The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
Notes to Unaudited Condensed Consolidated Financial Statements
Note
1. Description of Business and Summary of Significant Accounting Policies
Nature of operations and basis of presentation
References in these notes to the unaudited condensed 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 subsidiaries. Our consolidated financial statements include the accounts of the Company as well as its wholly-owned subsidiaries, with all material intercompany accounts and transactions eliminated in consolidation. In December 2014, we established a wholly-owned subsidiary, Samsara Sciences, Inc., to focus on the acquisition of qualified cells in support of our commercial and research endeavors. In September 2015, we established another wholly-owned subsidiary in the United Kingdom, Organovo U.K., Ltd., for the primary purpose of establishing a sales presence in Europe.
Since its inception, the Company has devoted its efforts primarily to developing and commercializing a platform technology and 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. The Company has also focused efforts on raising capital and building infrastructure. In November 2014, the Company announced the commercial release of its first product, the ExVive™ Human Liver Tissue for use in toxicology and other drug testing. In September 2016, the Company announced that it had begun commercial contracting for services relating to its second product, the ExVive™ Human Kidney tissue.
The Company’s activities are subject to significant risks and uncertainties including failing to successfully develop products and services based on its technology and to achieve the market acceptance necessary to generate sufficient revenues to support its operations and to achieve and sustain profitability.
The accompanying interim condensed consolidated financial statements have been prepared by the Company, without audit, in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of its financial position, results of operations, stockholders’ equity and cash flows in accordance with generally accepted accounting principles (“GAAP”). The balance sheet at March 31, 2017 is derived from the Company’s audited balance sheet at that date.
In the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments, which are only normal and recurring, necessary for a fair statement of the Company’s financial position, results of operations, stockholders’ equity and cash flows. These financial statements should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2017, filed with the Securities and Exchange Commission (the “SEC”) on June 7, 2017. Operating results for interim periods are not necessarily indicative of operating results for the Company’s fiscal year ending March 31, 2018.
Liquidity
As of September 30, 2017, the Company had cash and cash equivalents of approximately $50.7 million and an accumulated deficit of approximately $218.9 million. The Company also had negative cash flows from operations of approximately $16.8 million during the six months ended September 30, 2017.
Through September 30, 2017, the Company has financed its operations primarily through the sale of convertible notes, the private placement of equity securities, the sale of common stock through public and at-the-market (“ATM”) offerings, and through revenue derived from product and research service-based agreements, collaborative research agreements, grants, and licenses. During the six months ended September 30, 2017, the Company issued 1,538,217 shares of its common stock through its ATM facility and received net proceeds of approximately $4.0 million.
On October 25, 2016, the Company closed the issuance and sale of 10,065,000 shares of its common stock in an underwritten public offering. The Company received net proceeds of approximately $25.7 million in the offering, after deducting underwriting discounts and commissions and the Company’s expenses. 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 from the financial statement issuance date.
6
The Company will need additional capital to further fund the 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 diseased tissues and organs. The Company intends to cover its future operating expenses through cash on hand, through revenue derived from research service agreements, product sales, collaborative research agreements, grants and roy
alty payments, and through the issuance of additional equity or debt securities. Depending on market conditions, 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.
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 condensed consolidated financial statements include those assumed in revenue recognized under the proportional performance model, the valuation of stock-based compensation expense, and the valuation allowance on deferred tax assets.
Fair value measurement
The Company had issued warrants, of which some were 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 used Level 3 inputs (unobservable inputs that are supported by little or no market activity, and that are significant to the fair value of the assets or liabilities) 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. The Company’s derivative liabilities were adjusted to reflect estimated fair value at each period end, with any increase or decrease in the estimated fair value being recorded in other income or expense accordingly, as adjustments to the fair value of the derivative liabilities. Various factors are considered in the pricing models the Company used to value the warrants, including the Company’s current stock price, the remaining life of the warrant, the volatility of the Company’s stock price, and the risk-free interest rate. The remaining warrants expired as of March 31, 2017 and were removed from the Balance Sheet. The Company does not have any financial assets or liabilities measured on a fair value basis as of September 30, 2017 or March 31, 2017.
Revenue recognition
The Company’s revenues are derived from research service agreements, product sales, and collaborative research agreements with pharmaceutical and biotechnology companies, as well as grants and license-payments from the National Institutes of Health (“NIH”), U.S. Treasury Department, academic institutions, and private not-for-profit organizations.
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 September 30, 2017 and March 31, 2017, the Company had approximately $721,000 and $640,000, respectively, in deferred revenue related to its grants and royalty payments, collaborative research programs and research service agreements.
