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MYOS > SEC Filings for MYOS > Form 10-K on 30-Mar-2016All Recent SEC Filings

Show all filings for MYOS RENS TECHNOLOGY INC.

Form 10-K for MYOS RENS TECHNOLOGY INC.


30-Mar-2016

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our financial statements and related notes appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to, those factors which are not within our control. Amounts in this section are in thousands, unless otherwise indicated.

Overview

We were incorporated in the State of Nevada on April 11, 2007. On March 17, 2016, we merged with our wholly-owned subsidiary and changed our name from MYOS Corporation to MYOS RENS Technology Inc. Prior to February 2011, we did not have any operations and did not generate any revenues. In February 2011, we acquired our proprietary active ingredient called Fortetropin®, the first clinically proven natural myostatin reducing agent. Since February 2011, our principal business activities have been focused on deepening our scientific understanding of the activity of Fortetropin, and to leverage this knowledge to strengthen and build our intellectual property; developing sales and marketing strategies aimed at expanding our commercial presence; evaluating the value of Fortetropin in therapeutic markets, including the treatment of sarcopenia, cachexia, anorexia, obesity and muscular-related conditions; and, conducting research and development focused on the discovery, development and commercialization of other products and technologies aimed at maintaining or improving the health and performance of muscle tissue. Since our inception in April 2007, we have recognized cumulative revenues of approximately $7.8 million.

Plan of Operation

We are focused on the discovery, development and commercialization of nutritional supplements, functional foods, therapeutic products and other technologies aimed at maintaining or improving the health and performance of muscle tissue. Our initial core ingredient is Fortetropin, a natural, reversible, temporary myostatin reducing agent. Our plan of action is to: (i) create a sales platform through marketing products containing our proprietary ingredient Fortetropin in established, growing, and new markets and strategic selection of partnerships and collaborations to maximize near-term and future revenues, (ii) deepen the scientific understanding of the activity of Fortetropin, specifically as a natural, reversible, temporary modulator of the regulatory protein myostatin, and to leverage this knowledge to strengthen and build our intellectual property, (iii) conduct research and development activities to evaluate myostatin modulation in a range of both wellness and disease states, (iv) identify other products and technologies which may broaden our portfolio and define a business development strategy to protect, enhance and accelerate the growth of our products, (v) reduce the cost of manufacturing through process improvement, and (vi) identify contract manufacturing resources that can fully meet our future growth requirements. We believe that myostatin regulation represent a rational entry point for our drug discovery efforts and are evaluating therapeutic targets in this area.

Our commercial focus is to leverage our clinical data to develop multiple products to target the large, but currently underserved, markets focused on muscle health. The sales channels through which we sell our products are evolving. The first product we introduced was MYO-T12, which was sold in the sports nutrition market. MYO T-12 is a proprietary formula containing Fortetropin and other ingredients. The formula was sold under the brand name MYO T-12 and later as MYO-X through an exclusive distribution agreement with Maximum Human Performance ("MHP"). While the exclusive distribution agreement with MHP terminated in March 2015, MHP continues to distribute its remaining MYO-X inventories on popular retailer websites and in specialty retailers principally in the U.S. Sales to MHP for the year ended December 31, 2015 were $57. We expect minimal future sales to MHP, if any.

In February 2014, we expanded our commercial operations into the age management market through a distribution agreement with Cenegenics Product and Lab Services, LLC ("Cenegenics"), under which Cenegenics distributes and promotes a proprietary formulation containing Fortetropin through its age management centers and its community of physicians focused on treating a growing population of patients focused on proactively addressing age-related health and wellness concerns. On November 28, 2014, we entered into a settlement agreement with Cenegenics wherein we agreed to accept $1,900 by April 2016, (i.e., $300 in the fourth quarter of 2014 and $100 per month from January 2015 through April 2016) in full satisfaction of Cenegenics outstanding obligations with respect to units of product produced by the Company, including units that had not yet been shipped to Cenegenics at the time of the settlement agreement. In exchange, we agreed to withdraw our October 10, 2014 request for arbitration before the International Chamber of Commerce. During the second quarter of 2015, Cenegenics accepted delivery of the remaining units that we were storing on its behalf. Given the settlement agreement's extended payment schedule, the Company deferred the revenue and related cost associated with the shipment and will record the revenue and cost of sales when the related payments are received, which is expected to be in early 2016. The distribution agreement with Cenegenics expires in December 2016. We are unable to predict the amount of future orders from Cenegenics under the distribution agreement, if any.

