Note 2 - Going Concern and Management’s Liquidity Plan

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company incurred a net loss of approximately $8.9 million and $1.4 million during the six months ended June 30, 2017 and 2016, respectively, and has an accumulated deficit of approximately $31.8 million at June 30, 2017. Cash used in operating activities was approximately $2.7 million and $1.0 million for the six months ended June 30, 2017 and 2016, respectively. The aforementioned factors raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the issuance of these financial statements. Historically, the Company has financed its operations through equity and debt financing transactions and expects to continue incurring operating losses for the foreseeable future. The financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern within one year after the date the financial statements are issued.

The Company will need to raise additional capital to sustain its operations, repay its debt, pursue its product development initiatives and penetrate markets for the sale of its products. Management believes that the Company has access to capital resources through possible additional public or private equity offerings, debt financings, or other means; however, the Company cannot provide any assurance that it will be able to raise additional capital or obtain new financing on commercially acceptable terms. If the Company is unable to secure additional capital, it may be required to curtail its operations or delay the execution of its business plan.

Note 3 - Summary of Significant Accounting Policies

Interim Financial Statements

The accompanying unaudited condensed financial statements and notes are representations of the Company’s management, who are responsible for their integrity and objectivity. These statements have been prepared in accordance with GAAP for interim financial information pursuant to Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP for annual financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) that are considered necessary for a fair presentation of the condensed financial statements of the Company as of June 30, 2017 and for the three months and six months ended June 30, 2017 and 2016. The results of operations for the three months and six ended June 30, 2017 are not necessarily indicative of the operating results for the full year ending December 31, 2017, or any other period. These condensed financial statements should be read in conjunction with the audited financial statements and related disclosures of the Company as of December 31, 2016 and 2015, and for the years then ended, included in the Offering Circular (“Offering Circular”) that forms part of the Company’s Registration Statement on Form 1-A (File No. 024-10662), which was qualified by the Securities and Exchange Commission on June 9, 2017.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America require management to make estimates and assumptions that affect certain reported amounts and disclosures. These estimates and assumptions are reviewed on an on-going basis and updated as appropriate. Actual results could differ from these estimates. The Company’s significant estimates relate to valuation of warrants and derivative liabilities, uncollectible accounts, deferred tax valuation allowances, warranty obligations and reserves for slow-moving inventory.

Inventories

Inventories are recorded at the lower-of-cost-or-market. Cost is determined using a specific identification method. The Company reduces the carrying value of inventory for those items that are potentially excess, obsolete or slow-moving based on changes in customer demand, technology developments or other economic factors.

The Company periodically analyzes anticipated product sales based on historical results, current sales pipeline and marketing plans. Based on these analyses, the Company anticipates the amounts of product, if any, that will not be sold during the next twelve months.

Stock-Based Compensation

The Company accounts for options granted to employees by measuring the cost of services received in exchange for the award of equity instruments based upon the fair value of the award on the date of grant. The fair value of that award is then ratably recognized as expense over the period during which the recipient is required to provide services in exchange for that award.

Options and warrants granted to consultants and other non-employees are recorded at fair value as of the grant date and subsequently adjusted to fair value at the end of each reporting period until such options and warrants vest, and the fair value of such instruments, as adjusted, is expensed over the related vesting period. Outstanding non-employee grants continue to be adjusted to fair value after the vesting, and the fair value adjustment is expensed.

Net Loss per Share

Basic loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding, plus potentially dilutive common shares. Convertible debt, preferred stock, restricted stock units, stock options and warrants are excluded from the diluted net loss per share calculation when their impact is antidilutive. The Company reported a net loss for the three and six months ended June 30, 2017 and 2016, and as a result, all potentially dilutive common shares are considered antidilutive for these periods.

Common shares potentially issuable at June 30, 2017 and 2016 consist of:

Reclassification

Certain amounts in the 2016 financial statements of operations have been reclassified to conform to the 2017 presentation. These reclassifications had no impact on previously reported net loss.

Subsequent Events

The Company evaluates events and/or transactions occurring after the balance sheet date and before the issue date of the condensed financial statements to determine if any of those events and/or transactions require adjustment to or disclosure in the financial statements.