7
Revenue arrangements with multiple deliverables
The Company follows ASC 605-25
Revenue Recognition – Multiple-Element Arrangements
for 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 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 vendor-specific objective evidence (“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.
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 Company’s results of operations.
The Company periodically receives 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.
Revenue from research service agreements
For research service agreements that contain only a single or primary deliverable, the Company defers any up-front fees collected from customers, and recognizes revenue for the delivered element only when it determines there are no uncertainties regarding customer acceptance. For agreements that contain multiple deliverables, the Company follows ASC 605-25 as described above.
Research and development revenue under collaborative agreements
The Company’s collaboration revenue consists of license and collaboration agreements that contain multiple elements, which may include non-refundable up-front 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 services are provided or substantive milestones are achieved. We recognize revenue that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. A milestone is considered substantive when the consideration payable to us for the milestone (i) is consistent with our performance necessary to achieve the milestone or the increase in value to the collaboration resulting from our performance, (ii) relates solely to our past performance and (iii) is reasonable relative to all of the other deliverables and payments within the arrangement. In making this assessment, we consider all facts and circumstances relevant to the arrangement, including factors such as the risks that must be overcome to achieve the milestone, the level of effort and investment required to achieve the milestone and whether any portion of the milestone consideration is related to future performance or deliverables.
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, using the appropriate method of revenue recognition based on its analysis of the related contractual element(s).
In November 2014, the Company entered into a collaborative non-exclusive research affiliation with a university medical school and a non-profit medical charity, under which the Company received a one-time grant from the charity towards the placement of a NovoGen Bioprinter at the university for the purpose of developing bioprinted tissues for surgical transplantation research. The Company has recorded $0 and $12,500 for the three months ended September 30, 2017 and 2016 and $0 and $25,000 for the six months ended September 30, 2017 and 2016, respectively, in revenue related to this collaboration in recognition of the proportional performance achieved.
In April 2015, the Company entered into a research collaboration agreement with a third party to develop custom tissue models for fixed fees. Based on the proportional performance achieved under this agreement, $150,000 in collaboration revenue was recorded for the three and six months ended September 30, 2017, and $0 collaboration revenue was recorded for the three and six months ended
8
September 30, 2016
.
Approximately $620,000 in collaboration revenue has been recognized to date under this agreement as of September 30, 2017.
Also in April 2015, the Company entered into a multi-year research agreement with a third party to develop multiple custom tissue models for use in drug development. No collaboration revenue was recorded under this agreement during the three and six months ended September 30, 2017. Approximately $332,000 and $533,000 were recorded as revenue in recognition of the proportional performance achieved under this agreement during the three and six months ended September 30, 2016, respectively.
In June 2016, the Company announced it had entered into another collaborative non-exclusive research affiliation with a university medical school and a non-profit medical charity, under which the Company received a one-time grant from the charity towards the placement of a NovoGen Bioprinter at the university for the purpose of developing bioprinted tissues for skeletal disease research. The Company received an up-front payment in June 2016, which was initially recorded as deferred revenue. Revenue of $18,000 and $35,000 has been recorded under this agreement during the three and six months ended September 30, 2017, respectively. No revenue was recorded under this agreement as of September 30, 2016.
In December 2016, the Company signed another collaborative non-exclusive research affiliation with a university medical school and a non-profit medical charity, under which the Company received a one-time grant from the charity towards the placement of a NovoGen Bioprinter at the university for the purpose of developing an architecturally correct kidney for potential therapeutic applications. The Company received an up-front payment in January and March of 2017, which has been recorded as deferred revenue. Revenue of $9,000 and $19,000 has been recorded under this agreement for the three and six months ended September 30, 2017, respectively.
In April 2017, the Company signed a collaborative non-exclusive research affiliation with a university, under which the Company received a one-time non-refundable payment toward the placement of a NovoGen Bioprinter at the university for the purpose of specific research projects mutually agreed by the university and the Company in the field of volumetric muscle loss. The Company received an up-front payment in May of 2017, which has been recorded as deferred revenue. Revenue of approximat
ely $14,000 has been recorded under this agreement for the three and six months ended September 30, 2017, beginning subsequent to the installation of the printer in July 2017. In addition, during April 2017, the Company signed a Non-exclusive Patent License agreement with the university including an annual fee of $75,000 for each of the two years for the license to the Company Patents for research use limited to the field of volumetric muscle loss. The Company received the first annual payment of $75,000 in April of 2017, which has been recorded as deferred revenue. Revenue of $18,750 and $37,500 has been recorded under this agreement for the three and six months ended September 30, 2017.
