was no allowance for doubtful accounts.
The Company’s product revenues consist principally of Mobetron systems and related service and maintenance sold principally to hospitals and doctors’ offices, throughout the United States, Europe, Middle East and Southeast Asia.
Accounts receivable from one customer totaled approximately 50% of total accounts receivable at September 30, 2022. Sales to four customers accounted for approximately 11%, 11%, 13% and 14% of total revenues for the year ended September 30, 2022.
Accounts receivable from four customers totaled approximately 24%, 21%, 18% and 13% of total accounts receivable at September 30, 2021. Sales to three customers accounted for approximately 21%, 19% and 13% of total revenues for the year ended September 30, 2021.
Inventories
Inventories are stated at the lower of cost or net realizable value, using a standard cost method. The Company periodically reviews its inventories for potential slow-moving or obsolete items and writes down specific items to net realizable value as appropriate.
Property and Equipment
Property and equipment are stated at historical cost, less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, generally two to seven years. Leasehold improvements are amortized using the straightline method over the shorter of the estimated useful lives of the assets or the term of the leases. Upon retirement or sale, the cost of assets disposed, and the related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in the consolidated statements of operations and comprehensive loss. Expenditures for repairs and maintenance are charged to expense as incurred.
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INTRAOP MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment (Continued)
The Company leases its equipment to certain customers. The costs related to this leased equipment are deferred and as the residual value of the equipment exceeds the cost, no depreciation has been recorded. The leased equipment is included in property leased to others under operating leases in the consolidated balance sheets.
Accounting for Impairment of Long-lived Assets
Long-lived assets, such as property and equipment, leased assets and intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the carrying amount of an asset exceeds estimated future net cash flows associated with the asset, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. No such impairments have been identified during the years ended September 30, 2022 and 2021.
Intangible Assets
Intangible assets with finite lives are amortized to expense over their useful lives of seven to ten years. The Company’s identified intangible assets consist of developed technology, customer relationships and trade name which are being amortized using the straight-line method.
Goodwill
Goodwill is not amortized but is tested for impairment on an annual basis or earlier if events occur or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. No such impairments have been identified to date.
Research and Development
Research and development costs are charged to operations as incurred.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are recorded based on the estimated future tax effects of differences between the financial statement and income tax basis of assets and liabilities. In addition, deferred tax assets are recorded for the future benefit of utilizing net operating loss and tax credit carryovers. Deferred tax assets and liabilities are measured using the enacted tax rates applied to taxable income. 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. A valuation allowance is provided against the Company’s deferred income tax assets when it is more likely than not that the asset will not be realized.
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INTRAOP MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes (Continued)
Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, the Company considers all available evidence, including past operating results, estimates of future taxable income and the feasibility of tax planning strategies. In the event that the Company changes its determination as to the amount of deferred tax assets that is more likely than not to be realized, the Company will adjust its valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.
The Company follows authoritative guidance regarding uncertain tax positions. This guidance requires that realization of an uncertain income tax position must be more likely than not (i.e., greater than 50% likelihood of receiving a benefit) before it can be recognized in the financial statements. The guidance further prescribes the benefit to be realized assumes a review by tax authorities having all relevant information and applying current conventions. The guidance also prescribes the financial statement classification of tax related penalties and interest and sets forth disclosures regarding unrecognized tax benefits. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits as income tax expense. As of September 30, 2022 and 2021. The Company has not identified any material uncertain tax positions.
Fair Value Measurement
The Company determines the fair value of financial assets and liabilities using the fair value hierarchy established in the accounting standards.
The hierarchy describes three levels of inputs that may be used to measure fair value, as follows:
Level 1 – | Observable inputs that reflect quoted prices in active markets for identical assets and liabilities. |
Level 2 – | Includes other inputs that are directly or indirectly observable in the marketplace. |
Level 3 – | Unobservable inputs that are supported by little or no market activity. |
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company’s only financial asset carried at fair value in these financial statements is the bifurcated embedded conversion derivative liability. The fair value is based upon Level 3 inputs.
A schedule of the activity for the derivative liability and discussion of the valuation approach and assumptions is included in Note 5.
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INTRAOP MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
The Company recognizes revenue through the application of the following the five steps:
(1) | Identification of the contract with a customer, which is typically a purchase order or signed agreement. |
(2) | Identification of the performance obligations in the contract. See below for the typical performance obligations. |
(3) | Determination of the transition price: Price is stated in the purchase order or agreement. Selling prices are determined by standardized pricing sheets and adjusted for estimated returns, discounts and allowances. |
(4) | Allocation of the transaction price to the performance obligations: The transaction price is allocated to the performance obligations based on standalone selling prices. |
(5) | Recognition of revenue when (or as) each performance obligation is satisfied. |
Below are the typical performance obligations and their revenue recognition method.
Sales of Mobetron systems and accessories are recognized at a point in time, upon delivery of the products. System sales are typically invoiced 20% upfront, 70% upon delivery and 10% within a couple weeks of delivery.
Maintenance and service contracts are typically invoiced annually or quarterly and recognized over time, ratably over the term of the contract. Amounts invoiced in advance of revenue recognition are recorded as deferred revenue in the accompanying consolidated balance sheets.
Customer deposits are recorded as a liability and recognized as revenue upon delivery of the product.
Rental revenue for leased Mobetron systems is typically invoiced quarterly or monthly and is recognized over time, ratably over the lease term.
