During 2010, the Company issued 219,369 shares of restricted common stock to certain employees, advisors and consultants of the Company.
During 2011, the Company issued certain convertible notes payable that included warrants. The related beneficial conversion feature, valued at
$823 was classified as an equity instrument and recorded as a discount to the carrying value of the related debt. The warrants, valued at approximately $1,260, were recorded as a warrant liability and recorded as a discount to the carrying value
related to debt.
During 2011, the Company issued 7,676,828 shares of common stock to note holders for the conversion of Convertible Notes
with a principal balance totaling $3,030 and accrued interest totaling $460.
During 2012, the Company issued 1,525,387 shares of common
stock to note holders for the conversion of Convertible Notes with a principal balance totaling $1,500 and accrued interest totaling $25.
During 2012, the Company issued warrants, valued at approximately $32,743, in connection with the Reverse Merger and the Private Placement.
The warrants were recognized as a derivative liability.
During 2012, the Company purchased equipment valued at $34 through a capital
lease.
During 2012, the Company transferred approximately $391 of bioprinter related inventory to fixed assets.
During 2012, the Company issued 650,000 warrants to purchase shares of our common stock for consulting services. The warrants were valued at
approximately $890.
During 2012, the warrant liability was reduced by $23,321 as a result of settlements during the year.
During the three months ended March 31, 2013, the Company transferred approximately $272 of bioprinter related inventory to fixed assets.
During the three months ended March 31, 2013, the warrant liability was reduced by approximately $23,869 as a result of warrant
exercises and $1,886 for warrants reclassified as equity instruments.
During the year ended March 31, 2014, the warrant liability
was reduced by approximately $10,874 as a result of warrant exercises and $767 for warrants reclassified as equity instruments.
During
the year ended March 31, 2014, the Company issued 75,000 warrants to purchase shares of our common stock for consulting services. The warrants were valued at approximately $404.
Notes to Consolidated Financial Statements
1. Change in Fiscal Year End
On March 31, 2013, the Board of Directors of the Company (the Board) approved a change in the
Companys fiscal year end from December 31
st
to March 31
st
. As a result of this change, the Company filed a Transition Report on
Form 10-KT for the three-month transition period ended March 31, 2013. References to any of the Companys pre-2013 fiscal years mean the fiscal year ending December 31 of that calendar year.
2. Description of Business and Summary of Significant Accounting Policies
A summary of significant accounting policies, consistently applied in the preparation of the accompanying consolidated financial statements
follows:
Nature of operations and basis of presentation
References in these notes to the consolidated financial statements to Organovo Holdings, Inc., Organovo Holdings, we,
us, our, the Company and our Company refer to Organovo Holdings, Inc. and its consolidated subsidiary Organovo, Inc. The Company is developing and commercializing functional three-dimensional
(3D) human tissues that can be employed in drug discovery and development, biological research, and as therapeutic implants for the treatment of damaged or degenerating tissues and organs.
As of March 31, 2014, the Company has devoted its efforts primarily to developing a platform technology for the generation of functional human
tissues that can be employed in drug discovery and development, biological research, and as therapeutic implants for the treatment of damaged or degenerating tissues and organs, raising capital and building infrastructure. The Company has not
realized significant revenues from its planned principal operations. Accordingly, the Company is considered to be in the development stage.
Reverse merger transaction
On February 8,
2012, Organovo, Inc., a privately held Delaware corporation, merged with and into Organovo Acquisition Corp., a wholly-owned subsidiary of Organovo Holdings, Inc., a publicly traded Delaware corporation (the Company), with Organovo, Inc.
surviving the merger as a wholly-owned subsidiary of the Company (the Merger). As a result of the Merger, the Company acquired the business of Organovo, Inc., and has continued the existing business operations of Organovo, Inc.
Simultaneously with the Merger, on February 8, 2012 (the Closing Date), all of the issued and outstanding shares of Organovo, Inc.s
common stock converted, on a 1 for 1 basis, into shares of the Companys common stock, par value $0.001 per share. Also, on the closing date, all of the issued and outstanding options to purchase shares of Organovo, Inc.s common stock and
other outstanding warrants to purchase Organovo, Inc.s common stock, and all of the issued and outstanding bridge warrants to purchase shares of Organovo, Inc.s common stock, converted on a 1 for 1 basis, into options, warrants and new
bridge warrants to purchase shares of the Companys common stock.
Immediately following the consummation of the Merger: (i) the former security
holders of Organovo, Inc. common stock had an approximate 75% voting interest in the Company and the Company stockholders retained an approximate 25% voting interest, (ii) the former executive management team of Organovo, Inc. remained as the
only continuing executive management team for the Company, and (iii) the Companys ongoing operations consisted solely of the ongoing operations of Organovo, Inc. Based primarily on these factors, the Merger was accounted for as a reverse
merger and a recapitalization in accordance with U.S. generally accepted accounting principles (GAAP). As a result, these financial statements reflect the historical results of Organovo, Inc. prior to the Merger, and the combined results
of the Company following the Merger. The par value of Organovo, Inc.
F-9
common stock immediately prior to the Merger was $0.0001 per share. The par value subsequent to the Merger is $0.001 per share, and therefore the historical results of Organovo, Inc. prior to the
Merger have been retroactively adjusted to affect the change in par value.
In connection with three separate closings of a private placement transaction
completed in connection with the Merger (the Private Placement), the Company received gross proceeds of approximately $5.0 million, $1.8 million and $6.9 million on closings on February 8, 2012, February 29, 2012 and
March 16, 2012, respectively. In 2011, the Company received $1.5 million from the purchase of 6% convertible notes which were automatically converted into 1,500,000 shares of common stock, plus 25,387 shares for accrued interest of $25,387 on
the principal, on February 8, 2012.
The cash transaction costs related to the Merger were approximately $2.1 million.
Before the Merger, the Companys Board of Directors and stockholders adopted the 2012 Equity Incentive Plan (the 2012 Plan). In addition, the
Company assumed and adopted Organovo, Inc.s 2008 Equity Incentive Plan.
NYSE MKT Listing
On July 9, 2013, the Company announced that its common stock had been approved to list on the NYSE MKT. Shares began trading on the New York Stock
Exchange on July 11, 2013 under the symbol ONVO. Prior to that time, the Companys shares were quoted on the OTC QX.
Liquidity
As of March 31, 2014, the Company had an accumulated deficit of approximately $92.2 million. The Company also had negative cash flows from
operations of approximately $15.6 million during the year ended March 31, 2014.
In August of 2013, the Company raised net proceeds of approximately
$43.4 million through the sale of 10,350,000 shares of its common stock in a public offering (see Note 7).
In addition, in November 2013, the Company
entered into an equity distribution agreement with an investment banking firm. Under the terms of the distribution agreement, the Company may offer and sell up to 4,000,000 shares of its common stock, from time to time, through the investment bank
in at the market offerings, as defined by the SEC, and pursuant to the Companys effective shelf registration statement previously filed with the SEC. As of March 31, 2014, the Company has raised approximately $3.5 million
through the sale of 334,412 shares of its common stock under the distribution agreement.
Through March 31, 2014, the Company has financed its
operations primarily through the sale of convertible notes, the private placement of equity securities, the public offering of common stock, and through revenue derived from grants or collaborative research agreements. Based on its current
operating plan and available cash resources, the Company has sufficient resources to fund its business for at least the next twelve months.
The Company
will need additional capital to further fund product development and commercialization of its human tissues that can be employed in drug discovery and development, biological research, and as therapeutic implants for the treatment of damaged or
degenerating tissues and organs. The Company intends to cover its future operating expenses through cash on hand, through additional financing from existing and prospective investors, from revenue derived from grants and collaborative research
agreements, and revenue from the commercialization of products and services. However, we may not be successful in obtaining funding from new or existing collaborative research agreements. In addition, we cannot be sure that additional financing will
be available when needed or that, if available, financing will be obtained on terms favorable to us or to our stockholders. Further, we cannot assure you that we will receive 100% of the potential funding under existing grants, and we may not be
successful in securing additional grants in the future.
F-10
Having insufficient funds may require us to delay, scale back, or eliminate some or all of our development
programs or relinquish rights to our technology on less favorable terms than we would otherwise choose. Failure to obtain adequate financing could eventually adversely affect our ability to operate as a going concern. If we raise additional funds
from the issuance of equity securities, substantial dilution to our existing stockholders would likely result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well
as covenants and specific financial ratios that may restrict our ability to operate our business.
Use of estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make
estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Significant estimates used in preparing the consolidated financial statements include those assumed in
computing the valuation of warrants and conversion features, revenue recognized under the proportional performance model, the valuation of stock-based compensation expense, and the valuation allowance on deferred tax assets.
Financial instruments
For certain of the Companys
financial instruments, including cash and cash equivalents, grants receivable, inventory, prepaid expenses and other assets, accounts payable, accrued expenses, deferred revenue, and capital lease obligations, the carrying amounts are generally
considered to be representative of their respective fair values because of the short-term nature of those instruments.
Cash and cash equivalents
The Company considers all highly liquid investments with original maturities of 90 days or less to be cash equivalents.
Derivative financial instruments
The Company does not
use derivative instruments to hedge exposures to cash flow, market or foreign currency.
The Company reviews the terms of convertible debt and equity
instruments it issues to determine whether there are derivative instruments, including an embedded conversion option that is required to be bifurcated and accounted for separately as a derivative financial instrument. In circumstances where a host
instrument contains more than one embedded derivative instrument, including a conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument. Also, in
connection with the sale of convertible debt and equity instruments, the Company may issue freestanding warrants that may, depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity.
Derivative instruments are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported as
non-operating income or expense. When the convertible debt or equity instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds allocated to the convertible host instruments are
first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the convertible instruments themselves, usually resulting in those instruments being recorded at a discount from
their face value.
The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over the
life of the instrument through periodic charges to interest expense, using the effective interest method.