In September 2017, the Company entered into an agreement with a company, under which the Company received a one-time non-refundable payment of $50,000 for limited use of a Company Patent in reference to four bioprinters developed and placed at research and academic facilities. The Company has recorded $50,000 for the three months and six months ended September 30, 2017.
Product revenue
The Company recognizes product revenue at the time of shipment to the customer, provided all other revenue recognition criteria have been met.
As our commercial sales increase, we expect to establish a reserve for estimated product returns that will be recorded as a reduction to revenue. This reserve will be maintained to account for future return of products sold in the current period. The reserve will be reviewed quarterly and will be estimated based on an analysis of our historical experience related to product returns.
Grant revenue
During August 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 expenses that are related to the grant. Revenue recognized under this grant was approximately $0 and $8,000 for each of the three months ended September 30, 2017 and 2016 and $0 and $12,000 for each of the six months ended September 30, 2017 and 2016, respectively. The Company has completed its obligations under this agreement as of March 31, 2017.
9
During
July 2017, the NIH awarded the Company a research grant totaling approximately $1,657,000. The grant provides for fixed payments
based on the achievement of certain milestones.
R
evenue
is
recognized upon completion of substantive milestones. Revenue recognized under this grant was approximately $149,000 for the three and six months ended September 30
,
2017.
Cost of revenues
The Company reported $0.3 million and $0.6 million in cost of revenues for the three and six months ended September 30, 2017, respectively. The Company reported $0.4 million and $0.6 million in cost of revenues for the three and six months ended September 30, 2016, respectively. This captures our costs related to manufacturing and delivering our product and service revenue.
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 warrants, shares reserved for purchase under the Company’s 2016 Employee Stock Purchase Plan (“ESPP”), the assumed release of restriction of restricted stock units, and shares subject to repurchase as the effect would be anti-dilutive. No dilutive effect was calculated for the three and six months ended September 30, 2017 or 2016, as the Company reported a net loss for each respective period and the effect would have been anti-dilutive.
Common stock equivalents excluded from computing diluted net loss per share were approximately 15.4 million at September 30, 2017, and 13.2 million at September 30, 2016.
Note
2. Stockholders’ Equity
Stock-based compensation expense and valuation information
Stock-based compensation expense for all stock awards consists of the following (in thousands):
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
Research and development
|
$
|
384
|
|
|
$
|
379
|
|
|
$
|
715
|
|
|
$
|
787
|
|
General and administrative
|
$
|
1,914
|
|
|
$
|
1,714
|
|
|
$
|
3,635
|
|
|
$
|
2,735
|
|
Total
|
$
|
2,298
|
|
|
$
|
2,093
|
|
|
$
|
4,350
|
|
|
$
|
3,522
|
|
The total unrecognized compensation cost related to unvested stock option grants as of September 30, 2017 was approximately $10,527,000 and the weighted average period over which these grants are expected to vest is 2.43 years.
The total unrecognized compensation cost related to unvested restricted stock units (not including performance-based restricted stock units) as of September 30, 2017 was approximately $7,027,000, which will be recognized over a weighted average period of 3.18 years.
The total unrecognized compensation cost related to unvested performance-based restricted stock units as of September 30, 2017 was approximately $378,000 which will be recognized over a weighted average period of 2.16 years.
As of September 30, 2017, there was no unrecognized stock-based compensation expense for restricted stock awards.
The total unrecognized stock-based compensation cost related to unvested ESPP shares as of September 30, 2017 was approximately $25,000, which will be recognized over a period of 5 months.
10
The Company calculates the grant date fair value of all stock-based awards in determining the stock-based compensation expense. Stock-based awards include (i) stock options, (ii) restricted stock aw
ards, (iii) restricted stock units, and (iv) rights to purchase stock under the 2016 Employee Stock Purchase Plan.
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:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Volatility
|
|
70.97%
|
|
|
72.28%
|
|
|
76.85%
|
|
|
72.04%
|
|
Risk-free interest rate
|
|
1.78%
|
|
|
1.07%
|
|
|
1.81%
|
|
|
1.1%
|
|
Expected life of options
|
|
6.00 years
|
|
|
6.00 years
|
|
|
6.00 years
|
|
|
6.00 years
|
|
Weighted average grant
date fair value
|
|
$
|
1.25
|
|
|
$
|
2.57
|
|
|
$
|
1.73
|
|
|
$
|
2.44
|
|
The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future. Due to the Company’s limited historical data as an early-stage commercial business, 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 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 fair value of each restricted stock unit and performance-based restricted stock unit is recognized as stock-based compensation expense over the vesting term of the award. The fair value is based on the closing stock price on the date of the grant.
