NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Organization and Summary of Significant Accounting Policies
Organization
Amedica
Corporation (“Amedica” or “the Company”) was incorporated in the state of Delaware on December 10, 1996.
Amedica is a materials company focused on developing, manufacturing and selling silicon nitride ceramics that are used in medical
implants and in a variety of industrial devices. At present, Amedica commercializes silicon nitride in the spine implant market.
The Company believes that its silicon nitride manufacturing expertise positions it favorably to introduce new and innovative devices
in the medical and non- medical fields. Amedica also believes that it is the first and only company to commercialize silicon nitride
medical implants. The Company acquired US Spine, Inc. (“US Spine”), a Delaware spinal products corporation with operations
in Florida, on September 20, 2010. The Company’s products are sold primarily in the United States.
Basis
of Presentation
These
unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the United
States Securities and Exchange Commission (“SEC”). Such rules and regulations allow the omission of certain information
and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally
accepted in the United States, so long as the statements are not misleading. In the opinion of management, these financial statements
and accompanying notes contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial
position and results of operations for the periods presented herein. These condensed consolidated financial statements should
be read in conjunction with the consolidated audited financial statements and notes thereto contained in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on March 23, 2016. The results of operations for
the nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the year ending December
31, 2016. The Company’s significant accounting policies are set forth in Note 1 to the consolidated financial statements
in its Annual Report on Form 10-K for the year ended December 31, 2015.
In
accordance with the adoption of Accounting Standards Update (“ASU”) 2015-03, the Company’s debt issuance costs
have been reclassified to be presented in the Condensed Consolidated Balance Sheets as a direct reduction from the debt liability
rather than as an asset.
The
following is a reconciliation of the effect of these reclassifications on the Company’s Condensed Consolidated Balance Sheet
at December 31, 2015 (in thousands):
|
|
December 31, 2015
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Revised
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
$
|
821
|
|
|
$
|
(592
|
)
|
|
$
|
229
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
|
16,957
|
|
|
|
(592
|
)
|
|
|
16,365
|
|
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S.
GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue
and expenses during the period. Actual results could differ from those estimates. Some of the more significant estimates relate
to inventory, stock-based compensation, long-lived and intangible assets and the liability for preferred stock and common stock
warrants.
Liquidity
and Capital Resources
For
the nine months ended September 30, 2016 and 2015, the Company incurred a net loss of $12.8 million and $21.4 million, respectively,
and used cash in operations of $5.3 million and $7.1 million, respectively. The Company had an accumulated deficit of $209.3 million
and $196.5 million at September 30, 2016 and December 31, 2015, respectively. To date, the Company’s operations have been
principally financed from proceeds from the issuance of preferred and common stock, convertible debt and bank debt and, to a lesser
extent, cash generated from product sales. It is anticipated that the Company will continue to generate operating losses and use
cash in operations through 2016.
As
discussed further in Note 7, in June 2014, the Company entered into a term loan with Hercules Technology Growth Capital, Inc.
(“Hercules Technology”), as administrative and collateral agent for the lenders thereunder and as lender, and Hercules
Technology III, LP, (“HT III” and, together with Hercules Technology, “Hercules”) as lender (the “Hercules
Term Loan”). The Hercules Term Loan has a liquidity covenant that requires the Company to maintain a cash balance of not
less than $3.5 million at September 30, 2016. At September 30, 2016, the Company’s cash balance was approximately $10.6
million. The Company believes it will be in position to maintain compliance with the liquidity covenant related to the Hercules
Term Loan into the second quarter of 2017. To maintain compliance beyond that date, the Company would need to refinance the note
or obtain additional funding in or prior to the second quarter of 2017. If the Company is unable to refinance the note or access
additional funds prior to becoming non-compliant with the financial and liquidity covenants related to the Hercules Term Loan,
the entire remaining balance of the debt under the Hercules Term Loan could become immediately due and payable at the option of
the lender. Although the Company may seek to refinance the note or obtain additional financing, additional funding may not be
available to the Company on favorable or acceptable terms, or at all. Any additional equity financing, if available to the Company,
will most likely be dilutive to its current stockholders, and debt financing, if available, may involve more restrictive covenants.