Revision of Financial Statements

During the preparation of its Offering Circular Supplement for the quarterly period ended March 31, 2017, the Company determined it had improperly classified its Notes Payable, MLSC and certain related accrued interest as long-term liabilities, which resulted in an understatement of current liabilities as of December 31, 2016. The Company assessed the materiality of the misstatement in accordance with Staff Accounting Bulletin No. 99, “Materiality” and No. 108, “Quantifying Misstatements”, and concluded that these classification errors were not qualitatively material and there was no impact on the Company’s condensed statements of operations, cash flows, changes in redeemable and convertible preferred stock and stockholders’ equity (deficiency) and net loss per share for the years then ended, nor on the Company’s stockholders’ equity (deficiency). As such, the correction of the error is reflected in the December 31, 2016 balance sheet. Disclosure of the revised amounts will also be reflected in future filings containing the applicable periods.

The effect of this revision on the line items within the Company’s balance sheet as of December 31, 2016 was as follows:

Recent Accounting Pronouncements

See discussion of recent accounting pronouncements are described in Note 3 to the Company’s audited financial statements included in the Company’s Offering Circular. 

When recorded, inventory reserves are intended to reduce the carrying value of inventories to their net realizable value. The Company establishes inventory reserves when conditions exist that indicate inventory may be in excess of anticipated demand or is obsolete based upon assumptions about future demand for the Company’s products or market conditions. The Company regularly evaluates the ability to realize the value of inventories based on a combination of factors including the following: forecasted sales or usage, estimated product end of life dates, estimated current and future market value and new product introductions. At June 30, 2017, the Company provided a reserve of approximately $36,000 for excess and obsolete inventories.

Note 5 -Revolving Line of Credit

On June 8, 2017, the Company’s Chief Executive Officer and Director, entered into an agreement with the Company pursuant to which he committed irrevocably to establish an up to $1,000,000 revolving line of credit for the Company. This commitment is subject to the preparation, execution and delivery of definitive loan documentation in customary form, including note(s) incorporating substantially the terms and conditions set forth in the accompanying term sheet. The line of credit will bear an interest rate of 10% of per annum and will terminate upon the earlier of (i) December 31, 2018; and (ii) the Company entering into a debt or loan facility with a bank or non-bank lender in the aggregate amount of not less than the greater of (A) $500,000 and (B) the then outstanding principal and interest under the facility.

Note 6 - Notes Payable, MLSC

On June 6, 2017, Myomo and MLSC entered into an agreement to extend and amend Myomo’s promissory note to MLSC. The promissory note’s maturity date of June 7, 2017 was extended to May 7, 2019, with repayment in twenty-four equal monthly installments beginning June 7, 2017. The unpaid principal and accrued interest is due and payable upon the earlier of (i) May 7, 2019, (ii) the closing of an initial public offering, prior to August 1, 2017, with gross proceeds of not less than $10 million, (iii) the sale of additional equity securities of $5 million or more at any time unless associated with the occurrence of an initial public offering prior to August 1, 2017, (iv) the closing of an acquisition of the Company, and (v) the occurrence of a default, as defined in the promissory note. The amended promissory note bears a reduced interest rate of 7% per annum. MLSC has the right, at its sole discretion, to extend the maturity date. Myomo has the right to redeem the note, in whole or in part, without penalty or premium with thirty days notice to MLSC.

Note 7 - Notes Payable, Shareholder

On May 23, 2017, Myomo and a related party noteholder entered into an agreement to amend Myomo’s related party promissory notes. The maturity date was extended from June 8, 2017 to June 8, 2019, unless prior to that date, the Company completes an equity financing in any twelve month period raising an aggregate of $10 million in gross proceeds (a “Qualified Financing”), excluding the conversion into common stock in an initial public offering of any convertible notes outstanding on the date of this amendment. In such case, these notes become due within 30 days of the completion of the financing. The Company may elect, in its sole discretion, to repay up to 50% of the outstanding principal and any accrued but unpaid interest as shall be due and payable under this note by issuing shares of the Company’s equity equal to 80% of the price per share of common stock.