The fair value of each restricted stock award is recognized as stock-based compensation expense over the vesting term of the award. The fair value is based on the closing stock price on the date of the grant.
The Company uses the Black-Scholes valuation model to calculate the fair value of shares issued pursuant to the Company’s ESPP. Stock-based compensation expense is recognized over the purchase period using the straight-line method. The fair value of ESPP shares was estimated at the purchase period commencement date using the following assumptions:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Volatility
|
|
43.03 - 74.70%
|
|
|
72.89%
|
|
|
43.03 - 74.70%
|
|
|
72.89%
|
|
|
Risk-free interest rate
|
|
0.79 - 1.10%
|
|
|
0.47%
|
|
|
0.79 - 1.10%
|
|
|
0.47%
|
|
|
Expected term
|
|
6 months
|
|
|
6 months
|
|
|
6 months
|
|
|
6 months
|
|
|
Weighted average grant
date fair value
|
|
$0.52 - $1.04
|
|
|
$1.22
|
|
|
$0.52 - $1.04
|
|
|
$1.22
|
|
|
The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future. For the first full year of ESPP offering periods, beginning September 1, 2016, due to the Company’s limited historical data as an early-stage commercial business, the estimated volatility incorporates the historical and implied volatility of comparable companies whose share prices are publicly available. As of September 1, 2017 and the beginning of the second year of ESPP offering periods, the Company is using our Company-specific volatility rate. The risk-free interest rate assumption was based on U.S. Treasury rates. The expected life is the 6-month purchase period.
11
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 current plans to issue shares of preferred stock.
Common stock
In May 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 have been issued under the 2008 Plan since 2011, and the Company does not intend to issue any additional shares from the 2008 Plan in the future.
In January 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. The Board of Directors and stockholders of the Company approved an amendment to the 2012 Plan in August 2013 to increase the number of shares of common stock that may be issued under the 2012 Plan by 5,000,000 shares. In addition, the Board of Directors and stockholders of the Company approved an amendment to the 2012 Plan in August 2015 to further increase the number of shares of common stock that may be issued under the 2012 Plan by 6,000,000 shares, bringing the aggregate shares issuable under the 2012 Plan to 17,553,986. The 2012 Plan as amended and restated became effective on August 20, 2015 and terminates ten years after such date. As of September 30, 2017, 2,117,682 shares remain available for issuance under the 2012 Plan.
On April 24, 2017, the Company filed a Registration Statement on Form S-8 with the SEC authorizing the issuance of 2,297,034 shares of the Company’s common stock, pursuant to the terms of an Inducement Award Stock Option Agreement and an Inducement Award Performance-Based Restricted Stock Unit Agreement (collectively, the “Inducement Award Agreements”).
The Company filed a shelf registration statement on Form S-3 (File No. 333-189995), or the 2013 Shelf, 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, or 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. The 2013 Shelf was declared effective by the SEC on July 26, 2013 and was terminated in 2016.
A shelf registration statement on Form S-3 (File No. 333-202382), or the 2015 shelf, was filed with the SEC on February 27, 2015 authorizing the offer and sale in one or more offerings of up to $190,000,000 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. The 2015 shelf was declared effective by the SEC on March 17, 2015.
In December 2014, the Company entered into an equity offering sales agreement, or the 2014 Sales Agreement, with an investment banking firm. Under the terms of the distribution agreement, the Company could offer and sell up to $30,000,000 of its shares of common stock, from time to time, through the investment bank in at-the-market offerings, as defined by the SEC, and pursuant to the 2013 Shelf.
On July 20, 2016, the Company filed a prospectus supplement to move the remaining $26.6 million of common stock that previously could have been sold pursuant to the 2014 Sales Agreement under the 2013 Shelf to the 2015 Shelf, which does not expire until March 17, 2018. On that same date, the Company filed a post-effective amendment to the 2013 Shelf de-registering all remaining securities that could have been offered by the Company pursuant to the 2013 Shelf.
During the three and six months ended September 30, 2017, the Company issued 398,728 and 1,538,217 shares of common stock, respectively, for net proceeds of $1.0 million and $4.0 million, respectively, in at-the-market offerings under the 2014 Sales Agreement. During the three and six months ended September 30, 2016, the Company issued 997,181 shares of common stock for net proceeds of $4.5 million. As of September 30, 2017, the Company has sold an aggregate of 3,535,398 shares of common stock in at-the-market offerings under the 2014 Sales Agreement, with net proceeds of approximately $14.8 million. Based on sales through September 30, 2017, the Company can sell an additional $17.8 million of shares pursuant to the 2014 Sales Agreement under the 2015 Shelf. The Company intends to use the net proceeds raised through any at-the-market sales for general corporate purposes, including research and development, the commercialization of the Company’s products, general administrative expenses, and working capital and capital expenditures.
