Notes
to the Interim Condensed Consolidated Financial Statements (unaudited)
(In
thousands, except share and per share amounts)
Note
1 – Description of Business
Motus
GI Holdings, Inc. (the “Company”) was incorporated in Delaware, U.S.A. in September 2016. The Company and its subsidiaries,
Motus, Ltd. and Motus, Inc., are collectively referred to as “Motus GI” or the “Company”.
The
Company has developed a single-use medical device system, the Pure-Vu system, cleared by the United States Food and Drug Administration,
which is intended to attach to standard colonoscopes to help facilitate intraprocedural cleaning of a poorly prepared colon by
irrigating or cleaning the colon and evacuating the irrigation fluid (water), feces and other bodily fluids and matter, e.g. blood.
The Pure-Vu system has been designed to integrate with standard colonoscopes to enable cleaning during the procedure while preserving
standard procedural workflow and techniques. The Pure-Vu® System is currently being introduced on a pilot basis in the U.S.
market, and the Company is planning to initiate a full commercial launch focused on the inpatient colonoscopy market in the U.S.
and select international markets in 2019. Challenges with bowel preparation for inpatient colonoscopy represent a significant
area of unmet need that directly affects clinical outcomes and increases the cost of care for a hospital in a market segment where
most of the reimbursement is under a bundle payment based on a DRG (Diagnostic Related Group). The Pure-Vu system does not currently have a unique reimbursement code with any private or governmental
third-party payors in any country. To date, as part of the Company’s limited pilot launch, the Company has focused on collecting
additional clinical and health economic data along with garnering valuable experience in key hospitals on the use of the Pure-Vu
system to support the full launch in the inpatient market in 2019.
Note
2 – Basis of Presentation and Going Concern
The
accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the 2017 10-K filed with the SEC on March 28, 2018. The accompanying condensed
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States (“GAAP”) for interim financial information, the instructions for Form 10-Q and the rules and regulations of
the SEC. Accordingly, since they are interim statements, the accompanying condensed consolidated financial statements do not include
all of the information and notes required by GAAP for annual financial statements, but reflect all adjustments consisting of normal,
recurring adjustments, that are necessary for a fair presentation of the financial position, results of operations and cash flows
for the interim periods presented. Interim results are not necessarily indicative of the results that may be expected for any
future periods. The December 31, 2017 balance sheet information was derived from the audited financial statements as of that date.
Certain reclassifications to prepaid expenses and other current assets, and other current and long-term liabilities, other expenses,
and income tax expense have been made to the prior period condensed consolidated financial statements to conform to the current
period presentation.
To
date, the Company has generated minimal revenues, experienced negative cash flows and has incurred substantial operating losses
from its activities. Management expects the Company to continue to generate substantial operating losses and to continue to fund
its operations primarily through utilization of its current financial resources, future product sales, and through additional
raises of capital.
The
Company has financed its operations primarily through sales of equity-related securities. At June 30, 2018, the Company had an
accumulated deficit of approximately $50.6 million, total current assets of approximately $15.9 million and total current liabilities
of approximately $1.5 million resulting in working capital of $14.4 million. At June 30, 2018, the Company had cash and cash equivalents,
and short-term investments of approximately $14.9 million. Based on the Company’s current business plan, it believes their
cash, cash equivalents, and short-term investments balance as of June 30, 2018 will be sufficient to meet its anticipated cash
requirements through approximately the second quarter of 2019. However, there is no assurance that the current business plan will
be achievable.
Such
conditions raise substantial doubts about the Company’s ability to continue as a going concern. Management’s plan
includes revenue generation through the sale of products and raising funds from outside investors. However, there is no assurance
that such sale of products will occur or that outside funding will be available to the Company, will be obtained on favorable
terms or will provide the Company with sufficient capital to meet its objectives. These financial statements do not include any
adjustments relating to the recoverability and classification of assets, carrying amounts or the amount and classification of
liabilities that may be required should the Company be unable to continue as a going concern.
Motus
GI Holdings, Inc. and Subsidiaries
Notes
to the Interim Condensed Consolidated Financial Statements (unaudited)
(In
thousands, except share and per share amounts)
Note
3 – Summary of Significant Accounting Policies
A
summary of the significant accounting policies applied in the preparation of the accompanying condensed consolidated financial
statements follows:
Principles
of Consolidation
The
unaudited condensed consolidated financial statements represent the consolidation of the accounts of the Company and its subsidiaries
in conformity with GAAP. All intercompany accounts and transactions have been eliminated in consolidation.
Cash
and Cash Equivalents
The
Company considers all highly liquid investment securities with an original maturity of three months or less to be cash equivalents.