During the years ended September 30, 2022 and 2021, the Company recognized the following:
2022 | 2021 | |||||||
Point in time revenue recognized | $ | 6,680,511 | $ | 4,300,164 | ||||
Over time revenue recognized | 3,451,923 | 2,893,253 | ||||||
Total revenue recognized | $ | 10,132,434 | $ | 7,193,417 |
Opening balances (as of October 1, 2021) of accounts receivable, contract assets and contract liabilities were as follows:
Accounts receivable | $ | 1,562,507 | ||
Deferred revenue | $ | 1,035,370 |
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INTRAOP MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Warranty
The warranty periods for the Company’s products are generally one year from the date of shipment. The Company is responsible for warranty obligations arising from its sales and provides for an estimate of its warranty obligation at the time of sale. Management estimates and provides a reserve for warranty upon sale of a new system based upon historical warranty repair expenses on the Company’s installed base. The warranty accrual is included in accrued expenses in the accompanying consolidated balance sheets.
Advertising
The Company expenses the costs of advertising, including promotional expenses, as incurred. Advertising expense for the years ended September 30, 2022 and 2021 was not material.
Sales Taxes
Sales taxes collected from customers and remitted to governmental authorities are not included in revenue.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. The guidance in this update supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities in the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for annual periods beginning after December 15, 2021, including interim periods within those fiscal year. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements, with certain practical expedients available. Management is currently evaluating the new standard, which will be effective for the Company beginning October 1, 2022.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which creates a new credit impairment standard for financial assets measured at amortized cost and available-for-sale debt securities. The ASU requires financial assets measured at amortized cost (including loans, trade receivables and held-to-maturity debt securities) to be presented at the net amount expected to be collected, through an allowance for credit losses that are expected to occur over the remaining life of the asset, rather than incurred losses. The ASU requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a direct write-down. The measurement of credit losses for newly recognized financial assets (other than certain purchased assets) and subsequent changes in the allowance for credit losses are recorded in the statement of income as the amounts expected to be collected change. The ASU is effective for fiscal years beginning after December 15, 2022. Early adoption is permitted. Management is currently evaluating the new standard, which will be effective for the Company beginning October 1, 2023.
14 |
INTRAOP MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In October 2021, the FASB issued ASU 2021-07, Compensation - Stock Compensation (Topic 718): Determining the Current Price of an Underlying Share for Equity-Classified Share-Based Awards, which will allow nonpublic entities that issue equity-classified share-based awards to elect a practical expedient to determine the current price input of equity-classified share-based awards issued to both employees and nonemployees using the reasonable application of a reasonable valuation method. The practical expedient describes the characteristics of the reasonable application of a reasonable valuation method including (1) the date on which a valuation’s reasonableness is evaluated, (2) the factors that a reasonable valuation should consider, (3) the scope of information that a reasonable valuation should consider, and (4) the criteria that should be met for the use of a previously calculated value to be considered reasonable. The same characteristics are used in the regulations of the U.S. Department of the Treasury related to Section 409A of the U.S. Internal Revenue Code (the Treasury Regulations) to describe the reasonable application of a reasonable valuation method for income tax purposes. A reasonable valuation performed in accordance with the Treasury Regulations is an example of a way to achieve the practical expedient. The practical expedient in this Update is effective prospectively for all qualifying awards granted or modified during fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early application, including application in an interim period, is permitted for financial statements that have not yet been issued or made available for issuance as of October 25, 2021. Management is currently evaluating the new standard, which will be effective for the Company beginning October 1, 2022.
NOTE 4 – SIGNIFICANT BALANCE SHEET COMPONENTS
Inventories
Inventories consisted of the following at September 30,:
2022 | 2021 | |||||||
Raw materials | $ | 2,667,056 | $ | 184,441 | ||||
Work in process | 620,320 | 346,339 | ||||||
Finished goods | 92,785 | 392,559 | ||||||
Software | 180,715 | 211,531 | ||||||
Total | $ | 3,560,876 | $ | 1,134,870 |
15 |
INTRAOP MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – SIGNIFICANT BALANCE SHEET COMPONENTS (Continued)
Property and Equipment
Property and equipment consisted of the following at September 30,:
2022 | 2021 | |||||||
Computers and equipment | $ | 292,192 | $ | 280,770 | ||||
Furniture and fixtures | 65,598 | 60,363 | ||||||
Leased equipment | 4,435,000 | 7,635,000 | ||||||
4,792,790 | 7,976,133 | |||||||
Less accumulated depreciation | (2,773,210 | ) | (2,582,539 | ) | ||||
Property and equipment, net | $ | 2,019,580 | $ | 5,393,594 |
Property leased to others under operating leases totaled $2,190,789 and $2,079,153 at September 30, 2022 and 2021, respectively. At September 30, 2022 and 2021, there were three leased Mobetron systems.
During 2022, the Company leased three systems to customers and recognized $692,778 of rental income, which is included in revenues in the statement of operations. Under the terms of one agreement, the lessee pays monthly rental fees of $30,000 for a two-year term. Under the terms of another agreement, the lessee pays monthly rental fees of $30,100 for a one-year term. Under the terms of another agreement, the lessee pays quarterly rental fees of 36,299 Euro.