F-11
Restricted cash
As of March 31, 2014, March 31, 2013, and December 31, 2012, the Company had approximately $78,800, $88,300, and $88,300, respectively, of
restricted cash deposited with a financial institution. The entire $78,800 as of March 31, 2014 and $38,300 of the balance as of March 31, 2013 and December 31, 2012 was held in certificates of deposit to support a letter of credit
agreement related to the facility lease entered into during 2012. In December 2013, the lease was amended to increase the rented area by 15,268 square feet, and as such, the Company was required to increase the amount held in certificates of deposit
to support the increased letter of credit as required by the lease amendment. The additional $50,000 included in the balance as of March 31, 2013 and December 31, 2012 represents funds held by a financial institution as a guarantee for the
Companys commercial credit cards. These funds were released from restriction during the year ended March 31, 2014 as a result of the Company transferring its credit card program to a different financial institution.
Grant receivable
Grant receivable as of March 31,
2013 and December 31, 2012 represents the amount due from the National Institutes of Health (NIH) under a research grant that concluded in April 2013. The Company considers the grants receivable to be fully collectible; and
accordingly, no allowance for doubtful amounts has been established. If amounts become uncollectible, they are charged to operations.
Inventory
Inventories are stated at the lower of the cost or market (first-in, first-out). Inventory consists of approximately $63,000, and $88,000 in raw
materials as of March 31, 2014 and 2013, respectively, net of reserves. Inventory consists of approximately $196,000 in finished goods, $60,000 work-in-process and $104,000 in raw materials as of December 31, 2012.
The Company provides inventory allowances based on excess or obsolete inventories determined based on anticipated use in the final product. The reserve for
obsolete inventory at March 31, 2014 was approximately $31,000. There was no reserve for obsolete inventory as of March 31, 2013 or December 31, 2012.
Fixed assets and depreciation
Property and
equipment are carried at cost. Expenditures that extend the life of the asset are capitalized and depreciated. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets or, in the
case of leasehold improvements, over the lesser of the useful life of the related asset or the lease term. The estimated useful lives of the fixed assets range between two and five years.
Impairment of long-lived assets
In accordance with
authoritative guidance the Company reviews its long-lived assets, including property and equipment and other assets, for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully
recoverable. To determine recoverability of its long-lived assets, the Company evaluates whether future undiscounted net cash flows will be less than the carrying amount of the assets and adjusts the carrying amount of its assets to fair value.
Management has determined that no impairment of long-lived assets occurred in the period from inception through March 31, 2014.
Fair value
measurement
Financial assets and liabilities are measured at fair value, which is defined 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. Valuation
F-12
techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The following is a fair value hierarchy based on three levels of
inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:
|
|
|
Level 1 Quoted prices in active markets for identical assets or liabilities.
|
|
|
|
Level 2 Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
|
|
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
The Company has issued warrants, of which some are classified as derivative liabilities as a result of the terms in the warrants that provide for down-round
protection in the event of a dilutive issuance. The Company uses Level 3 inputs for its valuation methodology for the warrant derivative liabilities. The estimated fair values were determined using a Monte Carlo option pricing model based on various
assumptions (see Note 5). The Companys derivative liabilities are adjusted to reflect estimated fair value at each period end, with any decrease or increase in the estimated fair value being recorded in other income or expense accordingly, as
adjustments to the fair value of derivative liabilities. Various factors are considered in the pricing models we use to value the warrants, including the Companys current stock price, the remaining life of the warrants, the volatility of the
Companys stock price, and the risk free interest rate. Future changes in these factors will have a significant impact on the computed fair value of the warrant liability. As such, we expect future changes in the fair value of the warrants to
continue to vary significantly from quarter to quarter.
The estimated fair values of the liabilities measured on a recurring basis are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2014, March 31, 2013, and December 31, 2012
(in thousands):
|
|
|
|
Balance at
March 31,
2014
|
|
|
Quoted
Prices in
Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Other
Unobservable
Inputs
(Level 3)
|
|
Warrant liability
|
|
$
|
377
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
377
|
|
|
|
|
|
|
|
|
Balance at
March 31,
2013
|
|
|
Quoted
Prices in
Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Other
Unobservable
Inputs
(Level 3)
|
|
Warrant liability
|
|
$
|
6,898
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,898
|
|
|
|
|
|
|
|
|
Balance at
December 31,
2012
|
|
|
Quoted
Prices in
Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Other
Unobservable
Inputs
(Level 3)
|
|
Warrant liability
|
|
$
|
20,619
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
20,619
|
|
F-13
The following table presents the activity for liabilities measured at estimated fair value using unobservable
inputs for the year ended December 2012, the three months ended March 31, 2013, and the year ended March 31, 2014:
Fair Value
Measurements Using Significant Unobservable Inputs (Level 3)
|
|
|
|
|
|
|
Warrant
Derivative
Liability
(in thousands)
|
|
Balance at December 31, 2011
|
|
$
|
1,267
|
|
Issuances
|
|
$
|
32,742
|
|
Adjustments to estimated fair value
|
|
$
|
9,931
|
|
Warrant liability removal due to settlements
|
|
$
|
(23,321
|
)
|
|
|
|
|
|
Balance at December 31, 2012
|
|
$
|
20,619
|
|
Issuances
|
|
$
|
|
|
Adjustments to estimated fair value
|
|
$
|
12,034
|
|
Warrant liability removal due to settlements
|
|
$
|
(23,869
|
)
|
Warrant liability reclassified to equity
|
|
$
|
(1,886
|
)
|
|
|
|
|
|
Balance at March 31, 2013
|
|
$
|
6,898
|
|
Issuances
|
|
$
|
|
|
Adjustments to estimated fair value
|
|
$
|
5,120
|
|
Warrant liability removal due to settlements
|
|
$
|
(10,874
|
)
|
Warrant liability reclassified to equity
|
|
$
|
(767
|
)
|
|
|
|
|
|
Balance at March 31, 2014
|
|
$
|
377
|
|
|
|
|
|
|
Research and development
Research and development expenses, including direct and allocated expenses, consist of independent research and development costs, as well as costs associated
with sponsored research and development. Research and development costs are expensed as incurred.
Income taxes
Deferred income taxes are recognized for the tax consequences in future years for differences between the tax basis of assets and liabilities and their
financial reporting amounts at each year end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is the combination of the tax payable for the year and the change during the year in deferred tax assets and liabilities.
Revenue recognition
The Companys revenues are
derived from collaborative research agreements, grants from the NIH, U.S. Treasury Department and private not-for-profit organizations, as well as the sale of bioprinter related products and services, and license agreements.
The Company recognizes revenue when the following criteria have been met: (i) persuasive evidence of an arrangement exists; (ii) services have been
rendered or product has been delivered; (iii) price to the customer is fixed and determinable; and (iv) collection of the underlying receivable is reasonably assured.
Billings to customers or payments received from customers are included in deferred revenue on the balance sheet until all revenue recognition criteria are
met. As of March 31, 2014, March 31, 2013, and December 31, 2012, the Company had approximately $17,000, $62,000, and $0, respectively, in deferred revenue related to its collaborative research programs.
F-14
Product Revenue
The Company recognizes product revenue at the time of shipment to the customer, provided all other revenue recognition criteria have been met. The Company
recognizes product revenues upon shipment to distributors, provided that (i) the price is substantially fixed or determinable at the time of sale; (ii) the distributors obligation to pay the Company is not contingent upon resale of
the products; (iii) title and risk of loss passes to the distributor at time of shipment; (iv) the distributor has economic substance apart from that provided by the Company; (v) the Company has no significant obligation to the
distributor to bring about resale of the products; and (vi) future returns can be reasonably estimated. For any sales that do not meet all of the above criteria, revenue is deferred until all such criteria have been met.
Research and Development Revenue Under Collaborative Agreements
The Companys collaboration revenue consists of license and collaboration agreements that contain multiple elements, including non-refundable upfront
fees, payments for reimbursement of third-party research costs, payments for ongoing research, payments associated with achieving specific development milestones and royalties based on specified percentages of net product sales, if any. The Company
considers a variety of factors in determining the appropriate method of revenue recognition under these arrangements, such as whether the elements are separable, whether there are determinable fair values and whether there is a unique earnings
process associated with each element of a contract.
The Company recognizes revenue from research funding under collaboration agreements when earned on a
proportional performance basis as research hours are incurred. The Company performs services as specified in each respective agreement on a best-efforts basis, and is reimbursed based on labor hours incurred on each contract. The Company
initially defers revenue for any amounts billed or payments received in advance of the services being performed, and recognizes revenue pursuant to the related pattern of performance, based on total labor hours incurred relative to total labor hours
estimated under the contract.
In December 2010, the Company entered into a 12 month research contract agreement with a third party, whereby the Company
was engaged to perform research and development services on a fixed-fee basis for approximately $600,000. Based on the proportional performance criteria, the Company recognized approximately $150,000 and $450,000 in revenue related to the contract
during the years ended December 31, 2012 and 2011, respectively. Total revenue recognized on the contract from inception through March 31, 2014 was approximately $600,000.
In October 2011, the Company entered into a research contract agreement with a third party, whereby the Company is performing research and development
services on a fixed-fee basis for $1,365,000. The agreement included an initial payment to the Company of approximately $239,000 with remaining payments occurring over a twenty-one month period. On November 27, 2012, the agreement was amended
to include additional research and development services, for an additional $135,000, bringing the total contract value to $1,500,000. The third party ultimately elected to have only $40,000 of these additional research and development services
performed by the Company, resulting in a total contract value of $1,405,000. The amendment extended the original contract (which ran concurrently) from twenty-one months to twenty-eight months. The Company recorded approximately $184,000, $97,000,
$120,000, $885,000 and $239,000 for the year ended March 31, 2014, the three months ended March 31, 2013 and 2012, and the years ended December 31, 2012 and 2011, respectively, in revenue related to the research contract in
recognition of the proportional performance achieved. Total revenue recognized on the contract from inception through March 31, 2014 was $1,405,000.
