I
tem 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
You should read the following discussion and analysis of our financial
condition and results of operations in conjunction with our unaudited consolidated financial statements and related notes thereto included in this Quarterly Report on Form 10-Q and with our consolidated financial statements and the related notes
thereto that are contained in our Annual Report on Form 10-K for the year ended December 31, 2016. In addition to historical
information, the following discussion and analysis includes forward-looking
statements that involve risks, uncertainties, and assumptions. Forward-looking statements are all statements other than statements of historical facts, such as those statements regarding the projections and timing surrounding our plans to commence commercial operations and sell products, conduct clinical trials, develop pipeline products, incur losses from operations, list our securities for sales on a U.S. stock exchange, and assess and obtain future financings for operating and capital requirements.
We caution readers that forward-looking statements are not guarantees of future performance and actual results and
the timing of events could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under “Risk
Factors” in our Form 10-K for the year ended December 31, 2016.
Investors are cautioned that many of the assumptions on which our forward-looking statements are based are likely to change after our forward-looking statements are made. Further, we may make changes to our business plans that could or will affect our results. We caution investors that we do not intend to update our forward-looking statements more frequently than quarterly, notwithstanding any changes in our assumptions, changes in our business plans, our actual experience, or other changes, and we undertake no obligation to update any forward-looking statements.
Overview
We are a medical device company that is focused on developing and commercializing products for use in humans, utilizing our proprietary polymer technologies. On April 3, 2017, our first product was approved for sale under a CE Mark, which allows us to commercialize in Europe and other jurisdictions that recognize the CE Mark. The product is our
Fantom
scaffold, a drug-eluting bioresorbable stent that is approved for the treatment of coronary artery disease. We have commenced commercial operations and expect to record initial sales during our second fiscal quarter of 2017. Prior to its approval,
Fantom
had been implanted in 247 patients in clinical trials conducted in eight countries outside the United States. We used the data from 117 of those patients at a six-month time point in our CE Mark application, which we submitted in 2016.
Bioresorbable stents are called “scaffolds” because they are not permanent devices like metal stents. In clinical use, a scaffold is implanted by an interventional cardiologist during a minimally invasive surgery. It is delivered to a coronary artery location with a balloon catheter system, whereupon it is deployed to restore blood flow through the artery and medicate the artery to prevent further blocking, or “restenosis.” Our scaffolds are made from our proprietary bioresorbable polymer and offer unique features that include full x-ray visibility, low profile, standard clinical delivery, and a wide expansion range. Our scaffolds also contain standard features of relevant sizing, robust strength during the healing period, and controlled and safe resorption. Due to their unique features and ease of clinical use, we believe
Fantom
will enable us to compete effectively in the stent marketplace.
Prior to receiving CE Marking for
Fantom
, we invested significant time and funds in development, having performed scientific research, engineering development, and testing in laboratory and preclinical studies. We developed, tested, and selected the polymer formulation, tested and selected the anti-restenotic drug and coating process, created and iterated the device design, and identified and implemented methods and processes to produce and test the scaffold. We designed and performed extensive preclinical tests that ranged from bench and engineering studies to in vitro and in vivo laboratory studies. In 2007, we enrolled patients in a small human clinical study that proved the viability of the technology while confirming areas for further development. We have been developing and advancing our scaffolds in both design and polymer composition since that study and have undertaken significant testing, including enrollment of 165 patients in two clinical trials between 2011 and 2014. We follow all clinical trial patients for a period of five years, including the 247 patients implanted with our
Fantom
scaffold between December 2014 and March 2016.
We have been preparing our manufacturing capabilities for commercialization and have developed our sales, marketing, and distribution strategies. We will continue to expand our commercial capabilities to allow for such things as increased volumes and jurisdictions following our initial launch during the second quarter. We additionally have been preparing our systems and back-office needs for commercialization and will continue to expand these during the remainder of 2017.