During 2021, the Company leased two systems to customers and recognized $435,663 of rental income, which is included in revenues in the statement of operations. Under the terms of one agreement, the lessee pays monthly rental fees of $30,000 for a two-year term. Under the terms of another agreement, the lessee pays monthly rental fees of $30,100 for a one-year term, however during the year, the Company issued a credit memo totaling $180,600, reversing rental income due to the special circumstances related to the COVID-19 pandemic. Under the terms of another agreement, the lessee pays quarterly rental fees of 36,299 Euro.
16 |
INTRAOP MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – SIGNIFICANT BALANCE SHEET COMPONENTS (Continued)
Intangible Assets
The gross amount of intangible assets and related amortization were as follows as of September 30, 2022:
Gross Carrying Amount | Estimated Useful Life (Years) | Accumulated Amortization | Carrying Value | |||||||||||||
Developed technology | $ | 11,000,000 | 9 | $ | 11,000,000 | $ | - | |||||||||
Customer relationships | 1,000,000 | 7 | 1,000,000 | - | ||||||||||||
Trade name | 800,000 | 10 | 720,000 | 80,000 | ||||||||||||
$ | 12,800,000 | $ | 12,720,000 | $ | 80,000 |
The gross amount of intangible assets and related amortization were as follows as of September 30, 2021:
Gross Carrying Amount | Estimated Useful Life (Years) | Accumulated Amortization | Carrying Value | |||||||||||||
Developed technology | $ | 11,000,000 | 9 | $ | 9,777,776 | $ | 1,222,224 | |||||||||
Customer relationships | 1,000,000 | 7 | 1,000,000 | - | ||||||||||||
Trade name | 800,000 | 10 | 640,000 | 160,000 | ||||||||||||
$ | 12,800,000 | $ | 11,417,776 | $ | 1,382,224 |
Future amortization expense for these assets is as follows:
For the Years Ending | ||||
September 30, | ||||
2023 | 80,000 |
17 |
INTRAOP MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – SIGNIFICANT BALANCE SHEET COMPONENTS (Continued)
Accrued Expenses
Accrued expenses consisted of the following at September 30,:
2022 | 2021 | |||||||
Employee related liabilities | $ | 360,555 | $ | 257,389 | ||||
Warranty accrual | 180,000 | 180,000 | ||||||
Accrued interest | 11,241,774 | 6,758,034 | ||||||
Other accrued liabilities | 645,741 | 457,595 | ||||||
Accrued expenses | $ | 12,428,070 | $ | 7,653,018 |
NOTE 5 – FINANCING ARRANGEMENTS
Related Party Notes Payable
In February 2014, the Company issued a $3,000,000 secured promissory note payable to an investor with an annual interest rate of 8%. This investor holds a majority of the outstanding convertible preferred stock of the Company. As amended, principal and interest payments were due in February 2020. In February 2017, the Company issued an additional $2,000,000 secured promissory note payable to the same investor with an annual interest rate of 8% that originally matured in February 2020. These notes require interest-only payments until the maturity date. In February 2020, the maturity dates for these notes were extended to June 2020. In June 2020, the maturity date was extended to December 2020. In December 2020, the maturity date was extended to December 2021. In November 2021, the maturity date was further extended to December 2022. In March 2022, the Company amended the secured promissory notes with the related party, whereby the Company shall make interest- only payments on a monthly basis through and including March 31, 2022; thereafter, interest shall accrue but shall not be payable until the maturity date. The balance of the notes at September 30, 2022 and 2021 was $5,000,000 for both years. Interest expense for the years ended September 30, 2022 and 2021 was $400,000, respectively.
Related Party Convertible Notes Payable
As of September 30, 2020, the Company had outstanding convertible notes payable of $12,261,129.
18 |
INTRAOP MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – FINANCING ARRANGEMENTS (Continued)
Related Party Convertible Notes Payable (Continued)
During the year ended September 30, 2021, the Company issued the following additional convertible promissory notes:
April 2021 | $ | 1,000,000 | ||
June 2021 | 500,000 | |||
July 2021 | 500,000 | |||
September 2021 | 500,000 | |||
Total | $ | 2,500,000 |
During the year ended September 30, 2022, the Company issued the following additional convertible promissory notes:
October 2022 | $ | 1,500,000 | ||
November 2022 | 1,000,000 | |||
February 2022 | 200,000 | |||
March 2022 | 150,000 | |||
April 2022 | 350,000 | |||
June 2022 | 700,000 | |||
Total | $ | 3,900,000 |
These convertible promissory notes all have an annual interest rate of 15% and mature in December 2022. The holder of the note has the option to convert the outstanding principal into the Series A-2 preferred stock or securities to be issued in the next round of financing. If the outstanding balance is converted to shares of Series A-2, the shares would equate to the loan balance divided by the Series A-2 issue price. If the loan balance is converted into securities from the next round of financing, the number of shares would equate to the outstanding loan balance divided by 80% of the price per share of the next round price.
The principal balance of the convertible promissory notes at September 30, 2022 and 2021 was $22,811,129 and $18,911,129, respectively. Interest expense for the years ended September 30, 2022 and 2021 was $4,280,728 (which included $1,028,476 related to debt discount amortization) and $4,392,923 (which included $691,164 related to debt discount amortization), respectively.