The Company’s ability to access capital when needed is not assured and, if not achieved on a timely basis, will materially
harm its business, financial condition and results of operations. These uncertainties create substantial doubt about the Company’s
ability to continue as a going concern. No adjustment has been made to our financial statements as a result of this uncertainty.
Significant
Accounting Policies
There
have been no significant changes to the Company’s significant accounting policies as described in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2015.
New
Accounting Pronouncements
In
August 2016, the Financial Accounting Standards Board (“FASB”) updated accounting guidance on the following eight
specific cash flow classification issues: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt
instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest
rate of the borrowing; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement
of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance
policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and
(8) separately identifiable cash flows and application of the predominance principle. Current GAAP does not include specific guidance
on these eight cash flow classification issues. These updates are effective for reporting periods beginning after December 15,
2017, with early adoption permitted. The Company is currently assessing the impact these updates will have on the Condensed Financial
Statements.
In
May 2016, the FASB updated accounting guidance rescinding certain SEC Staff Observer comments that indicated that registrants
should not rely on the following SEC Staff Observer comments upon adoption of Topic 606: (a) Revenue and Expense Recognition for
Freight Services in Process (b) Accounting for Shipping and Handling Fees and Costs, (c) Accounting for Consideration Given by
a Vendor to a Customer (including Reseller of the Vendor’s Products) (d) Accounting for Gas-Balancing Arrangements (that
is, use of the “entitlements method”). In addition, as a result of the amendments in Update 2014-16, the SEC staff
is rescinding its SEC Staff Announcement, “Determining the Nature of a Host Contract Related to a Hybrid Instrument Issued
in the Form of a Share under Topic 815,” effective concurrently with Update 2014-16. The Company is currently evaluating
the impact of this guidance on its consolidated financial position, results of operations and cash flows.
In
April 2016, the FASB issued guidance to clarify the following two aspects of Topic 606: (a) identifying performance obligations;
and (b) the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. The
effective date and transition requirements for the amendments are the same as the effective date and transition requirements in
Topic 606: The guidance is effective for the Company beginning January 1, 2018, although early adoption is permitted beginning
January 1, 2017. The Company is currently evaluating the impact of this guidance on its consolidated financial position, results
of operations and cash flows.
In
March 2016 the FASB updated the accounting guidance related to stock compensation. This update simplifies the accounting for employee
share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements,
as well as classification in the statement of cash flows. The Company is still evaluating the impact that this standard will have
on its consolidated financial statements.
In
February 2016, the FASB updated the accounting guidance related to leases as part of a joint project with the International Accounting
Standards Board (“IASB”) to increase transparency and comparability among organizations by recognizing lease assets
and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under the new guidance,
a lessee will be required to recognize assets and liabilities for capital and operating leases with lease terms of more than 12
months. Additionally, this update will require disclosures to help investors and other financial statement users better understand
the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements. For
public business entities, the amendments are effective for fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years, with early adoption permitted. The Company is currently evaluating the potential impact this new standard
may have on its financial statements.
In
August 2014, the FASB updated the accounting guidance related to disclosure of uncertainties about an entity’s ability to
continue as a going concern. The new standard provides guidance on determining when and how to disclose going concern uncertainties
in the financial statements. It requires management to perform interim and annual assessments of an entity’s ability to
continue as a going concern. The new standard is effective for annual periods ending after December 15, 2016, and interim periods
thereafter. Early adoption is permitted. The impact on the Company’s financial statements of adopting the new standard is
currently being assessed by management.
In
May 2014, the FASB updated the accounting guidance related to revenue from contracts with customers, which supersedes nearly all
existing revenue recognition guidance under U.S. GAAP. The core principle is that a company should recognize revenue when promised
goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled
for those goods or services. The standard defines a five step process to achieve this core principle and, in doing so, more judgment
and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard
is effective for annual periods beginning after December 15, 2017, and interim periods therein, and shall be applied either retrospectively
to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is evaluating the potential
impact of this adoption on its consolidated financial statements.
2.
Basic and Diluted Net Loss per Common Share
Basic
net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the
period, without consideration for common stock equivalents. Diluted net loss per share is calculated by dividing the net loss
by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method.