During the course of our product development and testing, we have invented, co-invented, and licensed a portfolio of proprietary technologies. Our design-related technologies have been invented by our employees and consultants and our materials-related technologies have been either invented by our employees or licensed from, or co-invented with, Rutgers, The State University of New Jersey. We consider our patent portfolio to be significant and have invested considerable time and funds to develop and maintain it. Our goal is to continue to perform
- 13 -
feasibility tests on additional technologies in our patent portfolio as our resources allow and, if feasibility is proven, determine a course of development for additional products.
We perform all of our research, development, and manufacturing activities from one location in San Diego, California. As of March 31, 2017, we had 60 employees, a majority of whom are degreed professionals and five of whom are PhDs. We intend to establish a small sales force in Europe during the second quarter of 2017 to perform our commercial sales activities. We leverage our internal expertise with contract research and preclinical laboratories, outside catheter manufacturing, a third party distribution and logistics service, and other outside services as needed. We have three clean rooms, a polymer manufacturing lab, and multiple engineering and chemistry labs at our facility in San Diego, in addition to our corporate and administrative office. We are ISO certified to the medical device standard 13485:2012 and intend to maintain this certification.
As of March 31, 2017, our cash balance was $1.7 million. On April 22, 2017, we entered into an agreement with one corporate and several institutional investors to provide ongoing funds for our operating and capital needs. Under the agreement, we received $21.3 million cash proceeds, before costs of the transaction, on May 4, 2017. An additional $11.2 million is committed to be funded in June 2017 in a second closing of the financing, subject to shareholder approval, and we may raise up to an additional $7.5 million in the second closing, for a total of up to $40.0 million net cash proceeds to the Company in exchange for issuance of up to $52.5 million in convertible notes payable, issuance of up to 2,362,500 warrants, each to purchase one share of our common stock, and the repurchase of 1,732,260 shares of common stock from one of the investors for approximately $12.5 million. Based on our current operating plans and projections, we believe the $21.3 million cash received on May 4, 2017 will be sufficient to fund our operating and capital needs through at least the first quarter of 2018. The remaining committed funds, and uncommitted funds, if approved by shareholders and if received, would further extend this operating timeframe.
Under the terms of the April 22, 2017 agreement, if we do not receive an aggregate of $42.5 million in gross cash proceeds by June 30, 2017, we would be in default of the agreement and the $33.8 million of convertible notes issued on May 4, 2017 could become immediately due and payable (a total of $33.8 million convertible notes were issued in exchange for $33.8 million gross cash proceeds, of which approximately $12.5 million is being used to repurchase 1,732,260 shares of our common stock, resulting in net cash proceeds of $21.3 million). Although we have committed investments under the agreement in excess of the minimum funding requirement, completion of the second closing to the agreement is subject to receipt of shareholder approval, which is being sought at our 2017 Annual Meeting scheduled for May 31, 2017.
Additionally on April 22, 2017, we entered into an amendment to modify the convertible notes issued in November 2014. Upon approval by shareholders, which is being sought at our 2017 Annual Meeting, the amendment will eliminate both a one-time option for redemption on June 30, 2017 and the automatic conversion feature of those 2014 notes. The redemption option would require payment of
face value plus accrued interest, a total of approximately $30.3 million.
The automatic conversion would have taken place when the Company listed its common stock on a U.S. stock exchange.
Due to the timing of the shareholder vote and the related nature of the 2014 notes with the April 22, 2017 agreement, we do not anticipate using any portion of the $21.3 million cash proceeds received on May 4, 2017 to redeem the 2014 notes.
We have incurred substantial losses since our inception; as of March 31, 2017, we had accumulated a deficit of approximately $387.9 million. We expect our losses to continue as we initiate commercial operations, continue to conduct clinical trials, and develop and test additional products. While
Fantom
has been approved for sale, our efforts to generate substantial revenue and achieve positive cash flows from our operations may take several years, even if we are successful with our initial commercial efforts. In order to successfully transition to profitable operations, we will need to achieve a level of revenues and product margins to support the Company’s cost structure. Until such time as we generate positive cash flow, we plan to continue to fund our operating and capital needs by utilizing current cash resources and the proceeds from the financing agreed on April 22, 2017. Also in either late 2017 or early 2018, we intend to pursue listing of our common stock on NASDAQ, or another exchange approved by our noteholders, and may consider raising additional funds concurrent with that listing in order to conduct a U.S. clinical trial.