The conversion feature in these notes is being accounted for as a derivative liability (and a related debt discount which is being amortized to interest expense over the term of the notes) and was revalued at the expected settlement value at each reporting period. Activity for the derivative liability is as follows:
19 |
INTRAOP MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – FINANCING ARRANGEMENTS (Continued)
Related Party Convertible Notes Payable (Continued)
Value at September 30, 2020 | $ | 5,007,509 | ||
Additional notes | 625,000 | |||
Change in value | 779,975 | |||
Value at September 30, 2021 | 6,412,484 | |||
Additional notes | 975,000 | |||
Change in value | 1,070,013 | |||
Value at September 30, 2022 | $ | 8,457,497 |
The derivative liability is being measured at fair value which is based upon the expected future settlement amount in accordance with the expected predominate settlement mechanism in the convertible notes, which is conversion into a qualified financing at a 20% discount. Given the short time to maturity of the convertible notes payable, the Company has not discounted the estimated future settlement amounts.
All of the related party notes are secured by a first priority security interest on all assets including cash, intangibles, fixed assets, inventory and accounts receivable.
Convertible Promissory Note
In September 2020, the Company issued a $1,500,0000 convertible promissory note at an annual interest rate of 10% with a maturity date of September 18, 2025. The note is secured by a Mobetron system. The holder of the note has the option to convert the outstanding principal into securities to be issued in the next round of financing, where the number of shares would equate to the outstanding loan balance divided by 80% of the price per share of the next round price.
In November 2020, the Company issued a $1,200,0000 convertible promissory note at an annual interest rate of 10% with a maturity date of November 18, 2025. The note is secured by a Mobetron system. The holder of the note has the option to convert the outstanding principal into securities to be issued in the next round of financing, where the number of shares would equate to the outstanding loan balance divided by 80% of the price per share of the next round price.
The conversion feature in these notes is accounted for as a derivative liability (and a related debt discount which is being amortized to interest expense over the term of the notes) and is revalued at the expected settlement value at each reporting period. There was no new convertible promissory note issued in FY 2022, thus there was no activity during the year. The value of the derivative liability at September 30, 2022 and 2021 was $675,000. For the years ended September 30, 2022 and 2021, debt discount amortization was $134,556 and $126,670, respectively.
20 |
INTRAOP MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – FINANCING ARRANGEMENTS (Continued)
Capital Leases/Sale Leasebacks
The Company enters into sale leaseback agreements to sell units of its equipment and then leases back the equipment. A summary of capital lease/sale leaseback transactions are as follows:
Date Entered | Amount | Term | Interest Rate | Monthly Lease Payments | Warrants Issued | Date Repurchased | ||||||
June 2018 | $1,500,000 | 60 months | 15% | $30,000 | 750,000 shares of common stock at an exercise price of $0.40 per share which expires in September 2025, of which 375,000 were immediately vested and 375,000 vests over a 60-month term | N/A | ||||||
March 2019 | $1,500,000 | 36 months | 10% | $42,475 | 562,500 shares of common stock at an exercise price of $0.40 per share which expires in March 2026 | June 2019 and November 2019 | ||||||
April 2019 | $750,000 | 36 months | 10% | $21,238 | September 2020 | |||||||
June 2019 | $1,500,000 | 36 months | 10% | $42,475 | 187,500 shares of common stock at an exercise price of $0.40 per share which expires in June 2026 | October 2020 and June 2021 | ||||||
September 2019 | $635,000 | 36 months | 10% | $17,981 | 157,750 shares of common stock at an exercise price of $0.40 per share which expires in September 2026 | N/A |
21 |
INTRAOP MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – FINANCING ARRANGEMENTS (Continued)
Capital Leases/Sale Leasebacks (Continued)
Date Entered | Amount | Term | Interest Rate | Monthly Lease Payments | Warrants Issued | Date Repurchased | ||||||
October 2019 | $750,000 | 36 months | 10% | $21,238 | N/A | May 2020 | ||||||
November 2019 | $750,000 | 36 months | 10% | $21,238 | N/A | October 2020 | ||||||
December 2019 | $750,000 | 36 months | 10% | $21,238 | 187,500 shares of common stock at an exercise price of $0.4 per share which expires in December 2026 | January 2021 | ||||||
September 2020 | $750,000 | 42 months | 10% | $21,238 | 187,500 shares of common stock at an exercise price of $0.4 per share which expires in September 2027 | June 2021 | ||||||
November 2020 | $1,500,000 | 34 months | 10% | $21,238 | 375,000 shares of common stock at an exercise price of $0.4 per share which expires in November 2027 | N/A | ||||||
January 2021 | $2,500,000 | 60 months | 10% | Interest payments ranging from approximately $19,178 to $21,233 | N/A | N/A | ||||||
August 2021 | $1,500,000 | 42 months | 10% | $21,238 | 375,000 shares of common stock at an exercise price of $0.4 per share which expires in August 2028 | November 2021 and November 2022 |
22 |
INTRAOP MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – FINANCING ARRANGEMENTS (Continued)
Capital Leases/Sale Leasebacks (Continued)
Date Entered | Amount | Term | Interest Rate | Monthly Lease Payments | Warrants Issued | Date Repurchased | ||||||
December 2021 | $750,000 | 42 months | 10% | $21,238 | 375,000 shares of common stock at an exercise price of $0.4 per share which expires in December 2028 | July 2022 | ||||||
December 2021 | $750,000 | 42 months | 10% | $21,238 | N/A | |||||||
January 2022 | $750,000 | 54 months | 10% | $21,238 | 187,500 shares of common stock at an exercise price of $0.4 per share which expires in January 2029 | N/A | ||||||
April 2022 | $750,000 | 54 months | 10% | $21,238 | 187,500 shares of common stock at an exercise price of $0.4 per share which expires in April 2029 | October 2022 | ||||||
May 2022 | $1,550,000 | 60 months | 12% | Interest payments ranging from approximately $15,288 to $15,797 | N/A | N/A |
23 |
INTRAOP MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – FINANCING ARRANGEMENTS (Continued)
Capital Leases/Sale Leasebacks (Continued)
Date Entered | Amount | Term | Interest Rate | Monthly Lease Payments | Warrants Issued | Date Repurchased | ||||||
June 2022 | $1,000,000 | 60 months | 10% | $21,247 | 250,000 shares of common stock at an exercise price of $0.4 per share which expires in June 2029 | N/A | ||||||
August 2022 | $4,000,000 | 60 months | 10% | $21,247 | 500,000 shares of common stock at an exercise price of $0.4 per share which expires in August 2029 | N/A |
During the year ended September 30, 2022, the Company entered into additional sale leaseback agreements with the investor for seven units for a total of $6,500,000. However, as of September 30, 2022, these seven units were under construction, and thus, the sale leaseback will occur when the units are completed. No deferred profit or leased equipment associated with these units was recorded as of September 30, 2022, only the capital lease obligation was recorded.
