UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

FOR THE QUARTERLY PERIOD ENDED June 30, 2021

 

OR

 

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

 

COMMISSION FILE NUMBER: 001-40254

 

MOVANO INC.

(Exact name of registrant as specified in its charter)

 

Delaware   26-0579295
(State of incorporation)   (I.R.S. Employer
Identification No.)

 

6800 Koll Center Parkway, Pleasanton, CA 94566

(Address of principal executive office) (Zip code)

 

(415) 651-3172

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.0001 per share   MOVE   The Nasdaq Stock Market LLC

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒   No ☐

 

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

 

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

 

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

 

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

 

As of August 11, 2021, there were 32,772,060 shares of our common stock, par value $0.0001 per share, outstanding.

 

 

 

 

 

 

MOVANO INC.

FORM 10-Q

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021

 

INDEX

 

    PAGE
PART I - FINANCIAL INFORMATION   1
     
Item 1. Financial Statements   1
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   27
     
Item 3. Quantitative and Qualitative Disclosure About Market Risk   33
     
Item 4. Controls and Procedures   33
     
PART II – OTHER INFORMATION   35
     
Item 1. Legal Proceedings   35
     
Item 1A. Risk Factors   35
     
Item 2. Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities   56
     
Item 3. Defaults Upon Senior Securities   56
     
Item 4. Mine Safety Disclosures   56
     
Item 5. Other Information   56
     
Item 6. Exhibits   56
     
SIGNATURES   57
     
EXHIBIT INDEX    

 

i

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Movano Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

(Unaudited)

 

    June 30,     December 31,  
    2021     2020  
             
ASSETS            
Current assets:            
Cash and cash equivalents   $ 29,305     $ 5,710  
Short-term investments     13,402        
Payroll tax credit, current portion     450       500  
Prepaid expenses and other current assets     1,502       691  
Total current assets     44,659       6,901  
Property and equipment, net     324       38  
Payroll tax credit, noncurrent portion     96       134  
Other assets     55       10  
Total assets   $ 45,134     $ 7,083  
                 
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)                
Current liabilities:                
Accounts payable   $ 255     $ 246  
Paycheck Protection Program loan, current portion           248  
Other current liabilities     1,496       666  
Total current liabilities     1,751       1,160  
Noncurrent liabilities:                
Convertible promissory notes, net    
      11,342  
Accrued interest    
      292  
Paycheck Protection Program loan, noncurrent portion           103  
Warrant liability           1,549  
Derivative liability    
      121  
Early exercised stock option liability     370       417  
Other noncurrent liabilities     43       161  
Total noncurrent liabilities     413       13,985  
Total liabilities     2,164       15,145  
                 
Commitments and contingencies (Note 13)    
 
     
 
 
                 
Series A redeemable convertible preferred stock, $0.0001 par value, no and 2,692,253 shares authorized at June 30, 2021 and December 31, 2020; no and 2,692,253 shares issued and outstanding at June 30, 2021 and December 31, 2020; liquidation preference of $0 and $15,170 at June 30, 2021 and December 31, 2020
   
      13,856  
                 
Series B redeemable convertible preferred stock, $0.0001 par value,   no and 5,238,095 shares authorized at June 30, 2021 and December 31, 2020; no and 4,942,319 shares issued and outstanding at June 30, 2021 and December 31, 2020; liquidation preference of $0 and $21,858 at June 30, 2021 and December 31, 2020
   
      18,962  
                 
Stockholders’ equity (deficit):                
Preferred stock, $0.0001 par value, 5,000,000 and no shares authorized at June 30, 2021 and December 31, 2020; no shares issued and outstanding at June 30, 2021 and December 31, 2020
   
     
 
                 
Common stock, $0.0001 par value, 75,000,000 and 22,069,652 shares authorized at June 30, 2021 and December 31, 2020;  32,772,060 and 6,393,069 shares issued and outstanding at June 30, 2021 and December 31, 2020     3       1  
Additional paid-in capital     96,258      
 
Accumulated other comprehensive loss     (1 )      
Accumulated deficit     (53,290 )     (40,881 )
Total stockholders’ equity (deficit)     42,970       (40,880 )
Total liabilities, redeemable convertible preferred stock, and stockholders’ equity (deficit)   $ 45,134     $ 7,083  

 

See accompanying notes to condensed consolidated financial statements.

 

1

 

 

Movano Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share data)

(Unaudited)

 

    Three Months Ended June 30,     Six Months Ended June 30,  
    2021     2020     2021     2020  
OPERATING EXPENSES:                        
Research and development   $ 3,183     $ 2,322     $ 5,125     $ 3,823  
General and administrative     1,863       413       3,187       931  
Total operating expenses     5,046       2,735       8,312       4,754  
                                 
Loss from operations     (5,046 )     (2,735 )     (8,312 )     (4,754 )
                                 
Other income (expense), net:                                
Interest expense           (167 )     (883 )     (175 )
Change in fair value of warrant liability           (14 )     (1,581 )     9  
Change in fair value of derivative liability           167       121       135  
Forgiveness of Paycheck Protection Program Loan     351             351        
Interest and other income, net     8       10       9       21  
Other income (expense), net     359       (4 )     (1,983 )     (10 )
                                 
Net loss     (4,687 )     (2,739 )     (10,295 )     (4,764 )
                                 
Accretion and dividends on redeemable convertible preferred stock           (2,118 )     (2,489 )     (4,074 )
Net loss attributable to common stockholders   $ (4,687 )   $ (4,857 )   $ (12,784 )   $ (8,838 )
                                 
Net loss   $ (4,687 )   $ (2,739 )   $ (10,295 )   $ (4,764 )
                                 
Other comprehensive loss:                                
Change in unrealized loss on available-for-sale securities     (1 )           (1 )      
Total comprehensive loss   $ (4,688 )   $ (2,739 )   $ (10,296 )   $ (4,764 )
                                 
Net loss per share attributable to common stockholders, basic and diluted   $ (0.15 )   $ (1.75 )   $ (0.64 )   $ (3.34 )
                                 
Weighted average shares used in computing net loss per share attributable to common stockholders, basic and diluted     32,017,335       2,775,784       20,099,402       2,649,996  

 

See accompanying notes to condensed consolidated financial statements.

 

2

 

 

Movano Inc.

Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(in thousands, except share data)

(Unaudited)

 

                                              Accumulated              
    Redeemable Convertible Preferred Stock                 Additional     Other           Total  
Three Months Ended   Series A     Series B     Common Stock     Paid-In     Comprehensive     Accumulated     Stockholders’  
June 30, 2021   Shares     Amount     Shares     Amount     Shares     Amount     Capital     Loss     Deficit     Equity  
Balance at March 31, 2021                 —     $
          —
                 —     $
            —
      32,772,060     $ 3     $ 95,882     $
    $ (48,603 )   $ 47,282  
Stock-based compensation          
           
           
      340      
     
      340  
Vesting of early exercised stock options          
           
           
      36      
     
      36  
Other comprehensive loss          
           
           
     
      (1 )    
      (1 )
Net loss          
           
           
     
     
      (4,687 )     (4,687 )
Balance at June 30, 2021         $
          $
      32,772,060     $ 3     $ 96,258     $ (1 )   $ (53,290 )   $ 42,970  
                                                                                 
                                              Accumulated           Total  
    Redeemable Convertible Preferred Stock                 Additional     Other           Stockholders’  
Six Months Ended   Series A     Series B     Common Stock     Paid-In     Comprehensive     Accumulated     Equity  
June 30, 2021   Shares     Amount     Shares     Amount     Shares     Amount     Capital     Loss     Deficit     (Deficit)  
Balance at December 31, 2020     2,692,253     $ 13,856       4,942,319     $ 18,962       6,393,069     $ 1     $
    $
    $ (40,881 )   $ (40,880 )
Stock-based compensation          
           
           
      695      
     
      695  
Accretion of Series A and Series B redeemable convertible preferred stock           686             1,803            
      (2,489 )    
     
      (2,489 )
Issuance of common stock upon exercise of options          
           
      134,541      
      49      
     
      49  
Vesting of early exercised stock options          
           
                      74      
     
      74  
Reclassification of negative additional paid-in capital          
           
           
      2,114      
      (2,114 )    
 
Conversion of preferred stock to common stock upon initial public offering     (2,692,253 )     (14,542 )     (4,942,319 )     (20,765 )     11,436,956       1       35,306      
     
      35,307  
Issuance of common stock upon initial public offering, net of issuance costs          
           
      9,775,000       1       41,924      
     
      41,925  
Issuance of underwriter warrants upon initial public offering          
           
           
      2,349      
     
      2,349  
Reclassification of liability-classified warrants upon initial public offering          
           
           
      3,130      
     
      3,130  
Conversion of convertible promissory notes and accrued interest upon  initial public offering          
           
      5,015,494      
      12,550      
     
      12,550  
Issuance of common stock for nonemployee services          
           
      17,000      
      85      
     
      85  
Beneficial conversion feature upon issuance of convertible promissory note          
           
           
      471      
     
      471  
Other comprehensive loss          
           
           
     
      (1 )    
      (1 )
Net loss          
           
           
     
     
      (10,295 )     (10,295 )
Balance at June 30, 2021         $
          $
      32,772,060     $ 3     $ 96,258     $ (1 )   $ (53,290 )   $ 42,970  
                                                                                 
                                              Accumulated              
    Redeemable Convertible Preferred Stock                 Additional     Other           Total  
Three Months Ended   Series A     Series B     Common Stock     Paid-In     Comprehensive     Accumulated     Stockholders’  
June 30, 2020   Shares     Amount     Shares     Amount     Shares     Amount     Capital     Loss     Deficit     Deficit  
Balance at March 31, 2020     2,692,253     $ 11,821       4,942,319     $ 14,039       4,539,584     $
    $
    $
    $ (23,839 )   $ (23,839 )
Stock-based compensation            —      
          —
               —      
           —
           
      41      
     
      41  
Accretion of Series A and Series B redeemable convertible preferred stock           640             1,478            
      (2,118 )    
     
      (2,118 )
Reclassification of negative additional paid-in capital to accumulated deficit          
           
           
      2,077      
      (2,077 )    
 
Net loss          
           
           
     
     
      (2,739 )     (2,739 )
Balance at June 30, 2020     2,692,253     $ 12,461       4,942,319     $ 15,517       4,539,584     $
    $
    $
    $ (28,655 )   $ (28,655 )
                                                                                 
                                              Accumulated              
    Redeemable Convertible Preferred Stock                 Additional     Other           Total  
Six Months Ended   Series A     Series B     Common Stock     Paid-In     Comprehensive     Accumulated     Stockholders’  
June 30, 2020   Shares     Amount     Shares     Amount     Shares     Amount     Capital     Loss     Deficit     Deficit  
Balance at December 31, 2019     2,692,253     $ 11,212       4,942,319     $ 12,692       4,539,584     $
    $
    $
    $ (19,907 )   $ (19,907 )
Stock-based compensation          
               —
          —      
          —
           
      90      
     
      90  
Accretion of Series A and Series B redeemable convertible preferred stock           1,249             2,825            
      (4,074 )    
     
      (4,074 )
Reclassification of negative additional paid-in capital to accumulated deficit          
           
           
      3,984      
      (3,984 )    
 
Net loss          
           
           
     
     
      (4,764 )     (4,764 )
Balance at June 30, 2020     2,692,253     $ 12,461       4,942,319     $ 15,517       4,539,584     $
    $
    $
    $ (28,655 )   $ (28,655 )

 

See accompanying notes to condensed consolidated financial statements.

 

3

 

 

Movano Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

    Six Months Ended June 30,  
    2021     2020  
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net loss   $ (10,295 )   $ (4,764 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     18       6  
Forgiveness of Paycheck Protection Program loan     (351 )    
 
Stock-based compensation     695       90  
Accretion of debt discount on convertible promissory notes     772       125  
Accrued interest on convertible promissory notes     115       57  
Accretion of discount on short-term investments     21      
 
Non-employee services under convertible promissory notes     50       50  
Compensation of non-employee services upon issuance of common stock     74      
 
Change in fair value of derivative liability     (121 )     (135 )
Change in fair value of warrant liability     1,581       (9 )
Changes in operating assets and liabilities:                
Payroll tax credit     88       (133 )
Prepaid expenses and other current assets     (1,008 )     (371 )
Other assets     (45 )     166  
Accounts payable     5       326  
Other current and noncurrent liabilities     629       139  
Net cash used in operating activities     (7,772 )     (4,453 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Purchases of property and equipment     (304 )    
 
Purchases of short-term investments     (13,424 )    
 
Net cash used in investing activities     (13,728 )    
 
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Proceeds from issuance of convertible promissory notes    
      8,248  
Payment of issuance costs    
      (414 )
Proceeds from April 2020 Paycheck Protection Program Loan    
      351  
Repayment of April 2020 Paycheck Protection Program Loan    
      (351 )
Proceeds from May 2020 Paycheck Protection Program Loan    
      351  
Issuance of common stock     76      
 
Proceeds from issuance of shares upon Initial Public Offering - net of issuance costs     45,019      
 
Net cash provided by financing activities     45,095       8,185  
                 
Net increase in cash and cash equivalents     23,595       3,732  
Cash and cash equivalents at beginning of period     5,710       4,291  
Cash and cash equivalents at end of period   $ 29,305     $ 8,023  
                 
NONCASH INVESTING AND FINANCING ACTIVITIES:                
Accretion of Series A redeemable convertible preferred stock   $ 686     $ 1,249  
Accretion of Series B redeemable convertible preferred stock   $ 1,803     $ 2,825  
Conversion of preferred stock to common stock upon initial public offering   $ 35,307     $
 
Reclassification of liability-classified warrants upon initial public offering   $ 3,130     $
 
Issuance of underwriter warrants upon initial public offering   $ 2,349     $
 
Issuance of convertible promissory notes for completion of non-employee services   $ 500     $
 
Beneficial conversion feature upon issuance of convertible promissory note   $ 471     $
 
Conversion of convertible promissory notes upon initial public offering   $ 12,550     $
 
Vesting of common stock issued upon early exercise   $ 74     $
 
Issuance of common stock for non-employee services   $ 11     $
 
Reclassification of deferred offering costs upon initial public offering   $ 497     $
 

 

See accompanying notes to condensed consolidated financial statements.

 

4

 

 

Movano Inc.

Notes to Condensed Consolidated Financial Statements

For the three months and six months ended June 30, 2021 and 2020

(Unaudited)

 

Note 1 – Business Organization, Nature of Operations

 

Movano Inc. (the “Company” or “Movano” or “Our”) was incorporated in Delaware on January 30, 2018 as Maestro Sensors Inc. and changed its name to Movano Inc. on August 3, 2018. The Company is in the development-stage and is a health-focused technology company creating simple, smart, and personalized devices designed to help individuals on their health journey optimize for good health today and to help prevent and manage chronic diseases in the future. The Company’s devices are being developed to provide vital health information, including glucose and blood pressure data, in a variety of form factors to meet individual style needs and give users actionable feedback to improve the quality of their life.

 

On April 28, 2021, the Company established Movano Ireland Limited, organized under the laws of Ireland, as a wholly owned subsidiary of the Company. Operations and activity at the wholly owned subsidiary were not significant for the three months ended June 30, 2021.

 

Since inception, the Company has engaged in only limited research and development of product candidates and underlying technology. As of December 31, 2020, the Company had not yet completed the development of its product and had not yet recorded any revenues. From February 2020 to December 2020, the Company issued subordinated convertible promissory notes for approximately $11.1 million in net proceeds (See Note 8). Additionally, in May 2020, the Company received a Paycheck Protection Program loan for $0.4 million (See Note 7).