Our pre-revenue stage of operations and history of losses and cash outflows, combined with the magnitude of the redemption payments of our convertible notes, which could total approximately $64.5 million if we are not successful in obtaining shareholder approvals as required by June 30, 2017 raise substantial doubt about our ability to continue as a going concern.
Our company was founded in California in June 1998 and named MD3, Inc. We changed our name to REVA Medical, Inc. in March 2002. We reincorporated from the State of California to the State of Delaware in October 2010; as a result, the rights of our stockholders are governed by the Delaware General Corporation Law. We formed
- 14 -
a wholly owned subsidiary in Germany in 2007 to facilitate our clinical trials and our p
lanned commercialization of products; we have not used this subsidiary yet for any operating activities.
Key Components of our Results of Operations
Through March 31, 2017, we were in a pre-revenue stage and our activities focused on the clinical study and manufacturing process refinements of our bioresorbable coronary scaffold with the goal of commercially selling it. We also have been performing a small amount of research and testing to determine the feasibility of other product possibilities. Consequently, our operating results through March 31, 2017 primarily consisted of research and development expenses, which include the costs to perform clinical trials, general and administrative expenses, and other expenses that are largely the costs underlying the convertible notes that we issued in November 2014.
Research and Development Expenses
:
Our research and development expenses arise from internal and external costs. Our internal costs primarily consist of employee salaries and benefits, facility and other overhead expenses, and engineering and other supplies that we use in our labs for prototyping, testing, and producing our scaffolds and other product possibilities. Our external costs primarily consist of contract research, engineering consulting, polymer consulting, polymer lasing costs, catheter system and anti-restenotic drug purchases, preclinical and clinical study expenses, regulatory consulting, and license fees paid for the technology underlying our polymer materials. We recorded the costs to commercially manufacture our
Fantom
scaffold prior to receiving the CE Mark regulatory approval as research and development expense. Following receipt of the regulatory approval, costs of commercial manufacturing will no longer be recorded as research and development. All research and development costs are expensed when incurred.
Historically, our research and development expenses have represented between 70 and 75 percent of our total operating expenses; they represented 68 percent of total operating expenses for the year ended December 31, 2016 and 65 percent for the three months ended March 31, 2017, reflecting our decreasing development and clinical trial activities as we move toward commercial operations. We expect our research and development expenses to continue to decrease during the remainder of 2017 and to decrease as a percentage of our total expenses as we continue this transition; however, we expect our research and development expenses to continue to be a significant portion of our operating expenses as we continue to research, prove feasibility, and develop additional products.
General and Administrative Expenses
:
Our general and administrative expenses consist primarily of salaries and benefits for our executive officers and administrative staff, corporate office and other overhead expenses, legal expenses including patent filing and maintenance costs, audit and tax fees, investor relations and other public company costs, and travel expenses. Although our patent portfolio is one of our most valuable assets, we record legal costs related to patent development, filing, and maintenance as expense when the costs are incurred since the underlying technology associated with these assets is purchased or incurred in connection with our research and development efforts and the future realizable value cannot be determined.
Historically, our general and administrative expenses have represented between 25 and 30 percent of our total operating expenses; they represented 32 percent of total operating expenses for the year ended December 31, 2016 and 35 percent for the three months ended March 31, 2017. We anticipate continuing to invest in patents at similar levels as we have in the past. Additionally, we anticipate that we will expand our corporate infrastructure during the remainder of 2017 to support the commercialization of
Fantom
and the ongoing needs of being a public company. We also expect to begin to incur sales and marketing expenses beginning in the second quarter of 2017 as we initiate product sales.
Revenue and Costs of Good Sold
:
Following the April 3, 2017 receipt of CE Mark and our initiation of commercial sales during the second quarter of 2017, we anticipate recording initial revenue and costs of goods sold by June 30, 2017. Our success, or lack thereof, will determine the amounts of revenues and costs in future periods.
