| Business, Liquidity and Summary of Significant Accounting Policies | 1. BUSINESS, LIQUIDITY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Description of Business and Current Financial Condition
Medifocus Inc. (the “Company” or
“Medifocus”) was incorporated under the Business
Corporations Act (Ontario) on April 25, 2005. Medifocus
develops and commercializes minimally invasive focused heat systems
for the treatment of cancerous and benign tumors, and enlarged
prostate, medically known as Benign Prostate Hyperplasia
(“BPH”). After the acquisition of Prolieve ®
The Company owns two technology platforms with comprehensive US and
international patent protection:
• The Endo-thermotherapy Platform-from
which Prolieve was developed, can potentially be used to treat
cancers in prostate, rectal, cervical and esophageal, and
• The Adaptive Phased Array
(“APA”) Microwave Focusing Platform-invented by MIT,
licensed to Medifocus, directs precisely focused microwave energy
at tumor center to induce shrinkage or eradication of tumors
without undue harm to surrounding tissue. The Company’s APA
1000 Breast Cancer Treatment System, developed from the APA
technology platform is currently in pivotal Phase-III clinical
trials.
Going Concern Consideration
The Company’s operations are subject to certain risks and
uncertainties including, among others, current and potential
competitors with greater resources, dependence on significant
customers, lack of operating history and uncertainty of future
profitability and possible fluctuations in financial results. Since
inception, the Company has incurred substantial operating losses,
principally from expenses associated with the Company’s
research and development, financing activities, and development of
new technologies. The Company believes these expenditures are
essential for the commercialization of its technologies. The
Company expects its operating losses to continue for the
foreseeable future as it continues its product development efforts
and undertakes its sales and marketing activities. Due to continued
substantial operating losses, there is substantial doubt regarding
the Company’s ability to continue as a going concern. The
Company’s ability to achieve profitability is dependent upon
its ability to obtain governmental approvals, produce, and market
and sell its new product candidates. There can be no assurance that
the Company will be able to commercialize its technology
successfully or that profitability will ever be achieved. The
operating results of the Company have fluctuated significantly in
the past. The Company expects that its operating results will
fluctuate significantly in the future and will depend on a number
of factors, many of which are outside the Company’s
control.
The Company will need substantial additional funding in order to
complete the development, testing and commercialization of its
product candidates. The commitment to these projects will require
additional external funding, at least until the Company is able to
generate sufficient cash flow from the sale of one or more of its
products to support its continued operations. If adequate funding
is not available, the Company may be required to delay, scale back
or eliminate certain aspects of its operations or attempt to obtain
funds through unfavorable arrangements with partners or others that
may force it to relinquish rights to certain of its technologies,
products or potential markets or that could impose onerous
financial or other terms. Furthermore, if the Company cannot fund
its ongoing development and other operating requirements,
particularly those associated with its obligations to conduct
clinical trials under its licensing agreements, it will be in
breach of these licensing agreements and could therefore lose its
license rights, which could have material adverse effects on its
business. Additionally, the Company is not in compliance with the
provisions of outstanding debt agreements, and it has not remitted
quarterly royalty payments to Boston Scientific Corporation
pursuant to the terms of its purchase agreement for Prolieve. The
Company has not paid interest owing to certain holders of the
convertible debentures, and is in a technical default of the terms
of the debentures. The investors have not accelerated the terms of
the debenture. Management is continuing its efforts to obtain
additional funds through equity financing and through the
negotiation of debt agreements to ensure that the Company can meet
its obligations and sustain operations.
The financial statements do not include any adjustments relating to
recoverability and classification of recorded asset amounts or the
amounts and classification of liabilities that might be necessary
should the Company be unable to continue in existence.
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements of Medifocus
Inc. have been prepared in accordance with generally accepted
accounting principles in the United States (“U.S.
GAAP”) and include the accounts of the Company and its
wholly-owned subsidiary Celsion (Canada) Inc. All intercompany
transactions have been eliminated. There were no transactions for
Celsion (Canada) Inc. for the year ending March 31, 2015.