On June 23, 2015, the Company closed the public offering of 10,838,750 shares of its common stock (the “2015 Offering”), which included the full exercise of the underwriters’ over-allotment. The 2015 Offering was effected pursuant to an Underwriting Agreement
12
(the “2015 Underwriting Agreement”), dated June 18, 2015, with Jefferies LLC and Piper
Jaffray & Co. (the “Representatives”), acting as representatives of the underwriters named in the 2015 Underwriting Agreement. The price to the public in the 2015 Offering was $4.25 per share, and the Underwriters agreed to purchase the shares from the C
ompany pursuant to the 2015 Underwriting Agreement at a price of $3.995 per share.
The net proceeds to the Company from the 2015 Offering were approximately $43.1
million, after deducting underwriting discounts and commissions and expenses payable by the Company. The 2015 Offering was made pursuant to the 2015 Shel
f.
On October 25, 2016, the Company closed the public offering of 10,065,000 shares (the “2016 Offering”) of its common stock, which included partial exercise of the underwriters’ over-allotment. The 2016 Offering was effected pursuant to an Underwriting Agreement (the “2016 Underwriting Agreement”), dated October 20, 2016, with Jefferies LLC (the “Representative”), acting as representative of the underwriters named in the 2016 Underwriting Agreement. The price to the public in the 2016 Offering was $2.75 per share, and the underwriters purchased the shares from the Company pursuant to the 2016 Underwriting Agreement at a price of $2.585 per share. The net proceeds to the Company from the 2016 Offering were approximately $25.7 million after deducting underwriting discounts and commissions and expenses payable by the Company. The 2016 Offering was made pursuant to the 2015 Shelf.
During the three months ended September 30, 2017 and 2016, the Company issued 0 and 123,104 shares of common stock upon the exercise of 0 and 160,000 warrants, respectively. During the six months ended September 30, 2017 and 2016, the Company issued 0 and 123,104 shares of common stock up on the exercise of 0 and 160,000 warrants, respectively.
During the three months ended September 30, 2017 and 2016, the Company issued 500,000 and 206,266 shares of common stock upon the exercise of 500,000 and 206,266 stock options, respectively. During the six months ended September 30, 2017 and 2016, the Company issued 500,000 and 206,266 shares of common stock upon the exercise of 500,000 and 206,266 stock options, respectively.
Restricted stock awards
During the three months ended September 30, 2017 and 2016, there were 0 and 0 shares of restricted stock, respectively, cancelled 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 0 and 0 restricted stock awards, respectively. During the six months ended September 30, 2017 and 2016, there were 0 and 2,259 shares of restricted stock, respectively, cancelled 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 0 and 6,250 restricted stock awards, respectively. Upon the return of the common stock, an equal number of stock options with immediate vesting were granted to the individuals at the vesting date market value strike price.
Restricted stock units
During the three and six months ended September 30, 2017, the Company issued restricted stock units for an aggregate of 7,000 and 1,869,078 shares of common stock, respectively, to its employees and directors. These shares of common stock will be issued upon vesting of the restricted stock units. Vesting generally occurs (i) on the one-year anniversary of the grant date, (ii) quarterly over a three-year period, (iii) quarterly over a four-year period, (iv) over a four-year period, with 25% vesting on the one-year anniversary of the vesting commencement date and the remainder vesting ratably on a quarterly basis over the next twelve quarters, or (v) over a three-year period with 50% vesting on the two-year anniversary of the vesting commencement date and 50% vesting on the three-year anniversary of the vesting commencement date.
A summary of the Company’s restricted stock unit (not including performance-based restricted stock units) activity from March 31, 2017 through September 30, 2017 is as follows:
|
|
Number of
Shares
|
|
|
Weighted
Average Price
|
|
Unvested at March 31, 2017
|
|
|
1,178,114
|
|
|
$
|
3.57
|
|
Granted
|
|
|
1,869,078
|
|
|
$
|
2.66
|
|
Vested
|
|
|
(263,594
|
)
|
|
$
|
3.45
|
|
Cancelled / forfeited
|
|
|
(154,924
|
)
|
|
$
|
3.04
|
|
Unvested at September 30, 2017
|
|
|
2,628,674
|
|
|
$
|
2.96
|
|
Performance-based restricted stock units
On April 24, 2017, in connection with the appointment of a new CEO, the Company allocated 208,822 Performance-Based Restricted Stock Units outside of the 2012 Plan. The Company intends for these to be “inducement awards” within the meaning of NASDAQ Marketplace Rule 5635(c)(4). While outside the Company’s 2012 Plan, the terms and conditions of these awards are consistent with
13
awards granted to the Company’s executive officers pursuant to the 2012 Plan.