In March 2022, the Company entered into an amendment to the original sale leaseback agreement with an investor dated January 12, 2021, to exchange two units of Mobetron Ebeam Equipment as the original units were sold and shipped to customers. There was no change to the maturity of the agreement, but the interest rate per the amendment increased from 10% to 12%. As of September 30, 2022, these units that were reassigned per the new amendment were under construction, thus, the sale leaseback will occur when the units are completed. No deferred profit or leased equipment was recorded as of September 30, 2022, only the capital lease obligation was recorded. The Company recorded the amortization of the deferred profit of the two original units through March 2022, when the amendment was signed into effectiveness, and derecognized the leased equipment, resulting is a loss on sale leaseback modification of $635,593.
Interest expense for all these capital lease/sale leaseback transactions was $904,870 and $609,638 for the years ended September 30, 2022 and 2021, respectively.
24 |
INTRAOP MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – FINANCING ARRANGEMENTS (Continued)
Capital Leases/Sale Leasebacks (Continued)
Deferred profit activity for all these sale leaseback transactions are as follows:
Balance at September 30, 2020 | $ | 1,632,786 | ||
Additions | 2,957,626 | |||
Adjustments for repurchases | (294,611 | ) | ||
Profit on sale leaseback recognized | (1,449,057 | ) | ||
Balance at September 30, 2021 | 2,846,744 | |||
Additions | 1,752,549 | |||
Adjustments for repurchases | (860,121 | ) | ||
Adjustments for systems exchange | (1,239,407 | ) | ||
Adjustments for system not built | (220,713 | ) | ||
Profit on sale leaseback recognized | (986,594 | ) | ||
Balance at September 30, 2022 | $ | 1,292,458 |
Warrants issued in connection with these transactions, which include those immediately vested and those that vest over 60 months, were accounted for as a payment against the lease and recorded to equity. The number of warrants issued and calculated fair value of the warrants since March 2019 were summarized in the table below (As the value of the warrants since September 2020 were insignificant, they were not recorded):
Number of | ||
Date Issued | Warrants Issued | Calculated Fair Value |
March 2019 | 562,500 | $129,002 |
June 2019 | 187,500 | $42,370 |
September 2019 | 158,750 | $35,560 |
December 2019 | 187,500 | $42,107 |
September 2020 | 187,500 | $40,566 |
November 2020 | 375,000 | $32 |
August 2021 | 375,000 | $31 |
December 2021 | 375,000 | $33 |
January 2022 | 187,500 | $17 |
April 2022 | 187,500 | $19 |
June 2022 | 250,000 | $27 |
August 2022 | 500,000 | $51 |
25 |
INTRAOP MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – FINANCING ARRANGEMENTS (Continued)
Capital Leases/Sale Leasebacks (Continued)
The warrants were estimated using the Black-Scholes model with the following assumptions:
March 2019 | June 2019 | September 2019 | December 2019 | September 2020 | ||||||||||||||||
Expected dividend yield (1) | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % | ||||||||||
Risk-free interest rate (2) | 2.49 | % | 1.96 | % | 1.65 | % | 1.74 | % | 0.47 | % | ||||||||||
Expected volatility (3) | 55 | % | 55 | % | 55 | % | 55 | % | 55 | % | ||||||||||
Expected life (in years) (4) | 7 | 7 | 7 | 7 | 7 |
November 2020 | December 2021 | January 2022 | April 2022 | June 2022 | ||||||||||||||||
Expected dividend yield (1) | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % | ||||||||||
Risk-free interest rate (2) | 1.05 | % | 1.36 | % | 1.81 | % | 2.84 | % | 3.34 | % | ||||||||||
Expected volatility (3) | 60 | % | 60 | % | 60 | % | 60 | % | 60 | % | ||||||||||
Expected life (in years) (4) | 7 | 7 | 7 | 7 | 7 |
August 2022 | ||||
Expected dividend yield (1) | 0 | % | ||
Risk-free interest rate(2) | 2.86 | % | ||
Expected volatility (3) | 60 | % | ||
Expected life (in years) (4) | 7 |
(1) | The Company has no history or expectation of paying cash dividends on its common stock. |
(2) | The risk-free interest rate is based on the U.S. Treasury yield for a term consistent with the expected life of the awards in effect at the time of grant. |
(3) | The Company has estimated the expected volatility of its share price based on the share price volatility of similar publicly traded entities. |
(4) | The expected life represents the contractual term of the warrant. |
26 |
INTRAOP MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – FINANCING ARRANGEMENTS (Continued)
Capital Leases/Sale Leasebacks (Continued)
Following are the future minimum lease payments for the capital leases as of September 30,:
2023 | $ | 3,175,196 | ||
2024 | 2,611,659 | |||
2025 | 2,170,709 | |||
2026 | 4,046,302 | |||
2027 | 2,840,138 | |||
Total | 14,844,004 | |||
Less interest | (2,186,900 | ) | ||
Total | $ | 12,657,104 | ||
Less current portion | $ | (2,553,033 | ) | |
Capital lease obligation, long term | $ | 10,104,071 |
NOTE 6 – STOCKHOLDERS’ DEFICIT
Common Stock
On May 23, 2022, the Company amended and restated its Certificate of Incorporation to increase the number of authorized common stock from 55,000,000 to 100,000,000 shares at $0.00001 par value per share.