Unless otherwise noted, all references to “$” or
“dollar” refer to the United States dollar. Certain
items in the prior period financial statements have been
reclassified to conform to the current period presentation. The
Company operates in a single business segment, focused heat systems
for targeted thermotherapy of surface, subsurface and deep seated
localized and regional cancers. Substantially all of the
Company’s revenue is generated, and assets are located, in
the United States.
Foreign Currency
Effective April 1, 2013, the Company changed its reporting
currency from the Canadian dollar (“CAD”) to the U.S.
dollar in anticipation of filing its financial statements with the
U.S. Securities and Exchange Commission. Effective April 1,
2014, the Company changed its functional currency and that of its
wholly owned subsidiary to the U.S. dollar. As a result, all prior
year translation adjustments were recognized into income.
Use of Estimates
The preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amount of revenues and
expenses during the reporting period. The consolidated financial
statements include significant estimates for the expected economic
life and value of our licensed technology, allowance for doubtful
accounts, value of contingent consideration, value of our debt
issuances, accruals for estimated product returns, allowance for
inventory obsolescence, allowance for our net operating loss carry
forward and related valuation allowance for tax purposes and our
stock-based compensation related to employees and directors,
consultants and advisors. Because of the use of estimates inherent
in the financial reporting process, actual results could differ
significantly from those estimates.
Credit Concentration
The Company’s customers are primarily physicians and
physician organizations in the U.S .
Vendor Concentration
The Company currently purchases 100% of its Prolieve catheter
inventory from one supplier. Alternative suppliers and alternative
catheters are not currently available. The company maintains a
deposit of $221,330 with its vendor.
Fair Value Measurements
The Company’s consolidated balance sheets include various
financial instruments (primarily cash and cash equivalents,
accounts receivable, accounts payable, accrued expenses, and notes
payable) recorded at cost, which approximates their fair value.
Fair value is the price that would be received from the sale of an
asset or paid to transfer a liability assuming an orderly
transaction in the most advantageous market at the measurement
date. U.S. GAAP establishes a hierarchical disclosure framework
which prioritizes and ranks the level of observability of inputs
used in measuring fair value. These tiers include:
• Level 1—Quoted prices
(unadjusted) in active markets that are accessible at the
measurement date for identical assets or liabilities. The fair
value hierarchy gives the highest priority to Level 1 inputs.
• Level 2—Observable market-based
inputs other than quoted prices in active markets for identical
assets or liabilities.
• Level 3—Unobservable inputs are
used when little or no market data is available. The fair value
hierarchy gives the lowest priority to Level 3 inputs.
In connection with the acquisition of Prolieve, the Company owes
additional purchase consideration of up to $2.5 million (contingent
consideration) based on the sales of Prolieve products after their
acquisition. The contingent consideration is measured at fair value
on a recurring basis using level 3 inputs, and the fair value is
determined using unobservable inputs such as the discount rate. The
change in the fair value of the contingent consideration of
$280,296 and $705,355 and nil for the years ended March 31,
2015, 2014 and 2013, respectively, is reflected as “loss from
change in fair value of contingent consideration” in the
accompanying consolidated statements of operations. See note 2
The Company has no financial assets and liabilities measured at
fair value on a non-recurring basis. The Company’s long-lived
assets are measured at fair value on a non-recurring basis only
when an impairment is deemed to occur. See notes 3 and 4.
Fair Value of Financial Instruments
The carrying amounts of financial instruments classified as current
assets or liabilities, including accounts receivable, accounts
payable and accrued expenses approximate fair value because of the
short maturity of these instruments.
Comprehensive Income (Loss) and Accumulated Other Comprehensive
Income (Loss)
Comprehensive income (loss) includes the total of the
Company’s net income (loss) and all other changes in equity
other than transactions with owners, including changes in equity
for cumulative translation adjustments resulting from the
consolidation of foreign subsidiaries as the financial statements
of the subsidiaries were previously accounted for using the local
currency as the functional currency.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with original
maturities of three months or less to be cash equivalents. All
interest bearing and non-interest bearing accounts are guaranteed
by the FDIC up to $250,000. The Company may maintain cash balances
in excess of FDIC coverage. Management considers this to be a
normal business risk.