Dilutive common stock equivalents are comprised of warrants for the purchase of common stock, convertible notes, stock options
and unvested restricted stock units. For all periods presented, there is no difference in the number of shares used to calculate
basic and diluted shares outstanding because their effect would have been anti-dilutive due to the Company reporting a net loss.
The Company had potentially dilutive securities representing approximately 13.2 million and 3.0 million shares of common stock
at September 30, 2016 and 2015, respectively.
3.
Inventories
The
components of inventory were as follows (in thousands):
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Raw materials
|
|
$
|
759
|
|
|
$
|
819
|
|
WIP
|
|
|
154
|
|
|
|
235
|
|
Finished Goods
|
|
|
6,938
|
|
|
|
8,077
|
|
Total inventory
|
|
$
|
7,851
|
|
|
$
|
9,131
|
|
Finished
goods include consigned inventory in the amounts of approximately $3.4 million and $3.5 million as of September 30, 2016 and December
31, 2015, respectively.
4.
Intangible Assets
Intangible
assets consisted of the following (in thousands):
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Customer relationships
|
|
$
|
3,990
|
|
|
$
|
3,990
|
|
Developed technology
|
|
|
4,685
|
|
|
|
4,685
|
|
Other patents and patent applications
|
|
|
562
|
|
|
|
562
|
|
Trademarks
|
|
|
350
|
|
|
|
350
|
|
Total intangibles
|
|
|
9,587
|
|
|
|
9,587
|
|
Less accumulated amortization
|
|
|
(6,275
|
)
|
|
|
(5,900
|
)
|
Total intangibles net of amortization
|
|
$
|
3,312
|
|
|
$
|
3,687
|
|
Based
on the recorded intangibles at September 30, 2016, the estimated amortization expense is expected to be $125,000 during the remainder
of 2016 and approximately $501,000 per year through 2021 and $333,000 thereafter.
5.
Fair Value Measurements
Financial
Instruments Measured and Recorded at Fair Value on a Recurring Basis
The
Company measures and records certain financial instruments at fair value on a recurring basis. Fair value is based on the price
that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date, under a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as
follows:
|
Level
1
|
-
|
quoted
market prices for identical assets or liabilities in active markets.
|
|
|
|
|
|
Level
2
|
-
|
observable
prices that are based on inputs not quoted on active markets, but corroborated by market data.
|
|
|
|
|
|
Level
3
|
-
|
unobservable
inputs reflecting management’s assumptions, consistent with reasonably available assumptions made by other market participants.
These valuations require significant judgment.
|
The
Company classifies assets and liabilities measured at fair value in their entirety based on the lowest level of input that is
significant to their fair value measurement. No financial assets were measured on a recurring basis at September 30, 2016 and
December 31, 2015. The following tables set forth the financial liabilities measured at fair value on a recurring basis by level
within the fair value hierarchy at September 30, 2016 and December 31, 2015:
|
|
Fair Value Measurements at September 30, 2016
|
|
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Derivative liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
548
|
|
|
$
|
548
|
|
Total derivative liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
548
|
|
|
$
|
548
|
|
|
|
Fair Value Measurements at December 31, 2015
|
|
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Derivative liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
598
|
|
|
$
|
598
|
|
Total derivative liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
598
|
|
|
$
|
598
|
|
The
Company did not have any transfers of assets and liabilities between Level 1 and Level 2 of the fair value measurement hierarchy
during the nine months ended September 30, 2016 and 2015. The following table presents a reconciliation of the derivative liabilities
measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September
30, 2016 and 2015:
|
|
Common Stock
Warrants
|
|
|
Convertible Notes
|
|
|
Total
Derivative
Liability
|
|
Balance at December 31, 2014
|
|
$
|
(11,358
|
)
|
|
$
|
(2,612
|
)
|
|
$
|
(13,970
|
)
|
Issuances of derivatives
|
|
|
(14,556
|
)
|
|
|
-
|
|
|
|
(14,556
|
)
|
Modification of terms
|
|
|
(382
|
)
|
|
|
-
|
|
|
|
(382
|
)
|
Decrease in liability due to debt conversions
|
|
|
-
|
|
|
|
179
|
|
|
|
179
|
|
Decrease in liability due to warrants being exercised
|
|
|
10,326
|
|
|
|
-
|
|
|
|
10,326
|
|
Extinguishment of derivatives
|
|
|
-
|
|
|
|
3,468
|
|
|
|
3,468
|
|
Change in fair value
|
|
|
1,687
|
|
|
|
(1,035
|
)
|
|
|
652
|
|
Balance at September 30, 2015
|
|
$
|
(14,283
|
)
|
|
$
|
-
|
|
|
$
|
(14,283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
(598
|
)
|
|
$
|
-
|
|
|
$
|
(598
|
)
|
Issuances of derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Extinguishment of derivative liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Change in fair value included in earnings, as other income
|
|
|
50
|
|
|
|
-
|
|
|
|
50
|
|
Balance at September 30, 2016
|
|
$
|
(548
|
)
|
|
$
|
-
|
|
|
$
|
(548
|
)
|
Common
Stock Warrants
The
Company has issued certain warrants to purchase shares of common stock, which are considered mark-to-market liabilities and are
re-measured to fair value at each reporting period in accordance with accounting guidance.