 

In December 2019, a novel coronavirus and the resulting disease (“COVID-19”) was reported, and in January 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern. In February 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and in March 2020, the WHO characterized COVID-19 as a pandemic. The Company is continuing to ascertain the long-term impact of the COVID-19 pandemic on its business, but given the uncertainty about the situation, the Company cannot estimate the impact to our financial statements from the economic crisis arising from COVID-19.

 

The Company’s Registration Statement on Form S-1, as amended (Reg. No. 333-252671), was declared effective by the U.S. Securities and Exchange Commission (the “SEC”) on March 23, 2021. The registration statement registered the securities offered in the Company’s initial public offering (“IPO”). In the IPO, the Company sold 9,775,000 shares of common stock at a price to the public of $5.00 per share, including the full exercise of the underwriters’ option to purchase additional shares. The IPO closed on March 25, 2021 and the underwriters exercised their overallotment option as of March 25, 2021, as a result of which the Company raised net proceeds of $44.3 million after deducting $3.3 million in underwriting discounts, commissions, and expenses and $1.3 million in offering expenses paid or payable by the Company. National Securities Corporation (“NSC”) was the underwriter for the IPO, and also received a warrant related to the IPO, which is discussed in Note 11. No portion of the net proceeds from the IPO were used for payments made by the Company to its directors or officers or persons owning ten percent or more of its common stock or to their associates, or to the Company’s affiliates, other than payments in the ordinary course of business to officers for salaries and to nonemployee directors as compensation for board or board committee service.

 

The Company has incurred losses from operations and has generated negative cash flows from operating activities since inception. The Company expects to continue to incur net losses for the foreseeable future as it continues the development of its technology. The Company’s ultimate success depends on the outcome of its research and development and commercialization activities, for which it expects to incur additional losses in the future. Through June 30, 2021, the Company has relied primarily on the proceeds from equity offerings to finance its operations. The Company expects to require additional financing to fund its future planned operations, including research and development and commercialization of its products. The Company will likely raise additional capital through the issuance of equity, borrowings, or strategic alliances with partner companies. However, if such financing is not available at adequate levels, the Company would need to reevaluate its operating plans.

 

5

 

 

Movano Inc.

Notes to Condensed Consolidated Financial Statements

For the three months and six months ended June 30, 2021 and 2020

(Unaudited)

 

Note 2 – Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary and have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. The unaudited and condensed consolidated financial statements have been prepared on the same basis as the annual financial statements. In the opinion of management, the accompanying unaudited and condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation. Intercompany transactions are eliminated in the condensed consolidated financial statements. The results of operations for the three and six months ended June 30, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021. The condensed consolidated balance sheet as of December 31, 2020 has been derived from audited financial statements at that date but does not include all the information required by GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the preceding fiscal year included in Amendment No. 2 to the Company’s Registration Statement on Form S-1 filed with the SEC on March 17, 2021.

 

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, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of expenses during the reporting periods.

 

Significant estimates and assumptions reflected in these condensed consolidated financial statements include, but are not limited to, the accrual of research and development expenses, the valuation of common stock, stock options and warrants, the valuation of the embedded redemption derivative liability and income taxes. Estimates are periodically reviewed considering changes in circumstances, facts, and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates or assumptions.

 

Segment Information

 

Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business in one segment. The Company’s chief operating decision maker is the chief executive officer.

 

Cash, Cash Equivalents and Short-term Investments

 

The Company invests its excess cash primarily in money market funds, commercial paper and short-term debt securities. The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company classifies all marketable securities for use in current operations, even if the security matures beyond 12 months, and presents them as short-term investments in the condensed consolidated balance sheets.

 

The Company determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation at each balance sheet date. The Company has classified and accounted for the purchased marketable securities as available-for-sale. After considering the Company’s capital preservation objectives, as well as its liquidity requirements, the Company may sell securities prior to their stated maturities. The Company carries its available-for-sale short-term investments at fair value. The Company reports the unrealized gains and losses, net of taxes, as a component of stockholders’ equity, except for unrealized losses determined to be credit-related, which are recorded as other income (expense), net in the condensed consolidated statements of operations and comprehensive loss and reports an allowance for credit losses in short-term investments on the balance sheet, if any. The Company determines any realized gains or losses on the sale of short-term investments on a specific identification method and records such gains and losses as a component of other income (expense), net. Interest earned on cash, cash equivalents, and short-term investments is recorded in interest and other income, net in the accompanying condensed consolidated statements of operations and comprehensive loss and was not significant during the three and six months ended June 30, 2021 or 2020.

 

6

 

 

Movano Inc.

Notes to Condensed Consolidated Financial Statements

For the three months and six months ended June 30, 2021 and 2020

(Unaudited)

 

The Company's investment policy only allows purchases of high credit quality instruments and provides guidelines on concentrations and credit quality to ensure minimum risk of loss. The Company evaluates whether the unrealized loss on available-for-sale short-term investments is the result of the credit worthiness of the securities it held, or other non-credit-related factors such as liquidity by reviewing a number of factors such as the implied yield of the corporate note based on the market price, the nature of the invested entity's business or industry, market capitalization relative to debt, changes in credit ratings, and the market prices of the instruments subsequent to the period end.

 

Concentrations of Credit Risk and Off-Balance Sheet Risk

 

Cash and cash equivalents are financial instruments that are potentially subject to concentrations of credit risk. All cash and cash equivalents are held in United States financial institutions. Cash equivalents consist of interest-bearing money market accounts. The amounts deposited in the money market accounts exceeds federally insured limits. The Company has not experienced any losses related to this account and believes the associated credit risk to be minimal due to the financial condition of the depository institutions in which those deposits are held.

 

The Company has no financial instruments with off-balance sheet risk of loss.

 

Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets were comprised of prepaid expenses, other current receivables, and deferred offering costs, which consist of legal, accounting, filing and other fees related to the IPO that were capitalized prior to the IPO. The deferred offering costs were offset against proceeds from the IPO within additional paid-in capital upon the effective date of the IPO. As of June 30, 2021 and December 31, 2020, offering costs of approximately $0 and $0.5 million were capitalized, respectively.

 

Paycheck Protection Program Loan

 

The Company accounted for funds received from the Paycheck Protection Program as a financial liability with interest accrued and expensed over the term of the loan under the effective interest method. The loan remained recorded as a liability until the Company was legally released from the liability. The amount that was ultimately forgiven by the lender was recognized in the condensed consolidated statement of operations and comprehensive loss as a gain on extinguishment.

 

Convertible Financial Instruments

 

The Company bifurcates embedded redemption and conversion options from their host instruments and accounts for them as freestanding derivative financial instruments at fair value if certain criteria are met. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. Debt discounts under these arrangements are amortized to interest expense using the interest method over the earlier of the term of the related debt or their earliest date of redemption.

 

From time to time, the Company issues convertible financial instruments to nonemployees in payment for services that are provided. Until the services are completely rendered, the Company will expense the principal and any interest earned prior to the service completion to the representative expense account for the services performed and will record a noncurrent liability for the expected amount of the principal balance. Upon completion of the services, the Company will reclassify the noncurrent liability balance to the balance of an outstanding convertible financial instrument and assess the embedded redemption and conversion options that are applicable at that time.

 

7

 

 

Movano Inc.

Notes to Condensed Consolidated Financial Statements

For the three months and six months ended June 30, 2021 and 2020

(Unaudited)

 

Beneficial Conversion Feature

 

If the conversion feature of conventional convertible promissory notes provides for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (“BCF”). A BCF is recorded by the Company as a debt discount and as additional paid-in capital on the condensed consolidated balance sheet. In those circumstances, the convertible debt is recorded net of the discount related to the BCF and the Company amortizes the discount to interest expense over the life of the debt using the effective interest method.

 

Redeemable Convertible Preferred Stock

 

The Company records all shares of redeemable convertible preferred stock at their respective issuance price less issuance costs on the dates of issuance. Under certain circumstances the Company will be required to redeem the Series A and Series B redeemable convertible preferred stock unless an IPO has been consummated prior to April 1, 2021, or an extension or waiver is obtained upon approval of a majority of the holders of such preferred stock. As the preferred stock becomes redeemable due to the passage of time, the Company considers the preferred stock to be redeemable as of April 1, 2021. The Company records the accretion of the Series A and B preferred stock balances to their respective redemption amounts using the effective interest method. The redeemable convertible preferred stock is presented outside of stockholders’ deficit on the condensed consolidated balance sheet as of December 31, 2020. Upon the IPO, the redeemable convertible preferred stock converted in to 11,436,956 shares of common stock.

 

Income Taxes

 

The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial statement and tax basis of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. As the Company maintained a full valuation allowance against its deferred tax assets, the changes resulted in no provision or benefit from income taxes during the three and six months ended June 30, 2021 and 2020.

 

The Company accounts for unrecognized tax benefits using a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The Company establishes a liability for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. The Company records an income tax liability, if any, for the difference between the benefit recognized and measured and the tax position taken or expected to be taken on the Company’s tax returns. To the extent that the assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. The liability is adjusted considering changing facts and circumstances, such as the outcome of a tax audit. The provision for income taxes includes the impact of liability provisions and changes to the liability that are considered appropriate. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

 

For interim periods, the Company estimates its annual effective income tax rate and applies the estimated rate to the year-to-date income or loss before income taxes. The Company computes the tax provision or benefit related to items reported separately and recognizes the items net of their related tax effect in the interim periods in which they occur. The Company recognizes the effect of changes in enacted tax laws or rates in the interim periods in which the changes occur.

 

8

 

 

Movano Inc.

Notes to Condensed Consolidated Financial Statements

For the three months and six months ended June 30, 2021 and 2020

(Unaudited)

 

Stock-Based Compensation

 

The Company measures equity classified stock-based awards granted to employees, directors, and nonemployees based on the estimated fair value on the date of grant and recognizes compensation expense of those awards on a straight-line basis over the requisite service period, which is generally the vesting period of the respective award. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model. This valuation model for stock-based compensation expense requires the Company to make assumptions and judgments about the variables used in the calculation including the expected term, the volatility of the Company’s common stock, and an assumed risk-free interest rate. The Company accounts for forfeitures as they occur.

  

Early Exercised Stock Option Liability

 

Upon the early exercise of stock options by employees, the Company records as a liability the purchase price of unvested common stock that the Company has a right to repurchase if and when the employment of the stockholder terminates before the end of the requisite service period. The proceeds originally recorded as a liability are reclassified to additional paid-in capital as the Company’s repurchase right lapses.

 

Net Loss per Share Attributable to Common Stockholders

 

Basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period, without consideration for common stock equivalents. The net loss attributable to common stockholders is calculated by adjusting the net loss of the Company for the accretion on the Series A and B redeemable convertible preferred stock and cumulative dividends on Series A and B redeemable convertible preferred stock. Diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders, since the effects of potentially dilutive securities are antidilutive.

 

Recently Adopted Accounting Pronouncements

 

In December 2019, the FASB issued Accounting Standards Update 2019-12, Income Taxes (Topic 740). The amendments in this update provide further simplification of accounting standards for the accounting for income taxes. Certain exceptions for requirements regarding the accounting for franchise taxes, tax basis of goodwill, and tax law rate changes are made. The Company early adopted this guidance as of January 1, 2021 and the adoption did not have a significant impact on the financial statements and related disclosures.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which requires the early recognition of credit losses on financing receivables and other financial assets in scope. ASU 2016-13 requires the use of a transition model that will result in the earlier recognition of allowances for losses. The Company early adopted this guidance as of January 1, 2021 and the adoption did not have a significant impact on the financial statements and related disclosures.

 

9

 

  

Movano Inc.

Notes to Condensed Consolidated Financial Statements

For the three months and six months ended June 30, 2021 and 2020

(Unaudited)

 

Note 3 – FAIR VALUE MEASUREMENTS 

 

Financial assets and liabilities are recorded at fair value. The Company uses a three-level hierarchy, which prioritizes, within the measurement of fair value, the use of market-based information over entity-specific information for fair value measurements based on the nature of inputs used in the valuation of an asset or liability as of the measurement date. Fair value focuses on an exit price and is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs or methodology used for valuing financial instruments are not necessarily an indication of the risk associated with investing in those financial instruments.

 

A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:

 

  Level 1 Quoted prices in active markets for identical assets or liabilities.

 

  Level 2 Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable, either directly or indirectly.

 

  Level 3 Significant unobservable inputs that cannot be corroborated by market data.

 

The Company measures its cash equivalents, short-term investments and derivative financial instruments at fair value. The Company classifies its cash equivalents and short-term investments within Level 1 or Level 2 because the Company values these investments using quoted market prices or alternative pricing sources and models utilizing market observable inputs. The fair value of the Company’s Level 1 financial assets is based on quoted market prices of the identical underlying security. The fair value of the Company’s Level 2 financial assets is based on inputs that are directly or indirectly observable in the market, including the readily-available pricing sources for the identical underlying security that may not be actively traded.

 

The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

 

Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate. At December 31, 2020, the warrants related to the Series A preferred stock issuance, the Series B preferred stock issuance, and the convertible promissory notes and the derivative liability related to the issuance of convertible promissory notes are classified within level 3 of the valuation hierarchy. The instruments are not present at June 30, 2021 in light of accounting ramifications of the IPO, which are discussed further in Note 8 and Note 11.

 

The carrying amounts of prepaid expenses, payroll tax credit, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these instruments.

 

Based upon interest rates currently available to the Company for debt with similar terms, the carrying values of the Company’s convertible promissory notes and Paycheck Protection Program Loan are approximately equal to their fair values.

 

The following tables provide a summary of the assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2021 and December 31, 2020 (in thousands). 

 

    June 30, 2021  
    Fair Value     Level 1     Level 2     Level 3  
Cash equivalents:                        
Money market funds   $ 18,496     $ 18,496     $
-
    $
  -
 
Commercial paper     7,856      
-
      7,856      
-
 
Corporate notes     337      
-
      337      
-
 
Municipal bonds     1,866      
-
      1,866      
-
 
Total cash equivalents   $ 28,555     $ 18,496     $ 10,059     $
-
 
                                 
Short-term investments:                                
Commercial paper   $ 3,529     $
-
    $ 3,529     $
-
 
Corporate notes     7,391      
-
      7,391      
-
 
Municipal bonds     2,482      
-
      2,482      
-
 
Total short-term investments   $ 13,402     $
-
    $ 13,402     $
-
 

  

    December 31, 2020  
    Fair Value     Level 1     Level 2     Level 3  
Cash equivalents – money market funds   $ 5,181     $ 5,181     $
    $
 
Warrant liability   $ 1,549     $
    $
    $ 1,549  
Derivative liability   $ 121     $
    $
    $ 121  

 

10

 

 

Movano Inc.

Notes to Condensed Consolidated Financial Statements

For the three months and six months ended June 30, 2021 and 2020

(Unaudited)

 

Note 4 – CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

 

Cash, cash equivalents and short-term investments consist of the following (in thousands):

 

    June 30,
2021
    December 31,
2021
 
Cash and cash equivalents:            
Cash   $ 750     $ 529  
Money market funds     18,496       5,181  
Commercial paper     7,856       -  
Corporate notes     337       -  
Municipal bonds     1,866       -  
Total cash and cash equivalents   $ 29,305     $ 5,710  
                 
Short-term investments:                
Commercial paper   $ 3,529     $ -  
Corporate notes     7,391       -  
Municipal bonds     2,482       -  
Total short-term investments   $ 13,402     $ -  

 

The contractual maturities of short-term investments classified as available-for-sale as of June 30, 2021 were as follows (in thousands):

 

    June 30,
2021
 
       
Due within one year   $ 11,739  
Due after one year through five years   1,663  
Total   $ 13,402  

  

The following table summarizes the unrealized gains and losses related to short-term investments classified as available-for-sale on the Company’s condensed consolidated balance sheet (in thousands):

 

    June 30, 2021  
    Amortized Cost     Gross Unrealized Gains     Gross Unrealized Losses     Aggregate
Estimated Fair Value
 
                         
Short-term investments:                        
Commercial paper   $ 3,530     $
-
    $ (1 )   $ 3,529  
Corporate notes     7,393      
-
      (2 )     7,391  
Municipal bonds     2,481       1      
-
      2,482  
Total short-term investments   $ 13,403     $ 1     $ (2 )   $ 13,402  

 

As of June 30, 2021, the gross unrealized loss on available-for-sale short-term investments was immaterial and there were no expected credit losses related to the Company's available-for-sale debt securities. The Company has determined that all unrealized losses are temporary. As of June 30, 2021, no allowance for credit losses in short-term investments was recorded.