During the second quarter of 2015 we launched R? Muscle HealthTM, our own direct-to-consumer portfolio of muscle health bars, meal replacement shakes and daily supplement powders each powered by a full 6.6 gram single serving dose of Fortetropin. Our R? Muscle Health products are sold through our e-commerce website, remusclehealth.com, and amazon.com.

We continue to pursue additional distribution and branded sales opportunities. There can be no assurance that we will be able to secure distribution arrangements on terms acceptable to the Company, or that we will be able to generate significant sales of our current and future branded products. We expect to continue developing our own core branded products in markets such as functional foods, sports and fitness nutrition and rehab and restorative health and to pursue international sales opportunities. We expect to leverage our relationship with RENS Agriculture Science & Technology Co. Ltd., ("RENS Agriculture") to pursue distribution opportunities in countries in Southeast Asia where we believe there may be significant demand for our products. For additional information about RENS Agriculture, refer to the section below entitled "Strategic Investment Transaction." During 2015, we recorded inventory reserves and write-offs of $369. Based on expected demand for our products in Southeast Asia combined with the long shelf life of our unblended Fortetropin inventories, we concluded that inventories at December 31, 2015 were fairly stated. We believe the growing awareness of the potential therapeutic uses of myostatin reducing agents supports continued development of our own core products. We remain committed to continuing our focus on various clinical trials in support of our marketing claims as well as to enhance our intellectual property, to develop product improvements and new products, and to reduce the cost of our products by finding more efficient manufacturing processes and contract manufacturers.

The Company currently relies on one third-party manufacturer to produce Fortetropin. This manufacturer purchases all the necessary raw materials from suppliers and coordinates any additional production steps with third-parties. We have multiple vendors for blending, packaging and labeling our products. The Company is pursuing other supply alternatives. See Risk Factors - "We are dependent on third-party manufacturers, suppliers and processors" for additional information regarding our relationship with our third-party manufacturers.

As an early-stage bionutritional and biotherapeutics company, we are dedicated to basic and clinical research that supports our existing and future product portfolio. Our research program is actively evaluating the many active proteins, lipids and peptides in Fortetropin, specifically as a natural, reversible, temporary modulator of the regulatory protein myostatin, and to leverage this knowledge to strengthen and build our intellectual property. We are dedicated to protecting our innovative technology and believe that our research programs will establish a basis for the continued submission of patent applications to help protect the Company's intellectual property. We expect our investment in research and development to continue to grow in the future.

Strategic Investment Transaction

On December 17, 2015, the Company entered into a Securities Purchase Agreement (the "Purchase Agreement") with RENS Technology Inc. (the "Purchaser"), pursuant to which the Purchaser agreed to invest $20.25 million in the Company (the "Financing") in exchange for (i) an aggregate of 3,537,037 shares (the "Shares") of the Company's common stock, par value $0.001 per share ("Common Stock"), and
(ii) warrants to purchase an aggregate of 884,259 shares of Common Stock (the "Warrants", and together with the Shares, the "Securities"). The Purchaser will purchase the Securities in three tranches over twenty-four months. In the first tranche, which closed on March 3, 2016, the Purchaser acquired 1,500,000 Shares and a warrant to purchase 375,000 shares of Common Stock (the "Initial Warrant") for $5.25 million. In the second tranche, which will close within six months of the closing of the first tranche, the Purchaser will acquire 925,926 Shares and a warrant to purchase 231,481 shares of Common Stock (the "Second Warrant") for $5.0 million. In the third tranche, which will close within eighteen months of the closing of the second tranche, the Purchaser will acquire 1,111,111 Shares and a warrant to purchase 277,778 shares of Common Stock (the "Third Warrant") for $10.0 million. Each of the Warrants will be immediately exercisable upon issuance, will expire five years after issuance and will have the following exercise prices: (a) $7.00 per share for the Initial Warrant, (b) $10.80 per share for the Second Warrant and (c) $18.00 per share for the Third Warrant. In addition, the Company agreed: (i) that the Purchaser will have the right to appoint four persons to the Company's board of directors, subject to adjustment based on the Purchaser's ownership percentage of the Company; (ii) to provide the Purchaser with a right to participate in 50% (or 100% if shares are to be issued for less than $3.50 per share) of any future financings pursued by the Company within 12 months from the closing of the third tranche of the Financing; and, (iii) until the closing of the third tranche, the Company will not take certain actions, including issuing shares (except for certain permitted issuances) or appointing new officers and directors, without the Purchaser's consent.