The
assumptions used in estimating the common stock warrant liability at September 30, 2016 and December 31, 2015 were as follows:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Weighted-average risk free interest rate
|
|
|
0.99
|
%
|
|
|
1.71
|
%
|
Weighted-average expected life (in years)
|
|
|
3.4
|
|
|
|
3.7
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Weighted average expected volatility
|
|
|
122
|
%
|
|
|
119
|
%
|
Other
Financial Instruments
The
Company’s recorded values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate
their fair values based on their short-term nature. The recorded value of notes payable approximates the fair value as the interest
rate approximates market interest rates.
6.
Accrued Liabilities
Accrued
liabilities consisted of the following (in thousands):
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Commissions
|
|
$
|
440
|
|
|
$
|
867
|
|
Payroll and related expenses
|
|
|
562
|
|
|
|
683
|
|
Royalties
|
|
|
407
|
|
|
|
515
|
|
Interest payable
|
|
|
95
|
|
|
|
222
|
|
Final loan payment fees
|
|
|
1,219
|
|
|
|
783
|
|
Other
|
|
|
1,151
|
|
|
|
351
|
|
Total accrued liabilities
|
|
$
|
3,874
|
|
|
$
|
3,421
|
|
7.
Debt
Hercules
Term Loan
On
June 30, 2014, the Company entered into a Loan and Security Agreement with Hercules which provided the Company with a $20 million
term loan. The Hercules Term Loan matures on January 1, 2018. The Hercules Term Loan included a $200,000 closing fee, which was
paid to Hercules on the closing date of the loan. The closing fee was recorded as a debt discount and is being amortized to interest
expense over the life of the loan. The Hercules Term Loan also includes a non-refundable final payment fee of $1.7 million. The
final payment fee is being accrued and recorded to interest expense over the life of the loan. The Hercules Term Loan bears interest
at the rate of the greater of either (i) the prime rate plus 9.2%, and (ii) 12.5%, and was 12.7% at September 30, 2016. Interest
accrues from the closing date of the loan and interest payments are due monthly. Principal payments commenced August 1, 2015 and
are currently being made in equal monthly installments of approximately $500,000, with the remainder due at maturity. The Company’s
obligations to Hercules are secured by a first priority security interest in substantially all of its assets, including intellectual
property. The Hercules Term Loan contains certain covenants related to restrictions on payments to certain Company affiliates
and financial reporting requirements.
On
September 8, 2015, the Company entered into a Consent and First Amendment to Loan and Security Agreement (the “Amendment”)
with Hercules. The Amendment modified the liquidity covenant to reduce the minimum cash balance required by $500,000 for every
$1.0 million paid in principal to a minimum of $2.5 million. The minimum cash and cash equivalents balance required to maintain
compliance with the minimum liquidity covenant at September 30, 2016 was $3.5 million. The Company believes it is in position
to maintain compliance with the liquidity covenant related to the Hercules Term Loan into the second quarter of 2017. To maintain
compliance beyond that date, the Company would need to refinance the note or obtain additional funding in or prior to the second
quarter of 2017, and has therefore classified the entire obligation as a current liability.