Convertible Preferred Stock
On May 23, 2022, the Company amended and restated its Certificate of Incorporation to increase the number of authorized preferred stock from 47,348,161 to 76,856,187 shares at $0.00001 par value per share.
27 |
INTRAOP MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)
Convertible Preferred Stock (Continued)
The convertible preferred stock as of September 30, 2022 and 2021, consisted of the following:
Number of Shares Authorized as of September 30, 2022 | Number of Shares Authorized as of September 30, 2021 | Number of Shares Issued and Outstanding | Total Liquidation Preference | |||||||||||||
Series C | 26,856,187 | 30,944,765 | 26,856,187 | $ | 28,017,717 | |||||||||||
Series A-2 | 50,000,000 | 16,403,396 | 2,903,396 | 2,903,396 | ||||||||||||
76,856,187 | 47,348,161 | 29,759,583 | $ | 30,921,113 |
As of September 30, 2022 and 2021, the rights and preferences, privileges and restrictions of the Series C and A-2 Convertible Preferred Stock are set forth in the Company’s Amended and Restated Articles of Incorporation and are summarized as follows:
Dividends Provisions
The holders of shares of Series C and A-2 Convertible Preferred Stock shall be entitled to receive dividends when, as and if declared by the board of directors, prior and in preference to any declaration or payment of any dividend or distribution on the Common Stock or any other junior equity security of the Company, at the rate of 8% of the original Series C and A-2 base price, adjustable for certain events, such as stock splits and combinations. The Company has not declared dividends to date.
After such dividends to the holders of the Series C and A-2 Convertible Preferred Stock, any additional dividends or distributions shall be distributed among all holders of Common Stock and Convertible Preferred Stock in proportion to the number of shares of Common Stock that would be held by each such holder if all shares of Convertible Preferred Stock were converted to Common Stock at the then effective Conversion Ratio.
Redemption Provisions
The Convertible Preferred Stock is not redeemable at the option of the holder.
28 |
INTRAOP MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)
Convertible Preferred Stock (Continued)
Liquidation Preference
In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the holders of the Series C Convertible Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of the Series A-2 and Common Stock or other junior equity securities of the Company by reason of their ownership thereof, an amount per share equal to the Series C Issue Price times 1.25 plus all dividends accrued but unpaid thereon, whether or not declared, together with any other dividends declared but unpaid thereon. Holders of Series A-2 are entitled to an amount per share equal to Series A-2 Issue Price plus all dividends accrued but unpaid thereon, whether or not declared, together with any other dividends declared but unpaid thereon. If upon the occurrence of such event, the assets and funds thus distributed among the holders of the Series A-2 and C Convertible Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then the entire assets and funds of the Company legally available for distribution shall be distributed ratably among the holders of the Series A-2 and C Convertible Preferred Stock in proportion to the full preferential amount that each such holder is otherwise entitled to receive.
Conversion
Each share of Convertible Preferred Stock shall be convertible at the option of the holder thereof, at any time after the date of issuance of such share, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the outstanding amount of the Original Series C and A-2 Issue Price by the Series C and A-2 conversion price (initially $0.8436 and $1.00, respectively).
Each share of Series C and A-2 shall be converted into fully-paid, nonassessable shares of Common Stock at the then effective Preferred conversion price immediately prior to the closing of a firm commitment underwritten public offering pursuant to an effective registrant statement filed under the Securities Act of 1933, covering the offer and sale of Common Stock provided that a) the public offering price is at least $4.218 per share of Common Stock, b) the aggregate gross proceeds to the Corporation are not less than $50,000,000 and c) the Common Stock of the Corporation is listed for quotation on the NYSE or NASDAQ stock market.
The conversion price is subject to adjustment for stock splits, recapitalizations, reorganizations and other equity restructuring transactions. Additionally, the conversion price is subject to the adjustment based upon future dilutive issuances at a price less than the Preferred conversion price.