The first tranche of the Financing was completed on March 3, 2016. The Company intends to use the net proceeds from the first tranche of the Financing to fund its working capital, product development and marketing, research and development and other general corporate purposes. Concurrent with the execution of the Purchase Agreement, the Company entered into an exclusive distribution agreement (the "Distribution Agreement") with RENS Agriculture, the parent company of the Purchaser. Pursuant to the terms of the Distribution Agreement, the Company will supply product for RENS Agriculture's exclusive distribution in China (including mainland China, Hong Kong, Macau and Taiwan) and all countries in Southeast Asia in exchange for payment terms to be mutually agreed upon the conclusion of a market study and trial sale. In addition, the Purchaser agreed that, subsequent to the closing of the first tranche of the Financing, it will assist the Company in: utilizing its food technologies in the Company's existing and future products, finding suitable manufacturing partners in China, locating suitable acquisition targets in China and setting up a subsidiary in China.

Results of Operations

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014



(In thousand $)                               Years Ended December 31,                 Change
                                               2015               2014          Dollars          %

Net sales                                  $        159       $      3,343     $  (3,184 )         -95 %
Cost of sales                                       780              1,420          (640 )         -45 %
Gross profit (loss)                                (621 )            1,923        (2,544 )        -132 %
as a % of net revenues                             -391 %               58 %
Operating expenses:
Research and development                            858              1,348          (490 )         -36 %
Selling, general and administrative               3,373              5,621        (2,248 )         -40 %
Amortization of acquired intangibles                210                154            56            36 %
Loss on asset impairment                              -                  5            (5 )        -100 %
Total operating expenses                          4,441              7,128        (2,687 )         -38 %
as a % of net revenues                            N/M                  213 %

Operating loss                                   (5,062 )           (5,205 )         143            -3 %

Other income (expense), net                         (14 )               (2 )         (12 )         N/M

Loss before income taxes                   $     (5,076 )     $     (5,207 )   $     131            -3 %

Income tax benefit (expense)                         (2 )              748          (750 )        -100 %

Net loss                                   $     (5,078 )     $     (4,459 )   $    (619 )          14 %

Net sales

Net sales for the year ended December 31, 2015 decreased $3,184, or 95%, compared to net sales for the year ended December 31, 2014. The decrease in net sales was primarily due to lower distributor sales. Net sales for the year ended December 31, 2014 included distributor sales to MHP and Cenegenics of $1,220 and $2,095, respectively. Net sales for the year ended December 31, 2015 included R? Muscle Health net product sales of $82, distributor sales to MHP of $57 and other product sales of $19.

Cost of sales and gross profit

Cost of sales for the year ended December 31, 2015 decreased $640, or 45%, compared to cost of sales for the year ended December 31, 2014. The decrease in cost of sales was primarily due to lower net sales, partially offset by higher inventory reserves and write-off charges of $369. Cost of sales for the year ended December 31, 2015 and 2014 included slow moving obsolete/damaged goods inventory charges of $697 and $328, respectively.

Operating expenses

Research and development expenses for the year ended December 31, 2015 decreased $490, or 36%, compared to research and development expenses for the year ended December 31, 2014. The decrease in research and development expenses was primarily due to lower costs associated with our clinical and basic research programs through academic and industry collaborations of $449, lower professional and consulting fees of $45 and lower personnel expenses of $29, partially offset by increases in other research and development expenses.

Selling, general and administrative expenses for the year ended December 31, 2015 decreased $2,248, or 40%, compared to selling, general and administrative expenses for the year ended December 31, 2014. The decrease in selling, general and administrative expenses was primarily due to a $780 decrease in bad debt expense resulting from an allowance for doubtful accounts accrual of $390 recorded against the Cenegenics' accounts receivable balance in the year ended December 31, 2014, which was subsequently reversed during the year ended December 31, 2015 due to the collection of the outstanding accounts receivable. Also contributing to the decrease were lower personnel costs of $715, mainly due to lower stock based compensation, and lower distributor co-operative advertising and broker commissions of $616.