 

No sales of available-for-sale short-term investments occurred during the three and six months ended June 30, 2021.

 

11

 

 

Movano Inc.

Notes to Condensed Consolidated Financial Statements

For the three months and six months ended June 30, 2021 and 2020

(Unaudited)

 

Note 5 – Property and Equipment

 

Property and equipment, net, as of June 30, 2021 and December 31, 2020, consisted of the following (in thousands):

 

    June 30,     December 31,  
    2021     2020  
Office equipment and furniture   $ 171     $ 43  
Software     115      
 
Test equipment     83       22  
Total property and equipment     369       65  
Less: accumulated depreciation and amortization     (45 )     (27 )
Total property and equipment, net   $ 324     $ 38  

 

Total depreciation and amortization expense related to property and equipment for the three and six months ended June 30, 2021 was approximately $17,000 and $18,000, respectively. Total depreciation expense related to property and equipment for the three and six months ended June 30, 2020 was approximately $3,000 and $6,000, respectively.

 

Note 6 – Other Current Liabilities

 

Other current liabilities as of June 30, 2021 and December 31, 2020 consisted of the following (in thousands):

 

    June 30,
    December 31,
 
    2021     2020  
Accrued research and development   $ 29     $ 197  
Accrued compensation     1,158       184  
Accrued vacation     232       192  
Accrued legal expense     8       41  
Accrued accounting and consulting expense     17       40  
Other     52       12  
    $ 1,496     $ 666  

 

NOTE 7 – PAYCHECK PROTECTION PROGRAM LOAN

 

The Paycheck Protection Program (“PPP”) was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). On April 23, 2020, the Company entered into a promissory note with Silicon Valley Bank evidencing an unsecured loan in the aggregate amount of approximately $351,000 under the PPP (the “PPP Loan”). The interest rate on the PPP Loan was 1.00% and the term was two years, with a deferral of payments for ten months from the date of origination. On May 7, 2020, the Company elected to repay the PPP loan in full until further guidance was provided by the SBA on the loan origination and eligibility requirements. On May 27, 2020, the Company entered into a promissory note with Silicon Valley Bank evidencing an unsecured loan in the aggregate amount of approximately $351,000, with all other terms the same as the prior loan. Beginning eleven months from the date of the PPP Loan, the Company was required to make monthly payments of principal and interest. The promissory note evidencing the PPP Loan contained customary events of default relating to, among other things, payment defaults or breaching the terms of the PPP Loan documents. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from the Company, or filing suit and obtaining judgment against the Company. The PPP Loan was repayable at any time by the Company without prepayment penalties.

 

Funds from the PPP Loan could be used for payroll costs, costs used to continue group health care benefits, mortgage payments, rent, utilities, and interest on other debt obligations, if those debt obligations were incurred before February 15, 2020. The Company used the entire PPP Loan amount for qualifying expenses.

 

Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loan granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for qualifying expenses. On May 28, 2021, the Company received full loan forgiveness for obligations related to the PPP loan. The Company accounted for the PPP loan as debt, and the loan forgiveness was accounted for as a debt extinguishment. The amount of loan and interest forgiven is recognized as a gain upon debt extinguishment and is reported in the accompanying condensed consolidated statement of operations and comprehensive loss for the three months and six months ended June 30, 2021.

 

12

 

 

Movano Inc.

Notes to Condensed Consolidated Financial Statements

For the three months and six months ended June 30, 2021 and 2020

(Unaudited)

 

NOTE 8 – CONVERTIBLE PROMISSORY NOTES

 

On various dates between February 2020 and December 2020, the Company received total proceeds of approximately $11.8 million from the issuance of subordinated convertible promissory notes (“Convertible Notes”) to investors. The Convertible Notes accrued interest at 4% per year and the principal balance of the Convertible Notes, plus all accrued interest would have been due on February 28, 2022 (the Maturity Date).

 

The Convertible Notes were convertible upon the occurrence of certain events, including upon a change in control or a next equity financing. The conversion features are described as follows:

 

Conversion Event   Description   Conversion Price
Automatic Conversion – Next Qualified Equity Financing   Upon the closing of a Next Qualified Equity Financing (defined as greater than $5,000,000), the Convertible Notes are converted into shares issued equal to the outstanding balance divided by the Conversion Price.   An amount equal to the lower of (i) 80% of the lowest per-share selling price of such stock sold by the Company at the Next Qualified Equity Financing or (ii) the implied per share price determined by dividing $60,000,000 by the total number of Common Stock Equivalents (defined as fully diluted common shares for all outstanding securities, excluding common shares reserved for issuance or exercise of options or grants in the future) immediately prior to Next Qualified Equity Financing closing.
         
Automatic Conversion – Change of Control (defined as consolidation or merger of the Company or transfer of a majority of share ownership or disposition of substantially all assets of the Company)   If at any time before payment or conversion of the balance, the Company effects a Change of Control, all of the balance outstanding immediately prior to such Change of Control will automatically convert into the most senior series of Preferred Stock outstanding immediately prior to such Change of Control at the Conversion Price.   An amount equal to the implied per share price determined by dividing $60,000,000 by the total number of Common Stock Equivalents immediately prior to such Change of Control.
         
Automatic Conversion – Maturity Date   If the Company has not paid or otherwise converted the entire balance before the Maturity Date, then on the Maturity Date, all of the balance then outstanding will automatically convert into the most senior series of Preferred Stock outstanding as of the Maturity Date at the Conversion Price then in effect.   An amount equal to the implied per share price determined by dividing $60,000,000 by the total number of Common Stock Equivalents as of the Maturity Date.
         
Automatic Conversion – IPO   If at any time before payment or conversion of the balance, the Company consummates an IPO, all of the balance outstanding immediately prior to the IPO will automatically convert into Common Stock at the Conversion Price.   An amount equal to the lower of (i) 80% of the lowest per-share selling price of the Common Stock sold by the Company in an IPO or (ii) the implied per share price determined by dividing $60,000,000 by the total number of Common Stock Equivalents immediately prior to closing of an IPO.

 

13

 

 

Movano Inc.

Notes to Condensed Consolidated Financial Statements

For the three months and six months ended June 30, 2021 and 2020

(Unaudited)

 

Conversion Event   Description   Conversion Price
Optional Conversion   If at any time while the Convertible Notes are still outstanding the Company sells stock in a single transaction or in a series of related transactions that does not constitute a Next Qualified Equity Financing (and thus is defined as a Non-qualified Financing), then, at the closing of the Nonqualified Financing, the balance then outstanding may be converted, at the option of the holder, into that number of shares of Non-qualified Preferred Stock (preferred stock sold in the Non-qualified Financing) determined by dividing (i) the balance by (ii) the Conversion Price then in effect.   An amount equal to the lowest per share selling price of Nonqualified Preferred Stock sold by the Company for new cash investment in the Non-Qualified Financing.

 

As part of the Convertible Note financing, the Company agreed to issue subordinated convertible promissory notes to nonemployees in exchange for services totaling $747,000.

 

As of December 31, 2020, Convertible Notes totaling approximately $247,000 were issued to nonemployees in exchange for services. As of December 31, 2020, future services of $500,000 of the original $747,000 had not been fully completed. A portion of those services that had been completed were recorded as a component of other noncurrent liabilities of $150,000 on the condensed consolidated balance sheet at December 31, 2020.

 

During the three months ended March 31, 2021, additional nonemployee services of $50,000 were completed, which were recorded as a component of other noncurrent liabilities. In connection with the IPO, a Convertible Note for $500,000 was issued for nonemployee services and the $300,000 of the nonemployee services that remained to be completed was recorded in prepaid assets and other current expenses on the condensed consolidated balance sheet. The Company calculated a BCF of approximately $500,000 upon the issuance of this Convertible Note. During the three and six months ended June 30, 2020, nonemployee services of services of $50,000 were completed.

 

In connection with the Convertible Notes, the Company issued 10,000 and 204,500 warrants to purchase common stock, to a noteholder and its brokers, respectively. The warrants have a five-year life and are initially exercisable into common stock at $2.97 per share. (See Note 11 – Common Stock Warrants for fair value computation and discussion of the change in the exercise price). During March 2021, 42,220 of these warrants to purchase common stock were cancelled.

 

Issuance costs and commissions to brokers to obtain the Convertible Notes were recorded as a debt discount in the amount of approximately $83,000 and $612,000, respectively.

 

The Company determined that the terms that would result in Convertible Notes automatically converting at (i) 80% of the lowest per-share selling price of the stock sold by the Company in the Next Qualified Equity Financing or (ii) 80% of the lowest per-share selling price of the Conversion Stock sold by the Company in an IPO are deemed a redemption feature. The Company also concluded that those redemption features require bifurcation from the Convertible Notes and subsequent accounting in the same manner as a freestanding derivative. Accordingly, subsequent changes in the fair value of these redemption features are measured at each reporting period and recognized in the condensed consolidated statement of operations and comprehensive loss.

 

The sum of the fair value of the warrants, the fair value of the embedded redemption derivative liability, issuance costs, BCF and commission payments for the Convertible Notes were recorded as debt discounts to be amortized to interest expense over the respective term using the effective interest method. During the three and six months ended June 30, 2021, the Company recognized interest expense of approximately $0 and $0.8 million from the accretion of those debt discounts, respectively. During the three and six months ended June 30, 2020, the Company recognized interest expense of approximately $0.1 million and $0.1 million, respectively, from the accretion of those debt discounts.

 

14

 

 

Movano Inc.

Notes to Condensed Consolidated Financial Statements

For the three months and six months ended June 30, 2021 and 2020

(Unaudited)

 

The Convertible Notes automatically converted upon the closing of the IPO at the implied per share price determined by dividing $60,000,000 by the total number of Common Stock Equivalents immediately prior to the closing of the IPO. The outstanding principal ($12.5 million) and interest due ($0.4 million) under the Convertible Notes, in an aggregate amount of $12.9 million, was converted into 5,015,494 shares of the Company’s common stock at the implied per share conversion of $2.5736. The carrying value of the Convertible Notes was credited to common stock and additional paid-in capital on the condensed consolidated balance sheet. The remaining unamortized discount of $0.4 million was recorded to additional paid-in capital and no gain or loss was recognized on the conversion. The remaining unamortized discount related to the BCF of $0.5 million was recognized immediately as interest expense in the condensed consolidated statement of operations and comprehensive loss.

 

Derivative Liability

 

As described above, the redemption provisions embedded in the Convertible Notes required bifurcation and measurement at fair value as a derivative. The fair value of the Convertible Note embedded redemption derivative liability was calculated by determining the value of the debt component of the Convertible Notes at various conversion or maturity dates using a Probability Weighted Expected Return valuation method. The fair value calculation placed greater probability on the occurrence of the conversion or the maturity date scenario, with little or no weight given to other scenarios. The fair value of the embedded redemption derivative liability is significantly influenced by the discount rate, the remaining term to maturity and the Company’s assumptions related to the probability of a qualified financing or no financing prior to maturity. The Financing Date is the estimated date of an automatic conversion as the result of a Next Qualified Equity Financing or an IPO.

 

The Company estimated the fair value of the embedded redemption derivative liability using the following weighed average assumptions as of December 31, 2020:

 

    Financing Date  

Maturity Date

Probability of Conversion at Financing   80%   20%
Expected Term   March 2021   February 2022
Conversion Ratio   1.25  
N/A
Discount Rate   1.68% to 11.67%  
N/A

 

The Company estimated the fair value of the embedded redemption derivative liability using the following weighed average assumptions as of June 30, 2020:

 

    Financing Date   Maturity Date
Probability of Conversion at Financing   80%   20%
Expected Term   March 2021    February 2022
Conversion Ratio   1.25  
N/A
Discount Rate   6.18% to 11.67%  
N/A

 

The embedded redemption derivative liability no longer had significant value as of the date of the Company’s IPO since the conversion of the Convertible Notes occurred via a redemption feature that was not bifurcated as a derivative. Upon the conversion of the Convertible Notes at the IPO, the Company recorded a final change in the fair value of the derivative liability of $0.1 million in the condensed consolidated statement of operations and comprehensive loss, and the derivative liability was extinguished.

 

The changes in the fair value of the derivative liability for the six months ended June 30, 2021 and for the three and six months ended June 30, 2020 were as follows:

 

    December 31,
2020
    Fair Value at
issuance date
    Change in
fair value
    June 30,
2021
 
Derivative liability   $ 121      
      (121 )   $
 

 

    March 31,
2020
    Fair Value at
issuance date
    Change in
fair value
    June 30,
2020
 
Derivative liability   $ 103       517       (167 )   $ 453  

 

    December 31,
2019
    Fair Value at
issuance date
    Change in
fair value
    June 30,
2020
 
Derivative liability   $
      588       (135 )   $ 453  

 

15

 

 

Movano Inc.

Notes to Condensed Consolidated Financial Statements

For the three months and six months ended June 30, 2021 and 2020

(Unaudited)

 

Note 9 – REDEEMABLE Convertible Preferred Stock

 

On March 28, 2019, the Company’s Second Amended and Restated Certificate of Incorporation was filed with the Delaware Secretary of State which (i) increased the number of shares of common stock the Company is authorized to issue to 22,069,652; (ii) increased the number of shares of preferred stock the Company was authorized to issue to 7,930,348, of which 2,692,253 shares were designated as Series A preferred stock and 5,238,095 shares were designated as Series B preferred stock; (iii) amended and set a fixed conversion price of Series A preferred stock to $1.40; and (iv) extended the IPO Commitment Date from April 1, 2020 to no later than March 31, 2021.

 

The Company assessed the accounting treatment of the amendment of the Certificate of Incorporation related to the Series A preferred stock and determined that the amendment is a modification for accounting purposes. After considering the nature of the changes as a result of the amendment, the Company determined the modification of the Series A preferred stock did not have a significant impact on the financial statements.

 

On various dates from March 2019 through August 2019, the Company issued 4,942,319 shares of Series B preferred stock at $2.10 per share for net cash proceeds of $9.3 million. The Series B preferred stock has a liquidation preference of an amount equal to the greater of (i) two times the original issue price of $2.10 per share (adjusted for stock splits, stock dividends, stock combination, recapitalizations and certain similar events) plus any declared and unpaid dividends thereon or (ii) the amount per share that would have been received by the holders had the Series B preferred stock been converted into common stock immediately prior to such liquidation, dissolution or winding-up plus any declared and unpaid dividends thereon, pari passu with the Series A preferred stock and in preference to any distributions to the holders of common stock.

 

The Series B preferred stock was measured and recorded at the transaction price net of issuance costs, resulting in an initial value of $9.3 million. The accretion to the carrying value of the Series B preferred stock was recorded as a charge to additional paid in capital. The accumulated accretion as of the IPO date was $11.5 million, which resulted in an adjusted Series B preferred stock carrying value of $20.8 million.

 

The accretion to the carrying value of the Series A preferred stock was recorded as a charge to additional paid in capital. The accumulated accretion as of the IPO date was $8.2 million, which resulted in an adjusted Series A preferred stock carrying value of $14.5 million.