Voting Rights
The holder of each share of Preferred Stock shall have the right to one vote for each share of Common Stock into which such Preferred Stock could be converted on the record date for the vote or consent of stockholders, and, except as otherwise required by law, with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock.
29 |
INTRAOP MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – STOCK-BASED COMPENSATION
The Company has adopted the 2013 Stock Plan under which it originally reserved 4,350,636 shares for grants of awards. An additional 3,719,364 shares were reserved in May 2016 under the amended plan, bringing the total shares reserved to 8,070,000.
The Option Plan provides for the grant of incentive and non-statutory stock options to employees, nonemployee directors and consultants of the Company. Options granted under the Option Plan generally become exercisable ratably over a four-year period following the date of grant and expire ten years (five years for incentive and non-statutory stock options granted to holders of 10% or more of the voting stock) from the date of grant. At the discretion of the Company’s Board of Directors, certain options may be exercisable immediately at the date of grant but subject to repurchase at their original exercise price in the event of an employee’s termination prior to full vesting. All other options are exercisable only to the extent vested.
The exercise price of both incentive and non-statutory stock options granted under the Option Plan must be at least equal to 100% of the fair value of the Company’s common stock at the date of grant, as determined by the Board of Directors. Incentive and non-statutory stock options granted to stockholders who own greater than 10% of the Company’s outstanding stock at the date of grant must be issued at no less than 110% of the estimated fair value of the common stock on the date of grant.
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INTRAOP MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – STOCK-BASED COMPENSATION (Continued)
Stock option activity for the years ended September 30, 2022 and 2021 was as follows:
Shares | Weighted- average exercise price per share | Weighted- average remaining contractual life (in years) | ||||||||||
Outstanding at September 30, 2020 | 2,382,000 | $ | 0.40 | 5.76 | ||||||||
Options granted | 2,281,000 | $ | 0.006 | |||||||||
Options exercised | (181,250 | ) | $ | 0.04 | ||||||||
Options forfeited/cancelled | (315,000 | ) | $ | 0.006 | ||||||||
Outstanding at September 30, 2021 | 4,166,750 | $ | 0.006 | 6.89 | ||||||||
Options granted | 10,000 | $ | 0.006 | |||||||||
Options exercised | (150,625 | ) | $ | 0.006 | ||||||||
Options forfeited/cancelled | (1,724,125 | ) | $ | 0.006 | ||||||||
Outstanding at September 30, 2022 | 2,302,000 | $ | 0.006 | 5.22 | ||||||||
Vested and expected to vest at | ||||||||||||
September 30, 2022 | 2,302,000 | $ | 0.006 | 5.22 | ||||||||
Exercisable at September 30, 2022 | 1,786,896 | $ | 0.006 | 4.97 |
The weighted-average grant date calculated fair value of options granted during the years ended September 30, 2022 and 2021 was $0.004 and $0.003, respectively. The total fair value of shares vested during the years ended September 30, 2022 and 2021 was $4,835 and $10,587, respectively. The intrinsic value of options exercised was zero for the years ended September 30, 2022 and 2021.
During the year ended September 30, 2021, the Company amended substantially all existing option agreements to reduce the exercise price to $0.006 per share. The impact of the option modification was insignificant.
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INTRAOP MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – STOCK-BASED COMPENSATION (Continued)
As of September 30, 2022, there was $1,106 of unamortized stock-based compensation cost related to unvested stock options which is expected to be recognized over a weighted average period of 1.39 years.
The calculated fair value option grants were estimated using the Black-Scholes option pricing model with the following weighted-average assumptions for the years ended September 30,:
2022 | 2021 | |||||||
Expected dividend yield (1) | 0% | 0% | ||||||
Risk-free interest rate (2) | 3.97% | 1.32% | ||||||
Expected volatility (3) | 60.00% | 60.00% | ||||||
Expected life (in years) (4) | 6.125 | 6.125 |
(1) | The Company has no history or expectation of paying cash dividends on its common stock. |
(2) | The risk-free interest rate is based on the U.S. Treasury yield for a term consistent with the expected life of the awards in effect at the time of grant. |
(3) | The Company has estimated the expected volatility of its share price based on the share price volatility of similar publicly traded entities. |
(4) | The expected life represents the period of time that options granted are expected to be outstanding and was estimated using the simplified method and essentially equates to the weighted average of the vesting term and contractual life of the options. |
NOTE 8 – INCOME TAXES
The provision for income taxes consisted of the following for the years ended September 30,:
2022 | 2021 | |||||||
Current: | ||||||||
Federal | $ | - | $ | - | ||||
State | 1,320 | 1,150 | ||||||
Total current | $ | 1,320 | $ | 1,150 | ||||
Deferred: | ||||||||
Federal | $ | 13,408 | $ | 13,408 | ||||
State | - | - | ||||||
Total provision | $ | 14,728 | $ | 14,558 |
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INTRAOP MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – INCOME TAXES (Continued)
The components of the net deferred tax assets and liabilities are as follows as of September 30,:
2022 | 2021 | |||||||
Deferred tax assets: | ||||||||
Net operating loss carryforwards | $ | 13,838,645 | $ | 11,953,883 | ||||
Derivative liability | 2,245,674 | 1,781,381 | ||||||
Fixed assets and intangibles | 1,210,888 | 1,172,582 | ||||||
Stock compensation | 168,797 | 172,533 | ||||||
Credit carryforwards | 812,860 | 697,449 | ||||||
Accrued warranty | 44,262 | 45,242 | ||||||
Accrued compensation | 52,979 | 61,970 | ||||||
Deferred revenue | 317,814 | 257,527 | ||||||
Other | 53,933 | 1,256 | ||||||
Gross deferred tax assets | 18,745,852 | 16,143,823 | ||||||
Valuation allowance | (17,766,324 | ) | (15,159,552 | ) | ||||
Net deferred tax assets | 979,528 | 984,271 | ||||||
Deferred tax liabilities: | ||||||||
Goodwill | (696,273 | ) | (631,445 | ) | ||||
Deferred COGS | (227,273 | ) | (232,303 | ) | ||||
Debt discount | (174,907 | ) | (226,039 | ) | ||||
Net deferred tax liabilities | $ | (118,925 | ) | $ | (105,516 | ) |
The difference between the provision for income taxes and the income tax determined by applying the federal statutory rate of 21% is principally due to the changes in the valuation allowance. The valuation allowance increased $2,606,772 and $2,544,618 for the years ended September 30, 2022 and 2021, respectively.