Other Income and Expense
:
Following our issuance of convertible notes and warrants in November 2014, the components of other income and expense include interest expense on the notes and gains or losses arising from the changes in fair values of the notes and warrants. We remeasure fair values at each reporting date and if those fair values change, we record a corresponding gain (upon a decrease in fair value) or loss (upon an increase in fair value) in the consolidated statement of operations. All the warrants were exercised and none remained outstanding after February 12, 2016 so we have not recorded any gain or loss from changes in their fair value since that time.
The fair values of the convertible notes and warrants (during the time they remained outstanding) have fluctuated significantly due to a variety of factors. These factors include the successful enrollment of patients in the clinical trial of
Fantom
, positive clinical results from those patients, and an increase in the market trading price of our common stock of approximately 16 percent since January 1, 2016, as well as the delay in receiving CE Mark
- 15 -
approval and the uncertainty surrounding the timing of a follow-on fina
ncing arrangement. We recorded a $32.8 million loss on the increase in value during the three months ended March 31, 2016 and an $8.1 million gain from the decrease in value during the three months ended March 31, 2017. Until the Notes are either converted
into common stock or repaid, we expect our other income and expense to fluctuate, possibly by a significant amount, by future gains or losses on changes in their fair value. Also, we will continue to accrue and record interest expense on the notes at the
rate of 7.54 percent per annum until they are either converted or repaid.
In addition to the convertible notes outstanding at March 31, 2017, we anticipate the convertible notes and warrants issued, and to be issued, under the agreement signed April 22, 2017, to be recorded at fair value and, therefore, they will contribute additional fluctuation on our other income and expense based on their gains or losses in fair value. We will also accrue and record interest expense on the new convertible notes at the rate of 8.0 percent per annum.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. In preparing our financial statements and related disclosures, we are required to use estimates, assumptions, and judgments that affect the reported amounts of assets, liabilities, stockholders’ equity, expenses, and the presentation and disclosures related to those items. We base our estimates and assumptions on historical experience and other factors that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis; changes in our estimates and assumptions are reasonably likely to occur from period to period. Additionally, actual results could differ significantly from the estimates we make. To the extent there are material changes in our estimates or material differences between our estimates and our actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected.
We believe the following accounting policies involve a greater degree of judgment and complexity than any other of our accounting policies and, therefore, are the most critical to understanding and evaluating our consolidated financial condition and results of operations through March 31, 2017. Our other key accounting policies are less subjective and, therefore, are not included here.
Research and Development Costs
:
We expense research and development costs as incurred. Our preclinical and clinical study costs are incurred on a contract basis and generally span a period from a few months to longer than a year. We record costs incurred under these contracts as the work occurs and make payments according to contractual terms. Until a contract is completed, we estimate the amount of work performed and accrue for estimated costs that have been incurred but not paid. As actual costs become known, we adjust our accruals. Until such time as we commence another large clinical trial, we expect our clinical expense accruals to decrease from recent levels since we have reached the primary measurement for a majority of the patients in our
Fantom
trial. We will continue to make estimates of work performed throughout the term of our clinical trials, each of which is expected to be five years or longer. If our estimates are inaccurate, possible material changes to our accruals could be required, which could materially affect our results of operations within any fiscal period. To date, there have been no material changes in our research and development expense estimates, including our estimates for accrued clinical costs.
Stock-Based Compensation:
We recognize stock-based compensation expense in connection with equity grants and awards to employees, directors, and consultants. Most of these grants and awards vest based on the passage of time; in 2015 we awarded restricted stock units (“RSU”) and stock options that vest based on achievement of performance milestones.
For awards to employees and directors, we determine the amount of compensation expense by estimating fair value on the date of award and recording the resulting stock-based compensation over the vesting period, which ranges from one to four years, on a straight-line basis. For awards that vest upon achievement of performance milestones, we record compensation expense for only the performance milestones that are probable of being achieved, on a straight-line basis over the vesting period.
Through March 31, 2016, we determined that two of the three milestones for the 2015 performance-based awards were probable of being achieved and, therefore, recorded expense for those two milestones only. During the second quarter of 2016, we determined that all three performance milestones were probable of being achieved and, therefore, recorded cumulative expense for the third milestone at that time and have been recording straight line expense for all three performance milestones since that time. We reverse cumulative expense recorded whenever unvested performance based awards are cancelled.