Note 8 - 2016 Convertible Promissory Notes

During the three months ended March 31, 2017 the Company issued the 2016 convertible promissory notes with an aggregate principal balance of $1,770,000 for cash. In addition, during this period the Company entered into an agreement with certain 2015 convertible promissory noteholders whereby the noteholders of the 2015 convertible promissory noteholders exchanged $430,000 notes for an equivalent amount of 2016 convertible promissory notes (See Note 9). The Company did not recognize a gain or loss on the exchange of the notes. The 2016 convertible promissory notes had an interest rate of 8% per annum and matured on December 31, 2018, at which time the principal and any accrued but unpaid interest would be due and payable on demand. The notes were subordinated to the notes payable, MLSC.

The 2016 convertible promissory notes provided that in the event the Company, on or before the date of the repayment in full of these notes, sells shares of its equity securities to investors in any public equity financing resulting in gross proceeds to the Company of at least $5 million (excluding the conversion of these convertible promissory notes and any other indebtedness, but including, for such purposes, all amounts raised in the Company’s initial public offering, then the outstanding principal balance of these notes, and any accrued but unpaid interest will be automatically converted into the equity securities upon the closing of the initial public offering. The number of shares of equity securities of the Company to be issued upon such conversion shall be equal to the quotient obtained by dividing the entire principal amount plus accrued interest by the lower of (i) a price per share equal to $35,000,000 divided by the aggregate number of shares of capital stock outstanding on a fully diluted basis immediately prior to the initial closing of the Qualified Financing, as defined, and (ii) eighty percent (80%) of the per share price paid by the Investors in the Qualified Financing.

On June 5, 2017, the Company modified the terms of these 2016 convertible promissory notes such that the automatic conversion of these notes will occur upon any public equity financing resulting in gross proceeds to the Company of at least $5,000,000, excluding the conversion of the notes and any other indebtedness, but including, for such purposes, all amounts raised in the IPO and the concurrent private placement.

Upon the closing of the Company’s IPO on June 9, 2017, in accordance with the terms of the 2016 convertible promissory notes, the principal balance of these notes, and all accrued but unpaid interest, totaling $5,467,389 were converted into 1,055,430 shares of common stock at weighted-average price of $5.18 per share.

In connection with the issuance of the 2016 convertible promissory notes, the Company issued, to these noteholders, warrants to purchase common stock which are exercisable for three years from the date of the IPO. One warrant was issued for each share of common stock issued as part of the conversion. Upon the closing of the IPO, and at June 30, 2017, there were warrants outstanding to purchase 799,349 shares of common stock exercisable at $6.47 per share.

In accordance with ASC 470-20-25-20 “Contingent Conversion Option” if the conversion terms of the 2016 convertible promissory notes would be triggered by future events not controlled by the issuer shall be accounted for as contingent conversion options. The Company determined that the future public equity financing is analogous to an IPO and considered to be a contingency outside the control of the holder. Accordingly, upon the closing of the Company’s IPO, it recorded a charge to interest expense in the statement of operations on June 9, 2017 of $4,142,000 for the issuance of the warrants.

The Company had capitalized deferred issuance costs of approximately $20,800 relating to 2016 convertible promissory notes and had amortized approximately $6,700 to interest expense in the statements of operations through the date of its IPO. Debt issuance costs are comprised of incremental legal and accounting fees directly related to the issuance of convertible promissory notes. Debt issuance costs are amortized over the life of the related debt instrument. Net debt issuance costs are included in the balance sheets as a reduction (debt discount) of the related convertible promissory notes prior to the closing of the Company’s IPO.

Note 9 - 2015 Convertible Promissory Notes

For the three months ended March 31, 2017, the noteholders exchanged $430,000 of their 2015 Convertible Promissory Notes for 2016 convertible promissory notes of an equivalent principal amount. The other 2015 Convertible Promissory Notes that were previously outstanding had been exchanged for 2016 convertible promissory notes of an equivalent principal amount in 2016. The Company did not recognize a gain or loss the exchange of the notes. (See Note 8).

In connection with the issuance of the 2015 convertible promissory notes, the Company agreed to issue warrants to purchase common stock to these noteholders, which are exercisable five years from the date of the IPO. The number of shares of stock to be acquired under the warrants is determined by a formula which amounts to 15% of the principal amount invested divided by the lowest price paid per share for the equity securities by the investors in the Equity Financing as defined. Upon the closing of the IPO, the Company issued warrants to purchase 29,425 shares of common stock exercisable at $5.25 per share. All warrants issued were outstanding at June 30, 2017.