Amortization expense for the year ended December 31, 2015 increased $56, or 36%, compared to amortization expense for the year ended December 31, 2014. The increase was due to $50 amortization in connection with our Fortetropin intellectual property, including the formula, trademarks, trade secrets, patent application and domain name acquired from Peak Wellness, Inc., which we began amortizing in the second quarter of 2014 and $6 amortization in connection with our Fortetropin manufacturing process patent, which we began amortizing in the fourth quarter of 2014.

Loss on asset impairments for the year ended December 31, 2014 included an impairment charge of $5 related to the unrecoverable net carrying value of a capitalized fixed asset. We did not consider any of our property and equipment to be impaired during the year ended December 31, 2015.

Other income (expense), net

Other income (expense), net was ($14) for the year ended December 31, 2015 and included ($15) of interest expense, primarily related to the revolving credit agreement, which was converted to a term loan on September 10, 2015 (as amended, the "Term Note").

Income tax benefit (expense)

Income tax (expense) for the year ended December 31, 2015 was ($2), which reflects minimum state corporate taxes. Included in the year ended December 31, 2014 is an income tax benefit resulting from the reversal of a valuation allowance previously recorded against the Company's State of New Jersey net operating losses ("NOL") that resulted from the Company's sale of $8,890 of its New Jersey State NOLs and $15 of its unused research and development tax credits under the State of New Jersey's Technology Business Tax Certificate Transfer Program (the "Program") for cash of $750, net of commissions. The Program allows qualified technology and biotechnology businesses in New Jersey to sell unused amounts of NOLs and defined research and development tax credits for cash.

Liquidity and Capital Resources

Working capital at December 31, 2015 and December 31, 2014 is summarized as follows:

(In thousand $)                                      December 31,      December 31,        Increase
                                                         2015              2014           (Decrease)
Current Assets:
Cash                                                 $         879     $       1,567     $       (688 )
Accounts receivable, net                                       406               982             (576 )
Inventories, net                                             1,467             1,814             (347 )
Prepaid expenses and other current assets                      523               745             (222 )
Total current assets                                 $       3,275     $       5,108     $     (1,833 )
Current liabilities:
Accounts payable                                     $         328     $          79     $        249
Accrued expenses and other current liabilities                 717               495              222
Convertible note                                               575                 -              575
Term note                                                      100                 -              100
Total current liabilities                            $       1,720     $         574     $      1,146
Working Capital                                      $       1,555     $       4,534     $     (2,979 )
Current Ratio                                                 1.90              8.90

Working capital decreased $2,979 to $1,555 at December 31, 2015 compared to $4,534 at December 31, 2014. Changes in working capital components were as follows:

? Cash decreased $688 due to $2,252 used in operations and $27 of capital spending, partially offset by $916 net proceeds received from the cash exercise of the Series D warrants, $575 from the issuance of a unsecured convertible note to Gan Ren, a related party of RENS Agriculture and $100 net borrowing under the Term Note.

? Accounts receivable, net decreased $576 primarily due to $1,200 of cash collections from Cenegenics, partially offset by a $390 reduction in the allowance for doubtful accounts recorded against the Cenegenics' accounts receivable balance and $228 of receivables resulting from product shipped to Cenegenics and recorded as deferred revenue.

? Inventories, net decreased $347 primarily due to cost of sales of $780, which includes inventory reserves and write-offs of $697, shipments to Cenegenics of $153, which have been recorded as deferred charges within prepaid expenses and other current assets and will be recognized in cost of sales upon recognition of the related revenues and product samples of $27, partially offset by new inventory production of $613, which included $414 of Fortetropin purchases made in 2014 but received in 2015.

? Prepaid expenses and other current assets decreased $222 primarily due to a $414 decrease in prepaid inventory purchases, partially offset by deferred charges of $153 related to the cost of inventory shipped to Cenegenics that was deferred until payment of the commensurate sale is received and deferred financing costs of $65 related to the Financing with RENS Technology Inc.

? Accounts payable increased $249 primarily due to the timing of payments.

? Accrued expenses and other current liabilities increased $222 primarily due to deferred revenue of $228 related to inventory shipped to Cenegenics that will be recognized upon collection, partially offset by a net decrease in other accrued items.

? Short-term borrowings increased $675 resulting from the issuance of an unsecured convertible note to Gan Ren, a related party of RENS, for $575 and $100 net borrowing under the Term Note.

At December 31, 2015, we had cash of $879 and total assets of $5,342 (which includes $1,780 of intangible assets).