Stock-based compensation expense has been recorded as either research and development or general and administrative expense based on a recipient’s work classification. For stock options, we estimate the grant date fair value by using the Black-Scholes option pricing model. For the model inputs, we use the fair value of the underlying common stock, a risk-free interest rate that corresponds to the expected life of the option, an expected option life
- 16 -
ranging between 5.50 and 6.25 years, and an estimate of volatility based on the market trading prices of comparative peer companies. W
e used peer group data through December 31, 2016 due to the fact that we had limited historical trading data.
Beginning in 2017, we use our historical market prices; our securities began trading on our IPO date of December 23, 2010, which provides approximately 6.25 years’ history as of March 31, 2017. The fair values of RSUs and restricted stock awards are equal
to the closing market price of our common stock on the date of award.
Through December 31, 2016, we reduced the amount of recorded compensation expense to allow for potential forfeitures of awards; the forfeiture rate was based on actual historical forfeitures and ranged from approximately 1.7 percent to 3.4 percent. Upon adoption of ASU 2016-09 on January 1, 2017, we recorded a cumulative effect adjustment to our accumulated deficit of approximately $53,000, with a corresponding increase to additional paid-in capital, to reverse our forfeiture estimate for unvested awards. All forfeitures occurring after adoption will be recognized in the consolidated statement of operations in the reporting period in which they occur. We had no forfeitures during the three months ended March 31, 2017.
We occasionally grant options to consultants; no consultant options remained subject to vesting at either March 31, 2016 or March 31, 2017. When we grant or have unvested consultant options, we estimate the fair value at date of grant and at each subsequent reporting date until vesting is complete and record compensation expense based on the fair value during the service period of the consultant. We estimate the fair value by using the Black-Scholes option pricing model with the same approach to inputs and assumptions as we use to estimate the fair value of options granted to employees, except we use the remaining term as the expected life of the option.
As a result of our use of estimates for the fair value calculations and the performance-based achievement probabilities, if factors change and we use different assumptions, the amount of our stock-based compensation expense could fluctuate materially in the future. Also, we may increase the level of awards during the remainder of 2017 as we expand our workforce, including the addition of a direct sales force, and begin commercial sales, which could result in an increase of our stock-based compensation in the future.
Notes Payable
:
We analyze notes payable as of their issue date to determine their classification, issue discounts or premiums, and embedded or derivative features, if any. If embedded or derivative features exist, such as a right to convert notes into common stock, we evaluate the features in accordance with accounting guidance for derivative securities, determine whether such features would give rise to separate accounting, and, if they do, make an election to account for the notes at cost or at fair value. On the issue date of convertible notes, we record the difference, if any, between the issue price of the notes and their fair value as a gain or loss in the consolidated statement of operations.
We elected to account for the convertible notes we issued in November 2014 at fair value, which does not require separate accounting for derivative features. Until such time as the notes are converted into common stock or repaid, we accrue interest on the notes at the stated interest rate. We additionally remeasure the fair value of the notes at each reporting date and record a gain (upon decrease in fair value) or loss (upon an increase in fair value) for any change in fair value. The fair values are determined using a least squares Monte Carlo simulation model, which requires the use of subjective assumptions, including unobservable inputs that are supported by little or no market activity. The assumptions represent our best estimates, but involve certain inherent uncertainties. Inputs to the model include the market value of the underlying stock, a life equal to the contractual life of the notes, incremental borrowing rates that correspond to debt with similar credit worthiness, estimated volatility based on the historical prices of our trading securities, and we make assumptions as to our abilities to test and commercialize our product(s), to obtain future financings when and if needed, and to comply with the terms and conditions of the notes. Since the determination of fair value is complex and involves the use of subjective assumptions, if our assumptions, estimates, or modeling approaches change and we use different assumptions or methods, our fair values could be materially different in the future.