See
discussion below with respect to the assignment of $3.0 million of the principal balance of the Hercules Term Loan to Riverside
Merchant Partners, LLC (“Riverside”) and the subsequent agreement between the Company and Riverside to exchange the
$3.0 million of the Hercules Term Loan held by Riverside for subordinated convertible promissory notes in the aggregate principal
amount of $3.0 million.
Magna
Note
In
August 2014, the Company entered into a Securities Purchase Agreement with Magna pursuant to which the Company sold to Magna an
unsecured promissory note with an aggregate principal amount of $3.5 million (the “Magna Note”). In July 2016, the
Company paid Magna $888,000 to redeem in full the remaining principal balance and interest related to the Magna Note. The outstanding
principal amount of the Magna Note at extinguishment was $763,000. The Magna Note would have matured on August 11, 2016, and accrued
interest at an annual rate of 6.0%.
Hercules
and Riverside Debt Exchange
On
April 4, 2016, the Company entered into an Assignment and Second Amendment to Loan and Security Agreement (the “Assignment
Agreement”) with Riverside Merchant Partners, LLC (“Riverside”), and Hercules, pursuant to which Hercules sold
$1.0 million of the principal amount outstanding under the Hercules Term Loan to Riverside. In addition, pursuant to the terms
of the Assignment Agreement, Riverside acquired an option to purchase an additional $2.0 million of the principal amount outstanding
under the Hercules Term Loan from Hercules. On April 18, 2016, Riverside exercised and purchased an additional $1.0 million of
the principal amount of the Hercules Term Loan and on April 27, 2016, Riverside exercised the remainder of its option and purchased
an additional $1.0 million of the principal amount of the Hercules Term Loan from Hercules.
Riverside
Debt
On
April 4, 2016, the Company entered into an exchange agreement (the “Exchange Agreement”) with Riverside, pursuant
to which the Company agreed to exchange $1.0 million of the principal amount outstanding under the Hercules Term Loan held by
Riverside for a subordinated convertible promissory note in the principal amount of $1.0 million (the “First Exchange Note”)
and a warrant to purchase 100,000 shares of common stock of the Company at a fixed exercise price of $1.63 per share (the “First
Exchange Warrant”) (the “Exchange”). All principal accrued under the Exchange Notes was convertible into shares
of common stock at the election of the Holder at any time at a fixed conversion price of $1.43 per share (the “Conversion
Price”). The closing stock price on April 4, 2016, was $1.63 and a beneficial conversion feature of $246,000 was recorded
to equity and as a debt discount. The warrant value of $106,000 was recorded to equity and as a debt discount.
In
addition, pursuant to the terms and conditions of the Exchange Agreement, the Company and Riverside had the option to exchange
an additional $2.0 million of the principal amount of the Hercules Term Loan for an additional subordinated convertible promissory
note in the principal amount of up to $2.0 million and an additional warrant to purchase 100,000 shares of common stock (the “Second
Exchange Warrant”). The Exchange Agreement also provided that if the volume-weighted average price of the Company’s
common stock was less than the Conversion Price, the Company would issue up to an additional 150,000 shares of common stock (the
“True-Up Shares”) to Riverside, which was subsequently reduced to 140,000 shares of common stock.
On
April 18, 2016, the Company and Riverside exercised their option to exchange an additional $1.0 million of the principal amount
of the Hercules Term Loan for an additional subordinated convertible promissory note in the principal amount of $1.0 million (the
“Second Exchange Note”). The closing stock price on April 18, 2016, was $2.02 and a beneficial conversion feature
of $413,000 was recorded to equity and as a debt discount. Additionally, on April 28, 2016, the Company and Riverside exercised
their option to exchange an additional $1.0 million of the principal amount of the Term Loan for an additional subordinated convertible
promissory note in the principal amount of $1.0 million (the “Third Exchange Note”) and an additional warrant to purchase
100,000 shares of the Company’s common stock at a fixed exercise price of $1.66 per share. The warrant value of $107,000
was recorded to equity and as a debt discount. The closing stock price on April 28, 2016, was $1.66 and a beneficial conversion
feature of $268,000 was recorded to equity and as a debt discount. Financing costs were $267,000 and were recorded to interest
expense. The unamortized deferred financing costs and debt discount of the Hercules Term Loan exchanged were $244,000 at the time
of the exchange and were recorded as a loss on extinguishment of debt related to the debt exchange. The First Exchange Note, the
Second Exchange Note and the Third Exchange Note are collectively referred to herein as the “Exchange Notes.”