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INTRAOP MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – INCOME TAXES (Continued)
Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain. Accordingly, the deferred tax assets have been offset by a valuation allowance. As of September 30, 2022, the Company had NOL (net operating loss) carryforwards for federal tax purposes totaling $53,836,136 and for state tax purposes totaling $26,222,140. The NOL carryforwards will begin expiring in 2034 for both federal and state purposes for tax years before 2018 and post 2017 federal NOLs can be carried forward indefinitely. At September 30, 2022, the Company also has federal and state research and development tax credit carryforwards of $452,966 and $382,092, respectively. The federal tax credits will expire starting in 2034, unless previously utilized. The state tax credits do not expire and can be carried forward indefinitely.
Utilization of the NOL and tax credit carryforwards may be subject to a substantial annual limitation due to ownership percentage change limitations that may have occurred or that could occur in the future, as required by the Internal Revenue Code (the “Code”), as well as similar state provisions. In general, an “ownership change” as defined by the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders or public groups. The annual limitation may result in the expiration of the NOL and tax credit carryforwards before utilization.
The Company’s 2014 through 2022 tax years remain open for examination by the federal and state taxing authorities.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
Operating Lease
The Company leases its facilities under a noncancelable operating lease that expired September 2021. In November 2021, the Company renewed the noncancelable operating lease for its facilities and extended the term of the lease to September 2026. In addition to the base rent, the Company is responsible for certain insurance, property tax and maintenance expenses under the terms of the facilities lease.
The Company recognizes rent on a straight-line basis over the term of the lease. The difference between required lease payments and straight-line rent expense has been recorded as deferred rent in the accompanying consolidated balance sheets at September 30, 2022 and 2021. Rent expense for years ended September 30, 2022 and 2021 was $609,345 and $515,663, respectively.
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INTRAOP MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – COMMITMENTS AND CONTINGENCIES (Continued)
Operating Lease (Continued)
At September 30, 2022, future minimum payments required under the noncancelable operating lease for future years ending September 30 are as follows:
2023 | $ | 591,081 | ||
2024 | 608,813 | |||
2025 | 627,078 | |||
2026 | 645,890 | |||
Total | $ | 2,472,862 |
Indemnification
In the Company’s sales agreements, the Company typically agrees to indemnify its customers for any expenses or liability resulting from claimed infringements of patents, trademarks or copyrights of third parties. The terms of these indemnification agreements are generally perpetual any time after execution of the agreement. The maximum amount of potential future indemnification is unlimited. To date, the Company has not paid any amounts to settle claims or defend lawsuits.
Litigation
The Company may from time to time become involved in various legal proceedings arising in the ordinary course of business. The unfavorable resolution of any such matters could have a material effect on the Company’s consolidated financial position and results of operations.
NOTE 10 – DEFINED CONTRIBUTION 401(K) PLAN
The Company has a qualified 401(k) plan for all eligible employees. Employees may contribute up to the statutory maximum, which is set by law each year. The Company does not currently match contributions.
NOTE 11 – SUBSEQUENT EVENTS
In October 2022, the Company amended the previously issued warrants in connection with the sale leaseback transactions as disclosed in Note 5 to amend the exercise price to $0.01.
In October 2022, the Company entered into three additional sale leaseback agreements. Each lease has a term of 60 months, with monthly payments of $21,247. The Company also issued a warrant to purchase 500,000 shares of common stock at an exercise price of $0.01 per share which expires in August 2029 and an additional warrant to purchase 750,000 shares of common stock at an exercise price of $0.01 per share which expires in October 2029.
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INTRAOP MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – SUBSEQUENT EVENTS (Continued)
In November 2022, the Company entered into another sale leaseback agreement for $1,600,000. The lease has a term of 60 months, with monthly payments ranging from $14,729 to $16,307. In connection with this, the Company issued a warrant to purchase 150,000 shares of common stock at an exercise price of $0.40 per share which expires in December 2029.
In December 2022, the Company amended the secured convertible promissory notes and the secured promissory notes with the related party as disclosed in Note 5 to extend the maturity dates of all the previously issued security convertible promissory and secured promissory notes to December 31, 2023.
The Company evaluated subsequent events through March 24, 2023, the date which the consolidated financial statements were available to be issued.
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