Revenue Arrangements with Multiple Deliverables
The Company
occasionally enters into revenue arrangements that contain multiple deliverables. Judgment is required to properly identify the accounting units of the multiple deliverable transactions and to determine the manner in which revenue should be
allocated among the accounting units. Moreover, judgment is used in
F-15
interpreting the commercial terms and determining when all criteria of revenue recognition have been met for each deliverable in order for revenue recognition to occur in the appropriate
accounting period. For multiple deliverable agreements, consideration is allocated at the inception of the agreement to all deliverables based on their relative selling price. The relative selling price for each deliverable is determined using VSOE
of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence of selling price exists, the Company uses its best estimate of the selling price for the deliverable.
The Company recognizes revenue for delivered elements only when it determines there are no uncertainties regarding customer acceptance. While changes in the
allocation of the arrangement consideration between the units of accounting will not affect the amount of total revenue recognized for a particular sales arrangement, any material changes in these allocations could impact the timing of revenue
recognition, which could affect the Companys results of operations.
The Company expects to periodically receive license fees for non-exclusive
research licensing associated with funded research projects. License fees under these arrangements are recognized over the term of the contract or development period as it has been determined that such licenses do not have stand-alone value.
NIH and U.S. Treasury Grant Revenues
During 2010, the U.S.
Treasury awarded the Company two one-time grants totaling approximately $397,000 for investments in qualifying therapeutic discovery projects under section 48D of the Internal Revenue Code. The grants covered reimbursement for qualifying expenses
incurred by the Company in 2010 and 2009. The proceeds from these grants are classified in Revenues Grants for the period from inception through March 31, 2014.
During 2012, 2010 and 2009, the NIH awarded the Company three research grants totaling approximately $558,000. Revenues from the NIH grants are based upon
internal and subcontractor costs incurred that are specifically covered by the grants, and where applicable, an additional facilities and administrative rate that provides funding for overhead expenses. These revenues are recognized when expenses
have been incurred by subcontractors and as the Company incurs internal expenses that are related to the grants. Revenue recognized under these grants for the year ended March 31, 2014, the three months ended March 31, 2013 and 2012, and
the years ended December 31, 2012, and 2011 was approximately $12,000, $117,000, $0, $162,000, and $57,000, respectively. Total revenue recorded under these grants from inception through March 31, 2014 was approximately $558,000.
During August of 2013, the Company was awarded a research grant by a private, not-for-profit organization for up to $251,700, contingent on go/no-go decisions
made by the grantor at the completion of each stage of research as outlined in the grant award. Revenues from the grant are based upon internal costs incurred that are specifically covered by the grant, plus an additional rate that provides funding
for overhead expenses. Revenue is recognized when the Company incurs reimbursable expenses that are related to the grant. The Company recognized revenue from this grant of approximately $119,000 for the year ended March 31, 2014 and from
inception to date.
Stock-based compensation
The
Company accounts for stock-based compensation in accordance with the Financial Accounting Standards Boards ASC Topic 718,
Compensation Stock Compensation,
which establishes accounting for equity instruments exchanged for employee
services. Under such provisions, stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense, under the straight-line method, over the employees requisite
service period (generally the vesting period of the equity grant).
F-16
The Company accounts for equity instruments, including restricted stock or stock options, issued to non-employees
in accordance with authoritative guidance for equity based payments to non-employees. Stock options issued to non-employees are accounted for at their estimated fair value determined using the Black-Scholes option-pricing model. The fair value of
options granted to non-employees is re-measured as they vest, and the resulting increase in value, if any, is recognized as expense during the period the related services are rendered. Restricted stock issued to non-employees is accounted for at
their estimated fair value as they vest.
Comprehensive income (loss)
Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. The
Company is required to record all components of comprehensive income (loss) in the financial statements in the period in which they are recognized. Net income (loss) and other comprehensive income (loss), including unrealized gains and losses on
investments, are reported, net of their related tax effect, to arrive at comprehensive income (loss). For the year ended March 31, 2014, the three months ended March 31, 2013 and 2012, and the years ended December 31, 2012 and 2011,
and for the period April 19, 2007 (inception) through March 31, 2014, the comprehensive loss was equal to the net loss.
Net loss per share
Basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period. The
weighted-average number of shares used to compute diluted loss per share excludes any assumed exercise of stock options, and the assumed issuance of common stock under restricted stock units, shares subject to repurchase and warrants as the effect
would be anti-dilutive. No dilutive effect was calculated for the year ended March 31, 2014, the three months ended March 31, 2013 or 2012, or the years ended December 31, 2012 or 2011 as the Company reported a net loss for each
respective period and the effect would have been anti-dilutive. Total common stock equivalents that were excluded from computing diluted net loss per share were approximately 7.7 million, 8.9 million, 25.8 million, 15.2 million,
and 6.4 million for the year ended March 31, 2014, the three months ended March 31, 2013 and 2012 and the years ended December 31, 2012 and 2011, respectively.
Reclassifications
Certain reclassifications were made to
the 2011 financial statements in order to conform to the presentation of the financial statements for 2012. The reclassifications did not have any effect on previously reported net loss or stockholders equity (deficit).
3. Fixed Assets
Fixed assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
Laboratory equipment
|
|
$
|
1,207
|
|
|
$
|
1,168
|
|
|
$
|
759
|
|
Computer software and equipment
|
|
|
191
|
|
|
|
114
|
|
|
|
114
|
|
Furniture and fixtures
|
|
|
33
|
|
|
|
33
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,431
|
|
|
|
1,315
|
|
|
|
906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
|
|
(574
|
)
|
|
|
(270
|
)
|
|
|
(192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
857
|
|
|
$
|
1,045
|
|
|
$
|
714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the year end March 31, 2014, the three months ended March 31, 2013 and
March 31, 2012, and the years ended December 31, 2012 and December 31, 2011 was approximately $380,000, $78,000, $15,000, $188,000 and $63,000, respectively. Depreciation and amortization expense was approximately $794,000 for the
period from April 19, 2007 (inception) through March 31, 2014.
F-17
4. Accrued Expenses
Accrued expenses consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
Accrued compensation
|
|
$
|
505
|
|
|
$
|
386
|
|
|
$
|
720
|
|
Deferred rent
|
|
|
345
|
|
|
|
270
|
|
|
|
188
|
|
Accrued legal and professional fees
|
|
|
283
|
|
|
|
53
|
|
|
|
|
|
Other accrued expenses
|
|
|
34
|
|
|
|
71
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,167
|
|
|
$
|
780
|
|
|
$
|
981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. Derivative Liability
During 2012, in relation to the reverse Merger and the three offerings under the Private Placement, the Company issued 21,347,182 five-year
warrants to purchase the Companys common stock. In October and November of 2011, the Company issued 1,500,000 five-year warrants in connection with Convertible Notes. The exercise price of the warrants is protected against down-round
financing throughout the term of the warrant, as described below. Pursuant to ASC 815-15 and ASC 815-40, the fair value of the warrants of approximately $32.7 million and $1.3 million in 2012 and 2011, respectively, was recorded as a derivative
liability on the issuance dates.
The Company revalued the warrants as of the end of each reporting period, and the estimated fair value of the
outstanding warrant liabilities was $0.4 million, $6.9 million, $20.6 million and $1.3 million as of March 31, 2014, March 31, 2013, and December 31, 2012 and December 31, 2011, respectively. The changes in fair value of the
derivative liabilities for the year ended March 31, 2014, the three months ended March 31, 2013 and 2012, and the years ended December 31, 2012 and 2011 were increases of $5.1 million, $12.0 million, $13.5 million, $9.9 million and
less than $0.1 million, respectively, and are included in other income (expense) in the statements of operations.
During the year ended March 31,
2014, the three months ended March 31, 2013 and the year ended December 31, 2012, 1,920,874, 6,990,556 and 13,010,237 warrants that were classified as derivative liabilities were exercised. The warrants were revalued as of the settlement
date, and the change in fair value was recognized to earnings. In addition, in the year ended March 31, 2014 and the three months ended March 31, 2013 the Company entered into amendment agreements with certain of the warrant holders, which removed
the down-round pricing protection provision, resulting in 269,657 and 601,735, respectively, of these warrants being reclassified from liability instruments to equity instruments. The Company also recognized a reduction in the warrant liability
based on the fair value as of the settlement date for the warrants exercised and as of the modification date for the warrants that were amended, with a corresponding increase in additional paid-in capital.
The derivative liabilities were valued at the closing dates of the Private Placement and the end of each reporting period using a Monte Carlo valuation model
with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
Closing price per share of common stock
|
|
$
|
7.64
|
|
|
$
|
3.68
|
|
|
$
|
2.60
|
|
Exercise price per share
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
Expected volatility
|
|
|
76.50
|
%
|
|
|
88.80
|
%
|
|
|
92.90
|
%
|
Risk-free interest rate
|
|
|
0.90
|
%
|
|
|
0.57
|
%
|
|
|
0.54
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining expected term of underlying securities (years)
|
|
|
2.96
|
|
|
|
3.88
|
|
|
|
4.16
|
|
In addition, as of the valuation dates, management assessed the probabilities of future financings assumptions in the Monte
Carlo valuation models. Management also applied a discount for lack of marketability to the valuation of the derivative liabilities based on such trading restrictions due to certain of the shares not being registered.