Accounts Receivable
The Company extends credit to customers on an unsecured basis and
payment terms are typically 30 days from delivery or service. The
Company’s receivables are primarily related to Prolieve
products and services. Management assesses the collectability of
its receivables based on a periodic customer-by-customer analysis,
considering historical collection experience as well as
customer-specific conditions; when a specific customer account is
determined to be uncollectible, the Company provides an allowance
equal to the estimated uncollectible amounts. Receivables are
written off when it is determined that amounts are uncollectible.
The Company maintained an allowance for doubtful accounts of
$74,289 and $34,289 as of March 31, 2015 and 2014,
respectively.
2015 2014
Accounts receivable trade $ 920,022 $ 1,821,704
Accounts receivable - Harmonized sales tax 211,972 241,981
Allowance for doubtful accounts (74,289 ) (34,289 )
$ 1,057,705 $ 2,029,396
Inventory
Inventory consists primarily of console units and single-use
treatment catheters. Inventory consists of the direct costs of
acquiring the inventory from vendors. Inventory of console units
are considered non-current since the sales period is usually in
excess of one year.
Inventory is valued at the lower of cost or net realizable value.
Net realizable value represents the estimated selling price for
inventories less costs necessary to make the sale. In determining
net realizable value, we consider, at a minimum, selling prices,
reimbursements charges, and changes in demand for products due to
competitive conditions or market acceptance. A provision is
recognized to reduce the cost of inventories to the estimated net
realizable values, if required, however no provision was recognized
for the years ending March 31, 2015, 2014 and 2013. We also
analyze the level of inventory on hand on a periodic basis, in
relation to estimated customer requirements to determine whether
write-downs for excess, obsolete, or slow-moving inventory are
required. Any significant or unanticipated change in the factors
noted above could have a significant impact on the value of
inventories and on reported operating results.
Inventory is relieved using the first-in, first-out method and
consists of the following at March 31, 2015 and 2014.
2015 2014
Current inventory – Catheters $ 79,604 $ 518,763
Non-current inventory - Consoles 190,276 190,276
$ 269,880 $ 709,039
Property and Equipment
Property and equipment is stated at cost less accumulated
depreciation. Depreciation is provided over the estimated useful
lives of the related assets, ranging from three to seven years,
using the straight-line method. Major renewals and improvements are
capitalized and ordinary repairs and maintenance are expensed as
incurred.
The Company reviews property and equipment for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. An asset is considered
impaired if its carrying amount exceeds the future net undiscounted
cash flows that the asset is expected to generate. If such asset is
considered to be impaired, the impairment recognized is the amount
by which the carrying amount of the asset, if any, exceeds its fair
value determined using a discounted cash flow model.
Contingent Consideration
In accordance with ASC 805, upon the purchase of Prolieve, the
Company recognized a contingent consideration obligation as part of
the consideration transferred in exchange for the acquired
business. The initial measurement of the contingent consideration
obligation was based on its estimated fair value. The contingent
consideration obligation has been remeasured to fair value at each
reporting date and will continue to be remeasured until the
contingency is resolved. The changes in fair value are recognized
in earnings. The obligation outstanding totaled $1,031,179 and
$1,172,654 as of March 31, 2015 and 2014. See Note 2
Intangible Assets
Intangible assets consist of intellectual property and customer
relationships for our Prolieve business acquired in July 2012.
These intangible assets were originally recorded at fair value and
are amortized on a straight line basis over their estimated useful
lives of 10 years. The Company reviews its intangible assets for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable, in a
manner similar to that for property and equipment.
Deferred Financing Fees and Other Assets
As part of the convertible debt transaction (see note 5), the
Company has unamortized deferred financing fees in the amount of
$282,926 and $467,357 as of March 31, 2015 and 2014,
respectively. Other assets primarily include a vendor deposit and
prepaid rent.
Revenue Recognition
The Company sells products and provides services which are used in
the treatment of BPH. The Company recognizes revenue, net of sales
taxes, from the sale of Prolieve consoles and catheters upon
shipment to the customer. Revenue from the sale of products is
measured at the fair value of the consideration received or
receivable, net of any estimated returns. Revenue from the mobile
service is recognized upon completion of the services, which is
generally upon treatment of the patient.