 

Upon the IPO, the redeemable convertible preferred stock converted in to 11,436,956 shares of common stock and no shares of redeemable convertible preferred stock remain outstanding as of June 30, 2021.

 

On March 24, 2021, the Company’s Third Amended and Restated Certificate of Incorporation was filed with the Delaware Secretary of State which (i) eliminated the Company’s Series A and Series B preferred stock, (ii) increased the authorized number of shares of common stock to 75,000,000 and (iii) authorized 5,000,000 shares of preferred stock at par value of $0.0001 per share. The significant rights and preferences of the preferred stock will be established by the Company’s Board of Directors (the “Board”) upon issuance of any such series of preferred stock in the future.

 

16

 

 

Movano Inc.

Notes to Condensed Consolidated Financial Statements

For the three months and six months ended June 30, 2021 and 2020

(Unaudited)

 

Note 10– Common Stock

 

As of June 30, 2021 and December 31, 2020, the Company was authorized to issue 75,000,000 and 22,069,652 shares of common stock with a par value of $0.0001 per share, and 32,772,060 and 6,393,069 shares were issued and outstanding, respectively.

 

Conversion of Redeemable Convertible Preferred Stock

 

In connection with the closing of the IPO, on March 25, 2021, the outstanding shares of the Company’s Series A and Series B redeemable convertible preferred stock was converted into 11,436,956 shares of the Company’s common stock. The holders of the common stock with respect to the conversion shares are subject to lock-up requirements with respect to the conversion shares until September 25, 2021.

 

Conversion of Convertible Notes

 

In connection with the funding of the IPO, on March 25, 2021, the principal and interest due under the Company’s Convertible Notes, in an aggregate amount of $12.9 million, was converted into 5,015,494 shares of the Company’s common stock. The purchasers of the convertible notes are subject to lock-up requirements with respect to the conversion shares until September 25, 2021.

 

Third Amended and Restated Certificate of Incorporation

 

In connection with the IPO, the Third Amended and Restated Certificate of Incorporation became effective and authorized 75,000,000 shares of common stock at par value of $0.0001 per share. Dividends may be declared and paid on the common stock when and if determined by the Board of Directors. Upon liquidation, each common stockholder is entitled to receive an equal portion of the distribution. Each holder of common stock will have one vote in respect of each share of common stock held. The rights and privileges listed above will be subject to preferential rights of any then outstanding shares of preferred stock.

 

At the IPO date, the Company issued 17,000 shares of common stock for nonemployee services valued at $85,000.

 

Common stock reserved for future issuance as June 30, 2021 is summarized as follows:

 

Warrants to purchase common stock     1,938,143  
Stock options outstanding     4,717,637  
Stock options available for future grants     990,322  
Total     7,646,102  

 

17

 

 

Movano Inc.

Notes to Condensed Consolidated Financial Statements

For the three months and six months ended June 30, 2021 and 2020

(Unaudited)

 

Restricted Stock Purchase Agreements

 

In 2018, 400,000 shares were issued to the Company’s founder at inception pursuant to a Restricted Stock Purchase Agreement. The Restricted Stock Purchase Agreement stipulates that in the event of the voluntary or involuntary termination of the Company’s founder’s continuous service status for any reason (including death or disability), with or without cause, the Company or its assignees(s) shall have an option (“Repurchase Option”) to repurchase all or any portion of the shares held by the Purchaser as of the termination date which have not yet been released from the Company’s Repurchase Option at the original purchase price of $0.0125 per share. Shares are to be released from the Repurchase Option over four years. The initial 12/48ths of the shares were released on January 30, 2019, and an additional 1/48th of the shares are being released monthly thereafter. As of June 30, 2021 and December 31, 2020, 58,333 and 108,333 of the shares issued to the Company’s founder remain subject to the Repurchase Option, respectively. These shares were originally purchased by the Company’s founder at $0.0125 per share.

 

In 2018, 3,640,000 shares were also issued pursuant to a Restricted Stock Purchase Agreement. The holders of these shares are considered related parties of the Company because the holders are directly related either to the founder or to the legal counsel of the Company. The same terms described above apply to these issuances. As of June 30, 2021 and December 31, 2020, 530,834 and 985,834 of the shares issued to these holders remain subject to the Repurchase Option, respectively. These shares were originally purchased by the holders at $0.0125 per share.

 

Early Exercised Stock Option Liability.

 

During the three and six months ended June 30, 2021, none and 50,000 shares, respectively, were issued upon the early exercise of common stock options. The Exercise Notice (Early Exercise) Agreement states that the Company has the option to repurchase all or a portion of the unvested shares in the event of the separation of the holder from service to the Company. The shares continue to vest in accordance with the original vesting schedules of the former option agreements. There were no early exercises during the three and six months ended June 30, 2020.

 

As of June 30, 2021 and December 31, 2020, the Company has recorded a repurchase liability for approximately $370,000 and $417,000 for 749,272 and 856,814 shares that remain unvested. The weighted average remaining vesting period is approximately 2.5 years.

 

Note 11 – Common Stock Warrants

 

Preferred A Placement Warrants

 

On February 22, 2018, the Company entered into an agreement with NSC, pursuant to which the Company engaged NSC as the Company’s exclusive financial advisor and placement agent in connection with an offering or series of offerings of Company securities. Specifically, NSC was the placement agent in connection with the sale of its Series A preferred stock.

 

In connection with the closing of Series A preferred stock offering, the Company issued warrants (“Preferred A Placement Warrants”) to purchase a total of 133,648 shares of its common stock to NSC on March 14, 2018 and April 23, 2018. On June 1, 2018, the Preferred A Placement Warrants were reassigned among NSC and three individuals at Liquid Venture Partners (“LVP”). The Preferred A Placement Warrants have a term of five years and the exercise price is equal to the conversion price of Series A preferred stock upon its conversion. The Preferred A Placement Warrants included an adjustment provision pursuant to which upon completion of the IPO, and the conversion of the Series A preferred stock in connection therewith, the number of shares issuable upon exercise of the warrants was adjusted to be equal to 10% of the aggregate number of common stock shares issued by the Company upon conversion of 1,336,485 shares of Series A preferred stock (the “Preferred A Adjustment Provision”).

 

The Second Amended and Restated Certificate of Incorporation that was approved on March 28, 2019 amended and fixed the conversion price of the Series A preferred stock at $1.40. As a result, on August 28, 2019, the Company elected to amend and reissue the Preferred A Placement Warrants, thereby reducing the exercise price to $1.40 and increasing the number of warrant shares by 109,200 to a total of 242,847 warrant shares.

 

18

 

 

Movano Inc.

Notes to Condensed Consolidated Financial Statements

For the three months and six months ended June 30, 2021 and 2020

(Unaudited)

 

In connection with the IPO, pursuant to the Preferred A Adjustment Provision variable settlement provision, the number of shares of common stock subject to the Preferred A Placement Warrants settled, resulting in an additional 50,195 shares of common stock.

 

Preferred A Lead Investor Warrants

 

During February 2021, a total of 52,500 warrants for common stock were issued to advisors to the Company at a weighted average exercise price of $0.0125 per share. The resulting fair value of the warrants for common stock is not significant.

 

Preferred B Placement Warrants

 

On April 16, 2019, in connection with the Series B preferred stock offering, the Company issued warrants (“Preferred B Placement Warrants”) to purchase 414,270 shares of its common stock to NSC, Newbridge Securities Corporation, and five individuals at LVP. The Preferred B Placement Warrants have a term of five years and their exercise price is equal to $2.10, the conversion price of Series B preferred stock. The Preferred B Placement Warrants included an adjustment provision pursuant to which upon completion of the IPO, and the conversion of the Series B preferred stock in connection therewith, the number of shares issuable upon exercise of the warrants was adjusted to be equal to 10% of the aggregate number of common stock shares issued by the Company upon conversion of 4,142,270 shares of Series B preferred stock (the “Preferred B Adjustment Provision”).

 

In connection with the IPO, pursuant to the Preferred B Adjustment Provision variable settlement provision, the number of shares of common stock subject to the Preferred B Placement Warrants settled, resulting in an additional 49,528 shares of common stock.

 

Convertible Note Placement Warrants

 

In connection with the Convertible Notes, the Company issued 10,000 and 204,500 warrants to purchase common stock, to a noteholder and its brokers, respectively. The warrants have a five-year life and are initially exercisable into common stock at $2.97 per share with the warrants ultimately being exercisable into common stock at the final Conversion Price of the Convertible Notes. When the Convertible Notes converted at the IPO date as described in Note 9, the exercise price of the warrants was adjusted to equal the Conversion Price, which is $2.57. During March 2021, 42,220 of these warrants to purchase common stock were cancelled.

 

Underwriter Warrants

 

In connection with the IPO, the Company issued the underwriter a warrant to purchase shares of common stock equal to 9.79% of the shares of common stock sold in the IPO or 956,973 shares. The warrant is exercisable at $6.00 per share and has a 5-year term. The warrant is subject to a six-month lock-up period. Additionally, the underwriter has contractually agreed that it will not sell, transfer, assign, pledge, or hypothecate this warrant or the securities underlying this warrant, nor will it engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of this warrant or the underlying securities for a period of 540 days (approximately 18 months) from the IPO. 

 

19

 

 

Movano Inc.

Notes to Condensed Consolidated Financial Statements

For the three months and six months ended June 30, 2021 and 2020

(Unaudited)

 

The following is a summary of the Company’s warrant activity for the six months ended June 30, 2021:

 

Warrant Issuance   Issuance     Exercise
Price
    Outstanding,
December 31,
2020
    Granted     Exercised     Canceled/
Expired
    Variable Settlement Provision Adjustment     Outstanding,
June 30,
2021
    Expiration  
Preferred A Placement Warrants     March and April 2018 and August 2019     $ 1.40       242,847      
     
     
      50,195       293,042       March and April 2023  
Preferred A Lead Investor Warrants     February 2021     $ 0.0125      
      52,500      
     
     
      52,500       March 2023  
Preferred B Placement Warrants     April 2019     $ 2.10       414,270      
     
     
      49,528       463,798       April 2024  
Convertible Notes Placement Warrants     August 2020     $ 2.57       214,050      
     
      (42,220 )    
      171,830       August 2025  
Underwriter Warrants     March 2021     $ 6.00      
      956,973      
     
     
      956,973       March 2026  
                      871,167       1,009,473      
      (42,220 )     99,723       1,938,143          

 

Warrants Classified as Liabilities

 

Preferred A Placement Warrants and Preferred B Placement Warrants

 

The Preferred A Placement Warrants and Preferred B Placement Warrants were initially classified as a derivative liability because their variable terms did not qualify these as being indexed to the Company’s own common stock and will be measured at fair value on a recurring basis.

  

As a result of the conversion of the Preferred Stock into common stock in connection with the IPO, and the related impact of the Preferred A Adjustment Provision and the Preferred B Adjustment Provision, the number of warrant shares that are convertible is no longer variable. Accordingly, the Preferred A Placement Warrants and Preferred B Placement Warrants were determined to be indexed to the Company’s own common stock and will no longer be measured at fair value on a recurring basis. Instead the Preferred A Placement Warrants and the Preferred B Placement Warrants were determined to be equity instruments, and the liability was recorded at fair value with the change in fair value recorded in the condensed consolidated statement of operations and comprehensive loss and reclassified to additional paid-in capital at their estimated fair value at the IPO date.

 

Convertible Notes Placement Warrants

 

The Convertible Notes Placement Warrants were classified as a derivative liability because the exercise price was variable, thus these did not qualify as being indexed to the Company’s own common stock and were measured at fair value on a recurring basis.

 

20

 

 

Movano Inc.

Notes to Condensed Consolidated Financial Statements

For the three months and six months ended June 30, 2021 and 2020

(Unaudited)

 

As a result of the conversion of the Convertible Notes into common stock in connection with the IPO, the exercise price is no longer variable. Accordingly, the Convertible Notes Placement Warrants were determined to be indexed to the Company’s own common stock and will no longer be measured at fair value on a recurring basis. Instead the Convertible Notes Placement Warrants were determined to be equity instruments, and the liability was recorded at fair value with the change in fair value recorded in the condensed consolidated statement of operations and comprehensive loss and reclassified to additional paid-in capital at their estimated fair value at the IPO date.

 

Estimated Fair Value of Outstanding Warrants Classified as Liabilities

 

The estimated fair value of outstanding warrants classified as liabilities is determined at each balance sheet date. Any decrease or increase in the estimated fair value of the warrant liability since the most recent balance sheet date is recorded in the condensed consolidated statements of operations and comprehensive loss as a change in fair value of warrant liability.

 

There were no warrants classified as liabilities outstanding during the three months ended June 30, 2021.

 

The changes in fair value of the outstanding warrants classified as liabilities for the six months ended June 30, 2021 were as follows (in thousands):

 

Warrant Issuance   Warrant liability,
December 31,
2020
    Fair value
of warrants granted
    Fair value
of warrants exercised
    Change in fair
value of warrants
    Reclassified to additional
paid-in
capital
    Warrant liability,
June 30,
2021
 
Preferred A Placement Warrants   $ 518     $
    $
    $ 575     $ (1,093 )   $
 
Preferred B Placement Warrants     708      
     
      800       (1,508 )   $
 
Convertible Notes Placement Warrants     323      
     
      206       (529 )   $
 
    $ 1,549     $
    $
    $ 1,581     $ (3,130 )   $
 

  

The changes in fair value of the warrant liability for the six months ended June 30, 2020 were as follows (in thousands):

 

Warrant Issuance   Warrant liability,
December 31,
2019
    Fair value of
warrants granted
    Fair value of
warrants exercised
    Change in fair
value of warrants
    Warrant liability,
June 30,
2020
 
Preferred A Placement Warrants   $ 12     $
    $
    $ (1 )   $ 11  
Preferred B Placement Warrants     20      
     
      (8 )     12  
    $ 32     $
    $
    $ (9 )   $ 23  

 

21

 

 

Movano Inc.

Notes to Condensed Consolidated Financial Statements

For the three months and six months ended June 30, 2021 and 2020

(Unaudited)

 

The fair values of the outstanding warrants accounted for as liabilities at the IPO date are calculated using the Black-Scholes option pricing model with the following assumptions:

 

    Black-Scholes Fair Value Assumptions at IPO Date  
Warrant Issuance   Dividend
Yield
    Expected
Volatility
    Risk-Free
Interest
Rate
    Expected
Life
 
Preferred A Placement Warrants    
%     59.21 %     0.14 %     2.0 years  
Preferred B Placement Warrants    
%     58.51 %     0.30 %     3.0 years  
Convertible Note Placement Warrants    
%     52.28 %     0.82 %     4.4 years  

 

Upon the conversion of the redeemable convertible preferred stock and the Convertible Notes into common stock at the IPO date, the estimated fair value of the outstanding warrants accounted for as liabilities of $3.1 million was reclassified to additional paid-in capital.

 

The fair values of the outstanding warrants accounted for as liabilities at December 31, 2020 are calculated using the Black-Scholes option pricing model with the following assumptions:

 

    Black-Scholes Fair Value Assumptions - December 31, 2020  
Warrant Issuance   Dividend
Yield
    Expected
Volatility
    Risk-Free
Interest
Rate
    Expected
Life
 
Preferred A Placement Warrants    
%     67.75 %     0.13 %   2.2 years  
Preferred B Placement Warrants    
%     55.76 %     0.17 %   3.3 years  
Convertible Note Placement Warrants    
%     52.93 %     0.36 %   4.7 years  

 

The fair values of the outstanding warrants accounted for as liabilities at June 30, 2020 are calculated using the Black-Scholes option pricing model with the following assumptions:

 

   

Black-Scholes Fair Value Assumptions – June 30, 2020

 
Warrant Issuance   Dividend
Yield
    Expected
Volatility
    Risk-Free
Interest
Rate
    Expected
Life
 
Preferred A Placement Warrants    
%     50.26 %     0.18 %     2.7 years  
Preferred B Placement Warrants    
%     48.15 %     0.24 %      3.8 years  

  

22

 

 

Movano Inc.