In accordance with ASC 470-20-25-20 “Contingent Conversion Option” if the conversion terms of the convertible note would be triggered by future events not controlled by the issuer shall be accounted for as contingent conversion options. The Company determined that the future public equity financing is analogous to an IPO and considered to be a contingency outside the control of the holder. Accordingly the Company recorded a charge to interest expense for the six months ended June 30, 2017 of $1,030,000 for the issuance of the warrants upon the closing of the Company’s IPO.

During the six months ended June 30, 2017, the Company granted options to purchase 69,600 shares of its common stock to certain executives, employees and consultants.

As of June 30, 2017, there was $319,447 of unrecognized compensation cost related to employees and non-employee unvested stock option grants, which is expected to be recognized over a weighted-average remaining service period of approximately 1.5 years.

Note 11 - Fair Value of Financial Instruments

The Company measures the fair value of financial assets and liabilities based on the guidance of ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”) which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.

ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:

The carrying amounts of the Company’s other financial instruments, such as cash and cash equivalents, accounts receivable and accounts payable, approximate fair value due to the short-term nature of these instruments. The carrying amounts of the Company’s notes payables approximates fair value, as the notes include contractual interest rates, taken together with other features such as concurrent issuance of warrants, which are comparable to rates of returns for instruments of similar credit risk. 

Derivative liabilities measured at fair value on a recurring basis at June 30, 2017 were as follows:

The following table presents the fair value reconciliation of Level 3 liabilities measured at fair value during the six months ended June 30, 2017:

Assumptions utilized in the valuation of Level 3 liabilities are described as follows:

The expected stock price volatility for the Company’s common stock warrant liabilities was determined by the historical volatilities for industry peers and used an average of those volatilities. Risk free interest rates were obtained from U.S. Treasury rates for the applicable periods. The expected term used is the contractual life of the instrument being valued. The expected dividend yield was not considered in the valuation of the common stock liabilities as the Company historically has not declared any dividends and does not expect to.

The Company’s other financial instruments include cash and cash equivalents and accounts receivable, which management believes approximates fair value due to the short-term nature of these instruments. The carrying value of the Company’s trade payables and notes payable also approximates fair value, as the notes bear terms and conditions comparable to the current market for obligations with similar terms and maturities. 

Note 12 - Common Stock

On June 9, 2017, the Company completed its IPO raising $4,991,235, before selling and other offering expenses of $1,006,158, through the sale of 665,498 shares of its common stock at a price of $7.50 per share.

On June 9, 2017, the Company also closed on a private placement pursuant to which it sold to accredited investors an aggregate of 557,216 units at $5.25 per unit, for aggregate proceeds of $2,925,385, before offering expenses of $2,500. Each unit consists of one share of common stock and a three-year warrant to purchase one share of common stock exercisable for $7.50 per share.

In June 2017, the Company issued 4,000 shares to an investor relations firm for services performed. The Company recorded a charge to operations for $30,000 for the fair value of the stock issued.

During the six months ended June 30, 2017 the Company issued 8,167 shares of common stock through the exercise of stock options for proceeds of $2,982. During the six months ended June 30, 2016 the Company issued 2,003 shares of common stock through the exercise of stock options for proceeds of $132. 

Upon closing of the IPO, the Company issued 960,083 shares of common stock upon the conversion of 960,083 shares of Series A-1 Preferred Stock, and 1,662,104 shares of common stock upon the conversion of 1,662,104 shares of Series B-1 Preferred Stock. As of June 30, 2017, the Company does not have any convertible preferred stock issued or outstanding. 

Note 14 - Stock Options Plans

The Company granted options for 69,600 shares of common stock during the six months ended June 30, 2017, at a weighted-average exercise price of $1.0496. The aggregate fair value of the awards on the grant date was approximately $50,000.