F-18
In accordance with the terms of the warrant agreements, if, prior to the expiration date of the warrants, the
Company issues additional shares of common stock, as defined below, without consideration or for a consideration per share less than the exercise price of the warrants in effect immediately prior to such issue, then the exercise price shall be
reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such exercise price by a fraction, (A) the numerator of which shall be (1) the number of shares of common stock outstanding
immediately prior to such issue plus (2) the number of shares of common stock which the aggregate consideration received or to be received by the Company for the total number of additional shares of common stock so issued would purchase at such
exercise price; and (B) the denominator of which shall be the number of shares of common stock outstanding immediately prior to such issue plus the number of such additional shares of common stock so issued; provided that (i) all shares of
common stock issuable upon conversion or exchange of convertible securities outstanding immediately prior to such issue shall be deemed to be outstanding, and (ii) the number of shares of common stock deemed issuable upon conversion or exchange
of such outstanding convertible securities shall be determined without giving effect to any adjustments to the conversion or exchange price or conversion or exchange rate of such convertible securities resulting from the issuance of additional
shares of common stock that is the subject of this calculation. For purposes of the warrants, additional shares of common stock shall mean all shares of common stock issued by the Company after the effective date (including without
limitation any shares of common stock issuable upon conversion or exchange of any convertible securities or upon exercise of any option or warrant, on an as-converted basis), other than: (i) shares of common stock (and/or warrants for any class
of equity securities of the Company) issued or issuable upon conversion or exchange of any convertible securities or exercise of any options or warrants outstanding on the effective date; (ii) shares of common stock issued or issuable by reason
of a dividend, stock split, split-up or other distribution on shares of common stock; (iii) shares of common stock (or options with respect thereto) issued or issuable to employees or directors of, or consultants to, the Company or any of its
subsidiaries pursuant to a plan, agreement or arrangement approved by the Board of Directors of the Company; (iv) any securities issued or issuable by the Company pursuant to (A) the Private Placement; or (B) the Merger;
(v) securities issued pursuant to acquisitions or strategic transactions approved by a majority of disinterested directors of the Company, provided that any such issuance shall only be to a person which is, itself or through its subsidiaries,
an operating company in a business synergistic with the business of the Company and in which the Company receives benefits in addition to the investment of funds, but shall not include a transaction in which the Company is issuing securities
primarily for the purpose of raising capital or to an entity whose primary business is investing in securities and (vi) securities issued to financial institutions, institutional investors or lessors in connection with credit arrangements,
equipment financings or similar transactions approved by a majority of disinterested directors of the Company, but shall not include a transaction in which the Company is issuing securities primarily for the purpose of raising capital or to an
entity whose primary business is investing in securities.
Upon each adjustment of the exercise price pursuant to the provisions stated above, the number
of warrant shares issuable upon exercise of the warrants shall be adjusted by multiplying a number equal to the exercise price in effect immediately prior to such adjustment by the number of warrant shares issuable upon exercise of the warrant
immediately prior to such adjustment and dividing the product so obtained by the adjusted exercise price.
6. Convertible Notes Payable
Convertible notes
From
February 9, 2008 through December 31, 2011, the Company raised an aggregate of $2,390,000 in funds through loans consisting of convertible notes (Convertible Notes) to certain stockholders, management, vendors, and investors.
The notes bore interest at rates ranging from 8% to 10% per annum and had maturity dates ranging from 2011 to 2018. The Convertible Notes were unsecured and subordinated to certain senior indebtedness of the Company, and for all Convertible
Notes the principal plus accrued interest was convertible into the Companys common stock. During October 2011, in connection with the Exchange Agreement and Release, the Convertible Notes and accrued interest converted into the Companys
common stock.
F-19
Local Bridge
During July and August 2011, $740,000 of Convertible Notes bearing interest at 20% per annum, and warrants to purchase shares of common stock were issued
to investors. The Convertible Notes were due at the earlier of 1) one year from the issuance date or 2) one week after the consummation of a Merger transaction. The number of warrants to be issued was equal to the note principal divided by the
exercise price. The exercise price was the per share or per unit fair market value received in the Merger. The notes were convertible at a price per share equal to seventy-five percent (75%) of the per share fair market value of the total
consideration received for a share of a public companys common stock to be determined to be identified upon consummation of a merger.
The Company
determined that the beneficial conversion feature and the warrants did not represent embedded derivative instruments. Additionally, at issuance of the Convertible Notes, the Company did not record the discount for the beneficial conversion feature
due to the contingencies surrounding conversion. The beneficial conversion feature was recorded when the contingencies were resolved. In accordance with ASC 470-20, Debt with Conversion and Other Options, the Company recorded a discount of
approximately $583,700 for the warrants in 2011. The discount was amortized to interest expense over the term of the Convertible Notes using the effective interest method.
The Company calculated the fair value of the warrants using the Black-Scholes Model using a volatility of 109.84%, an interest rate of 1.12% and a dividend
yield of zero. Certain of these Convertible Notes and accrued interest were converted into the Companys common stock in October 2011, in connection with the Exchange Agreement and Release, as discussed below. Upon conversion the Company
recognized the unamortized debt discount related to these notes to interest expense. The Company recognized approximately $583,700 of interest expense for the amortization of the note discount during the year ended December 31, 2011.
Exchange Agreement and Release
In October 2011, the
Companys Board of Directors and stockholders approved an Exchange Agreement, whereby the note holders could exchange their Convertible Notes and accrued interest for shares of the Companys common stock and warrants to purchase the
Companys common stock. A total of $3,030,000 of principal and approximately $459,800 of accrued interest converted, at prices ranging from $0.27 to $0.75, into 7,676,828 shares of the Companys common stock, plus five-year warrants to
purchase 1,309,750 common shares at an exercise price of $1.00 per share. For the holders that elected to participate, the Exchange Agreement and Release resulted in the cancellation of the Convertible Notes and release from the note holders for any
claims related to the Convertible Notes.
The Company determined that the warrants issued in connection with the Exchange Agreement and Release did not
represent derivative instruments. The warrants, valued at approximately $527,600, were classified as equity instruments and recorded as interest expense on the date of issuance in 2011. The Company calculated the fair value of the warrants using the
Black-Scholes Model, using a volatility of 110.13%, an interest rate of 1.11% and a dividend yield of zero.
At December 31, 2011, an unsecured
$100,000 Convertible Note, with interest at 10% and a maturity date of April 2014, remained outstanding. In February 2012, at the close of the Merger, the convertible note and accrued interest in the aggregate of approximately $110,000 were repaid.
2011 Private placement
On September 18, 2011,
Organovo, Inc.s Board of Directors authorized a private placement offering of up to 30 Units of its securities at a price of $50,000 per Unit for an aggregate purchase price of $1,500,000. Each Unit consisted of a convertible note in the
principal amount of $50,000 accruing simple interest at the rate of 6% per annum (the Convertible Notes), plus five-year warrants to purchase 50,000 shares of the next Qualified Round of Equity Securities, at an exercise price of
$1.00 per share. The principal plus accrued interest was convertible into the Companys common stock upon consummation of a Merger transaction.
F-20
During October and November 2011, $1,500,000 of Convertible Notes bearing interest at 6% per annum with a
maturity date of March 30, 2012, and five-year warrants to purchase 1,500,000 shares of the Companys common stock were issued to investors under the Private Placement. The warrants are exercisable at $1.00 per share, expire in five years,
and contain down-round price protection. The Convertible Notes were outstanding at December 31, 2011, and were converted into 1,525,387 Units during February 2012, in connection with the Merger.
The Company determined that the warrants represent a derivative instrument due to the down-round price protection, and accordingly, the Company recorded a
derivative liability related to the warrants, with a corresponding debt discount of approximately $1,260,300. See Note 5. Additionally, upon issuance of the notes during 2011, the Company recorded the discount for the beneficial conversion feature
of $239,700. The debt discount associated with the warrants and beneficial conversion feature were amortized to interest expense over the life of the Convertible Notes, and fully amortized upon conversion of the Convertible Notes in 2012. The
Company recorded approximately $896,200 and $603,800 of interest expense for the amortization of the debt discount during the years ended December 31, 2012 and 2011, respectively, and approximately $1,500,000 for the period from inception
through March 31, 2014.
As consideration for locating investors to participate in the Private Placement, the placement agent earned a cash payment
of $195,000 in 2011. Additionally, upon closing of the Merger transaction in 2012, the placement agent earned five-year warrants to purchase 610,155 shares of the Companys common stock at $1.00 per share. These warrants contain down round
protection and were classified as derivative liabilities upon issuance. See Note 5.
2012 Private placement
During 2012, concurrently with the closing of the Merger and in contemplation of the Merger, the Company completed the initial closing of the Private Placement
of up to 8,000,000 Units of its securities, at a price of $1.00 per Unit, with the ability to increase the offering to an aggregate of up to 16,000,000 Units. Each Unit consisted of one share of common stock and a warrant to purchase one share
of common stock. The Company completed three closings under the Private Placement during 2012, and raised total gross proceeds of $13,722,600 and total net proceeds of $11,593,066. The Company issued 13,722,600 shares of its common stock and
warrants to purchase 15,247,987 shares of its common stock (including warrants to purchase 1,525,387 shares to former holders of the Convertible Notes) exercisable at $1.00 to investors in the Offering. The placement agent and its selected
dealers were paid total cash commissions of $1,372,260 and the placement agent was paid an expense allowance of $411,678 and was issued placement agent warrants to purchase 6,099,195 shares of the Companys common stock at an exercise price of
$1.00 per share.
The warrants issued to the investors and the placement agent, as described above, contain down round protection, and accordingly, were
classified as derivative liabilities upon issuance. On the closing date, the derivative liabilities were recorded at an estimated fair value of approximately $32,742,000. Given that the fair value of the derivative liabilities exceeded the total
proceeds of the private placement of $13,722,600, no net amounts were allocated to the common stock. The amount by which the recorded liabilities exceeded the proceeds of approximately $19,019,400 was charged to other expense at the closing dates.
The Company has revalued the derivative liability as of each reporting period, and will continue to do so on each subsequent balance sheet date until the securities to which the derivative liabilities relate are exercised or expire, with any changes
in the fair value recognized through earnings in the statement of operations. See Note 5.