Due to the short-term maturity of such investments, the carrying amounts are a reasonable estimate of fair value.
Short-term
Investments
The
Company invests all excess cash primarily in debt securities.
Investment
securities that management has the positive intent and ability to hold to maturity are classified as held-to-maturity securities
and are carried at amortized cost. Purchase premiums and discounts are recognized in finance income, net over the term of the
security. Investment securities not classified as held-to-maturity securities are classified as available-for-sale securities
and recorded at fair value, with unrealized gains and losses reported in other comprehensive income. Gains and losses on the sale
of available-for-sale securities are recorded on the trade date.
Management
evaluates whether available-for-sale securities and held-to-maturity securities are other-than-temporarily impaired (OTTI) on
a quarterly basis. Debt securities with unrealized losses are considered OTTI if the Company intends to sell the security or if
it is more likely than not that the Company will be required to sell such security prior to any anticipated recovery. If management
determines that a security is OTTI under these circumstances, the impairment recognized in earnings is measured as the entire
difference between the amortized cost and the then-current fair value. During the three and six months ended June 30, 2018, no
investment OTTI losses were realized.
The
Company’s investment policy is focused on the preservation of capital, liquidity and return. From time to time, the Company
may sell certain securities, but the objectives are generally not to generate profits on short-term differences in price.
Revenue
Recognition
The
FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which provides a single comprehensive model for entities to
use in accounting for revenue arising from contracts with customers. The Company adopted this ASU effective January 1, 2018 on
a full retrospective basis. Adoption of this standard did not result in significant changes to accounting policies, business processes,
systems or controls, or have a material impact on the financial position, results of operations and cash flows or related disclosures.
As such, prior period financial statements were not recast.
The
Pure-Vu System –
The Company manufactures a medical device system (a “Workstation”) and a single use
disposable sleeve (a “Disposable”) designed to improve a colonoscopy procedure. These products are shipped directly
to healthcare professionals under contract-based terms. Revenue for the products sold is recognized at the point in time when
control transfers to the customer, which is generally when the shipment is received and accepted by the customer. In certain circumstances,
products are available for free of charge for a limited evaluation period. At the end of the limited evaluation period, the customer
may purchase the products at which time the Company will record the corresponding revenue, or the products may be returned. As
of June 30, 2018, the Company had no future performance obligations from any customer contracts.
Motus
GI Holdings, Inc. and Subsidiaries
Notes
to the Interim Condensed Consolidated Financial Statements (unaudited)
(In
thousands, except share and per share amounts)
Stock
Based Compensation
The
Company applies ASC 718-10, “Share-Based Payment,” which requires the measurement and recognition of compensation
expenses for all share-based payment awards made to employees and directors including employee stock options under the Company’s
stock plans based on estimated fair values.
ASC
718-10 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing
model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite
service periods in the Company’s statement of operations. The Company recognizes share-based award forfeitures as they occur
rather than estimate by applying a forfeiture rate.
The
Company accounts for stock-based compensation awards to non-employees in accordance with FASB ASC 505-50, “Equity-Based
Payments to Non-Employees” (“FASB ASC 505-50”). Under FASB ASC 505-50, the Company determines the fair value
of the warrants or stock-based compensation awards granted as either the fair value of the consideration received or the fair
value of the equity instruments issued, whichever is more reliably measurable.
All
issuances of stock options or other equity instruments to non-employees as consideration for goods or services received by the
Company are accounted for based on the fair value of the equity instruments issued. Non-employee equity based payments are recorded
as an expense over the service period, as if the Company had paid cash for the services. At the end of each financial reporting
period, prior to vesting or prior to the completion of the services, the fair value of the equity based payments will be re-measured
and the non-cash expense recognized during the period will be adjusted accordingly. Since the fair value of equity based payments
granted to non-employees is subject to change in the future, the amount of the future expense will include fair value re-measurements
until the equity based payments are fully vested or the service completed.
The
Company recognizes compensation expenses for the value of non-employee awards, which have graded vesting, based on the straight-line
method over the requisite service period of each award.
The
Company estimates the fair value of stock options granted as equity awards using a Black-Scholes options pricing model. The option-pricing
model requires a number of assumptions, of which the most significant are share price, expected volatility and the expected option
term (the time from the grant date until the options are exercised or expire). Expected volatility is estimated based on volatility
of similar companies in the technology sector. The Company has historically not paid dividends and has no foreseeable plans to
issue dividends. The risk-free interest rate is based on the yield from governmental zero-coupon bonds with an equivalent term.
The expected option term is calculated for options granted to employees and directors using the “simplified” method.