The Company does not have a return policy that allows customers to
return product, however the company has allowed returns on a
limited customer by customer basis. The Company’s estimate
for returns is based upon its historical experience with actual
returns, however such returns have historically been limited. While
such experience has allowed for reasonable estimation in the past,
history may not always be an accurate indicator of future returns.
The Company continually monitors its estimates for returns and
makes adjustments when it believes that actual product returns may
differ from the established accruals, if any. We record a provision
for estimated returns in the same period as the related revenue is
recorded.
Costs of Sales—Products
Costs of goods sold primarily include the cost of products sold to
customers on a first-in first-out basis, along with amortization
expense of our intellectual property, warranty costs, warehousing
costs, freight and handling charges. Warehousing costs include
payroll and benefit costs, including related stock-based
compensation expense.
Costs of Sales—Services
Costs of services consist primarily of the costs to provide mobile
services to our patients, including catheter cost, depreciation of
our mobile consoles and vehicle fleet, and payroll and benefit
costs, including related stock-based compensation expense.
Warranty Liabilities
Prolieve products are covered by warranties against defects in
material and workmanship for periods of up to 12 months. We record
a liability for warranty claims at the time of sale based on the
trend in the historical ratio of product failure rates, material
usage and service delivery costs to sales, the historical length of
time between the sale and resulting warranty claim and other
factors. The accrued liability for warranty provisions was $37,960
and $31,650 for the years ended March 31, 2015 and 2014,
respectively, and is included in accrued expenses in the
accompanying consolidated balance sheets.
Research and Development Expenses
Research and development costs are expensed as incurred.
Income Taxes
Income taxes are accounted for under the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carry forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax asset and liabilities of a change in tax rates is
recognized in results of operations in the period that the tax rate
change occurs. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to
be realized.
A tax position is recognized as a benefit only if it is “more
likely than not” that the tax position taken would be
sustained in a tax examination, presuming that a tax examination
will occur. The Company recognizes interest and/or penalties
related to income tax matters in the income tax expense
category. The Company remains subject to examination for
income tax returns for the years ending after 2010.
Stock-Based Compensation
Compensation costs for all stock-based awards is measured at fair
value on the date of the grant using an option pricing model and is
recognized over the service period for awards expected to
vest. The estimation of stock-based awards that will
ultimately vest requires judgment, and to the extent actual results
or updated estimates differ from the current estimates, such
amounts will be recorded as a cumulative adjustment in the period
estimates are revised. We consider many factors when
estimating expected forfeitures, including types of awards,
employee class, and historical experience.
Profit Sharing Plan
The Company sponsors a defined contribution retirement plan through
a Section 401(k) profit sharing plan. Employees may contribute
up to 15% of their pre-tax compensation. Participants are eligible
for matching Company contributions up to 3% of eligible
compensation dependent on the level of voluntary contributions.
Company matching contributions totaled $75,000, $78,000 and
$17,000, respectively, for the years ended March 31, 2015,
2014 and 2013.
Net Income (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income
(loss) available to common shareholders by the weighted-average
number of shares of common shares outstanding during the
period.
For periods of net loss, diluted loss per share is calculated
similarly to basic loss per share because the impact of all
dilutive potential common shares is anti-dilutive due to the net
losses. For the years ended March 31, 2015, 2014 and 2013,
outstanding stock options of 8,525,000 for each of the years, and
warrants outstanding to purchase 105,278,102, 94,996,882 and
86,106,777 commons shares, respectively were considered
anti-dilutive and therefore were not included in the calculation of
diluted shares. For the years ended March 31, 2015 and 2014,
convertible promissory notes convertible into 22,160,000 shares of
common stock were considered anti-dilutive and therefore were not
included in the calculation of diluted shares.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued
ASU 2014-09 – Revenue from Contracts with Customers providing
guidance for revenue recognition for contracts. This guidance
requires an entity to review contracts in five steps and will
result in enhanced disclosures regarding the nature, amount, timing
and uncertainty of revenue arising from contracts with customers.