Interest expense, including amortization of the note discounts
and other interest expense was approximately $13,000, $65,000, $1,088,000, $1,088,000, and $2,067,000 for the year ended March 31, 2014, the three months ended March 31, 2013 and 2012, and the years ended December 31, 2012, and 2011,
respectively. Interest expense, including amortization of the note discounts and other interest expense, for the period from April 19, 2007 (inception) through March 31, 2014 was approximately $3,484,000.
F-21
Registration rights agreement
The Company entered into a registration rights agreement (Registration Rights Agreement) with the investors in the Offering. Under the terms
of the Registration Rights Agreement, the Company agreed to file a registration statement covering the resale of the common stock underlying the Units and the common stock that is issuable on exercise of the Investor Warrants (but not the
common stock that is issuable upon exercise of the warrants issued as compensation to the placement agent in connection with the Offering) within 90 days from the final closing date of the Offering (the Filing Deadline). The Company
filed the registration statement on June 13, 2012. The registration statement became effective during July 2012.
The Company agreed to use
reasonable efforts to maintain the effectiveness of the registration statement through the one year anniversary from the date the registration statement was declared effective by the Securities and Exchange Commission (the SEC), or until
Rule 144 of the 1933 Act is available to investors in the Offering with respect to all of their shares, whichever is earlier. If the Company had not met the Effectiveness Deadline, the Company would have been liable for monetary penalties equal to
one-half of one percent (0.5%) of each investors investment in the offering at the end of every 30 day period following such Effectiveness Deadline failure until such failure was cured. No payments shall be owed with respect to any period
during which all of the investors registrable securities may be sold by such investor under Rule 144 or pursuant to another exemption from registration.
7. Stockholders Equity
Common stock
In October 2011, the
Company issued 7,676,828 shares of common stock to note holders for the conversion of Convertible Notes with a principal balance totaling $3,030,000 and accrued interest totaling approximately $459,800.
During February and March 2012, the Company issued 21,247,987 shares of common stock related to the Merger. See Note 2. During the year ended
December 31, 2012, the Company issued 13,423,622 shares of common stock upon exercise of 13,532,487 warrants.
During the year ended
December 31, 2012, a total of 224,064 stock options were exercised for 224,064 shares of common stock.
During the three months ended March 31,
2013, the Company issued 6,131,198 shares of common stock upon exercise of 7,090,556 warrants.
A shelf registration statement on Form S-3 (File
No. 333-189995), or shelf, was filed with the SEC on July 17, 2013 authorizing the offer and sale in one or more offerings of up to $100,000,000 in aggregate of common stock, preferred stock, debt securities, warrants to purchase common
stock, preferred stock or debt securities, or any combination of the foregoing, either individually or as units comprised of one or more of the other securities. This shelf was declared effective by the SEC on July 26, 2013.
On August 2, 2013, the Company, entered into an Underwriting Agreement (the Underwriting Agreement) with Lazard Capital Markets LLC, acting
as representative of the underwriters named in the Underwriting Agreement (the Underwriters) and joint book-runner with Oppenheimer & Co. Inc., relating to the issuance and sale of 10,350,000 shares of the Companys common
stock, which includes the issuance and sale of 1,350,000 shares pursuant to an overallotment option exercised by the Underwriters on August 5, 2013. JMP Securities LLC and Maxim Group LLC each acted as co-managers for the offering. The price to
the public in the Offering was $4.50 per share, and the Underwriters purchased the shares from the Company pursuant to the Underwriting Agreement at a price of $4.23 per share. The net proceeds to the Company from the Offering were approximately
$43.4 million, after deducting underwriting discounts and commissions and other offering expenses of $3.2 million payable by the Company, including the Underwriters exercise of the overallotment option. The transactions contemplated by
the Underwriting Agreement closed on August 7, 2013.
F-22
The Underwriting Agreement contained customary representations, warranties and agreements by the Company,
customary conditions to closing, indemnification obligations of the Company and the Underwriters, including for liabilities under the Securities Act, other obligations of the parties and termination provisions.
The representations, warranties and covenants contained in the Underwriting Agreement were made only for purposes of the Underwriting Agreement as of specific
dates indicated therein, were solely for the benefit of the parties to the Underwriting Agreement, and may be subject to limitations agreed upon by the parties, including being qualified by confidential disclosures exchanged between the parties in
connection with the execution of the Underwriting Agreement.
In November 2013, the Company entered into an equity distribution agreement with an
investment banking firm. Under the terms of the distribution agreement, the Company may offer and sell up to 4,000,000 shares of its common stock, from time to time, through the investment bank in at the market offerings, as defined by
the SEC, and pursuant to the Companys effective shelf registration statement previously filed with the SEC. During the year ended March 31, 2014, the Company issued 334,412 shares of common stock in at-the-market offerings under the
distribution agreement with net proceeds of $3.5 million.
In addition, during the year ended March 31, 2014, the Company issued 2,713,207 shares of
common stock upon exercise of 3,201,633 warrants.
During the year ended March 31, 2014, the Company issued 183,796 shares of common stock upon
exercise of 183,796 options.
Restricted stock awards
In February 2008, four founders, including the Chief Executive Officer (CEO) and three directors of the Company received 11,779,960 shares of
restricted common stock, 25% vesting after the first year and the remaining 75% vesting in equal quarterly portions over the following three years. These shares are fully vested as of March 31, 2014.
In May of 2008, the Board of Directors of the Company approved the 2008 Equity Incentive Plan (the 2008 Plan). The 2008 Plan authorized the
issuance of up to 1,521,584 common shares for awards of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock award units, and stock appreciation rights. The 2008 Plan terminates on July 1, 2018. No
shares were issued under the 2008 Plan during the year ended December 31, 2012, the three months ended March 31, 2013, or the year ended March 31, 2014, and the Company does not intend to issue any additional shares from the 2008 Plan
in the future.
From 2008 through December 31, 2011, the Company issued a total of 1,258,934 shares of restricted common stock to various employees,
advisors, and consultants of the Company. Of those shares, 1,086,662 were issued under the 2008 Plan and the remaining 172,272 shares were issued outside the plan.
In January of 2012, the Board of Directors of the Company approved the 2012 Equity Incentive Plan (the 2012 Plan). The 2012 Plan authorized the issuance
of up to 6,553,986 shares of common stock for awards of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, performance shares, and other stock or cash awards.
In August 2013, the Board of Directors of the Company approved an amendment to the 2012 Plan to increase the number of shares of common stock that may be issued under the 2012 Plan by 5,000,000 shares, for an aggregate of 11,553,986 shares issuable
under the 2012 Plan. The 2012 Plan terminates ten years after its adoption.
During the year ended December 31, 2012, the Company issued an aggregate
950,000 of restricted stock awards to certain members of senior management and 130,000 restricted stock awards to non-executive employees. The vesting schedule is 25% on each anniversary of the vesting start date over four years. Additionally, the
Company issued 100,000 restricted stock awards to a consultant. The vesting schedule is 100% after 6 months.
F-23
During the year ended December 31, 2012, the Company issued an aggregate 200,000 restricted stock awards to
a member of senior management, the vesting of which is performance based. As of March 31, 2014, the Company believed the financial targets would be met, and accordingly is recognizing the related stock based compensation expense over the
requisite service period.
During the year ended December 31, 2012, there were 95,842 restricted stock awards forfeited by staff members upon
termination of their employment with the Company. Additionally, 89,674 restricted stock awards were surrendered related to shares of common stock returned to the Company, at the option of the holders, to cover the tax liability related to the
vesting of 211,250 restricted stock awards. Upon the return of the common stock, 89,674 stock option grants with immediate vesting were granted to the individuals at the vesting date market value strike price.
During the three months ended March 31, 2013, the Company issued an aggregate of 55,000 restricted stock awards with immediate vesting to a consultant.
During the three months ended March 31, 2013, there were 10,000 restricted stock awards forfeited by one staff member upon termination of their
employment with the Company. Additionally, 24,690 restricted stock awards were surrendered related to shares of common stock returned to the Company, at the option of the holder, to cover the tax liability related to the vesting of 50,000 restricted
stock awards. Upon the return of the common stock, 24,690 stock option grants with immediate vesting were granted to the individual at the vesting date market value strike price.
During the year ended March 31, 2014, 218,655 restricted stock awards were surrendered related to shares of common stock returned to the Company, at the
option of the holder, to cover the tax liability related to the vesting of 405,000 restricted stock awards. Upon the return of the common stock, 218,655 stock option grants with immediate vesting were granted to the individual at the vesting date
market value strike price.
During the year ended March 31, 2014, the Company issued an aggregate of 60,000 restricted stock units with immediate
vesting to a consultant.
F-24
A summary of the Companys restricted stock award activity is as follows:
|
|
|
|
|
|
|
Number of
Shares
|
|
Unvested at December 31, 2007
|
|
|
|
|
Granted
|
|
|
12,627,697
|
|
Vested
|
|
|
(65,211
|
)
|
Canceled / forfeited
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2008
|
|
|
12,562,486
|
|
Granted
|
|
|
130,422
|
|
Vested
|
|
|
(5,373,004
|
)
|
Canceled / forfeited
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2009
|
|
|
7,319,904
|
|
Granted
|
|
|
219,369
|
|
Vested
|
|
|
(3,256,191
|
)
|
Canceled / forfeited
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2010
|
|
|
4,283,082
|
|
Granted
|
|
|
61,406
|
|
Vested
|
|
|
(3,233,193
|
)
|
Canceled / forfeited
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2011
|
|
|
1,111,295
|
|
Granted
|
|
|
1,380,000
|
|
Vested
|
|
|
(1,233,409
|
)
|
Canceled / forfeited
|
|
|
(95,842
|
)
|
|
|
|
|
|
Unvested at December 31, 2012
|
|
|
1,162,044
|
|
Granted
|
|
|
55,000
|
|
Vested
|
|
|
(221,302
|
)
|
Canceled / forfeited
|
|
|
(10,000
|
)
|
|
|
|
|
|
Unvested at March 31, 2013
|
|
|
985,742
|
|
Granted
|
|
|
60,000
|
|
Vested
|
|
|
(472,247
|
)
|
Canceled / forfeited
|
|
|
|
|
|
|
|
|
|
Unvested at March 31, 2014
|
|
|
573,495
|
|
|
|
|
|
|
The fair value of each restricted common stock award is recognized as stock-based expense over the vesting term of the award.