Pursuant
to the terms of the Exchange Notes, since the volume-weighted average price of the Company’s common stock was less than
the Conversion Price on May 6, 2016, the Company issued an additional 140,000 shares of common stock to Riverside and recorded
the value of the True-Up Shares of $199,000 to interest expense and equity.
All
principal outstanding under each of the Exchange Notes was to be due on April 3, 2018 (the “Maturity Date”). Each
of the Exchange Notes bore interest at a rate of 6% per annum, with the interest that would accrue on the initial principal amount
of the Exchange Notes during the first 12 months being guaranteed and deemed earned as of the date of issuance. Prior to the Maturity
Date, all interest accrued under the Exchange Notes was payable in cash or, if certain conditions were met, payable in shares
of common stock at the Company’s option, at a conversion price of $1.34 per share. The entire principal amount of the First
and Second Exchange Notes, $300,000 of the Third Exchange Note, and the interest related to the First, Second, and Third Exchange
Notes had been converted into 1,742,718 shares of common stock. In July 2016, the Company paid Riverside $840,000 to redeem in
full the remaining principal balance of the Third Exchange Note. The debt discounts associated with the converted debt was recorded
to interest expense.
Outstanding
long-term debt consisted of the following (in thousands):
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Outstanding Principal
|
|
|
Unamortized Discount and Debt Issuance Costs
|
|
|
Net Carrying Amount
|
|
|
Outstanding Principal
|
|
|
Unamortized Discount and Debt Issuance Costs
|
|
|
Net Carrying Amount
|
|
Hercules Term Loan
|
|
|
8,981
|
|
|
|
(549
|
)
|
|
|
8,432
|
|
|
|
17,051
|
|
|
|
(1,420
|
)
|
|
|
15,631
|
|
Convertible Note
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Magna Note
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
763
|
|
|
|
(29
|
)
|
|
|
734
|
|
Total debt
|
|
|
8,981
|
|
|
|
(549
|
)
|
|
|
8,432
|
|
|
|
17,814
|
|
|
|
(1,449
|
)
|
|
|
16,365
|
|
Less: Current portion
|
|
|
(8,981
|
)
|
|
|
549
|
|
|
|
(8,432
|
)
|
|
|
(17,814
|
)
|
|
|
1,449
|
|
|
|
(16,365
|
)
|
Long-term debt
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The
following summarizes by year the future principal payments as of September 30, 2016 (in thousands):
Years Ending December 31,
|
|
Hercules Term
Loan
|
|
|
Total
|
|
2016
|
|
$
|
1,564
|
|
|
$
|
1,564
|
|
2017
|
|
|
6,779
|
|
|
|
6,779
|
|
2018
|
|
|
638
|
|
|
|
638
|
|
Total future principal payments
|
|
$
|
8,981
|
|
|
$
|
8,981
|
|
8.
Equity
During
the nine months ended September 30, 2016, 536,388 shares of common stock were issued upon the cashless exercise of 1,137,365 Series
A warrants issued in September 2015 and 647 shares of common stock were issued upon warrants exercised for cash.
1,882,718
shares of common stock were issued related to the Riverside Debt discussed in Note 7.
In
July 2016, the Company completed a secondary offering in which the Company sold 5,258,000 Class A Units, including 1,650,000 units
sold pursuant to the exercise by the underwriters of their over-allotment option, priced at $1.00 per unit, and 7,392 Class B
Units, priced at $1,000 per unit. Each Class A Unit consisted of one share of common stock and one warrant to purchase one share
of common stock. Each Class B Unit consisted of one share of preferred stock convertible into 1,000 shares of common stock and
warrants to purchase 1,000 shares of common stock. The securities comprising the units were immediately separable and were issued
separately. In total, the Company issued 5,258,000 shares of common stock, 7,392 shares of preferred stock convertible into 7,392,000
shares of common stock, and warrants to purchase 12,650,000 shares of common stock at a fixed exercise price of $1.00 per share.
The Company received proceeds of approximately $11.4 million, net of underwriting and other offering costs.