Grants to non-employees are based on the contractual term. Changes in the determination of each of the inputs can affect the fair
value of the options granted and the results of operations of the Company.
Income
Taxes
The
Company provides for income taxes using the asset and liability approach. Deferred tax assets and liabilities are recorded based
on the differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect when these
differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available
evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. As of June 30, 2018, and
December 31, 2017, the Company had a full valuation allowance against deferred tax assets.
Motus
GI Holdings, Inc. and Subsidiaries
Notes
to the Interim Condensed Consolidated Financial Statements (unaudited)
(In
thousands, except share and per share amounts)
The
Tax Cuts and Jobs Act (the “Tax Act”), enacted on December 22, 2017, among other things, permanently lowered the statutory
federal corporate tax rate from 35% to 21%, effective for tax years including or beginning January 1, 2018. Under the guidance
of ASC 740, “Income Taxes” (“ASC 740”), the Company revalued its net deferred tax assets on the date of
enactment based on the reduction in the overall future tax benefit expected to be realized at the lower tax rate implemented by
the new legislation. Although in the normal course of business the Company is required to make estimates and assumptions for certain
tax items which cannot be fully determined at period end, the Company did not identify items for which the income tax effects
of the Tax Act have not been completed as of June 30, 2018 and, therefore, considers its accounting for the tax effects of the
Tax Act on its deferred tax assets and liabilities to be complete as of June 30, 2018.
For
the three and six months ended June 30, 2018 and 2017, the Company recorded zero income tax expense. No tax benefit
has been recorded in relation to the pre-tax loss for the three and six months ended June 30, 2018 and 2017, due to a full valuation
allowance to offset any deferred tax asset related to net operating loss carry forwards attributable to the losses.
Fair
Value Measurements
The
Company accounts for financial instruments in accordance with ASC 820, “Fair Value Measurements and Disclosures” (“ASC
820”). ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair
value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value
hierarchy under ASC 820 are described below:
Level
1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets
or liabilities;
Level
2 – Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable,
either directly or indirectly; and
Level
3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
The
following table summarizes the fair value of our financial assets and liabilities that were accounted for at fair value on a recurring
basis, by level within the fair value hierarchy, as of June 30, 2018 and December 31, 2017:
|
|
June
30, 2018
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Fair
Value
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments
|
|
$
|
4,868
|
|
|
$
|
5,006
|
|
|
|
—
|
|
|
$
|
9,874
|
|
Total
|
|
$
|
4,868
|
|
|
$
|
5,006
|
|
|
$
|
—
|
|
|
$
|
9,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent
royalty obligation
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,821
|
|
|
$
|
1,821
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,821
|
|
|
$
|
1,821
|
|
|
|
December 31, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent royalty obligation
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,662
|
|
|
$
|
1,662
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,662
|
|
|
$
|
1,662
|
|
Motus
GI Holdings, Inc. and Subsidiaries
Notes
to the Interim Condensed Consolidated Financial Statements (unaudited)
(In
thousands, except share and per share amounts)
Financial
instruments with carrying values approximating fair value include cash, accounts receivable, prepaid expenses and other current
assets, accounts payable and accrued expenses, and other current liabilities, due to their short-term nature.
In
estimating the fair value of the Company’s contingent royalty obligation (see Note 5), the Company used the discounted cash
flow method as of June 30, 2018 and December 31, 2017. Based on the fair value hierarchy, the Company classified contingent royalty
obligation within Level 3 because valuation inputs are based on projected revenues discounted to a present value.
The
following table sets forth a summary of changes in the estimated fair value of the Company’s Level 3 contingent royalty
obligation for the six months ended June 30, 2018:
|
|
Fair Value Measurements of Contingent Royalty Obligation (Level 3)
|
|
Balance at January 1, 2018
|
|
$
|
1,662
|
|
Change in estimated fair value of contingent royalty obligation
|
|
|
159
|
|
Balance at June 30, 2018
|
|
$
|
1,821
|
|
The
contingent royalty obligation is re-measured at each balance sheet date using the following assumptions as of June 30, 2018 and
December 31, 2017: 1) Discount rate of 20%, 2) rate of royalty payment of 3%.
In accordance with ASC-820-10-50-2(g), the Company
performed a sensitivity analysis of the liability, which was classified as a level 3 financial instrument. The Company recalculated
the fair value of the liability by applying a +/- 2% change to the input variable in the discounted cash flow model; the discount
rate. A 2% decrease in the discount rate would increase the liability by approximately $210 and a 2% increase in the discount
rate would decrease the liability by approximately $185.
Recently
Issued Accounting Standards
In
February 2016, the FASB issued ASU 2016-02 “Leases” to increase transparency and comparability among organizations
by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.