Notes to Condensed Consolidated Financial Statements

For the three months and six months ended June 30, 2021 and 2020

(Unaudited)

 

Warrants Classified as Equity

 

Certain warrants are classified as equity instruments since they do not meet the characteristics of a liability or a derivative and are recorded at fair value on the date of issuance using the Black-Scholes option pricing model with the following assumptions. The fair value as determined at the issuance date is recorded as an issuance cost of the related stock. Those warrants and the assumptions used to calculate the fair value at issuance are as follows for the warrants issued during the six months ended June 30, 2021. There were no warrants issued during the three months ended June 30, 2021, nor during the three and six months ended June 30, 2020.

 

    Black-Scholes Fair Value Assumptions
Warrant Issuance   Issuance
Date
  Fair
Value
    Dividend
Yield
    Expected
Volatility
    Risk-Free
Interest
Rate
    Expected
Life
Underwriter Warrants   March 2021   $ 2,349      
%     52.58 %     0.82 %   5.0 years

 

Note 12 – Stock-based Compensation

 

2019 Equity Incentive Plan

 

Effective as of November 18, 2019, the Company adopted the 2019 Omnibus Incentive Plan (“2019 Plan”) administered by the Board. The 2019 Plan provides for the issuance of incentive stock options, non-statutory stock options, and restricted stock awards, for the purchase of up to a total of 4,000,000 shares of the Company’s common stock to employees, directors, and consultants and replaces the previous plan. The Board or a committee of the Board has the authority to determine the amount, type, and terms of each award. The options granted under the 2019 Plan generally have a contractual term of ten years and a vesting term of four years with a one-year cliff. The exercise price for options granted under the 2019 Plan must generally 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. The incentive stock options granted under the 2019 Plan to 10% or greater stockholders must have an exercise price at least equal to 110% of the fair value of the Company’s common stock at the date of grant, as determined by the Board, and have a contractual term of ten years.

 

On September 30, 2020, the Board approved an increase in the aggregate number of shares of common stock that may be issued pursuant to the 2019 Plan from 4,000,000 to 4,500,000.

 

On December 7, 2020, the Board approved an increase in the aggregate number of shares of common stock that may be issued pursuant to the 2019 Plan from 4,500,000 to 6,000,000. 

 

In connection with the closing of the IPO, effective as of March 25, 2021 the 2019 Plan was amended and restated as a result of which the aggregate number of shares of common stock that may be issued pursuant to the 2019 Plan was increased from 6,000,000 to 7,400,000.

 

As of June 30, 2021, the Company had 990,322 shares available for future grant under the 2019 Plan.

 

23

 

 

Movano Inc.

Notes to Condensed Consolidated Financial Statements

For the three months and six months ended June 30, 2021 and 2020

(Unaudited)

 

Stock Options

 

Stock option activity for the six months ended June 30, 2021 was as follows (in thousands, except share, per share, and remaining life data):

 

    Number of Options     Weighted Average Exercise Price     Weighted Average Remaining Life   Intrinsic Value  
Outstanding at December 31, 2020     3,188,011     $ 0.66     9.0 years   $ 8,155  
Granted     1,810,000     $ 3.74    
 
   
 
 
Exercised     (134,541 )   $ 0.56    
 
   
 
 
Cancelled     (145,833 )   $ 0.59    
 
   
 
 
Outstanding at June 30, 2021     4,717,637     $ 1.84     8.9 years   $ 15,457  
                             
Exercisable as of June 30, 2021     1,757,533     $ 0.49     8.4 years   $ 8,078  
                             
Vested and expected to vest as of June 30, 2021     4,667,437     $ 1.86     9.0 years   $ 15,221  

 

The weighted-average grant date fair value of options granted during the six months ended June 30, 2021 and 2020 was $2.80 and $0.21. During the six months ended June 30, 2021 and 2020, 134,531 and no options were exercised for proceeds of $76,000 and $0, respectively. The fair value of the 402,939 and 450,840 options that vested during the six months ended June 30, 2021 and 2020 was approximately $0.3 million and $0.1 million, respectively.

 

The Company estimated the fair value of stock options using the Black-Scholes option pricing model. The fair value of the stock options was estimated using the following weighted average assumptions for the six months ended June 30, 2021 and 2020.

 

    Six Months Ended
June 30,
 
    2021     2020  
             
Dividend yield    
%    
%
Expected volatility     67.61 %     61.93 %
Risk-free interest rate     0.74 %     1.48 %
Expected life     6.05 years       5.57 years  

 

Dividend Rate—The expected dividend rate was assumed to be zero, as the Company had not previously paid dividends on common stock and has no current plans to do so.

 

Expected Volatility—The expected volatility was derived from the historical stock volatilities of several public companies within the Company’s industry that the Company considers to be comparable to the business over a period equivalent to the expected term of the stock option grants.

 

Risk-Free Interest Rate—The risk-free interest rate is based on the interest yield in effect at the date of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the option’s expected term.

 

Expected Term—The expected term represents the period that the Company’s stock options are expected to be outstanding. The expected term of option grants that are considered to be “plain vanilla” are determined using the simplified method. The simplified method deems the term to be the average of the time-to-vesting and the contractual life of the options. For other option grants not considered to be “plain vanilla,” the Company determined the expected term to be the contractual life of the options.

 

24

 

 

Movano Inc.

Notes to Condensed Consolidated Financial Statements

For the three months and six months ended June 30, 2021 and 2020

(Unaudited)

 

Forfeiture Rate—The Company made the one-time policy election to recognize forfeitures when they occur.

 

The Company has recorded stock-based compensation expense for the three and six months ended June 30, 2021 and 2020 related to the issuance of stock option awards to employees and nonemployees in the condensed consolidated statement of operations and comprehensive loss as follows:

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2021     2020     2021     2020  
Research and development   $ 171     $ 12     $ 250     $ 25  
General and administrative     169       29       445       65  
    $ 340     $ 41     $ 695     $ 90  

 

As of June 30, 2021, unamortized compensation expense related to unvested stock options was approximately $7.2 million, which is expected to be recognized over a weighted average period of 3.0 years.

 

Note 13 – Commitments and Contingencies

 

Operating Leases

 

As of June 30, 2021, the Company had two office leases. One lease, for facility space in Dublin, California expires in September 2021, and future minimum lease payments for that lease during 2021 are approximately $13,800.

 

On April 15, 2021, the Company executed a lease agreement for corporate office space. The lease commenced on May 14, 2021 when the improvements were completed by the landlord and the Company had access to the facility. The lease term is 40 months, and the base rent is approximately $14,000 per month for the first twelve months, with subsequent escalation provisions for future months. The Company paid a security deposit of approximately $47,000.

 

Future minimum lease payments for this new corporate office space lease are as follows as of June 30, 2021:

 

Remainder of 2021   $ 51  
2022     173  
2023     179  
2024     138  
Total   $ 541  

 

Rent expense for the three months ended June 30, 2021 and 2020 was $34,000 and $28,000, respectively. Rent expense for the six months ended June 30, 2021 and 2020 was $48,000 and $56,000, respectively.

 

Litigation

 

From time to time, the Company may become involved in various litigation and administrative proceedings relating to claims arising from its operations in the normal course of business. Management is not currently aware of any matters that may have a material adverse impact on the Company’s business, financial position, results of operations or cash flows.

 

Indemnification

 

The Company enters into standard indemnification agreements in the ordinary course of business. Pursuant to these arrangements, the Company indemnifies, holds harmless and agrees to reimburse the indemnified parties for losses suffered or incurred by the indemnified party, in connection with any trade secret, copyright, patent or other intellectual property infringement claim by any third party with respect to its technology. The term of these indemnification agreements is generally perpetual after the execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these agreements is not determinable because it involves claims that may be made against the Company in the future, but have not yet been made. The Company has not incurred costs to defend lawsuits or settle claims related to these indemnification agreements.

 

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Movano Inc.

Notes to Condensed Consolidated Financial Statements

For the three months and six months ended June 30, 2021 and 2020

(Unaudited)

 

The Company has entered into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct of the individual.

 

No amounts associated with such indemnifications have been recorded as of June 30, 2021.

 

Note 14 – NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS

 

The following table computes the computation of the basic and diluted net loss per share attributable to common stockholders during the three and six months ended June 30, 2021 and 2020 is as follows (in thousands, except share and per share data):

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2021     2020     2021     2020  
Numerator:                        
Net loss   $ (4,687 )   $ (2,739 )   $ (10,295 )   $ (4,764 )
Accretion and dividends on redeemable convertible preferred stock    
-
      (2,118 )     (2,489 )     (4,074 )
Net loss attributable to common stockholders   $ (4,687 )   $ (4,857 )   $ (12,784 )   $ (8,838 )
Denominator:                                
Weighted-average common shares outstanding     32,017,335       2,775,784       20,099,402       2,649,996  
                                 
Net loss per share attributable to common stockholders, basic and diluted   $ (0.15 )   $ (1.75 )   $ (0.64 )   $ (3.34 )

 

The potential shares of common stock that were excluded from the computation of diluted net loss per share attributable to common stockholders for the three and six months ended June 30, 2021 and 2020 because including them would have been antidilutive are as follows:

 

    June 30,  
    2021     2020  
Shares of redeemable convertible preferred stock    
      10,998,700  
Non-vested shares under restricted stock grants     589,167       1,599,167  
Shares related to convertible promissory notes    
      2,847,221  
Shares subject to options to purchase common stock     4,717,637       3,062,478  
Shares subject to warrants to purchase common stock     1,938,143       960,117  
Total     7,244,947       19,467,683  

 

For the three and six months ended June 30, 2021 and 2020, performance based option awards for 50,200 shares of common stock, respectively, are not included in in the table above or considered in the calculation of diluted earnings per share until the performance conditions of the option award are considered probable by the Company.

 

Note 15 – Subsequent Events

 

Management of the Company evaluated events that have occurred after the balance sheet dates through the date these condensed consolidated financial statements were issued. Based upon the review, management did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the condensed consolidated financial statements.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

As used in this Quarterly Report on Form 10-Q (this “Form 10-Q”), unless the context otherwise requires, the terms “we,” “us,” “our,” “Movano” and the “Company” refer to Movano Inc., a Delaware corporation. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our historical financial statements and related notes thereto in this Form 10-Q. This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are intended to be covered by the “safe harbor” created by those sections. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of forward-looking terms such as “believe,” “expect,” “may,” “will,” “should,” “could,” “seek,” “intend,” “plan,” “estimate,” “anticipate” or other comparable terms. All statements other than statements of historical facts included in this Form 10-Q regarding our strategies, prospects, financial condition, operations, costs, plans and objectives are forward-looking statements. Examples of forward-looking statements include, among others, statements we make regarding expectations for revenues, cash flows and financial performance, the anticipated results of our development efforts and the timing for receipt of required regulatory approvals and product launches. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:

 

  our limited operating history and our ability to achieve profitability;

 

  our ability to demonstrate the feasibility of and develop products and their underlying technologies;

 

  the impact of competitive or alternative products, technologies and pricing;

 

  the impact of the COVID-19 on our business and local and global economic conditions;

 

  our ability to continue as a going concern and our need for and ability to obtain additional capital in the future;

 

  our ability to attract and retain highly qualified personnel, including the retention of our founder;

 

  our dependence on consultants to assist in the development of our technologies;

 

  our ability to manage the growth of our Company and to realize the benefits from any acquisitions or strategic alliances we may enter in the future;

 

  our dependence on the successful commercialization of our proposed wearable product;

 

  our dependence on third parties to design, manufacture, market and distribute our proposed products;

 

  the adequacy of protections afforded to us by the patents that we own and the success we may have in, and the cost to us of, maintaining, enforcing and defending those patents;

 

  our ability to obtain, expand and maintain patent protection in the future, and to protect our non-patented intellectual property;

 

  the impact of any claims of intellectual property infringement, trade secret misappropriation, product liability, product recalls or other claims;

 

27

 

 

  our need to secure required FCC, FDA and other regulatory approvals from governmental authorities in United States;

 

  the impact of healthcare regulations and reform measures;

 

  the accuracy of our estimates of market size for our planned wearable product;

 

  our ability to implement and maintain effective control over financial reporting and disclosure controls and procedures;

 

  our success at managing the risks involved in the foregoing items; and

 

  other factors discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors sections of this Form 10-Q.

 

Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

 

Overview

 

We are a health-focused technology company developing simple, smart and personalized devices designed to help individuals on their health journey maintain good health today and prevent and manage chronic diseases in the future.

 

We are developing a proprietary platform that uses Radio Frequency (“RF”) technology, which we believe will enable the creation of low-cost and scalable sensors that are small enough to fit into a wearable and other small form factors. While our technology is currently in the development phase, we expect that our platform will provide users with the ability to measure and continuously monitor vital health data and provide actionable feedback to jumpstart changes in behaviors.

 

Our platform is the foundation for our first product in development, which is a non-invasive and cuffless wearable that simultaneously measures glucose, blood pressure and heart rate. It is intended to combine the functionality of a continuous glucose monitor (“CGM”) and a cuffless RF-based blood pressure monitor (“rBPM ®”) into one wearable device. Once developed, we believe it will allow users to manage their health with confidence and in a manner that best fits their lifestyle, ultimately improving health outcomes. A fundamental part of our corporate development strategy is to establish one or more strategic partnerships that would allow us to more fully exploit the potential of our technology.

 

On April 28, 2021, the Company established Movano Ireland Limited, organized under the laws of Ireland, as a wholly owned subsidiary of the Company.

 

Financial Operations Overview

 

Our technology is in the development phase. We intend to maximize the value and probability of the commercialization of our technology by focusing on research, testing, optimizing, conducting pilot studies and partnering for more extensive, later stages of clinical development, as well as seeking extensive patent protection and intellectual property development.

 

Since we are a development stage company, the majority of our business activities to date and our planned future activities will be devoted to further research and development. We plan to use the majority of the net proceeds from our initial public offering (“IPO”) to fund these research and development efforts.

 

Our research and development expenses primarily include wages, fees and equipment for the development of our technology and our proposed products. Additionally, we incur certain costs associated with the protection of our products and inventions through a combination of patents, licenses, applications, and disclosures.

 

Critical Accounting Policies and Estimates

 

Management’s discussion and analysis of our financial condition and results of operations is based on our unaudited and condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these unaudited and condensed consolidated financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material. There have been no material changes in our critical accounting policies during the three and six months ended June 30, 2021, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Significant Judgments and Estimates” and in Note 3 in our audited financial statements included in our Registration Statement.

 

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Results of Operations

 

Three and six months ended June 30, 2021 and 2020

 

Our condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2021 and 2020 as discussed herein are presented below.