The Company raised $4.8 million associated
with the Class A Units which were recorded as common stock and additional paid in capital. The Company also raised $6.8 million
associated with the Class B Units of which it allocated and recorded $3.7 million to preferred stock and allocated $3.1 million
to the warrants which were recorded to additional paid in capital. The 7,392 preferred shares were convertible into 7,392,000
shares of common stock and had an effective conversion rate of $0.50 per share based on the proceeds that were allocated to them.
The stock price on July 8, 2016, was $0.88 per share which resulted in a fair value in excess of carrying value of $0.38 per share
or $2.5 million in total. The fair value in excess of carrying value, or beneficial conversion feature, was recorded as an adjustments
within equity (e.g., deemed dividend). The Company recorded a non-cash, deemed dividend of $6.3 million ($2.5 and $3.8
million) related to a beneficial conversion feature and accretion of a discount on convertible preferred stock.
Subsequent
to the secondary offering, all 7,392 shares of convertible preferred stock have been converted into 7,392,000 shares of common
stock. Furthermore, the Company received $446,500 and issued 446,500 shares of common stock upon the exercise of certain warrants
issued in the secondary offering.
9.
Stock-Based Compensation
Option
and Equity Plans
In
May 2016, the stockholders of the Company approved a proposal to increase the number of shares of common stock available for issuance
under the 2012 Employee, Director and Consultant Equity Incentive Plan (the “2012 Plan”) by 800,000 shares, from 342,425
to 1,142,425.
The
total number of shares available for grant under the 2012 Plan at September 30, 2016 was 904,254.
Stock
Options
A
summary of the Company’s stock option activity for the nine months ended September 30, 2016 was as follows:
|
|
Options
|
|
|
Weighted-Average
Exercise Price
|
|
Outstanding at December 31, 2015
|
|
|
112,373
|
|
|
$
|
41.53
|
|
Granted
|
|
|
39,354
|
|
|
$
|
1.37
|
|
Expired
|
|
|
(13,702
|
)
|
|
$
|
24.22
|
|
Outstanding at September 30, 2016
|
|
|
138,025
|
|
|
$
|
32.29
|
|
Exercisable at September 30, 2016
|
|
|
94,069
|
|
|
$
|
48.26
|
|
Vested and expected to vest at September 30, 2016
|
|
|
136,889
|
|
|
$
|
32.79
|
|
The
Company estimates the fair value of each stock option on the grant date using the Black-Scholes-Merton valuation model, which
requires several estimates including an estimate of the fair value of the underlying common stock on grant date. The expected
volatility was based on an average of the historical volatility of a peer group of similar companies. The expected term was calculated
utilizing the simplified method. The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time
of grant for the expected term of the option. The following weighted average assumptions were used in the calculation to estimate
the fair value of options granted to employees during the nine months ended September 30, 2016 and 2015:
|
|
Nine Months Ended September 30
|
|
|
|
2016
|
|
|
2015
|
|
Weighted-average risk-free interest rate
|
|
|
1.63
|
%
|
|
|
1.64
|
%
|
Weighted-average expected life (in years)
|
|
|
6.3
|
|
|
|
6.3
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Weighted-average expected volatility
|
|
|
65
|
%
|
|
|
48
|
%
|
Summary
of Stock-Based Compensation Expense
Total
stock-based compensation expense included in the condensed consolidated statements of operations and comprehensive loss was allocated
as follows (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Cost of revenue
|
|
$
|
6
|
|
|
$
|
11
|
|
|
$
|
13
|
|
|
$
|
45
|
|
Research and development
|
|
|
18
|
|
|
|
8
|
|
|
|
71
|
|
|
|
167
|
|
General and administrative
|
|
|
20
|
|
|
|
46
|
|
|
|
95
|
|
|
|
405
|
|
Selling and marketing
|
|
|
1
|
|
|
|
11
|
|
|
|
18
|
|
|
|
163
|
|
Capitalized into inventory
|
|
|
11
|
|
|
|
20
|
|
|
|
14
|
|
|
|
66
|
|
Total stock-based compensation expense
|
|
$
|
56
|
|
|
$
|
96
|
|
|
$
|
211
|
|
|
$
|
846
|
|
Unrecognized
stock-based compensation at September 30, 2016 was as follows (in thousands):
|
|
Unrecognized Stock-
Based Compensation
|
|
|
Weighted Average
Remaining Period of
Recognition (in years)
|
|
Stock options
|
|
$
|
313
|
|
|
|
1.3
|
|
10.