For operating leases, the ASU requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at
the present value of the lease payments, on its balance sheet. The ASU retains the current accounting for lessors and does not
make significant changes to the recognition, measurement, and presentation of expenses and cash flows by a lessee. The ASU is
effective for the Company in the first quarter of 2019, with early adoption permitted. The Company is in the process of implementing
changes to its systems and processes in conjunction with its review of lease agreements. The Company will adopt ASU 2016-02 effective
January 1, 2019 and expects to elect certain available transitional practical expedients.
In
June 2016, the FASB issued ASU 2016-13 “Financial Instruments – Credit Losses” to improve information on credit
losses for financial assets and net investment in leases that are not accounted for at fair value through net income. The ASU
replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses. The ASU is
effective for the Company in the first quarter of 2020, with early adoption permitted. The Company is currently evaluating the
effect the adoption of this ASU will have on its consolidated financial statements.
In
May 2017, the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting,”
which clarifies when a change to terms or conditions of a share-based payment award must be accounted for as a modification. The
new guidance requires modification accounting if the vesting condition, fair value or the award classification is not the same
both before and after a change to the terms and conditions of the award. The new guidance was adopted by the Company on January
1, 2018, on a prospective basis. The adoption of this standard did not have a material impact on the Company’s condensed
consolidated financial statements.
Motus
GI Holdings, Inc. and Subsidiaries
Notes
to the Interim Condensed Consolidated Financial Statements (unaudited)
(In
thousands, except share and per share amounts)
In
June 2018, the FASB issued ASU 2018-07, “Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting”, which simplifies the accounting for nonemployee share-based payment transactions. The amendments specify
that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed
in a grantor’s own operations by issuing share-based payment awards. The standard will be effective in the first quarter
2019, although early adoption is permitted (but no sooner than the adoption of Topic 606). The Company is currently evaluating
the effect the adoption of this ASU will have on its consolidated financial statements.
Note
4 – Short-term investments, and Fair Value
Short
term investments as of June 30, 2018 consist of held-to-maturity securities which are carried at amortized costs and available-for-sale
securities which are carried at fair value. Interest and dividends on short-term investments are included in finance income, net.
The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization
and accretion is included in finance income, net. The Company did not have any short-term investments at December 31, 2017.
The
following table summarizes, by major security type, the Company’s assets that are measured at fair value on a recurring
basis and were categorized using the fair value hierarchy and where they are classified on the condensed consolidated balance
sheet as of June 30, 2018.
|
|
Amortized
Cost
|
|
|
Estimated
Fair Value
|
|
Level 1
securities:
|
|
|
|
|
|
|
|
|
Mutual
fund, available-for-sale
|
|
$
|
4,868
|
|
|
$
|
4,868
|
|
Level 2 securities:
|
|
|
|
|
|
|
|
|
Corporate
debt securities, held-to-maturity
|
|
|
5,006
|
|
|
|
5,006
|
|
Total
|
|
$
|
9,874
|
|
|
$
|
9,874
|
|
There
were no changes in the fair value hierarchy leveling during the three and six months ended June 30, 2018. The Company had $0 unrealized
gains and losses from available-for-sale securities during the three and six months ended June 30, 2018. Actual maturities may
differ from contractual maturities because the issuers may have the right to call or prepay obligations with or without call or
prepayment penalties. Contractual securities mature from July 2018 through November 2018.
Note
5 – Commitments and Contingencies
Royalty
on Coated Products
On
January 30, 2018, the Company entered into a license and supply agreement with a third party whereby it was granted a worldwide
license to sell its products coated with an agent that is the intellectual property of the third party for providing a lubricious
surface to the Company’s products (a “Coated Product” or “Coated Products”). The third party is
entitled to a royalty in the amount of:
|
a.
|
2% of
the first $25 million in annual net sales of Coated Products; and
|
|
b.
|
1.5% once annual
net sales exceed $25 million of Coated Products.
|
The
above two tiers reset annually on January 1
st
of each calendar year.