  

    Three Months Ended
June 30,
          Six Months Ended
June 30,
       
    2021     2020     Change     2021     2020     Change  
    (in thousands, except share and per share data)     (in thousands, except share and per share data)  
OPERATING EXPENSES:                                    
Research and development   $ 3,183     $ 2,322     $ 861     $ 5,125     $ 3,823     $ 1,302  
General and administrative     1,863       413       1,450       3,187       931       2,256  
Total operating expenses     5,046       2,735       2,311       8,312       4,754       3,558  
                                                 
Loss from operations     (5,046 )     (2,735 )     (2,311 )     (8,312 )     (4,754 )     (3,558 )
                                                 
Other income (expense), net:                                                
Interest expense           (167 )     167       (883 )     (175 )     (708 )
Change in fair value of warrant liability           (14 )     14       (1,581 )     9       (1,590 )
Change in fair value of derivative liability           167       (167 )     121       135       (14 )
Forgiveness of Paycheck Protection Program Loan     351             351       351             351  
Interest and other income, net     8       10       (2 )     9       21       (12 )
Other income (expense), net     359       (4 )     363       (1,983 )     (10 )     (1,973 )
                                                 
Net loss     (4,687 )     (2,739 )     (1,948 )     (10,295 )     (4,764 )     (5,531 )
                                                 
Accretion and dividends on redeemable convertible preferred stock           (2,118 )     2,118       (2,489 )     (4,074 )     1,585  
                                                 
Net loss attributable to common stockholders   $ (4,687 )   $ (4,857 )   $ 170     $ (12,784 )   $ (8,838 )   $ (3,946 )
                                                 
Net loss per share attributable to common stockholders, basic and diluted   $ (0.15 )   $ (1.75 )           $ (0.64 )   $ (3.34 )        
                                                 
Weighted average shares used in computing net loss per share attributable to common stockholders, basic and diluted     32,017,335       2,775,784               20,099,402       2,649,996          

   

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Research and Development

 

Research and development expenses totaled $3.2 million and $2.3 million for the three months ended June 30, 2021 and 2020, respectively. This increase of $0.9 million was due primarily to the growth of the Company and its activities. Research and development expenses for the three months ended June 30, 2021 included expenses related to employee compensation of $1.7 million, tools and equipment expenses of $0.2 million, other professional fees of $1.2 million, and other expenses of $0.1 million. Research and development expenses for the three months ended June 30, 2020 included expenses related to employee compensation of $0.6 million, research and laboratory expenses of $0.2 million, and other professional fees of $1.5 million.

 

Research and development expenses totaled $5.1 million and $3.8 million for the six months ended June 30, 2021 and 2020, respectively. This increase of $1.3 million was due primarily to the growth of the Company and its activities. Research and development expenses for the six months ended June 30, 2021 included expenses related to employee compensation of $2.5 million, tools and equipment expenses of $0.4 million, other professional fees of $2.1 million, and other expenses of $0.1 million. Research and development expenses for the six months ended June 30, 2020 included expenses related to employee compensation of $1.2 million, other professional fees of $2.3 million and research and laboratory expenses of $0.3 million.

 

General and Administrative

 

General and administrative expenses totaled $1.9 million and $0.4 million for the three months ended June 30, 2021 and 2020, respectively. This increase of $1.5 million was due primarily to the growth of the Company and its activities. General and administrative expenses for the three months ended June 30, 2021 included expenses related to employee and board of director compensation of $1.0 million, professional and consulting fees of $0.4 million, and other expenses of $0.5 million. General and administrative expenses for the three months ended June 30, 2020 included expenses related to employee and board of director compensation of $0.3 million, and professional and consulting fees of $0.1 million.

 

General and administrative expenses totaled $3.2 million and $0.9 million for the six months ended June 30, 2021 and 2020, respectively. This increase of $2.3 million was due primarily to the growth of the Company and its activities. General and administrative expenses for the six months ended June 30, 2021 included expenses related to employee and board of director compensation of $1.8 million, professional and consulting fees of $0.9 million, and other expenses of $0.5 million. General and administrative expenses for the six months ended June 30, 2020 included expenses related to employee and board of director compensation of $0.5 million, professional and consulting fees of $0.3 million, and other expenses of $0.1 million.

 

Loss from Operations

 

Loss from operations was $5.0 million for the three months ended June 30, 2021, as compared to $2.7 million for the three months ended June 30, 2020.

 

Loss from operations was $8.3 million for the six months ended June 30, 2021, as compared to $4.8 million for the six months ended June 30, 2020.

 

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Other Income (Expense), Net

 

Other income (expense), net for the three months ended June 30, 2021 was a net other income of $0.4 million as compared to an insignificant amount for the three months ended June 30, 2020. Other income (expense), net for the three months ended June 30, 2021 included forgiveness of the Paycheck Protection Program Loan of $0.4 million. Other income (expense), net for the three months ended June 30, 2020 included interest expense of $0.2 million related to the accrual of interest and amortization of debt discounts on the convertible promissory notes, offset by $0.2 million related to the change in fair value of the derivative liability.

 

Other income (expense), net for the six months ended June 30, 2021 was a net other expense of $2.0 million as compared to an insignificant amount for the six months ended June 30, 2020. Other income (expense), net for the six months ended June 30, 2021 included interest expense of $0.9 million related to the accrual of interest and amortization of debt discounts on the convertible promissory notes, $1.6 million related to the change in fair value of the warrant liability, $0.1 million related to the change in the fair value of the derivative liability and forgiveness of the Paycheck Protection Program Loan of $0.4 million. Other income (expense), net for the six months ended June 30, 2020 included interest expense of $0.2 million related to the accrual of interest and amortization of debt discounts on the convertible promissory notes, offset by $0.2 million related to the change in fair value of the derivative liability and by the change in interest and other income, net.

 

Net Loss

 

As a result of the foregoing, net loss was $4.7 million for the three months ended June 30, 2021, as compared to $2.7 million for the three months ended June 30, 2020.

 

As a result of the foregoing, net loss was $10.3 million for the six months ended June 30, 2021, as compared to $4.8 million for the six months ended June 30, 2020.

 

Liquidity and Capital Resources

 

The Company’s condensed consolidated financial statements are presented on a basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We have not generated any revenues from operations since inception, and do not expect to do so in the foreseeable future. We have experienced operating losses and negative operating cash flows since inception and expect to continue to do so. We have financed our working capital requirements during this period through the sale of equity securities and convertible notes.

 

At June 30, 2021 and December 31, 2020, we had cash and cash equivalents and short-term investments of $42.7 million and $5.7 million, respectively, available to fund our ongoing business activities. We believe that our cash and cash equivalents and short-term investments as of June 30, 2021 will be sufficient to fund our projected operating requirements for at least 12 months. However, such cash and cash equivalents and short-term investments are not expected to be sufficient to enable us to complete the development and commercialization of our proposed wearable product. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We anticipate that our expenses will increase substantially as we:

 

  advance the engineering design and development of our proposed wearable and other potential products;

 

  prepare applications required for marketing approval of our proposed wearable product in the United States;

 

  develop our plans for manufacturing, distributing and marketing our proposed wearable and other potential products;

 

  add operational, financial and management information systems and personnel, including personnel to support our product development, planned commercialization efforts and our operation as a public company.

  

Until we can generate a sufficient amount of revenue from our planned products, if ever, we expect to finance future cash needs through public or private equity offerings, debt financings or corporate collaborations and licensing arrangements. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our research or development programs or our commercialization efforts. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience additional dilution, and debt financing, if available, may involve restrictive covenants. To the extent that we raise additional funds through collaborations and licensing arrangements, it may be necessary to relinquish some rights to our technologies or applications or grant licenses on terms that may not be favorable to us. We may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time.

 

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The following table summarizes our cash flows for the periods indicated (in thousands):

 

    Six Months Ended
June 30,
 
    2021     2020  
             
Net cash used in operating activities   $ (7,772 )   $ (4,453 )
Net cash used in investing activities     (13,728 )      
Net cash provided by financing activities     45,095       8,185  
Net increase (decrease) in cash and cash equivalents   $ 23,595     $ 3,732  

 

Operating Activities

 

During the six months ended June 30, 2021, the Company used cash of $7.9 million in operating activities, as compared to $4.5 million used in operating activities during the six months ended June 30, 2020.

  

The $7.8 million used in operating activities during the six months ended June 30, 2021 was primarily attributable to our net loss of $10.3 million during the period and changes in our operating assets and liabilities totaling $0.3 million. These items were offset by non-cash items, including stock-based compensation of $0.7 million, accretion of the debt discount on our convertible promissory notes of $0.8 million, the forgiveness of our PPP loan of $0.4 million, accrued interest on our convertible promissory notes of $0.1 million, compensation of nonemployee services upon the issuance of common stock of $0.1 million, the change in the fair value of the derivative liability of $0.1 million and the change in the fair value of the warrant liability of $1.6 million. During the six months ended June 30, 2020, the Company used cash of $4.5 million in operating activities, which was primarily attributable to our net loss of $4.8 million. The difference between cash used in operating activities and net loss consisted primarily of changes in operating assets and liabilities.

 

Investing Activities

  

During the six months ended June 30, 2021 the Company used cash of $13.7 million in investing activities, consisting of $13.4 million in purchases of marketable securities and $0.3 million for the purchase of office and laboratory equipment. During the six months ended June 30, 2020 the Company did not have any investing activities.

 

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Financing Activities

  

During the six months ended June 30, 2021, the Company was provided cash of $45.1 million from financing activities, comprised of $45.0 million from the net proceeds of our initial public offering and $0.1 million from the issuance of common stock. During the six months ended June 30, 2020, the Company was provided cash of $8.2 million from financing activities, comprised of $8.2 million from the issuance of convertible promissory notes which was partially offset by $0.4 million of issuance costs and $0.7 million in proceeds from the Paycheck Protection Program loan which was partially offset by the repayment of $0.4 million.

 

Off-Balance Sheet Transactions

 

At June 30, 2021, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

 

Item 3. Quantitative and Qualitative Disclosure About Market Risk

 

As a smaller reporting company, we are not required to provide the information required by this Item 3.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We are responsible for maintaining disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Disclosure controls and procedures are controls and other procedures designed to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Based on our management’s evaluation (with the participation of our principal executive officer and our principal financial officer) of our disclosure controls and procedures as required by Rule 13a-15 under the Exchange Act, our principal executive officer and our principal financial officer have concluded that our disclosure controls and procedures were not effective as of June 30, 2021, the end of the period covered by this report.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. We have identified three material weaknesses in our internal control over financial reporting at June 30, 2021. The material weaknesses relate to (i) lack of proper segregation of duties across significant accounting cycles, (ii) lack of effective information technology security policies and control over access to key systems, and (iii) lack of precision in the design of internal control over financial reporting. Although we are making efforts to remediate these issues, these efforts may not be sufficient to avoid similar material weaknesses in the future.

 

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Inherent Limitations on Effectiveness of Controls

 

Our management, including our principal executive officer and our principal financial officer, do not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of control effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the three and six months ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are not currently a party to any pending legal proceedings that we believe will have a material adverse effect on our business or financial condition. We may, however, be subject to various claims and legal actions arising in the ordinary course of business from time to time.

 

Item 1A. Risk Factors

 

Summary of Risk Factors

 

The following is a summary of the principal risks that could adversely affect our business, operations and financial results.

 

Risks Related to our Business

 

  We may be unable to continue as a going concern if we do not successfully raise additional capital on favorable terms, or at all, or if we fail to generate sufficient revenue from operation.

 

  Our efforts may never demonstrate the feasibility of any product.

 

  We face competition from other technology companies and our operating results will suffer if we fail to compete effectively.

 

  The outbreak of the novel strain of coronavirus, SARS-CoV-2, which causes COVID-19, has and could continue to adversely impact our business.

 

  If we are not successful in attracting and retaining highly qualified personnel, we may not be able to successfully implement our business strategy. In addition, the loss of the services of our founder would adversely impact our business prospects.

 

  We are subject to risks associated with our utilization of consultants.

 

  We will need to grow the size of our organization, and we may experience difficulties in managing this growth.

 

  We may acquire businesses or products, or form strategic alliances, in the future, and we may not realize the benefits of such acquisitions.

 

Risks Related to Product Development, Manufacturing and Commercialization

 

  We are highly dependent on the success of our proposed wearable product and cannot give any assurance that it will receive regulatory approval or clearance or be successfully commercialized.

 

  We will depend on third parties to design, manufacture, market and distribute our products. If any third party fails to successfully design, manufacture, market or distribute any of our products, our business will be materially harmed.

 

  Our business and operations would suffer in the event of system failures.

 

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Risks Related to Intellectual Property and Other Legal Matters

 

  It is difficult and costly to protect our intellectual property and our proprietary technologies, and we may not be able to ensure their protection.

 

  If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.

 

  We may in the future be a party to intellectual property litigation or administrative proceedings that could be costly and could interfere with our ability to develop our products.

 

  We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of their former employers or other third parties or claims asserting ownership of what we regard as our own intellectual property.

 

  We could become subject to product liability claims, product recalls and warranty claims that could be expensive, divert management’s attention and harm our business.

 

Risks Related to Regulation

 

  We expect to need FDA clearance or approval for our planned wearable product, which may be difficult to achieve, and existing laws or regulations or future legislative or regulatory changes may affect our business.

 

  If any OEMs contracted to manufacture our proposed wearable product fail to comply with FDA’s Quality System Regulations or other regulatory bodies’ equivalent regulations, manufacturing operations could be delayed or shut down and the development of our proposed wearable product could suffer.

 

  We expect our planned wearable product to be subject to certain Federal Communication Commission (“FCC”) regulations.

 

  Our planned wearable product may in the future be subject to product recalls that could harm our reputation.

 

  Healthcare reform measures could hinder or prevent our planned wearable product’s commercial success.

 

  If we fail to comply with healthcare regulations with respect to our planned wearable product, we could face substantial penalties and our business, operations and financial condition could be adversely affected.

 

Risks Related to Owning Our Securities and Our Financial Results

 

  As an investor, you may lose all of your investment.

 

  Our quarterly and annual results may fluctuate significantly, may not fully reflect the underlying performance of our business and may result in decreases in the price of our securities.

 

  The estimates of potential market size for our planned wearable product included in this prospectus may prove to be inaccurate, and even if the markets in which we compete are such estimated size, our business may not be able to establish a sufficient market share, if any at all.

 

  Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.

 

  The issuance of additional stock in connection with financings, acquisitions, our equity incentive plan, upon exercise of outstanding warrants or otherwise will dilute our existing stockholders.

  

  Even if an active trading market for our common stock develops after the IPO, the market price of our common stock may be significantly volatile.

 

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  Our failure to meet the continued listing requirements of Nasdaq could result in a de-listing of our common stock.

 

  Our Certificate of Incorporation will designate specific courts as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

 

  We have not paid dividends in the past and have no immediate plans to pay dividends.

 

  Concentration of ownership among our existing executive officers, directors and significant stockholders may prevent new investors from influencing significant corporate decisions.

 

  We are an “emerging growth company” under the JOBS Act and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

 

  We will incur significant increased costs as a result of becoming a public company that reports to the SEC and our management will be required to devote substantial time to meet compliance obligations.

 

  If securities or industry analysts do not publish research reports about our business, or if they issue an adverse opinion about our business, the price of our common stock and trading volume could decline.

 

  Our charter documents and Delaware law may inhibit a takeover that stockholders consider favorable.

 

We operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. This discussion highlights some of the risks that may affect future operating results. These are the risks and uncertainties we believe are most important for you to consider. We cannot be certain that we will successfully address these risks. If we are unable to address these risks, our business may not grow, our stock price may suffer, and we may be unable to stay in business. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations.

 

Risks Related to Our Business

 

We are a recently-formed, start-up, development-stage technology company with no history of generating revenue, have a history of operating losses, and we may never achieve or maintain profitability.

 

We are a technology company that was formed in January 2018. We have a very limited operating history and have engaged in only limited research and development activities relating to our proposed technology. The likelihood of success of our business plan must be considered in light of the challenges, substantial expenses, difficulties, complications and delays frequently encountered in connection with developing and expanding early-stage businesses and the regulatory and competitive environment in which we operate. Technology product development is a highly speculative undertaking, involves a substantial degree of risk and is a capital-intensive business.