Common Stock Warrants
:
Whenever we have a warrant liability, we remeasure the fair value of the underlying warrants at each reporting date and record a gain or loss based on the change in fair value. We value warrants utilizing either a binomial valuation model or a Black-Scholes valuation model, depending on the exercise price and other features. Inputs to the valuation models would be of the same nature as those used for convertible notes and involve the use of subjective assumptions.
Results of Operations
During the first quarter of 2016, our operating activities focused on completing clinical enrollments of our
Fantom
scaffold, performing follow-up assessments on patients, and preparing data for our CE Mark application. Enrollment was completed in March 2016 with a total of 240 patients enrolled.
- 17 -
During the first quarter of 2017, our activities focused on finalizing proce
sses for commercial operations in anticipation of initial sales during the second quarter of 2017 following receipt of CE Mark regulatory approval on April 3, 2017.
Comparison of the Three Months Ended March 31, 2016 and 2017
Our operating results for the three-month periods indicated are as follows (dollars in thousands):
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
|
|
Change
|
|
|
2016
|
|
|
2017
|
|
|
$
|
|
|
%
|
|
Research and development expense
|
$
|
5,288
|
|
|
$
|
3,964
|
|
|
$
|
(1,324
|
)
|
|
(25%)
|
|
General and administrative expense
|
$
|
2,193
|
|
|
$
|
2,102
|
|
|
$
|
(91
|
)
|
|
|
(4%)
|
|
Interest expense
|
$
|
505
|
|
|
$
|
591
|
|
|
$
|
86
|
|
|
|
17%
|
|
Gain (loss) on change in fair values of
convertible notes and warrant liability
|
$
|
(32,764
|
)
|
|
$
|
8,138
|
|
|
$
|
40,902
|
|
|
125%
|
|
Other expense
|
$
|
48
|
|
|
$
|
57
|
|
|
$
|
9
|
|
|
|
19%
|
|
Research and development expense decreased $1,324,000, or 25 percent, for the three months ended March 31, 2017 compared to the three months ended March 31, 2016. This decrease primarily comprises reductions in clinical costs, preclinical costs, material costs, and personnel costs. Clinical costs decreased $725,000 in the first quarter of 2017 as compared to the first quarter of 2016; the clinical trial initiated in March 2015 completed enrollment in March 2016 and patient follow-up assessment activity during the first quarter of 2017 was significantly less than the enrollment period due to the timing of scheduled assessments. Preclinical study costs decreased $233,000 between comparative quarters due to the timing of tests and analysis of testing results; a majority of preclinical tests for
Fantom
concluded during the first quarter of 2016. Stock compensation costs decreased $242,000 between comparative quarters primarily as a result of employee terminations and completion of vesting service periods for which new awards were not comparable. Direct material costs decreased $107,000 between comparative quarters due to the decrease in clinical device manufacturing and process validation activities as we moved toward commercialization. Offsetting the decreases, other personnel costs increased $103,000 between comparative quarters due to non-recurring recruiting and contract labor costs in 2017 as we prepared for commercialization, as well as increases in benefit premiums and payroll taxes. The remainder of the change in research and development expenses between quarters resulted from individually immaterial changes in lab supplies, quality and testing costs, engineering and other outside services, depreciation, and facilities expenses.
General and administrative expense decreased $91,000, or four percent, for the three months ended March 31, 2017 compared to the three months ended March 31, 2016. This decrease was a result of individually immaterial changes in personnel costs, travel and entertainment expenses, investor relations costs, marketing and tradeshow costs, office supplies, facilities costs, audit and legal fees, board of directors fees and costs, depreciation, insurance, and other overhead expenses.
Our other non-operating expenses during the first quarters of 2017 and 2016 primarily arose from our convertible notes and warrants. We accrued a comparable amount of interest expense, which compounds annually, on the notes each quarter. We recorded a gain on the change in fair value on the notes during the first quarter of 2017 compared to a loss on the change in fair values of the notes and warrants during the first quarter of 2016. This difference between comparative quarters reflects the timing of factors driving value, including a decrease in the market trading price of our securities of approximately eight percent during the first quarter of 2017 compared to an increase of approximately 34 percent during the first quarter of 2016 (a decrease in value results in a non-cash accounting gain; an increase in value results in a loss). Additionally, the warrants exercised in February 2016 had contributed to the change in value during the first quarter of 2016, whereas, the warrants did not contribute to the change during the first quarter of 2017 as none were outstanding. The increase in other expense primarily arose from currency exchange rate losses based on the relative strength of the U.S. dollar compared to the Australian and European currencies in which we make our clinical trial payments.