Commitments and Contingencies
On
April 1, 2016, Hampshire MedTech Partners II, GP (“Hampshire GP”) filed suit against the Company in the Travis County,
Texas 200th Judicial District Court relating to a Warrant to Purchase Shares of Common Stock issued to Hampshire MedTech Partners
II, LP (“Hampshire LP”) on November 6, 2014 (the “Warrant”). Hampshire GP alleges that as a result of
a subsequent financing the Company breached the anti-dilution provision of the Warrant by failing to increase the number of shares
subject to the Warrant as well as failing to reduce the exercise price of the Warrant. Hampshire GP seeks damages in excess of
$1,000,000.
From
time to time, the Company is subject to other various claims and legal proceedings covering matters that arise in the ordinary
course of its business activities. Management believes any liability that may ultimately result from the resolution of these matters
will not have a material adverse effect on the Company’s consolidated financial position, operating results or cash flows.
11.
Subsequent Events
On
October 3, 2016, the Board of Directors of the Company authorized the implementation of certain cost saving measures which included
a reduction in staff of 21 employees, or approximately 38% of the company’s workforce as the result of a comprehensive business
review to improve financial performance, increase operational efficiencies and strengthen the Company’s value proposition.
The implementation of the staff reduction was started on October 3, 2016 and completed on October 4, 2016. Conditional on the
execution of a release of potential claims, all employees whose employment was terminated as part of the workforce reduction were
provided with severance pay and benefits. We estimate the staff reductions will result in savings of approximately $2.0 million
in cash operating expenses on a going forward basis, with estimated one-time severance and related costs related to the restructuring
of approximately $465,000 expected to be recorded in the 4th quarter of 2016.
12. Restatement of Condensed Consolidated Statement of Operations a
nd
Comprehensive Loss
The
requirement to restate the Company’s net loss attributable to common stockholders and basic and diluted loss per common
share is due to the failure to record a one-time, non-cash $3.8 million charge attributable to the deemed dividend related to
the accretion of a discount on Series A convertible preferred stock upon conversion into the Company’s common stock,
which occurred in July 2016. The impact of this change for the three and nine months periods ended September 30, 2016 is as
follows (in thousands, except share and per share data):
|
|
Three
months ended September 30, 2016
|
|
|
|
As
Previously
Reported
|
|
|
As
Restated
|
|
Total comprehensive loss
|
|
$
|
(4,338
|
)
|
|
$
|
(4,338
|
)
|
Deemed dividend related to Series A convertible
preferred stock
|
|
|
(2,499
|
)
|
|
|
(6,278
|
)
|
Net loss attributable
to common stockholders
|
|
$
|
(6,837
|
)
|
|
$
|
(10,616
|
)
|
Basic and diluted
net loss per common share
|
|
$
|
(0.30
|
)
|
|
$
|
(0.46
|
)
|
Shares used to compute basic and diluted
net loss per common share
|
|
|
23,048,941
|
|
|
|
23,048,941
|
|
|
|
Nine
months ended September 30, 2016
|
|
|
|
As
Previously
Reported
|
|
|
As
Restated
|
|
Total comprehensive loss
|
|
$
|
(12,790
|
)
|
|
$
|
(12,790
|
)
|
Deemed dividend
related to Series A convertible preferred stock
|
|
|
(2,499
|
)
|
|
|
(6,278
|
)
|
Net loss attributable
to common stockholders
|
|
$
|
(15,289
|
)
|
|
$
|
(19,068
|
)
|
Basic and diluted
net loss per common share
|
|
$
|
(0.97
|
)
|
|
$
|
(1.21
|
)
|
Shares used to compute basic and diluted
net loss per common share
|
|
|
15,711,429
|
|
|
|
15,711,429
|
|
The above-mentioned
corrections do not have an effect on consolidated total comprehensive loss, and the consolidated balance sheets or statements
of cash flows, except for the non-cash financing activities presented on the statements of cash flows.