On August 23, 2017
,
the Board of Directors formally approved the vesting criteria for the Performance-Based Restricted Stock Units (“PBRSUs”) allocated
by the Company on April 24, 2017. The units are divided into five separate tranches each with independent vesting criteria. The first four tranches have performance criteria related to annual revenue goals with measurement at the end of fiscal year 2018 (2
0 percent), fiscal year 2019 (20 percent), fiscal year 2020 (20 percent), and fiscal year 2021 (20 percent). The fifth tranche has a performance metric related to a path to profitability goal measured as Negative Adjusted EBITDA achievable at any point bet
ween
the
grant date and the end of fiscal year 2020 (20 percent).
The number of units that ultimately vest for each tranche will range from 0 percent to 120 percent of the target amount, not to exceed 208,822 in aggregate.
As of September 30, 2017, no
tranches had vested
and 100% of current year tranches are expected to vest
.
The grant date fair values of the tranches are collectively $393,000 of which one-fifth is being recognized over each tranches’ service period. The Company began recording stock-based compensation expense for these tranches after the August 23, 2017 grant date when the financial performance goals were established and approved. As of September 30, 2017, PBRSUs from the fiscal year 2018 tranche and the Negative Adjusted EBITDA tranche have begun vesting and are expected to vest in the amount of 83,530 shares.
A summary of the Company’s performance-based restricted stock unit activity from March 31, 2017 through September 30, 2017 is as follows:
|
|
Number of
Shares
|
|
|
Weighted
Average Price
|
|
Unvested at March 31, 2017
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
|
208,822
|
|
|
$
|
1.88
|
|
Vested
|
|
|
—
|
|
|
$
|
—
|
|
Cancelled / forfeited
|
|
|
—
|
|
|
$
|
—
|
|
Unvested at September 30, 2017
|
|
|
208,822
|
|
|
$
|
1.88
|
|
Stock options
Under the 2012 Plan, 260,000 and 1,386,500 stock options were issued during the three months ended September 30, 2017 and 2016, respectively, and 2,366,812 and 1,803,140 stock options were issued during the six months ended September 30, 2017 and 2016, respectively, at various exercise prices based on the closing market price of the Company’s common stock on the date of the grant. The stock options generally vest (i) on the one-year anniversary of the grant date, (ii) quarterly over a three-year period, or (iii) over a four-year period with a quarter vesting on either the one year anniversary of employment or the one year anniversary of the vesting commencement date, and the remainder vesting ratably over the remaining 36 month terms. Stock options can also vest immediately at the grant date or vest after one full year.
On April 24, 2017, in connection with the appointment of a new CEO, the Company granted 2,088,212 stock options outside of the 2012 Plan. The Company intends for these to be “inducement grants” within the meaning of NASDAQ Marketplace Rule 5635(c)(4). While granted outside the Company’s 2012 Plan, the terms and conditions of these awards are consistent with awards granted to the Company’s executive officers pursuant to the 2012 Plan. These stock options vest
over a four-year period with a quarter vesting on either the one year anniversary of employment or the one year anniversary of the vesting commencement date.
A summary of the Company’s stock option activity from March 31, 2017 to September 30, 2017 is as follows:
|
|
Options
Outstanding
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at March 31, 2017
|
|
|
10,956,201
|
|
|
$
|
4.63
|
|
|
$
|
4,876,437
|
|
Options granted
|
|
|
2,366,812
|
|
|
$
|
2.65
|
|
|
$
|
—
|
|
Options cancelled / forfeited
|
|
|
(493,050
|
)
|
|
$
|
4.41
|
|
|
$
|
—
|
|
Options exercised
|
|
|
(500,000
|
)
|
|
$
|
1.65
|
|
|
$
|
235,000
|
|
Outstanding at September 30, 2017
|
|
|
12,329,963
|
|
|
$
|
4.38
|
|
|
$
|
1,812,776
|
|
Vested and Exercisable at September 30, 2017
|
|
|
7,265,871
|
|
|
$
|
4.92
|
|
|
$
|
1,723,601
|
|
The weighted-average remaining contractual term of options exercisable and outstanding at September 30, 2017 was approximately 6 years.