 

As of June 30, 2021, we had an accumulated deficit of approximately $53.3 million. Even assuming the sale of the common stock in the IPO, without additional capital our existing cash and cash equivalents will be insufficient to fully fund our business plan. We expect to continue to incur losses for the foreseeable future, and these losses will likely increase as we prepare for and begin to commercialize our first product. Our ability to achieve revenue-generating operations and, ultimately, achieve profitability will depend on whether we can obtain additional capital when we need it, complete the development of our technology, receive regulatory approval of our technology, potentially find strategic collaborators that can incorporate our technology into applications which can be successfully commercialized and achieve market acceptance. There can be no assurance that we will ever generate revenues or achieve profitability. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods.

 

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We may be unable to continue as a going concern if we do not successfully raise additional capital on favorable terms, or at all, or if we fail to generate sufficient revenue from operations.

 

Primarily as a result of our lack of revenue, history of losses to date and our lack of liquidity, there is substantial uncertainty as to our ability to continue as a going concern. As of June 30, 2021, we had total assets of approximately $45.1 million and total liabilities of approximately $2.2 million. We believe that our cash and cash equivalents and short-term investments as of June 30, 2021 will be sufficient to fund our projected operating requirements for at least 12 months. However, such cash and cash equivalents and short-term investments are not expected to be sufficient enable us to complete the development and commercialization of our proposed wearable product. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed elsewhere in this “Risk Factors” section. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.

 

We do not have any prospective arrangements or credit facilities as a source of future funds, and there can be no assurance that we will be able to raise sufficient additional capital on acceptable terms, or at all. If we are unable to raise additional capital or if we are unable to generate sufficient revenue from our operations, we may not stay in business. We may seek additional capital through a combination of private and public equity offerings, debt financings and strategic collaborations. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our existing stockholders could be significantly diluted and these newly-issued securities may have rights, preferences or privileges senior to those of holders of the common stock offered hereby. Debt financing, if obtained, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, which could increase our expenses and require that our assets secure such debt. Moreover, any debt we incur must be repaid regardless of our operating results. However, we do not own any significant assets that we expect could serve as acceptable collateral for a bank or other commercial lender. The above circumstances may discourage some investors from purchasing our stock, lending us money or from providing alternative forms of financing. In addition, the current economic instability in the world’s equity and credit markets may materially adversely affect our ability to sell additional securities and/or borrow cash. There can be no assurance that we will be able to raise additional working capital on acceptable terms or at all.

 

If we are unable to raise additional capital when needed, we may be required to curtail the development of our technology or materially curtail or reduce our operations. We could be forced to sell or dispose of our rights or assets. Any inability to raise adequate funds on commercially reasonable terms would have a material adverse effect on our business, results of operation and financial condition, including the possibility that a lack of funds could cause our business to fail and liquidate with little or no return to investors.

 

Even if we take these actions, they may be insufficient, particularly if our costs are higher than projected or unforeseen expenses arise. Additionally, if we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or products or to grant licenses on terms that may not be favorable to us. If we choose to expand more rapidly than we presently anticipate, we may also need to raise additional capital sooner than expected.

 

Our efforts may never demonstrate the feasibility of any product.

 

We have developed a working prototype of our proposed wearable product that is capable of generating data we believe will be able to be used to measure blood glucose and blood pressure levels, but significant additional research and development activity will be required before we achieve a commercial product. We have conducted limited studies to compare the data our prototype device generates to measurements from conventional blood glucose and blood pressure measuring tools, and we are using the data generated in those studies to refine our product design and to develop the algorithms our product in development will utilize. However, we have not yet conducted any studies that demonstrate that our planned product is able to measure blood glucose or blood pressure levels at any particular accuracy level and we may never be able to complete any clinical studies that demonstrate accuracy levels that would be necessary for a commercial product. Our research and development efforts remain subject to all of the risks associated with the development of new products based on emerging technologies, including unanticipated technical or other problems and the possible insufficiency of funds needed in order to complete development of these products and enable us to execute our business plan. Any such problems may result in delays and cause us to incur additional expenses that would increase our losses. If we cannot complete, or if we experience significant delays in, developing our technology and products and services based on such technology for use in potential commercial applications, particularly after incurring significant expenditures, our business may fail. To our knowledge, the technological concepts we are applying to develop commercial applications have not previously been successfully applied by anyone else.

 

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Accordingly, you should consider our prospects in light of the costs, uncertainties, delays and difficulties frequently encountered by companies in the early stages of development, especially technology companies such as ours. Potential investors should carefully consider the risks and uncertainties that a company with a limited operating history typically faces. In particular, potential investors should consider that we cannot assure you that we will be able to:

 

  successfully implement or execute our current business plan, or that our business plan is sound;

 

  successfully develop the radio frequency (“RF”) based technology necessary to develop our planned wearable product having the functionality and characteristics we discuss herein;

 

  successfully develop a prototype or a practical, efficient or economical commercial version of one or more products;

 

  obtain any additional issued patents;

 

  successfully develop proprietary technology and trade secrets and secure market exclusivity and/or adequate intellectual property protection for our products by way of patent protection or otherwise;

 

  successfully protect any such proprietary technology and trade secrets from competitors and third parties claiming infringement or misappropriation;

 

  attract and retain an experienced management and advisory team; and

 

  raise sufficient funds in the capital markets to effectuate our business plan, including for the development and commercialization of our products.

 

If we cannot successfully execute any one of the foregoing, our business may not succeed and your investment will be adversely affected.

 

We face competition from other technology companies and our operating results will suffer if we fail to compete effectively.

 

The technology industry, generally, and the glucose and blood pressure monitoring and general wellness markets, in particular, are intensely competitive, subject to rapid change, and significantly affected by new product introductions and other market activities by industry participants. To compete successfully, we will need to demonstrate the advantages of our products and technologies over well-established alternative solutions, products and technologies, as well as newer ones, and convince consumers and enterprises of the advantages of our products and technologies. Traditional glucometers and blood pressure monitors remain an inexpensive alternative to our proposed wearable product. With respect to our planned wearable product, we will face direct and indirect competition from a number of competitors who have developed or are developing products for continuous or periodic monitoring of glucose and blood pressure levels as well as general wellness, and we anticipate that other companies will develop additional competitive products in the future. We have existing competitors and potential new competitors, many of which have or will have substantially greater name recognition, financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals, and sales and marketing of approved products than we have. Mergers and acquisitions in the pharmaceutical, biotechnology and diagnostic industries may result in even more resources being concentrated among a smaller number of our competitors. Established competitors may invest heavily to quickly discover and develop novel technologies that could make obsolete or uneconomical the technology or the products that we plan to develop. Other small or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. Any new product that we develop that competes with a competitor’s existing or future product may need to demonstrate compelling advantages in cost, convenience, quality, and safety to be commercially successful. In addition, new products developed by others could emerge as competitors to our proposed product development candidates. If our technology under development or our future products are not competitive based on these or other factors, our business would be harmed, and our financial condition and operations will suffer. For additional information regarding our competition, see the “Business – Competition” section of this prospectus.

  

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The outbreak of the novel strain of coronavirus, SARS-CoV-2, which causes COVID-19, has and could continue to adversely impact our business.

 

Public health crises such as pandemics or similar outbreaks could adversely impact our business. In December 2019, a novel strain of coronavirus, SARS-CoV-2, which causes coronavirus disease 2019 (“COVID-19”), surfaced in Wuhan, China. Since then, COVID-19 has spread to countries around the world and has been declared a pandemic by the World Health Organization. Beginning in February 2020, we undertook temporary precautionary measures to help minimize the risk of the virus to our employees, including by temporarily requiring most employees to work remotely, pausing all non-essential travel worldwide for our employees, and limiting employee attendance at industry events and in-person work-related meetings, to the extent those events and meetings are continuing. We also took certain actions to reduce our cash expenses and changed the way we worked with certain of our outside vendors in an effort to mitigate potential delays in our development programs caused by the effects the pandemic was having on the operations of such vendors. We may take additional measures, any of which could negatively affect our business. In addition, third-party actions taken to contain the spread and mitigate the public health effects of COVID-19 may negatively affect our business.

 

As a result of the COVID-19 outbreak, or similar pandemics, we have and may in the future experience disruptions that could severely impact our business, including:

 

  interruption of attendance at industry events due to limitations on travel imposed or recommended by federal or state governments, employers and others;

 

  absenteeism or loss of employees at the Company, or at our collaborator companies, due to health reasons or government restrictions or otherwise, that are needed to develop, validate and perform other necessary functions for our operations;

 

  government responses, including orders that make it difficult for us to remain open for business, and other seen and unforeseen actions taken by government agencies;

 

  equipment failures, loss of utilities and other disruptions that could impact our operations or render them inoperable; and

 

  effects of a local or global recession or depression that could depress economic conditions for a prolonged period and limit access to capital by the Company.

 

These and other factors arising from the COVID-19 pandemic could worsen in the United States or locally at the location of our offices or the offices of our collaborator companies, each of which could further adversely impact our business generally and could have a material adverse impact on our operations and financial condition and results.

 

If we are not successful in attracting and retaining highly qualified personnel, we may not be able to successfully implement our business strategy. In addition, the loss of the services of our founder would adversely impact our business prospects.

 

Our ability to implement our business plan depends in large part upon our ability to attract and retain highly qualified managerial and engineering personnel. We will need to hire additional personnel as we further develop our products. Competition for skilled personnel in our market is intense and competition for experienced engineers may limit our ability to hire and retain highly qualified personnel on acceptable terms. Despite our efforts to retain valuable employees, members of our management and engineering teams may terminate their employment with us on short notice. The loss of the services of any of our executive officers or other key employees could potentially harm our business, operating results or financial condition. In particular, we believe that the loss of the services of our founder, Michael Leabman, would have a material adverse effect on our business. Currently, we do not maintain key man insurance policies with respect to any of our executive officers or employees.

 

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Our success also depends on our ability to continue to attract, retain and motivate highly skilled junior, mid-level and senior managers as well as junior, mid-level and senior engineering personnel. Other technology companies with which we compete for qualified personnel have greater financial and other resources, different risk profiles and longer histories than we have. They also may provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high-quality candidates than what we have to offer. If we are unable to continue to attract and retain high-quality personnel, the rate and success at which we can develop and commercialize products would be limited.

  

We are subject to risks associated with our utilization of consultants.

 

To improve productivity and accelerate our development efforts while we build out our own engineering team, we use experienced consultants to assist in selected business functions, including the development of our integrated circuits. We take steps to monitor and regulate the performance of these independent third parties. However, arrangements with third party service providers may make our operations vulnerable if these consultants fail to satisfy their obligations to us as a result of their performance, changes in their own operations, financial condition or other matters outside of our control. Effective management of our consultants is important to our business and strategy. The failure of our consultants to perform as anticipated could result in substantial costs, divert management’s attention from other strategic activities or create other operational or financial problems for us. Terminating or transitioning arrangements with key consultants could result in additional costs and a risk of operational delays, potential errors and possible control issues as a result of the termination or during the transition.

 

We will need to grow the size of our organization, and we may experience difficulties in managing this growth.

 

As we expand our activities, there will be additional demands on our financial, technical, operational and management resources. To manage our anticipated future growth, we must continue to implement and improve our financial, technical, operational and management systems and continue to recruit and train additional qualified personnel. Due to our limited financial resources and operating history, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.

 

We may acquire businesses or products, or form strategic alliances, in the future, and we may not realize the benefits of such acquisitions.

 

We may acquire additional businesses or products, form strategic alliances or create joint ventures with third parties that we believe will complement or augment our existing business. If we acquire businesses with promising markets or technologies, we may not be able to realize the benefit of acquiring such businesses if we are unable to successfully integrate them with our existing operations and company culture. We may encounter numerous difficulties in developing, manufacturing and marketing any new products resulting from a strategic alliance or acquisition that delay or prevent us from realizing their expected benefits or enhancing our business. We cannot assure you that, following any such acquisition, we will achieve the expected synergies to justify the transaction.

   

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Risks Related to Product Development, Manufacturing and Commercialization

 

We are highly dependent on the success of our proposed wearable product and cannot give any assurance that it will receive regulatory approval or clearance or be successfully commercialized.

 

We are highly dependent on the success of our initial wearable product under development. There is no guarantee that we will be successful in the development of this or any other future product. Our proposed wearable product will require substantial additional clinical development, extensive preclinical testing and clinical trials in order to receive regulatory clearance or approval. We cannot give any assurance that our proposed wearable product will receive regulatory clearance or approval or be successfully commercialized. Any failure to obtain regulatory clearance or approval of or to successfully commercialize the proposed wearable product would have a material adverse effect on our business.

 

We will depend on third parties to design, manufacture, market and distribute our products. If any third party fails to successfully design, manufacture, market or distribute any of our products, our business will be materially harmed.

 

We expect to depend on strategic partners such as third-party original equipment manufacturers (“OEMs”), value-added resellers (“VARs”) and other distributors to complete the design, manufacture, market and distribute our product under development or other future products. If these strategic partners fail to successfully complete the design, manufacture, market or distribute our product under development or other future products, our business will be materially harmed.

 

The products that we intend to develop are complex and will require the integration of a number of components that are themselves complex. In light of this complexity, we expect that we may determine not to complete the design of or manufacture these products ourselves and instead develop relationships with suitable third-party OEMs to complete these tasks. Similarly, we do not anticipate building a sales or marketing function and instead expect that our products under development will be marketed and sold through strategic partners such as OEMs, VARs or other distributors. We do not currently have a relationship with any OEM, VAR or other distributor, and may never be able to find any OEMs, VARs or other distributors that are willing to work with us on acceptable terms, or at all. We will have limited control over the efforts and resources that any third-party OEMs, VARs and other distributors would devote to designing, manufacturing, marketing or distributing our products under development. An OEM may not be able to successfully design and manufacture our products and such failure by an OEM could substantially harm the value of our business. Similarly, the OEMs, VARS or other distributors we engage with to market and sell our product under development may not be successful at marketing and selling such product. If we cannot find suitable strategic partners or our strategic partners do not perform as expected, our potential for revenue may be dramatically reduced and our business could be harmed.

 

Our business and operations would suffer in the event of system failures.

 

Our computer systems, as well as those of our contractors and consultants, are vulnerable to damage from computer viruses, unauthorized access, natural disasters (including earthquakes), terrorism, war and telecommunication and electrical failures. If such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our development programs. In the ordinary course of our business, we collect and store sensitive data, including intellectual property, proprietary business information, personal data and personally identifiable information of our clinical trial subjects and employees, on our networks. The secure processing, maintenance and transmission of this information is critical to our operations. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or internal bad actors, or breached due to employee error, a technical vulnerability, malfeasance or other disruptions. Although, to our knowledge, we have not experienced any such material security breach to date, any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information and significant regulatory penalties, and such an event could disrupt our operations, damage our reputation and cause a loss of confidence in us and our ability to conduct clinical trials, which could adversely affect our reputation and delay our development of our products.

  

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Risks Related to Intellectual Property and Other Legal Matters

 

It is difficult and costly to protect our intellectual property and our proprietary technologies, and we may not be able to ensure their protection.

 

Our success depends significantly on our ability to obtain, maintain and protect our proprietary rights to the technologies used in our products. Patents and other proprietary rights provide uncertain protections, and we may be unable to protect our intellectual property. At June 30, 2021, we had three issued U.S. patents having a total of 79 claims, 45 pending U.S. patent applications having a total of 1,053 claims, with an earliest priority date of August 16, 2018, and four pending international patent applications having a total of 191 pending claims.

 

While we plan to file additional patent applications, we may never develop any invention that results in any additional issued patents. Even if we obtain patents, we may be unsuccessful in defending our patents (and other proprietary rights) against third party challenges. Although we expect to attempt to obtain patent coverage for our technology where available and where we believe appropriate, there may be aspects of the technology for which patent coverage may never be sought or received. We may not possess the resources to or may not choose to pursue patent protection outside the United States or any or every country other than the United States where we may eventually decide to sell our future products. Our ability to prevent others from making or selling duplicate or similar technologies will be impaired in those countries in which we have no patent protection.