Liquidity and Capital Resources
Sources of Liquidity
We received CE Mark regulatory approval of our
Fantom
scaffold on April 3, 2017 and plan to initiate commercial sales in May 2017.
Fantom
is our first commercial product; we have not commercialized any products or generated any revenue since our inception in June 1998.
- 18 -
We have incurred substantial losses since our inception; as of March 31, 2017, we had accumulated a deficit of approximatel
y $387.9 million. We expect our losses to continue as we initiate commercial operations, continue to conduct clinical trials, and develop and test additional products. While
Fantom
has been approved for sale, our efforts to generate substantial revenue and
achieve positive cash flows from our operations may take several years, even if we are successful with our initial commercial efforts. In order to successfully transition to profitable operations, we will need to achieve a level of revenues and product ma
rgins to support our cost structure. Until such time as we generate positive cash flow, we plan to continue to fund our operating and capital needs by utilizing current cash resources and the proceeds from financings.
As of March 31, 2017, we had a cash balance of $1.7 million. On April 22, 2017, we entered into an agreement with one corporate and several institutional investors to provide funding for our ongoing operating and capital needs. Under the agreement, we received $21.3 million cash proceeds on May 4, 2017. An additional $11.2 million is committed to be funded in June 2017 in a second closing of the financing, subject to shareholder approval, and up to $7.5 million in additional funds may be raised under the agreement, for a total of up to $40.0 million net cash proceeds to the Company in exchange for issuance of up to $52.5 million in convertible notes payable, issuance of up to 2,362,500 warrants, each to purchase one share of REVA’s common stock, and the repurchase of 1,732,260 shares of common stock from one of the investors.
Under the terms of the April 22, 2017 agreement, if we do not receive an aggregate of $30.0 million in net cash proceeds by June 30, 2017, we would be in default of the agreement and the $33.8 million convertible notes issued on May 4, 2017 could become immediately due and payable (a total of $33.8 million of convertible notes were issued in exchange for $33.8 million gross cash proceeds, of which $12.5 million is being used to repurchase 1,732,260 shares of our common stock, resulting in net cash proceeds of $21.3 million). Although committed investments under the agreement total $32.5 million, an excess of $2.5 million to the minimum funding requirement, completion of the second closing to the agreement is subject to receipt of shareholder approval, which is being sought at our 2017 Annual Meeting scheduled for May 31, 2017.
Additionally on April 22, 2017, we entered into an amendment to modify the convertible notes issued in November 2014. Upon approval by shareholders, which is being sought at our 2017 Annual Meeting, the amendment will eliminate both a one-time option for redemption on June 30, 2017 and the automatic conversion feature of those 2014 notes. The redemption option would require payment of
face value plus accrued interest, a total of approximately $30.3 million.
The automatic conversion would have taken place when the Company listed its common stock on a U.S. stock exchange.
Due to the timing of the shareholder vote and the related nature of the 2014 notes with the April 22, 2017 agreement, we do not anticipate using any portion of the $21.3 million cash proceeds received on May 4, 2017 to redeem the 2014 notes.
Our pre-revenue stage of operations and history of losses and cash outflows, combined with the magnitude of the redemption payments of our convertible notes, which could total approximately $64.5 million if we are not successful in obtaining shareholder approvals as required by June 30, 2017 raise substantial doubt about our ability to continue as a going concern.