The Company recorded restricted stock-based compensation expense in operating expenses for employees and non-employees of approximately $817,000, $478,000, $0, $835,000, and $3,000 during the year ended March 31, 2014, the three months ended
March 31, 2013 and March 31, 2012, and the years ended December 31, 2012, and 2011, respectively. The Company recorded restricted stock-based compensation expense of approximately $2,141,000 for the period from April 19, 2007
(inception) through March 31, 2014. Expense for each of the periods included approximately $16,000, $4,000, $0, $23,000, and $0 for research and development during the year ended March 31, 2014, the three months ended March 31, 2013
and March 31, 2012, and the years ended December 31, 2012, and 2011, respectively. General and administrative expense for the year ended March 31, 2014, the three months ended March 31, 2013 and March 31, 2012, and the years
ended December 31, 2012, and 2011 were approximately $801,000, $474,000, $0, $812,000, and $3,000, respectively.
As of March 31, 2014, total
unrecognized restricted stock-based compensation expense was approximately $747,000, which will be recognized over a weighted average period of 1.46 years.
F-25
Stock options
Under the 2008 Equity Incentive Plan, on October 12, 2011, the Company granted an officer incentive stock options to purchase 896,256 shares of common
stock at an exercise price of $0.08 per share, a quarter of which vested on the one year anniversary of employment, in May 2012, and the remaining options are vesting ratably over the remaining 36 month term. Other than this grant, the Company
does not intend to issue any additional shares under the 2008 Plan.
During the year ended March 31, 2014, the three months ended March 31,
2013, and the year ended December 31, 2012, under the 2012 Equity Incentive Plan, 2,519,572, 927,981 and 2,023,394 incentive stock options were issued, respectively, at various exercise prices, a quarter of which will vest on either the one
year anniversary of employment or one year anniversary of the vesting commencement date. The remaining options will vest ratably over the remaining 36 month terms, with the exception of 218,655, 24,690 and 83,986 of the incentive stock option grants
during the year ended March 31, 2014, the three month period ended March 31, 2013, and the year ended December 31, 2012, respectively, that have immediate vesting at the grant date, 99,500 and 126,000 of the incentive stock option
grants in the years ended March 31, 2014 and December 31, 2012, respectively, that vest quarterly over three years, and 122,500 and 70,750 of the incentive stock option grants in the years ended March 31, 2014 and December 31,
2012, respectively, that vest after one full year.
The following table summarizes stock option activity for 2010 through March 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
896,256
|
|
|
$
|
0.08
|
|
|
|
|
|
Options canceled
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2011
|
|
|
896,256
|
|
|
$
|
0.08
|
|
|
|
|
|
Options granted
|
|
|
2,023,394
|
|
|
$
|
1.95
|
|
|
|
|
|
Options canceled
|
|
|
(5,000
|
)
|
|
$
|
2.25
|
|
|
|
|
|
Options exercised
|
|
|
(224,064
|
)
|
|
$
|
0.08
|
|
|
$
|
564,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2012
|
|
|
2,690,586
|
|
|
$
|
1.48
|
|
|
$
|
3,041,476
|
|
Options granted
|
|
|
927,981
|
|
|
$
|
3.93
|
|
|
|
|
|
Options canceled
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2013
|
|
|
3,618,567
|
|
|
$
|
2.11
|
|
|
$
|
5,909,154
|
|
Options granted
|
|
|
2,519,572
|
|
|
$
|
8.63
|
|
|
|
|
|
Options canceled
|
|
|
(18,455
|
)
|
|
|
3.31
|
|
|
|
|
|
Options exercised
|
|
|
(183,796
|
)
|
|
|
2.19
|
|
|
$
|
1,002,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2014
|
|
|
5,935,888
|
|
|
$
|
4.87
|
|
|
$
|
20,482,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and Exercisable at March 31, 2014
|
|
|
1,546,377
|
|
|
$
|
2.73
|
|
|
$
|
7,733,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average remaining contractual term of options exercisable and outstanding at March 31, 2014 was
approximately 8.5 years and 8.92 years, respectively.
F-26
The Company uses the Black-Scholes valuation model to calculate the fair value of stock options. Stock based
compensation expense is recognized over the vesting period using the straight-line method. The fair value of stock options was estimated at the grant date using the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
March 31, 2014
|
|
|
Three Months
Ended
March 31, 2013
|
|
|
Year Ended
December 31, 2012
|
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
78.22
|
%
|
|
|
96.83
|
%
|
|
|
96.22
|
%
|
Risk-free interest rate
|
|
|
1.32
|
%
|
|
|
1.19
|
%
|
|
|
0.89
|
%
|
Expected life of options
|
|
|
6.00 years
|
|
|
|
6.07 years
|
|
|
|
6.05 years
|
|
Weighted average grant date fair value
|
|
$
|
5.92
|
|
|
$
|
3.04
|
|
|
$
|
1.5
|
|
The assumed dividend yield was based on the Companys expectation of not paying dividends in the foreseeable future. Due
to the Companys limited historical data, the estimated volatility incorporates the historical and implied volatility of comparable companies whose share prices are publicly available. The risk-free interest rate assumption was based on the
U.S. Treasury rates. The weighted average expected life of options was estimated using the average of the contractual term and the weighted average vesting term of the options. Certain options granted to consultants are subject to variable
accounting treatment and are required to be revalued until vested.
The total stock option based compensation recorded as operating expense was
approximately $3,783,000, $370,000, $4,000, $600,000, and $6,000 for the year ended March 31, 2014, the three months ended March 31, 2013 and March 31, 2012, and the years ended December 31, 2012, and 2011, respectively. The
Company recorded stock-based compensation expense of approximately $4,761,000 for the period from April 19, 2007 (inception) through March 31, 2014. Expense for each of the periods included approximately $462,000, $58,000 and $81,000 for
research and development during the year ended March 31, 2014, the three months ended March 31, 2013, and the year ended December 31, 2012, respectively. General and administrative expense for the year ended March 31, 2014, the
three months ended March 31, 2013 and March 31, 2012, and years ended December 31, 2012, and 2011 were approximately $3,321,000, $312,000, $4,000, $519,000, and $6,000 respectively.
The total unrecognized compensation cost related to unvested stock option grants as of March 31, 2014 was approximately $16,045,500 and the weighted
average period over which these grants are expected to vest is 3.5 years.
Warrants
During the years ended December 31, 2012 and 2011, the Company issued warrants to investors to purchase 21,347,182 and 2,909,750 shares, respectively, of
its common stock.
During the year ended March 31, 2014, the three months ended March 31, 2013 and the year ended December 31, 2012,
225,000, 3,852,214, and 13,259,987 of these warrants were exercised for cash proceeds of approximately $210,000, $3,850,000 and $11,356,000, respectively, and 2,628,003, 3,138,342, and 272,500 of these warrants were exercised through a cashless
exercise for issuance of 2,139,577, 2,220,764, and 163,635 shares of common stock, respectively. No warrants were exercised during 2011.
In December
2012, the Company consummated a warrant tender offer to the holders of outstanding warrants to purchase approximately 14.5 million shares of the Companys common stock. In accordance with the tender offer, for those warrant holders that
elected to participate, this resulted in a reduction of the exercise price of the warrants from $1.00 per share to $0.80 per share of common stock in cash, shortened the exercise period of the warrants so that they expired concurrently with the
tender offer, and removed the price-based anti-dilution provisions contained in the warrants. The Company completed the tender offer on December 21, 2012, resulting in approximately 9.6 million warrants being exercised for gross
proceeds of approximately $7,700,000. In connection with the
F-27
transaction, the Company recognized an expense for the inducement to exercise the warrants of approximately $1,900,000. The Company also incurred approximately $400,000 in placement agent
fees, legal costs, and other related fees, which have been recognized as an offset to the proceeds received from the warrant exercises.
During the year
ended March 31, 2014, derivative liability warrants of 1,920,874 were exercised and 6,990,556 of the warrants exercised during the three months ended March 31, 2013 and 13,010,237 of the warrants exercised in 2012 were derivative liabilities
and were valued at the settlement date. The warrant liability was reduced to equity at the fair value on the settlement date. See Note 5.
During the
twelve months ended March 31, 2014 and the three months ended March 31, 2013, the Company entered into amendment agreements for 269,657 and 601,735, warrants respectively, to purchase common stock which reduced the exercise price of the warrants
from $1.00 to between $0.85 and $0.90, which removed the down-round price protection provision of the warrant agreement related to the adjustment of exercise price upon issuance of additional shares of common stock. As a result of the removal of the
down-round price protection provision, the warrants were reclassified from liability to equity instruments at their fair value. The Company determined the incremental expense associated with the modification based on the fair value of the awards
prior to and subsequent to the modification. The fair value of the awards subsequent to modification was calculated using the Black-Scholes model. The incremental expense associated with the modification of approximately $12,000 and $65,000 was
recognized as interest expense for the twelve months ended March 31, 2014 and the three months ended March 31, 2013, respectively.
During the year
ended December 31, 2012 the Company entered into four agreements with consultants for services. In connection with the agreements, the Company issued a total of 650,000 warrants to purchase common stock, at prices ranging from $1.70 to $3.24,
with lives ranging from two to five years, to be earned over service periods of up to six months. The fair value of the warrants was estimated to be approximately $890,000, which was recognized as a prepaid asset and is being amortized over the term
of the consulting agreements. These warrants were classified as equity instruments because they do not contain any anti-dilution provisions. The Black-Scholes model, using volatility rates ranging from 79.8% to 103.8% and risk free interest rate
factors ranging from 0.24% to 0.63%, were used to determine the value. The value is being amortized over the term of the agreements. During the year ended March 31, 2014, three months ended March 31, 2013 and the year ended
December 31, 2012, the Company recognized approximately $72,000, $261,000, and $556,000, respectively, of expense related to these services. During the year ended March 31, 2014, 348,630 warrants held by consultants were exercised resulting in
proceeds to the Company of approximately $891,000. During the three months ended March 31, 2013, 58,220 shares of common stock were issued through a cashless exercise of 100,000 of these warrants.