14
Employee Stock Purchase Plan
In June 2016, our Board of Directors adopted, and in August 2016 stockholders subsequently approved, the 2016 Employee Stock Purchase Plan. We reserved 1,500,000 shares of common stock for issuance thereunder. The ESPP permits employees after five months of service to purchase common stock through payroll deductions, limited to 15 percent of each employee’s compensation up to the lower of $25,000 or 10,000 shares per employee per year. Shares under the ESPP are purchased at 85 percent of the fair market value at the lower of (i) the closing price on the first trading day of the six-month purchase period or (ii) the closing price on the last trading day of the six-month purchase period. The initial offering period commenced in September 2016. At September 30, 2017, there were 1,372,960 shares available for purchase under the ESPP.
Warrants
During the three and six months ended September 30, 2017, there were no warrant exercises. During the three and six months ended September 30, 2016, 160,000 warrants were exercised through a cashless exercise provision in exchange for the issuance of 123,104 shares of common stock.
The following table summarizes warrant activity for the six months ended September 30, 2017:
|
|
Warrants
|
|
|
Weighted-
Average
Exercise Price
|
|
Balance at March 31, 2017
|
|
|
221,370
|
|
|
$
|
7.16
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
Cancelled
|
|
|
—
|
|
|
$
|
—
|
|
Balance at September 30, 2017
|
|
|
221,370
|
|
|
$
|
7.16
|
|
The warrants outstanding at September 30, 2017 are exercisable at prices between $2.28 and $7.62 per share, and have a weighted average remaining term of approximately 1.36 years.
Common stock reserved for future issuance
Common stock reserved for future issuance consisted of the following at September 30, 2017:
Common stock warrants outstanding
|
|
|
221,370
|
|
Common stock options outstanding under the 2008 Plan
|
|
|
622,192
|
|
Common stock options outstanding and reserved under the 2012 Plan
|
|
|
11,737,241
|
|
Common stock reserved under the 2016 Employee Stock Purchase Plan
|
|
|
1,372,960
|
|
Restricted stock units outstanding under the 2012 Plan
|
|
|
2,628,674
|
|
Common stock options outstanding and reserved under the Inducement Awards
|
|
|
2,088,212
|
|
Restricted stock units outstanding under the Inducement Awards
|
|
|
208,822
|
|
Total at September 30, 2017
|
|
|
18,879,471
|
|
Note 3. Commitments and Contingencies
Operating leases
The Company leases laboratory and office space in San Diego, California under two non-cancelable leases as described below.
Since July 2012, the Company has leased its main facilities at 6275 Nancy Ridge Drive, San Diego, California 92121. The lease, as amended in 2013, 2015 and 2016, consists of approximately 45,580 rentable square feet containing laboratory, clean room and office space. Monthly rental payments are currently approximately $120,000 per month with 3% annual escalators. The lease term for 14,685 of the total rentable square footage expires on December 15, 2018, with the remainder of the rentable square footage expiring on September 1, 2021 with the Company having an option to terminate this lease on or after September 1, 2019.
On January 9, 2015, the Company entered into an agreement to lease a second facility consisting of 5,803 rentable square feet of office and lab space located at 6310 Nancy Ridge Drive, San Diego, California 92121. The term of the lease is 36 months, beginning on February 1, 2015 and ending on January 31, 2018, with monthly rental payments of approximately $12,000 commencing on April 1, 2015. In addition, there are annual rent escalations of 3% on each 12-month anniversary of the lease commencement date.
15
In addition to these two leases, the Company leased a third facility from Feb
ruary 1, 2016 through January 31, 2017, consisting of 12,088 rentable square feet of office space located at 6166 Nancy Ridge Drive, San Diego, California 92121 with a monthly rent of $15,000.
The Company records rent expense on a straight-line basis over the life of the leases and records the excess of expense over the amounts paid as deferred rent. In addition, one of the leases provides for certain improvements made for the Company’s benefit to be funded by the landlord. Such costs, totaling approximately $518,000 to date, have been capitalized as fixed assets and included in deferred rent.
Rent expense was approximately $365,000 and $302,000 for the three months ended September 30, 2017 and 2016, respectively, and $731,000 and $605,000 for the six months ended September 30, 2017 and 2016, respectively.