Motus
GI Holdings, Inc. and Subsidiaries
Notes
to the Interim Condensed Consolidated Financial Statements (unaudited)
(In
thousands, except share and per share amounts)
Minimum
royalties shall be paid for each Coated Product sold by the Company as follows:
|
a.
|
January
1, 2020 to December 31, 2020 - $5 per calendar quarter;
|
|
b.
|
January 1, 2021
to December 31, 2021 - $10 per calendar quarter;
|
|
c.
|
January 1, 2022
and beyond - $15 per calendar quarter.
|
Additionally,
the Company shall make one-time milestone payments as follows:
|
a.
|
$12.5
due 6 months after the first commercial sale of a Coated Product.
|
|
b.
|
$12.5 due 12 months
after the first commercial sale of a Coated Product.
|
|
c.
|
$25 due 18 months
after the first commercial sale of a Coated Product.
|
For
the three and six months ended June 30, 2018, the Company recorded $0 and $50, respectively, as general and administrative expense
to accrue the one-time milestone payments since they sold their first coated product in the first quarter of 2018. As of June
30, 2018, the Company has recorded $25 as other current liabilities and $25 as other long-term liabilities. The amount of royalty
expense for the three and six months ended June 30, 2018 was deminimus.
Royalties
to the IIA
The
Company has received grants from the Government of the State of Israel through the Israel Innovation Authority of the
Ministry of Economy and Industry (the “IIA”) (formerly known as the Office of the Chief Scientist of the Ministry
of Economy and Industry (the “OCS”)) for the financing of a portion of its research and development expenditures
pursuant to the Encouragement of Research, Development and Technological Innovation in the Industry Law 5744-1984 (formerly
known as the Encouragement of Industrial Research and Development Law, 5744-1984), referred to as the Research Law, and
related regulations. The Company has received funding from the IIA, which was received and recorded between the periods
ending December 31, 2011 through 2016, in the aggregate amount of $1,332 and has a contingent obligation to the IIA in the
amount of approximately $1,379 as of June 30, 2018, which is generally repaid in the form of royalties ranging from 3% to 5%
of revenues on sales of products and services based on technology developed using IIA grants, up to an aggregate of 100%
(which may be increased under certain circumstances) of the U.S. dollar-linked value of the grant, plus interest at the rate
of 12-month LIBOR.
Repayment
of the grants is contingent upon the successful completion of the Company’s R&D programs and generating sales. The Company
has no obligation to repay these grants, if the R&D program fails, is unsuccessful or aborted or if no sales are generated.
The Company has recorded an immaterial expense and liability during the three and six months ended June 30, 2018 as sales occur.
Royalty
Payment Rights on Series A Convertible Preferred Stock
The
Company filed a Certificate of Designation of Preferences, Rights and Limitations (the “Certificate of Designation”),
establishing the rights and preferences of the holders of the Series A Convertible Preferred Stock (“the Royalty Payment
Rights”). As set forth in the in the Certificate of Designation, the Royalty Payment Rights initially entitled the holders
in aggregate, to a royalty in an amount of:
|
●
|
3% of
net sales subject to a maximum in any calendar year equal to the total dollar amount of Units closed on in the Company’s
2017 private placement (the “2017 Private Placement”); and
|
|
|
|
●
|
5% of licensing
proceeds subject to a maximum in any calendar year equal to the total dollar amount of Units closed on in the 2017 Private
Placement.
|
In
addition, in connection with completion of the 2017 private placement, the Company issued the placement agent royalty payment
rights certificates (the “Placement Agent Royalty Payment Rights Certificates”) which grants the placement agent,
and its designees, the right to receive, in the aggregate, 10% of the amount of payments paid to the holders of the Series A Convertible
Preferred Stock, or the holders of the Royalty Payment Rights Certificates (the “Royalty Payment Rights Certificates”),
upon the conversion of the Series A Convertible Preferred Stock into shares of the Company’s common stock. The Placement
Agent Royalty Payment Rights Certificates are on substantially similar terms as the Royalty Payment Rights of the Series A Convertible
Preferred Stock.
Motus
GI Holdings, Inc. and Subsidiaries
Notes
to the Interim Condensed Consolidated Financial Statements (unaudited)
(In
thousands, except share and per share amounts)
The
Royalty Payment Rights Certificate obligation and Placement Agent Royalty Payment Rights Certificate obligation (the “Contingent
Royalty Obligation”) was recorded as a liability at fair value as “Contingent royalty obligation” in the condensed
consolidated balance sheets at June 30, 2018 and December 31, 2017 (see Contingent Royalty Obligation below). The fair value at
inception was allocated to the royalty rights and the residual value was allocated to the preferred shares and recorded as equity.