Additionally, during November 2013 the Company entered into an agreement with a consultant for services. In connection with the agreement, the Company issued
75,000 warrants to purchase common stock, at a price of $7.36, with a life of five years, to be earned over a twelve month service period. The fair value of the warrants was estimated to be approximately $404,000, which was recognized as a prepaid
asset and is being amortized over the term of the consulting agreement. These warrants were classified as equity instruments because they do not contain any anti-dilution provisions. The Black-Scholes model, using a volatility rate of 96.90% and a
risk-free interest rate factor of 0.60%, was used to determine the value. The Company recognized approximately $163,000 during the year ended March 31, 2014 and for the period from April 19, 2007 (inception) through March 31, 2014,
related to these services.
F-28
The following table summarizes warrant activity for the year ended
March 31, 2014, the three months ended March 31, 2013, and the years ended December 31, 2012, 2011, and 2010:
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
Weighted-Average
Exercise Price
|
|
Balance at December 31, 2010
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,909,750
|
|
|
$
|
1.00
|
|
Expired / Canceled
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
2,909,750
|
|
|
$
|
1.00
|
|
Granted
|
|
|
21,997,182
|
|
|
$
|
1.04
|
|
Exercised
|
|
|
(13,532,487
|
)
|
|
$
|
0.84
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
|
11,374,445
|
|
|
$
|
1.08
|
|
Granted
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(7,090,556
|
)
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2013
|
|
|
4,283,889
|
|
|
$
|
1.17
|
|
Granted
|
|
|
112,500
|
|
|
$
|
7.36
|
|
Expired / Canceled
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(3,201,633
|
)
|
|
|
1.16
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2014
|
|
|
1,194,756
|
|
|
$
|
1.79
|
|
|
|
|
|
|
|
|
|
|
The warrants outstanding at March 31, 2014 are immediately exercisable at prices between $0.85 and
$7.36 per share, and have a weighted average remaining term of approximately 2.55 years.
Common stock reserved for future issuance
Common stock reserved for future issuance consisted of the following at March 31, 2014:
|
|
|
|
|
Common stock warrants outstanding
|
|
|
1,194,756
|
|
Common stock options outstanding under the 2008 Plan
|
|
|
672,192
|
|
Common stock options outstanding and reserved under the 2012 Plan
|
|
|
9,534,989
|
|
|
|
|
|
|
Total
|
|
|
11,401,937
|
|
|
|
|
|
|
Preferred stock
The
Company is authorized to issue 25,000,000 shares of preferred stock. There are no shares of preferred stock currently outstanding, and the Company has no present plans to issue shares of preferred stock.
8. Commitments and Contingencies
Operating leases
The Company leases
office and laboratory space under a non-cancelable operating lease which was entered into in February 2012 and amended in December 2013, with the future minimum lease payments from the lease included below. The Company records rent expense on a
straight-line basis over the life of the lease and records the excess of expense over the amounts paid as deferred rent. Deferred rent is included in accrued expenses in the consolidated balance sheets.
Rent expense was approximately $561,500, $105,500, $60,200, $325,600, and $145,200 for the year ended March 31, 2014, the three months ended
March 31, 2013 and 2012, and the years ended December 31, 2012, and 2011, respectively. Rent expense was approximately $1,317,200 for the period from April 19, 2007 (inception) through March 31, 2014.
F-29
On February 27, 2012, the Company entered into a facilities lease at 6275 Nancy Ridge Drive (the
Original Lease), San Diego, CA 92121, with occupancy as of July 15, 2012. The base rent under the lease was approximately $38,800 per month with 3% annual escalators. The lease term was 48 months with an option for the Company to
extend the lease at the end of the lease term.
On December 5, 2013, the Company entered into a First Amendment (the Amendment) to the
Original Lease, together with the Amendment, (the Amended Lease). Pursuant to the Amendment, the Company expanded the size of its facility by approximately 15,268 square feet (the Expansion Premises) from approximately 15,539
square feet (the Original Premises) for a total of approximately 30,807 square feet. The Amended Lease provides for base rent (i) on the Original Premises to continue at approximately $38,800 per month, with annual escalators, until
August 1, 2016, at which point the base rent shall be payable at the same rate per rentable square foot as the Expansion Premises and (ii) on the Expansion Premises of approximately $38,934 per month, with 3% annual escalators, not to
commence until two months after the earlier of (A) the date that the landlord delivers possession of the Expansion Premises to the Company with the work in the Expansion Lab Premises (as defined in the Amendment) substantially complete and
(B) the date the landlord could have delivered the Expansion Premises with the work in the Expansion Lab Premises (as defined in the Amendment) substantially complete but for certain delays of the Company. Additionally, the Company has a right
of first refusal on adjacent additional premises of approximately 14,500 square feet. The term of the Amended Lease expires on the seven-year anniversary of the earlier of (A) the date that the landlord delivers possession of the Expansion
Premises to the Company and (B) the date the landlord could have delivered the Expansion Premises but for certain delays of the Company (the Expansion Premises Commencement Date). The target Expansion Premises Commencement Date is
September 1, 2014. The Company also has the option to terminate the Amended Lease on the 5-year anniversary of the Expansion Premises Commencement Date. The Company intends for the Expansion Premises to contain office, laboratory, and clean
room areas.
Future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one
year as of March 31, 2014, are as follows (in thousands):
|
|
|
|
|
Fiscal year ended March 31, 2015
|
|
$
|
766
|
|
Fiscal year ended March 31, 2016
|
|
|
981
|
|
Fiscal year ended March 31, 2017
|
|
|
986
|
|
Fiscal year ended March 31, 2018
|
|
|
1,004
|
|
Fiscal year ended March 31, 2019
|
|
|
1,034
|
|
Thereafter
|
|
|
2,439
|
|
|
|
|
|
|
Total
|
|
$
|
7,210
|
|
|
|
|
|
|
Capital leases
During
2012, the Company entered into an agreement to lease certain laboratory equipment under a non-cancelable capital lease, which is included in fixed assets as follows (in thousands):
|
|
|
|
|
March 31, 2014
|
|
|
|
Lab equipment
|
|
$
|
34
|
|
Less accumulated depreciation
|
|
|
(11
|
)
|
|
|
|
|
|
Net book value
|
|
$
|
23
|
|
|
|
|
|
|
Depreciation expense related to the capital lease obligation was approximately $6,800, $1,700 and $2,900 for the year ended
March 31, 2014, the three months ended March 31, 2013 and the year ended December 31, 2012, respectively.
F-30
Future minimum capital lease payments at March 31, 2014 are as follows (in thousands):
|
|
|
|
|
Fiscal year ended March 31, 2015
|
|
$
|
11
|
|
Fiscal year ended March 31, 2016
|
|
|
4
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
15
|
|
Amount representing interest
|
|
|
|
|
Present value of minimum lease payments
|
|
|
15
|
|
Less current portion
|
|
|
(10
|
)
|
|
|
|
|
|
Long term portion
|
|
$
|
5
|
|
|
|
|
|
|
Legal Matters
In
addition to commitments and obligations in the ordinary course of business, the Company is subject to various claims and pending and potential legal actions arising out of the normal conduct of its business. The Company assesses contingencies to
determine the degree of probability and range of possible loss for potential accrual in its financial statements. An estimated loss contingency is accrued in its financial statements if it is probable that a liability has been incurred and the
amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing litigation contingencies is highly subjective and requires judgments about future events. When
evaluating contingencies, the Company may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery
and development of information important to the matters. In addition, damage amounts claimed in litigation against it may be unsupported, exaggerated or unrelated to possible outcomes, and as such are not meaningful indicators of its potential
liability. The Company regularly reviews contingencies to determine the adequacy of its accruals and related disclosures. The amount of ultimate loss may differ from these estimates. It is possible that cash flows or results of operations could be
materially affected in any particular period by the unfavorable resolution of one or more of these contingencies. Whether any losses finally determined in any claim, action, investigation or proceeding could reasonably have a material effect on the
Companys business, financial condition, results of operations or cash flows will depend on a number of variables, including: the timing and amount of such losses; the structure and type of any remedies; the monetary significance of any such
losses, damages or remedies may have on our consolidated financial statements; and the unique facts and circumstances of the particular matter that may give rise to additional factors.
Spencer Trask Matter
. On June 28, 2013, the Company filed a lawsuit for declaratory relief in the Supreme Court for the State of New York (case #
652305/2013) against Spencer Trask Ventures, Inc. (STV or Spencer Trask) in connection with a Warrant Solicitation Agency Agreement (the WSAA) that the Company entered into with STV in February 2013 (the New
York Action). In the New York Action, the Company is seeking a declaration that the WSAA remains a valid and enforceable agreement. Over the course of several weeks in February 2013, Organovo and STV, through their respective attorneys,
negotiated the WSAA pursuant to which the Company engaged STV as the Companys warrant solicitation agent in connection with the Companys efforts to solicit the exercise of outstanding Organovo warrants during the first quarter of 2013.
STVs President signed the WSAA on behalf of STV, and the Companys CEO executed the agreement on behalf of Organovo. Spencer Trask provided services to the Company pursuant to the WSAA, and the Company has paid STV for those services.