Cash Flows
Our cash flows for the periods indicated are as follows:
|
Three Months Ended
|
|
|
March 31,
|
|
|
2016
|
|
|
2017
|
|
|
(in thousands)
|
|
Net cash used for operating activities
|
$
|
(6,038
|
)
|
|
$
|
(4,889
|
)
|
Net cash used for investing activities
|
$
|
(199
|
)
|
|
$
|
(75
|
)
|
Net cash provided by financing activities
|
$
|
11,415
|
|
|
$
|
—
|
|
Net decrease in cash and cash equivalents
|
$
|
5,178
|
|
|
$
|
(4,964
|
)
|
Net Cash Flow from Operating Activities
Net cash used for operating activities during the first three months of 2016 primarily reflects the loss from operations of $7,481,000, offset by non-cash expenses of $1,195,000 for stock-based compensation, $282,000 of depreciation and amortization, and $14,000 from the changes in operating assets and liabilities. The accrued interest on convertible notes and the loss on change in fair value of convertible notes and warrant liability were non-cash items that had no effect on cash flows.
- 19 -
Net cash used for operating activities during the first three months of 201
7 primarily reflects the loss from operations of $6,066,000 and $50,000 from the changes in operating assets and liabilities, offset by non-cash expenses of $912,000 for stock-based compensation, $282,000 of depreciation and amortization, and a $43,000 los
s on property and equipment disposals. The accrued interest on convertible notes and the gain on change in fair value of convertible notes were non-cash items that had no effect on cash flows.
Net Cash Flow from Investing Activities
Cash used for investing activities during the first three months of each of 2016 and 2017 consisted of the purchase of lab and other equipment.
Net Cash Flow from Financing Activities
Cash provided by financing activities during the first three months of 2016 consisted of $11,407,000 in proceeds from the issuance of common stock upon the exercise of 4,375,000 warrants that had been issued in 2014 and $8,000 in proceeds from the issuance of common stock upon the exercise of employee stock options.
There were no cash flows from financing activities during the first three months of 2017.
Operating Capital and Capital Expenditure Requirements
We received CE Mark regulatory approval of our
Fantom
scaffold on April 3, 2017 and are working to initiate commercial sales in May 2017.
Fantom
is our first commercial product; we have not commercialized any products or generated any revenue since our inception in June 1998. We have incurred substantial losses since our inception and anticipate that we will continue to incur substantial net losses and cash outflows through the remainder of 2017 and into 2018 as we establish commercial operations, continue current and initiate new clinical trials, develop and test new technologies and product opportunities, and expand our corporate infrastructure.
Until we reach a sales volume to generate positive cash flow, we plan to fund our operating and capital needs with our current cash resources and with the proceeds of the financing agreement we entered into on April 22, 2017. Based on our current operating plans and projections, we believe the $21.3 million cash received on May 4, 2017 will be sufficient to fund our operating and capital needs through at least the first quarter of 2018. The remaining committed funds, and uncommitted funds, if approved by shareholders and if received, would further extend this operating timeframe. Also, in either late 2017 or early 2018, we intend to pursue listing of our common stock on NASDAQ, or another exchange approved by our noteholders, and may consider raising additional funds concurrent with that listing in order to conduct a U.S. clinical trial.
Assuming success in receiving shareholder approval and completing the April 22, 2017 financing agreement and in commercializing
Fantom
, we may still need to secure additional capital prior to the time we are able to maintain our operations from our cash inflows. This needed additional capital may not be available on reasonable terms, if at all. Additionally, we may be limited under the terms of our convertible notes as to the type, quantity, timing, or other aspects of a financing, unless the noteholders agree. Any financing, even one to which the noteholders agree, may result in additional dilution to our current securityholders, could have rights senior to those of our common stock, and/or could contain provisions that would restrict our operations. If we are unable to raise additional capital as and when needed, we may be compelled to sell certain assets, including intellectual property assets. Even if we are able to raise additional capital and commercialize our products, we may never become profitable, or if we do attain profitable operations, we may not be able to sustain profitability and cash flows on a recurring basis.
Our ongoing capital requirements will also depend on the extent to which we acquire or invest in businesses, products, and technologies; we currently have no commitments or agreements relating to any of these types of transactions. We believe our current San Diego facility has the capacity to produce the quantities of
Fantom
that will be needed for our initial commercial sales and, therefore, do not have any plans for facility expansion at this time.
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