 

Any patent applications we have filed or may file in the future may never result in issued patents, or patents issued based upon such applications may issue only with limited coverage or may issue and be subsequently successfully challenged by others and held invalid or unenforceable. There may exist prior art that may prevent our patent applications from resulting in issued patents, and there may be other inventors who file patent applications on inventions that are the same or similar to ours or that otherwise may be found to anticipate our inventions before we file patent applications of our own on our inventions, which may result in the issue of patents on our inventions or similar or anticipatory inventions to those other inventors.

 

Even if patents issue based on our current or any future applications, any issued patents may not provide us with any competitive advantagesCompetitors may be able to design around our patents or develop products that provide outcomes comparable or superior to ours. Our patents may be held invalid or unenforceable as a result of legal challenges by third parties, and others may challenge the inventorship or ownership of our patents and pending patent applications. In addition, if we choose to and are able to secure protection in countries outside the United States, the laws of some foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States. In the event a competitor infringes upon our patents or other intellectual property rights, enforcing those rights may be difficult, expensive and time consuming and we may elect not to enforce our patents or other intellectual property rights based on the facts and circumstances known to us at the time. Even if successful, litigation to enforce our intellectual property rights or to defend our patents against challenge could be expensive and time consuming and could divert our management’s attention. We do not now have and may not have in the future sufficient resources to enforce our intellectual property rights or to defend our patents against a challenge.

 

If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.

 

In addition to our patent activities, we rely upon, among other things, unpatented proprietary technology, processes, trade secrets and know-how. Any involuntary disclosure to or misappropriation by third parties of our confidential or proprietary information could enable competitors to duplicate or surpass our technological achievements, potentially eroding our competitive position in our market. While we require all of our employees, consultants, advisors and any third parties who have access to our proprietary know-how, information and technology to enter into confidentiality agreements, we cannot be certain that this know-how, information and technology will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. These agreements may be terminated or breached, and we may not have adequate remedies for any such termination or breach. Furthermore, these agreements may not be enforceable or provide meaningful protection for our trade secrets and know-how in the event of unauthorized use or disclosure. The disclosure of trade secrets or other proprietary information would impair our competitive position and may materially harm our business.

 

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We may in the future be a party to intellectual property litigation or administrative proceedings that could be costly and could interfere with our ability to develop our products.

 

Because our industry is characterized by competing intellectual property, we may be sued for violating the intellectual property rights of others. Determining whether a product infringes a patent involves complex legal and factual issues, and the outcome of patent litigation actions is often uncertain. We have not conducted any significant search of patents issued to third parties, and no assurance can be given that third party patents containing claims covering our product under development, parts of our product under development, technology or methods do not exist, have not been filed, or could not be filed or issued. Because of the number of patents issued and patent applications filed in our technical areas or fields, our competitors or other third parties may assert that our products and the methods we plan to employ in the use of our products are covered by United States or foreign patents held by them. In addition, because patent applications can take many years to issue and because publication schedules for pending applications vary by jurisdiction, there may be applications now pending of which we are unaware, and which may result in issued patents that our product under development or other future products would infringe. Also, because the claims of published patent applications can change between publication and patent grant, there may be published patent applications that may ultimately issue with claims that we infringe. There could also be existing patents that one or more of our future products or parts may infringe and of which we are unaware. As the number of competitors in our market increases, and as the number of patents issued in this area grows, the possibility of patent infringement claims against us increases. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations.

 

In the event that we become subject to a patent infringement or other intellectual property lawsuit and if the relevant patents or other intellectual property were upheld as valid and enforceable and we were found to infringe or violate the terms of a license to which we are a party, we could be prevented from selling any infringing products of ours unless we could obtain a license or were able to redesign the product to avoid infringement. If we were unable to obtain a license or successfully redesign, we might be prevented from selling our product under development or other future products. If there is an allegation or determination that we have infringed the intellectual property rights of a competitor or other person, we may be required to pay damages, or a settlement or ongoing royalties. In these circumstances, we may be unable to sell our products at competitive prices or at all, and our business could be harmed.

 

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of their former employers or other third parties or claims asserting ownership of what we regard as our own intellectual property.

 

We do and may employ and contract with individuals who were previously employed by other technology companies. Although we seek to protect our ownership of intellectual property rights by ensuring that our agreements with our employees, collaborators and other third parties with whom we do business include provisions requiring such parties to assign rights in inventions to us and to not use the know-how or confidential information of their former employer or other third parties, we cannot guarantee that we have executed such agreements with all applicable parties. We may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed confidential information of our employees’ former employers or other third parties. We may also be subject to claims that former employers or other third parties have an ownership interest in our patents. Litigation may be necessary to defend against these claims. There is no guarantee of success in defending these claims, and if we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable personnel or intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Even if we are successful, litigation could result in substantial cost and be a distraction to our management and other employees.

 

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In addition, while it is our policy to require our employees, contractors and other third parties who may be involved in the conception or development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property that we regard as our own. The assignment of intellectual property rights under such agreements may not be self-executing, or the assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual property. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects.

  

We could become subject to product liability claims, product recalls and warranty claims that could be expensive, divert management’s attention and harm our business.

 

Our business exposes us to potential liability risks that are inherent in the manufacturing, marketing and sale of products used by consumers. We may be held liable if our product under development or other future products cause injury or death or are found otherwise unsuitable during usage. Our future products to be developed are expected to incorporate sophisticated components and computer software. Complex software can contain errors, particularly when first introduced. In addition, new products or enhancements may contain undetected errors or performance problems that, despite testing, are discovered only after installation. While we believe our technology will be safe, because our proposed wearable product is an RF-based technology that is being designed to be used in close proximity to users, users may allege or possibly prove defects, some of which could be alleged or proved to cause harm to users or others. A product liability claim, regardless of its merit or eventual outcome, could result in significant legal defense costs. We cannot guarantee that we will be able to obtain products liability insurance; if we do, however, the coverage limits of any insurance policies that we may choose to purchase to cover related risks may not be adequate to cover future claims, and the cost of insurance, if obtainable, could be prohibitive. If sales of our products increase or we suffer future product liability claims, we may be unable to maintain product liability insurance in the future at satisfactory rates or with adequate amounts. A product liability claim, any product recalls or excessive warranty claims, whether arising from defects in design or manufacture or otherwise, could negatively affect our sales or require a change in the design or manufacturing process, any of which could harm our reputation and result in a decline in revenue, each of which would harm our business.

 

In addition, if a product we designed or manufactured is defective, whether due to design or manufacturing defects, improper use of the product or other reasons, we may be required to notify regulatory authorities and/or to recall the product. A required notification to a regulatory authority or recall could result in an investigation by regulatory authorities of our products, which could in turn result in required recalls, restrictions on the sale of the products or other penalties. The adverse publicity resulting from any of these actions could adversely affect the perception of customers and potential customers. These investigations or recalls, especially if accompanied by unfavorable publicity, could result in our incurring substantial costs, losing revenues and damaging our reputation, each of which would harm our business.

 

Risks Related to Regulation

 

We expect to need FDA clearance or approval for our planned wearable product, which may be difficult to achieve, and existing laws or regulations or future legislative or regulatory changes may affect our business.

 

Our proposed wearable product will be subject to current and future regulation by the Food and Drug Administration (“FDA”) and may be subject to regulation by other federal, state and local agencies. These agencies and regulations require manufacturers of medical devices to comply with applicable laws and regulations governing development, testing, manufacturing, labeling, marketing and distribution of medical devices. Devices are generally subject to varying levels of regulatory control, based on the risk level of the device. Governmental regulations specific to medical devices are wide-ranging and govern, among other things:

 

  product design, development and manufacture;

 

  laboratory, pre-clinical and clinical testing, labeling, packaging, storage and distribution;

 

  premarketing clearance or approval;

 

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  record keeping;

 

  product marketing, promotion and advertising, sales and distribution; and

 

  post-marketing surveillance, including reporting of deaths or serious injuries and recalls and correction and removals.

 

Before a new medical device or a new intended use for an existing product can be marketed in the United States, a company must first submit and receive either 510(k) clearance or premarketing approval (“PMA”) from FDA, unless an exemption applies. The typical duration to receive a 510(k) approval is approximately nine to twelve months from the date of the initial 510(k) submission and the typical duration to receive a PMA approval is approximately two years from the date of submission of the initial PMA application, although there is no guarantee that the timing will not be longer.

 

We expect our proposed wearable product would be classified as a Class II medical device that will require a 510(k) clearance prior to marketing. In some instances, the 510(k) pathway for product marketing may be used with only proof of substantial equivalence in technology for a given indication with a lawfully marketed device (a “predicate device”). In other instances, FDA may require additional clinical work to prove efficacy in addition to technological equivalence and basic safety. Whether clinical data is provided or not, FDA may decide to reject the substantial equivalence argument we present. If that happens, our device would be automatically designated as a Class III device and we would have to fulfill the more rigorous PMA requirements, or request a “de novo” reclassification of the device into Class I or II. Thus, although at this time we do not anticipate that we will be required to do so, it is possible that one or more of our planned products may require PMA approval de novo reclassification.

 

We may not be able to obtain the necessary clearances or approvals or may be unduly delayed in doing so, which could harm our business. Furthermore, even if we are granted regulatory clearances or approvals, they may include significant limitations on the indicated uses for the product, which may limit the market for the product. Delays in obtaining clearance or approval could increase our costs and harm our revenues and growth.

 

In addition, we will be required to timely file various reports with FDA, including reports required by the medical device reporting regulations that require us to report to certain regulatory authorities if our devices may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur. If these reports are not filed timely, regulators may impose sanctions and sales of our products may suffer, and we may be subject to regulatory enforcement actions, all of which could harm our business.

 

If we initiate a correction or removal for one of our devices to reduce a risk to health posed by the device, we would be required to submit a publicly available Correction and Removal report to FDA and, in many cases, similar reports to other regulatory agencies. This report could be classified by FDA as a device recall which could lead to increased scrutiny by FDA, other international regulatory agencies and our customers regarding the quality and safety of our devices. Furthermore, the submission of these reports has been and could be used by competitors against us in competitive situations and cause customers to delay purchase decisions or cancel orders and would harm our reputation.

 

FDA and FTC also regulate the advertising and promotion of our products to ensure that the claims we make are consistent with our regulatory clearances, that there are adequate and reasonable data to substantiate the claims and that our promotional labeling and advertising is neither false nor misleading in any respect. If FDA or FTC determines that any of our advertising or promotional claims are misleading, not substantiated or not permissible, we may be subject to enforcement actions, including warning letters, and we may be required to revise our promotional claims and make other corrections or restitutions.

 

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FDA and state authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement action by FDA or state agencies, which may include any of the following sanctions:

 

  adverse publicity, warning letters, fines, injunctions, consent decrees and civil penalties;

 

  repair, replacement, refunds, recall or seizure of our products;

 

  operating restrictions, partial suspension or total shutdown of production;

 

  refusing our requests for 510(k) clearance or PMA of new products, new intended uses or modifications to existing products;

 

  withdrawing 510(k) clearance or PMAs that have already been granted; and

 

  criminal prosecution.

 

If any of these events were to occur, our business and financial condition would be harmed.

 

The cost of compliance with new laws or regulations governing our technology or future products could adversely affect our financial results. New laws or regulations may impose restrictions or obligations on us that could force us to redesign our technology under development or other future products, and may impose restrictions that are not possible or practicable to comply with, which could cause our business to fail. We cannot predict the impact on our business of any legislation or regulations related to our technology or future products that may be enacted or adopted in the future.

 

If any OEMs contracted to manufacture our proposed wearable product fail to comply with FDA’s Quality System Regulations or other regulatory bodies’ equivalent regulations, manufacturing operations could be delayed or shut down and the development of our proposed wearable product could suffer.

 

The manufacturing processes of third-party OEMs are required to comply with FDA’s Quality System Regulations and other regulatory bodies’ equivalent regulations, which cover the procedures and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of our planned non-invasive, wearable product. They may also be subject to similar state requirements and licenses and engage in extensive recordkeeping and reporting and make available their manufacturing facilities and records for periodic unannounced inspections by governmental agencies, including FDA, state authorities and comparable agencies in other countries. If any OEM fails such an inspection, our operations could be disrupted and our manufacturing interrupted. Failure to take adequate corrective action in response to an adverse inspection could result in, among other things, a shut-down of our manufacturing operations, significant fines, suspension of marketing clearances and approvals, seizures or recalls of our products, operating restrictions and criminal prosecutions, any of which would cause our business to suffer. Furthermore, these OEMs may be engaged with other companies to supply and/or manufacture materials or products for such companies, which would expose our OEMs to regulatory risks for the production of such materials and products. As a result, failure to meet the regulatory requirements for the production of those materials and products may also affect the regulatory clearance of a third-party manufacturers’ facility. If FDA determines that any of the facilities that manufacture of our proposed wearable product is not in compliance with applicable requirements, we may need to find alternative manufacturing facilities, which would impede or delay our ability to develop, obtain regulatory clearance or approval for, or market our proposed wearable product, if developed and approved. Additionally, our key component suppliers may not currently be or may not continue to be in compliance with applicable regulatory requirements, which may result in manufacturing delays for our product and cause our results of operations to suffer.

 

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We expect our planned wearable product to be subject to certain Federal Communication Commission (“FCC”) regulations.

 

Our RF-based technology involves the transmission of RF energy, and as such, will be subject to regulation by the FCC, including the FCC’s equipment authorization regulations and its regulations governing human exposure to RF energy. In particular, we expect the planned wearable product to be regulated under Part 18 of the FCC’s rules governing industrial, scientific, and medical (ISM) equipment, and to be classified as consumer ISM equipment under that rule part. Based on the expected frequency and power of operation, we expect that the product will comply with the Part 18 technical specifications for these type of devices, which we will be required to verify under FCC equipment authorization procedures. We also expect, based on the device’s frequency and power of operation, that the product will comply with the FCC’s requirements governing human exposure to RF energy. There is the risk that the product, as we expect it to be developed, may not comply with these requirements, which could significantly affect our development costs and delay commercialization of the product. There is also the risk that we will be unable to cost effectively develop and produce a wearable product using RF technology that complies with these FCC requirements.

 

Our planned wearable product may in the future be subject to product recalls that could harm our reputation.

 

Regulatory agencies have the authority to require the recall of commercialized products in the event of material regulatory deficiencies or defects in design or manufacture. A government-mandated or voluntary recall by us could occur as a result of component failures, manufacturing errors or design or labeling defects. Recalls of our planned wearable product would divert management’s attention, be expensive, harm our reputation with customers and harm our financial condition and results of operations. A recall announcement would also negatively affect the price of our securities.

 

Healthcare reform measures could hinder or prevent our planned wearable product’s commercial success.

 

There have been, and we expect there will continue to be, a number of legislative and regulatory changes to the healthcare system in ways that could harm our future revenues and profitability and the future revenues and profitability of our potential customers. Federal and state lawmakers regularly propose and, at times, enact legislation that would result in significant changes to the healthcare system, some of which are intended to contain or reduce the costs of medical products and services. For example, one of the most significant healthcare reform measures in decades, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (the “Affordable Care Act”), was enacted in 2010. The Affordable Care Act contains a number of provisions, including those governing enrollment in federal healthcare programs, reimbursement changes and fraud and abuse measures, all of which may impact existing government healthcare programs and result in the development of new programs. The Affordable Care Act imposed a 2.3 percent excise tax on sales of medical devices. The excise tax was su