The
Company amended its Certificate of Designation to modify the Royalty Payment Rights when the Company consummated its Initial Public
Offering (“IPO) on February 16, 2018. Pursuant to the amended terms, if and when the Company generates sales of the Pure-Vu
system, including disposables, parts, and services, or if the Company receives any proceeds from the licensing of the Pure-Vu
system, then the Company will pay to the holders of the Royalty Payment Rights Certificates a royalty (the “Royalty Amount”)
equal to, in the aggregate, in royalty payments in any calendar year for all products:
|
●
|
3% of net sales*
for commercialized product directly;
|
|
|
|
|
●
|
5% of any licensing
proceeds** for rights to commercialize the product if sublicensed by the Company to a third-party.
|
*
Notwithstanding the foregoing, with respect to Net Sales based Royalty Amounts, (a) no Net Sales based Royalty Amount shall begin
to accrue or become payable until the Company has first generated, in the aggregate, since its inception, Net Sales equal to $20,000
(the “Initial Net Sales Milestone”), and royalties shall only be computed on, and due with respect to, Net Sales generated
in excess of the Initial Net Sales Milestone, and (b) the total Net Sales based Royalty Amount due and payable in any calendar
year shall be subject to a cap per calendar year of $30,000. Net Sales is defined in the Certificate of Designations. The Company
has not reached the Initial Net Sales Milestone as of June 30, 2018.
**
Notwithstanding the foregoing, with respect to Licensing Proceeds based Royalty Amounts, (a) no Licensing Proceeds based Royalty
Amount shall begin to accrue or become payable until the Company has first generated, in the aggregate, since its inception, Licensing
Proceeds equal to $3,500 (the “Initial Licensing Proceeds Milestone”), and royalties shall only be computed on, and
due with respect to, Licensing Proceeds in excess of the Initial Licensing Proceeds Milestone and (b) the total Licensing Proceeds
based Royalty Amount due and payable in any calendar year shall be subject to a cap per calendar year of $30,000. Licensing Proceeds
is defined in the Certificate of Designations. The Company has not reached the Initial Licensing Proceeds Milestone as of June
30, 2018.
The
Royalty Amount will be payable up to the later of (i) the latest expiration date for the Company’s current patents (which
is currently October 2026), or (ii) the latest expiration date of any pending patents as of the date of the initial closing of
the 2017 Private Placement that may be issued in the future. Following the expiration of all such patents, the holders of the
Royalty Payment Rights and Placement Agent Royalty Payment Rights will no longer be entitled to any further royalties for any
period following the latest to occur of such patent expiration.
On
February 16, 2018, the date of the closing of the IPO, (1) the amendment to the Certificate of Designation became effective, (2)
all outstanding shares of Series A Convertible Preferred Stock were converted into shares of the Company’s common stock
pursuant to a mandatory conversion, and (3) the Royalty Payment Rights Certificates were issued to the former holders of the Series
A Convertible Preferred Stock. As provided for in the Certificate of Designation, if a holder had elected to convert a portion
or all their Series A Convertible Preferred Stock into shares of the Company’s common stock prior to the mandatory conversion,
the holder would have forfeited all rights to future royalty payments, if any. No such conversion elections were received by the
Company prior to the mandatory conversion.
Motus
GI Holdings, Inc. and Subsidiaries
Notes
to the Interim Condensed Consolidated Financial Statements (unaudited)
(In
thousands, except share and per share amounts)
Contingent
Royalty Obligation
The
Contingent Royalty Obligation was recorded as a long-term liability at fair value in the condensed consolidated balance sheets
at June 30, 2018 and December 31, 2017 in the amount of $1,821 and $1,662, respectively. For the three months ending June 30,
2018 and 2017, the Company recorded a loss on change in fair value of Contingent Royalty Obligation in the amount of $81 and $69,
respectively. For the six months ending June 30, 2018 and 2017, the Company recorded a loss on change in fair value of Contingent
Royalty Obligation in the amount of $159 and $134, respectively.
Note
6 – Related Party Transactions
Other
than transactions and balances related to cash and share-based compensation to officers and directors, the Company did not have
any transactions and balances with related parties and executive officers during the three and six months ending June 30, 2018
and 2017 except for the following.
Shareholder
Loan
During the three months ended June 30, 2018, the
Company received $126 in cash proceeds as repayment of a shareholder loan. The loan was entered into on May 15, 2017 for a principal
balance of $122 at a stated interest rate of 3.4%. The loan principal and accrued interest was repaid in full as of June
30, 2018. For the three and six months ended June 30, 2018, the Company recorded $4 as finance income related to the shareholder
loan. For the three and six months ended June 30, 2017, the Company recorded $0 as finance income related to the shareholder loan.
Sales
and Marketing Services Arrangement with FreeHold Surgical, Inc.
In
August, 2017, the Company began paying a monthly fee to FreeHold Surgical, Inc (“FreeHold”), an entity in which one
of our Directors serves as a Director and President. Pursuant to the fee arrangement, the Company pays FreeHold a monthly amount
of approximately $25 as all-in compensation for sales and marketing services performed for the Company, on a part time basis,
by two Freehold sales representatives. As of June 30, 2018 and December 31, 2017, the Company had $25 and $50 recorded as accounts
payable to FreeHold, respectively. For the three and six months ended June 30, 2018, the Company recorded $75 and $150, respectively,
as general and administrative expense related to this arrangement.