The Company uses the Black-Scholes option pricing model to estimate the grant date fair value of its stock options. There was no income tax benefit recognized in the financial statements for share-based compensation arrangements for the six months ended June 30, 2017. The assumptions underlying the calculation of grant date fair value are as follows for the six months ended:

The stock price volatility for the Company's options was determined using historical volatilities for industry peers. The risk-free interest rate was derived from U.S. Treasury rates existing on the date of grant for the applicable expected option term. The expected term represents the period of time that options are expected to be outstanding. Because the Company does not have historical exercise behavior, it determines the expected life assumption using the simplified method, which is an average of the contractual term of the option and its ordinary vesting period. The expected dividend yield assumption is based on the fact that the Company has never paid, nor has any intention to pay, cash dividends.

Note 15 -Warrants

On June 9, 2017, the Company issued warrants for the purchase of 557,216 shares of common stock to investors in connection with the IPO, as more fully described in Note 1. The warrants are exercisable for three years from the date of the IPO and are fully vested and exercisable at any time by the holder at a price of $7.50 per share. The warrants can only be settled in the Company’s own shares, and as such, under ASC 815 Derivatives and Hedging the warrants were deemed to be equity instruments and, therefore are included in stockholders’ equity and no fair value adjustments are required from period-to-period.

On June 9, 2017, the Company issued warrants for the purchase of 33,275 shares of common stock to its IPO selling agent. The warrants are fully vested, exercisable at any time after December 9, 2017 by the holder at an exercise price of $8.25 per share and have a life of five years. The warrants include a fundamental transaction clause which provide for the warrant holder to be paid in cash upon an event as defined in the warrant. The cash payment is to be computed using the Black-Scholes valuation model for the unexercised portion of the warrant. Accordingly under ASC 815 Derivatives and Hedging the warrants were deemed to be a derivative liability and are marked to market at each reporting period. Accordingly, on the date of issuance the Company recorded as a derivative liability the fair value of the warrants which was $156,725 and on June 30, 2017 the derivative liability was marked to its then fair market value of $250,415.

In connection with the issuance of its 2016 and 2015 convertible promissory notes, as more fully described in Notes 8 and 9, the Company issued warrants that expire three years from the date of its IPO for the purchase of 799,349 shares of common stock and 29,425 warrants that expire five years from the date of its IPO.

In addition, in connection with the issuance of its promissory notes to MLSC and a shareholder, as more fully described in Notes 7 and 8 to our audited financial statements included in our Offering Circular, the Company issued warrants that expire in 2021 for the purchase of 8,228 shares of stock at an exercise price of $6.47 per share.

Note 16 - Related Party Transactions

The Company sells its products to GRE, an orthotics and prosthetics practice, whose ownership includes Jonathan Naft, a minority stockholder and officer of the Company. Sales to this related party are sold at standard list process. Sales to GRE during were approximately $24,400 and $24,500 in the six month ended 2017 and 2016, respectively.

The Company also obtains consulting and fabrication services from GRE. Charges for these services amounted to approximately $118,200 and $61,500 during the six months ended June 30, 2017 and 2016, respectively. Included in accounts payable and accrued expenses at June 30, 2017 and December 31, 2016, is $28,700 and $6,600, respectively, due to the related party.

Certain directors, executive officers and 5% stockholders of the Company purchased 296,669 (53% of total) shares of common stock with warrants, at $5.25 per unit in the Company’s private placement that closed concurrently with the IPO on June 9, 2017.

Note 17 - Commitments and Contingencies

Litigation

In the normal course of business, the Company may be involved in legal proceedings, claims and assessments arising from the ordinary course of business. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Currently, there is no litigation against the Company.

Warranty Liability

Warranty expense amounted to:

Major Customers

For the six months ended June 30, 2017, three customer accounted for approximately 49% (27%-$117,800, 12%-$51,800 and 10%-$45,000) of revenues, excluding grant income.

For the six months ended June 30, 2016, three customers accounted for approximately 61% (25%-$116,600, 25%-$113,700 and 11%-$47,200) of revenues, excluding grant income.

At June 30, 2017, two customers (35%-$89,600 and 10%-$25,000) accounted for approximately 45% of accounts receivable.

At December 31, 2016, four customers (23%-$26,100, 23%-$25,700, 21%-$24,500 [related party] and 13%-$15,200) accounted for approximately 80% of accounts receivable.

Contingently Issuable Shares

The Company, in the first quarter of 2017, accrued $26,000 for contingently issuable shares of its common stock in connection with a technology licensing agreement.