Summarized cash flows for the years ended December 31, 2015 and 2014 are as follows:

(In thousand $)                                Years Ended December 31,
                                                2015               2014          Change

Net cash used in operating activities       $     (2,252 )     $     (5,089 )   $  2,837
Net cash used in investing activities                (27 )              (29 )          2
Net cash provided by financing activities          1,591              6,234       (4,643 )
Net increase (decrease) in cash             $       (688 )     $      1,116     $ (1,804 )

Cash flows from operating activities represent net loss adjusted for certain non-cash items and changes in operating assets and liabilities. Net cash used by operating activities for the year ended December 31, 2015 decreased (i.e., improved) $2,837 compared to the year ended December 31, 2014 primarily due to lower operating expenses and lower working capital, partially offset by lower net sales. For additional information about the changes in operating assets and liabilities refer to the above discussion on working capital.

Net cash used in investing activities includes cash used to purchase capital assets. Net cash used in investing activities for the year ended December 31, 2015 included purchases of fixed assets of $27. Net cash used in investing activities for the year ended December 31, 2014 included purchases of fixed assets and intangible assets of $23 and $6, respectively.

Net cash provided by financing activities includes proceeds from borrowing and issuing equity instruments. Net cash provided by financing activities for the year ended December 31, 2015 includes net proceeds of $916 received from the cash exercise of the Series D warrants, $575 from the issuance of an unsecured convertible note to Gan Ren, a related party of RENS Agriculture Science & Technology Co. Ltd., ("RENS Agriculture"), and net borrowing of $100 under the Term Note (as defined below). Net cash provided by financing activities for the year ended December 31, 2014 included net proceeds of $4,663 from our January 2014 private placement transaction wherein Brean Capital, LLC served as placement agent and net proceeds of $1,571 from our registered offering transaction in November 2014.

Convertible Note

On December 17, 2015, concurrent with the execution of the Purchase Agreement with RENS Technology Inc., the Company issued an unsecured promissory note in the principal amount of $575 (the "Note") to Gan Ren, a related party of RENS Agriculture. The Note bears interest at a rate of 8% per annum and matures (the "Maturity Date") on December 17, 2016. On the Maturity Date, the Note and any accrued interest thereon will automatically convert into shares of Common Stock at $2.75 per share (the "Conversion Price"), unless earlier converted. At any time prior to the Maturity Date, the holder of the Note may convert in whole or in part the Note and any accrued interest into shares of Common Stock at the Conversion Price. Subject to conversion terms, the Note may be prepaid in whole or in part at any time by the Company prior to the Maturity Date, without penalty. In the event of a prepayment, the holder will have the right to convert the unpaid principal and accrued interest owing under the Note, in whole or in part, into shares of common stock of the Company at the Conversion Price. The Note includes standard events of default including non-payment of the principal or accrued interest due on the Note. Upon an event of default, all obligations under the Note will become due and payable.

Term Note

On September 10, 2015, the Company converted its outstanding revolving note with City National Bank, which had a termination date of August 31, 2015, into a term note (the "Term Note"). The Term Note provided that the then outstanding balance of $400 shall be payable along with interest thereon on the last day of each month in four (4) consecutive installments of $100, with the final installment due and payable in full on December 31, 2015. The Term Note was collateralized by all inventory, chattel paper, accounts, equipment, general intangibles, securities and instruments and contained customary events of default, including failure to make payment and bankruptcy. As of December 31, 2015, the interest rate on the Term Note was 4.50%. At December 31, 2015, the balance under the Term Note was $100, which was subsequently paid in full on January 7, 2016.

We may seek to raise additional capital through the issuance of debt or equity securities. Should the Company seek additional debt and/or equity financing, it cannot assure that such financing will be available on acceptable terms, if at all. Based on management's forecast, as of the filing date of this Form 10-K, we believe that we will have sufficient capital resources from operations and the existing Financing arrangement in order to meet operating expenses and working capital requirements for the next twelve months.

Long-term Contractual Obligations

As of December 31, 2015, the Company's enforceable and legally binding contractual obligations include future minimum lease payments under a non-cancellable operating lease and purchase obligations under a long-term supply agreement.

At December 31, 2015, the future minimum lease payments under the non-cancellable operating lease in excess of one year were as follows:

(In thousand $)

Years Ended December 31,    Amount
2016                       $    152
2017                            181
2018                            187
2019                            191
Total                      $    711

. . .

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