Note
7 – Stockholder’s Equity
Initial
Public Offering
On
February 16, 2018, the Company closed its IPO in which it sold 3,500,000 shares of the Company’s common stock at a public
offering price of $5.00 per share. In connection with the closing of the IPO, (1) the Company received net proceeds of approximately
$15,000 after deducting underwriting discounts and commissions of $1,400 and other offering expenses of approximately $1,100,
(2) the amendment to the registration rights agreement described below became effective, (3) the amendment to the Certificate
of Designation described above in Note 5 became effective, (4) all outstanding shares of Series A Convertible Preferred Stock
converted, on a one-to-one basis, into shares of the Company’s common stock, (5) the Company issued the Royalty Payment
Rights Certificates as described in Note 5, and (6) the Company issued warrants to certain of the former Series A Convertible
Preferred Stock and common stock holders, pursuant to the amendment to the Registration Rights Agreement, the amendment to the
Certificate of Designation, and the execution of a lock up agreement, to purchase an aggregate of 1,095,682 shares of the Company’s
common stock (the “Ten Percent Warrants”). The Ten Percent Warrants are exercisable any time on or after the 180-day
anniversary of the completion of the IPO, have a five-year term, and provide for cashless exercise. In addition, the Company granted
the representative of the several underwriters in the IPO (the “Representative”) a 30-day option (the “Over-Allotment
Option”) to purchase up to an aggregate 525,000 additional shares of the Company’s common stock at an exercise price
of $5.00 per share.
The
Ten Percent Warrants were valued using the Black-Scholes option pricing model under the following assumptions, (i) expected life
of 5 years, (ii) volatility of 67.08%, (iii) risk-free rate of 2.63%, and (iv) dividend rate of zero. The fair value of the Ten
Percent Warrants was estimated to be $3,156 which was recorded as warrant expense in the accompanying condensed consolidated statements
of comprehensive loss.
Motus
GI Holdings, Inc. and Subsidiaries
Notes
to the Interim Condensed Consolidated Financial Statements (unaudited)
(In
thousands, except share and per share amounts)
On
March 12, 2018, the Company closed the sale of an additional 56,000 shares of its common stock at a price of $5.00 per share,
pursuant to the Representative’s partial exercise of the Over-Allotment Option. In connection with the closing of the partial
exercise of the Over-Allotment Option, the Company received net proceeds of $258 after deducting underwriting discounts and commissions
of $22.
Registration
Rights
The
Company entered into an amended registration rights agreement, which became effective upon the closing of the IPO, to waive investors’
rights to receive penalties. Accordingly, all penalties or other amounts due to the investors under the registration rights agreement
have been forever waived and discharged, and the Company may be required to file a registration statement in accordance with the
registration rights agreement, as amended, within 225 days after the IPO date.
Issuance
of Stock
On
March 27, 2018, the Company’s Board of Directors approved the issuance of 15,000 shares of the Company’s common stock
to a third party for services to be provided. The stock vests immediately and is subject to a lock-up through February 14, 2019.
The Company recorded the fair market value of the stock on the date of issuance as stock-based compensation in the amount of $69.
Issuance
of Warrants
During the three months ended June 30, 2018, the
Company entered into a consultant agreement with a service provider which shall continue until the agreement is terminated by
the Company or service provider by providing at least five business days’ prior written notice. Pursuant to the agreement,
the Company (a) issued a warrant on June 6, 2018 to purchase 10,000 shares of the Company’s common stock, with an exercise price of $5.25
per share, (b) upon the four (4) month anniversary of the execution of the agreement, provided the service provider is still engaged
at that time, will issue a warrant to purchase 10,000 shares of the Company’s common stock, with an exercise price of $6.25
per share, and (c) upon the eight (8) month anniversary of the execution of the agreement, provided the service provider is still
engaged at that time, will issue a warrant to purchase 10,000 shares of the Company’s common stock, with an exercise price
of $7.25 per share (collectively, such warrants referred to as the “Consultant Warrants”). The Consultant Warrants
will each have a five year term, vest immediately, and will provide for cashless exercise.