This standard is effective for fiscal years beginning after
December 15, 2016 and early adoption is not permitted. We are
currently evaluating the impact, if any, that this new guidance
will have on our financial statements.
ASU No. 2014-12, Compensation-Stock
Compensation (Topic 718): Accounting for Share Based Payments When
the Terms of an Award Provide That a Performance Target Could Be
Achieved after the Requisite Service Period
ASU No. 2014-16, Derivatives and Hedging
(Topic 815): Determining Whether the Host Contract in a Hybrid
Financial instrument in the Form of a Share More Akin to Debt or
Equity.
ASU No. 2015-03, Interest-Imputation of
Interest (Subtopic 835-30): Simplifying the Presentation of Debt
Issuance Costs.
In August 2014, the FASB issued ASU 2014-15 – Presentation of
Financial Statements – Going Concern. This guidance requires
management to evaluate on a regular basis whether any conditions or
events have arisen that could raise substantial doubt about the
entity’s ability to continue as a going concern. This
guidance is effective for fiscal years beginning after
December 15, 2016 and early adoption is permitted. We do not
expect the adoption of this guidance to have a material impact on
our financial statements.
Emerging Growth Company Status
We are an “emerging growth company” as defined in
section 3(a) of the Exchange Act, as amended by the United States
Jumpstart Our Business Startups Act, enacted on April 5, 2012
(the “JOBS Act”), and will continue to qualify as an
“emerging growth company” until the earliest to occur
of: (a) the last day of the fiscal year during which we have
total annual gross revenues of $1,000,000,000 (as such amount is
indexed for inflation every 5 years by the SEC) or more;
(b) the last day of our fiscal year following the fifth
anniversary of the date of the first sale of our common equity
securities pursuant to an effective registration statement under
the Securities Act; (c) the date on which we have, during the
previous 3-year period, issued more than $1,000,000,000 in
non-convertible debt; or (d) the date on which we are deemed
to be a ‘large accelerated filer’, as defined in
Exchange Act Rule 12b–2.
Generally, a company that registers any class of its securities
under section 12 of the Exchange Act is required to include in the
second and all subsequent annual reports filed by it under the
Exchange Act, a management report on internal controls over
financial reporting and, subject to an exemption available to
companies that meet the definition of a “smaller reporting
company” in Exchange Act Rule 12b-2, an auditor attestation
report on management’s assessment of internal controls over
financial reporting. However, for so long as we continue to qualify
as an emerging growth company, we will be exempt from the
requirement to include an auditor attestation report in our annual
reports filed under the Exchange Act, even if we do not qualify as
a “smaller reporting company”. In addition, section
103(a)(3) of the Sarbanes-Oxley Act of 2002 has been amended by the
JOBS Act to provide that, among other things, auditors of an
emerging growth company are exempt from any rules of the Public
Company Accounting Oversight Board requiring mandatory audit firm
rotation or a supplement to the auditor’s report in which the
auditor would be required to provide additional information about
the audit and the financial statements of the company.
Any U.S. domestic issuer that is an emerging growth company is able
to avail itself to the reduced disclosure obligations regarding
executive compensation in periodic reports and proxy statements,
and to not present to its shareholders a nonbinding advisory vote
on executive compensation, obtain approval of any golden parachute
payments not previously approved, or present the relationship
between executive compensation actually paid and our financial
performance. As a foreign private issuer, we are not subject to
such requirements, and will not become subject to such requirements
even if we were to cease to be an emerging growth company.
As a reporting issuer under the securities legislation of the
Canadian provinces of Ontario, British Columbia, and Alberta, we
are required to comply with all new or revised accounting standards
that apply to Canadian public companies. Pursuant to
Section 107(b) of the JOBS Act, an emerging growth company may
elect to utilize an extended transition period for complying with
new or revised accounting standards for public companies until such
standards apply to private companies. We have elected to utilize
this extended transition period. However, while we have elected to
utilize this extended transition period, our audited consolidated
financial statements as of March 31, 2015 reflect the adoption
of all required accounting standards for public companies. |