The Companys dispute with Spencer Trask arose in March 2013 after the Company approached Spencer Trask about exercising its outstanding warrants to
help the Company qualify for up-listing its common stock on the NYSE MKT. Previously, Spencer Trask had not asserted any claims for additional compensation as a result of the warrant tender offer the Company completed in December 2012. In March
2013, the Company received two demand letters from STV, and a demand for arbitration notice in June 2013. In the first demand letter, STV alleges that it is entitled to compensation (including a cash fee and warrants to purchase common stock) as a
F-31
result of the warrant tender offer the Company completed in December 2012 and as a result of the notice of warrant redemption the Company completed in March 2013. In the second letter, STV
alleges it is entitled to damages because the Company allegedly violated confidentiality provisions in the Placement Agency Agreement (the PAA) the Company had previously entered into with STV in December 2012 in connection with the
private placement financings the Company completed in February and March 2012 (the Private Placements), by contacting the warrant holders who participated in the warrant tender offer. In response, on June 28, 2013, the Company filed
a lawsuit for declaratory relief in the Supreme Court for the State of New York against STV. The Companys tender offer was made to warrant holders of record relating to warrants already owned by them and whose identity was public information
via a Registration Statement on Form S-1 the Company was required to file to register the resale of the shares underlying their warrants. For these and other reasons, including applicability of the WSAA, the Company believes STV is not entitled to
compensation under the PAA and there was no violation of confidentiality. The Company received notice on August 5, 2013 that STV had filed its arbitration demand with the arbitrator (the Arbitration). In July, 2013, the Company
filed a motion to stay the arbitration pending determination of the New York Action. In January 2014, the New York Court stayed the New York Action, finding that the arbitrator should determine in the first instance which disputes between the
Company and Spencer Trask should proceed in the Arbitration and which disputes between the Company and Spencer Trask should proceed in the New York Court. The parties are proceeding in the Arbitration and the Company has reserved its right to file a
summary disposition motion with regard to the proper venue for its claims under the WSAA. The Arbitration is scheduled to commence on March 2, 2015.
The Company believes that the assertions made against it by STV are without merit and the Company intends to continue to vigorously defend against the claims
made by STV. The Company has not established a loss contingency accrual for these claims because any potential liability is not probable or estimable. Nonetheless, an unfavorable resolution of these claims could have a material adverse effect on the
Companys business, liquidity or financial condition in the reporting period in which such resolution occurs.
Other Legal Matters
. In
addition to the matter described above, the Company is subject to normal and routine litigation in the ordinary course of business. The Company has not accrued any loss contingencies for such matters. The Company intends to defend itself in any such
matters and does not currently believe that the outcome of such matters will have a material adverse effect on its business, liquidity or financial position.
9. Licensing Agreements and Research Contracts
University of Missouri
On
March 24, 2009, the Company entered into a license agreement with the Curators of the University of Missouri to in-license certain technology and intellectual property relating to self-assembling cell aggregates and to intermediate cellular
units. The Company received the exclusive worldwide rights to commercialize products comprising this technology for all fields of use. The Company paid to the University of Missouri a nonrefundable license fee of $25,000 and has committed to
reimburse the University of Missouri for certain prior and future patent costs. Each year the Company is required to pay the University of Missouri royalties ranging from 1% to 3% of net sales depending on the level of net sales achieved by the
Company each year. A minimum annual royalty of $25,000 is due beginning two years after the calendar year of the first commercial sale and is credited to sales royalties. The license agreement terminates upon expiration of the patents licensed and
is subject to certain conditions as defined in the license agreement, which are expected to expire after 2029. The $25,000 license fee is included in Other Assets in the accompanying balance sheets and is being amortized over the life of the related
patent.
On March 12, 2010, the Company entered into a license agreement with the Curators of the University of Missouri to in-license certain
technology and intellectual property relating to engineered biological nerve grafts. The Company received the exclusive worldwide rights to commercialize products comprising this technology for all fields of use. The Company paid to University of
Missouri a nonrefundable license fee of $5,000 and has
F-32
committed to reimburse the University of Missouri for certain prior and future patent costs. In 2012 and 2011, the Company paid the University of Missouri approximately $193,500 and $23,800,
respectively, for prior patent costs relating to the license agreements with the University of Missouri. No payments were made during the year ended March 31, 2014 or the three months ended March 31, 2013. Each year the Company is required
to pay the University of Missouri royalties ranging from 1% to 3% of net sales depending on the level of net sales achieved by the Company each year. A minimum annual royalty of $5,000 is due beginning two years after the calendar year of the first
commercial sale and is credited to sales royalties. An additional royalty of $12,500 is due if there are no net sales within five years from the effective date of the license. The license agreement terminates upon expiration of the patents licensed
and is subject to certain conditions as defined in the license agreement. The $5,000 license fee is included in Other Assets and is being amortized over the life of the related patent.
Clemson University
On May 2, 2011, the Company
entered into a license agreement with Clemson University Research Foundation to in-license certain technology and intellectual property relating to ink-jet printing of viable cells. The Company received the exclusive worldwide rights to
commercialize products comprising this technology for all fields of use. The Company agreed to pay Clemson University a nonrefundable license fee of $32,500, as well as an additional $32,500 to reimburse Clemson University for certain prior and
future patent costs. These fees, totaling $65,000, are included in Other Assets and are being amortized over the life of the related patent. Each year the Company is required to pay the University royalties ranging from 1.5% to 3% of net sales
depending on the level of net sales reached each year and minimum annual fees ranging from $20,000 to $40,000. Specific terms of the royalty and license agreements are confidential. The license agreement terminates upon expiration of the patents
licensed, which is expected to expire in May 2024, and is subject to certain conditions as defined in the license agreement.
No royalty payments have
been made under the above license agreements as of March 31, 2014. Approximately $4,000 is due to the University of Missouri relating to the first commercial sale. Annual royalty payments of $30,000 and $20,000 will be due to the University of
Missouri and Clemson University, respectively, in calendar 2014 per the terms of the respective license agreements.
Becton Dickinson
In February of 2013, the Company purchased the exclusive rights to intellectual property relating to perfusion bioreactors for culturing cells from Becton
Dickinson and Company for $18,500. This fee is included in Other Assets and is being amortized over the life of the related patent. This patent represents the acquisition of bioreactor technology for the support of our 3D tissues for use in drug
discovery and development. No future royalties or milestone payments are owed to Becton Dickinson and Company for this patent.
Capitalized license
fees consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
License fees
|
|
$
|
114
|
|
|
$
|
114
|
|
|
$
|
95
|
|
Less accumulated amortization
|
|
|
(25
|
)
|
|
|
(17
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License fees, net
|
|
$
|
89
|
|
|
$
|
97
|
|
|
$
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense of licenses was approximately $8,500, $2,000, $1,700, $7,000, $5,200, and $25,200 for the year ended
March 31, 2014, the three months ended March 31, 2013 and 2012, the years ended December 31, 2012 and 2011, and the period from April 19, 2007 (inception) through March 31, 2014, respectively. At March 31, 2014, the
weighted average remaining amortization period for all licenses was approximately 11 years. The annual amortization expense of licenses for the next five years is estimated to be approximately $8,500 per year.
F-33
10. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. Significant components of the Companys net deferred tax assets are as follows as of March 31, 2014, March 31, 2013, and December 31, 2012
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Research and development credits
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
22
|
|
|
|
(1
|
)
|
|
|
(2
|
)
|
Accrued expenses and reserves
|
|
|
280
|
|
|
|
224
|
|
|
|
290
|
|
Stock compensation
|
|
|
1,941
|
|
|
|
743
|
|
|
|
562
|
|
Other, net
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
2,244
|
|
|
|
967
|
|
|
|
850
|
|
Valuation allowance
|
|
|
(2,244
|
)
|
|
|
(967
|
)
|
|
|
(850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
A full valuation allowance has been established to offset the deferred tax assets as management cannot conclude that
realization of such assets is more likely than not. Under the Internal Revenue Code (IRC) Sections 382 and 383, annual use of our net operating loss and research tax credit carryforwards to offset taxable income may be limited based on
cumulative changes in ownership. We have not completed an analysis to determine whether any such limitations have been triggered as of March 31, 2014. Until this analysis is completed, we have removed the deferred tax assets related to net
operating losses and research credits from our deferred tax asset schedule. The valuation allowance increased by approximately $1,277,000 and increased by approximately $117,000 for the year ended March 31, 2014 and the three months ended
March 31, 2013, respectively.
The Company had federal and state net operating loss carryforwards of approximately $34,838,000 and $34,833,000 at
March 31, 2014, respectively. The federal and state net operating loss carryforwards will begin expiring in 2028, unless previously utilized. The net operating loss carryforwards included approximately $3,389,000 of windfall tax benefits
related to stock compensation that will be recorded as an increase to additional paid in capital.
The Company had federal and state research tax credit
carry forwards of approximately $450,000 and $548,000 at March 31, 2014, respectively. The federal research tax credit carryforwards begin expiring in 2028. The state research tax credit carryforwards do not expire.
In 2009 the Company adopted the accounting guidance for uncertainty in income taxes pursuant to ASC 740-10. The adoption of this guidance did not have a
material impact on the Companys consolidated financial statements. The Company did not record any accruals for income tax accounting uncertainties for the year ended March 31, 2014.
The Companys policy is to recognize interest and penalties that would be assessed in relation to the settlement value of unrecognized tax benefits as a
component of income tax expense. The Company did not accrue either interest or penalties from inception through March 31, 2014.
The Company does not
have any unrecognized tax benefits that will significantly decrease or increase within 12 months of March 31, 2014.
The Company is subject to tax in
the United States and in the state of California. As of March 31, 2014, the Companys tax years from inception are subject to examination by the tax authorities. The Company is not currently under examination by any U.S. federal or state
jurisdictions.
F-34
11. Concentrations
Credit risk
Financial instruments that
potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments. The Company maintains cash balances at various financial institutions primarily located in San Diego. Accounts at these institutions
are secured by the Federal Deposit Insurance Corporation. At times, balances may exceed federally insured limits. The Company has not experienced losses in such accounts, and management believes that the Company is not exposed to any
significant credit risk with respect to its cash and cash equivalents.
F-35