Future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of September 30, 2017, are as follows (in thousands):
Fiscal year ended March 31, 2018
|
|
|
794
|
|
Fiscal year ended March 31, 2019
|
|
|
1,465
|
|
Fiscal year ended March 31, 2020
|
|
|
1,073
|
|
Fiscal year ended March 31, 2021
|
|
|
1,104
|
|
Fiscal year ended March 31, 2022
|
|
|
467
|
|
Thereafter
|
|
|
—
|
|
Total
|
|
|
4,903
|
|
Legal Matters
In addition to commitments and obligations in the ordinary course of business, the Company may be subject, from time to time, 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. 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. During the period presented, the Company has not recorded any accrual for loss contingencies associated with such claims or legal proceedings; determined that an unfavorable outcome is probable or reasonably possible; or determined that the amount or range of any possible loss is reasonably estimable. However, the outcome of legal proceedings and claims brought against the Company is subject to significant uncertainty. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company in a reporting period, the Company’s consolidated financial statements for that reporting period could be materially adversely affected.
Note 4. 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 within the United States. Accounts at these institutions are secured by the Federal Deposit Insurance Corporation. 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.
The Company is also potentially subject to concentrations of credit risk in its revenues and accounts receivable. Because it is in the early commercial stage, the Company’s revenues to date have been derived from a relatively small number of customers and collaborators. However, the Company has not historically experienced any accounts receivable write-downs and management does not believe significant credit risk exists as of September 30, 2017.
16
Note 5. Related Parties
The Company has entered into two agreements with related parties in the ordinary course of its business and on terms and conditions it believes are as fair as those it offers and receives from independent third parties. Each agreement was ratified by the Company’s Board of Directors or a committee thereof pursuant to its related party transaction policy. In August 2017, the Company entered into a services agreement with Cirius Tx, Inc., an entity for which Robert Baltera, Jr., a director of the Company, serves as Chief Executive Officer. Under this agreement, the Company has provided ExVive™ Liver Tissue Services for Cirius amounting to $50,000 in the three and six months ended September 30, 2017. The agreement contains another $44,000 of ExVive™ Liver Tissue Services to be completed in the third quarter of fiscal 2018.
In November 2017, the Company entered into a collaboration agreement with Viscient Biosciences, an entity which Keith Murphy, a former director and Chief Executive Officer of the Company, serves as Chief Executive Officer. Under this agreement, the parties intend to develop a custom research platform for studying liver disease. The Company expects the platform to expand its current service portfolio for compound screening in disease models, which aids the drug discovery work for other customers. Viscient intends to target early discovery work for non-alcoholic fatty liver disease (“NAFLD”) and non-alcoholic steatohepatitis (“NASH”). Under this agreement, the Company will provide research services to Viscient amounting to $287,000 to be completed in fiscal 2018. For the three and six months ended September 30, 2017, this contract had no financial impact.
Note 6. Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard was originally effective for public companies for annual reporting periods beginning after December 15, 2016, with no early application permitted. In August 2015, the FASB issued ASU No. 2015-14 that defers by one year the effective date for all entities, with application permitted as of the original effective date. The updated standard becomes effective for us on April 1, 2018, with early adoption permitted as of April 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that this update will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of this updated standard on our ongoing financial reporting. We do not have plans to adopt this standard prior to the effective date.
In February 2016, the FASB issued ASU 2016-02, Leases, which requires an entity to recognize lease assets and lease liabilities on the balance sheet for leases with terms of more than 12 months and to disclose key information about leasing arrangements. This new guidance is effective for us on April 1, 2019, with early adoption permitted in any interim or annual period. The Company is currently evaluating the impact that this guidance will have on its financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718), which requires an entity recognize excess tax benefits and deficiencies as income tax expense or benefit, the cash flows of which should be included as operating activity in the statement of cash flows. An entity is allowed to either continue accruing compensation cost based on expected forfeitures or to begin recognizing expense as forfeitures occur. In addition, an entity may withhold the maximum statutory tax, increasing the allowable cash settlement portion of awards. The cash paid by an employer when directly withholding shares for tax purposes should be included in the financing activity section of the statement of cash flows. This new guidance became effective for us on April 1, 2017. The requirements of ASU 2016-09 did not have a significant impact on our consolidated financial statements.
Note 7. Subsequent Events
On October 4, 2017, the Company announced a plan to restructure its business to better focus and align resources, reducing approximately 15 positions, or 13% of its overall workforce. The internal reorganization intends to improve operational efficiency, consolidate overlapping positions, and streamline the Company’s management structure. As a result, the Company expects to record a restructuring charge in the fiscal third quarter of approximately $0.9 million, primarily related to employee severance and benefits costs. The actions associated with the restructuring announcement are anticipated to be complete by the end of fiscal third quarter 2018 with liabilities anticipated to be paid by the end of fiscal third quarter 2019.
In November 2017, the Company entered into a collaboration agreement with Viscient Biosciences, an entity which Keith Murphy, a former director and Chief Executive Officer of the Company, serves as Chief Executive Officer. See Note 5 for discussion of Related Parties.
17