Warrants totaling 10,000 issued during the six
months ended June 30, 2018 were valued using the Black-Scholes option pricing model under the following assumptions, (i) expected
life of 5 years, (ii) volatility of 62.24%, (iii) risk-free rate of 2.73%, and (iv) dividend rate of zero. The fair value of
the 10,000 warrants was estimated to be $35 which was expensed using the straight-line method over four months, the term the warrant
covers and when performance is expected to be completed in October 2018. The Company recorded $28 as prepaid expense in the accompanying
condensed consolidated balance sheets as of June 30, 2018 and $7 as general and administrative expense in the accompanying condensed consolidated statements
of comprehensive loss in relation to the 10,000 warrants for the three months ended June 30, 2018.
A
summary of the Company’s warrants to purchase common stock activity is as follows:
|
|
|
Shares Underlying Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted average Remaining Contractual Life (years)
|
|
|
Aggregate Intrinsic Value
|
|
Outstanding at December 31, 2017
|
|
|
|
1,340,869
|
|
|
$
|
5.07
|
|
|
|
3.73
|
|
|
$
|
—
|
|
Granted
|
|
|
|
1,105,682
|
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
|
2,446,551
|
|
|
$
|
5.04
|
|
|
|
3.87
|
|
|
$
|
5,265
|
|
Motus
GI Holdings, Inc. and Subsidiaries
Notes
to the Interim Condensed Consolidated Financial Statements (unaudited)
(In
thousands, except share and per share amounts)
Exercise
of Options
On
February 21, 2018, a consultant exercised 896 options on a cashless basis which resulted in the issuance of 394 shares of the
Company’s common stock.
Stock
Based Compensation
Stock
Options
The
following table summarizes stock option activity during the six months ended June 30, 2018:
|
|
|
Shares Underlying Options
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted average Remaining Contractual Life (years)
|
|
|
Aggregate Intrinsic Value
|
|
Outstanding at December 31, 2017
|
|
|
|
1,803,094
|
|
|
$
|
4.41
|
|
|
|
9.19
|
|
|
$
|
334
|
|
Granted
|
|
|
|
152,000
|
|
|
$
|
4.50
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
(896
|
)
|
|
$
|
2.52
|
|
|
|
|
|
|
$
|
2
|
|
Forfeited/canceled
|
|
|
|
(46,388
|
)
|
|
$
|
4.69
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
|
1,907,810
|
|
|
$
|
4.41
|
|
|
|
8.76
|
|
|
$
|
5,310
|
|
At
June 30, 2018, unamortized stock compensation for stock options was $2,242, with a weighted-average recognition period of 1.09
years.
At
June 30, 2018, outstanding options to purchase 961,807 shares of common stock were exercisable with a weighted-average exercise
price per share of $4.37.
Stock
Based Compensation
The
following table sets forth total non-cash stock-based compensation by operating statement classification for the three and six
months ended June 30, 2018 and 2017:
|
|
Three Months ended June 30
|
|
|
Six Months ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Research and development
|
|
$
|
35
|
|
|
$
|
42
|
|
|
$
|
103
|
|
|
$
|
48
|
|
Sales and marketing
|
|
|
10
|
|
|
|
37
|
|
|
|
39
|
|
|
|
37
|
|
General and administrative
|
|
|
426
|
|
|
|
(135
|
)
|
|
|
931
|
|
|
|
512
|
|
Total
|
|
$
|
471
|
|
|
$
|
(56
|
)
|
|
$
|
1,073
|
|
|
$
|
597
|
|
During
the period ended June 30, 2017, the Company performed a valuation assessment and adjusted the fair market value of its common
stock from $5.00 per share to $2.39 per share. The fair value adjustment resulted in a negative expense for the three months ended
June 30, 2017 for stock based compensation recorded in accordance with ASC 505-50 and ASC 718 due to the re-measurement of the
expense at fair value. The options granted during the three and six months ending June 30, 2018 were valued using the Black-Scholes
option pricing model using the following weighted average assumptions: (i) expected life of 5.7 years, (ii) volatility of 66.73%,
(iii) risk free interest rate of 2.72% and (iv) dividend yield of zero.
2016
Equity Incentive Plan
The Company has 2,641,250 shares of common stock
reserved for issuance and as of June 30, 2018, there were 725,208 shares available for grant under the Company’s equity plan.
The Company has one equity incentive plan that was adjusted in 2016. The number of shares of common stock available for issuance
under the Company’s equity plan shall increase annually by six percent (6%) of the total number of shares of our common stock
outstanding on December 31st of the preceding calendar year; provided, however, that the board of directors may act prior to the
first day of any calendar year to provide that there shall be no increase such calendar year, or that the increase shall be a lesser
number of shares of our common stock than would otherwise occur.
Motus
GI Holdings, Inc. and Subsidiaries
Notes
to the Interim Condensed Consolidated Financial Statements (unaudited)
(In
thousands, except share and per share amounts)
Note
8 – Subsequent Events
The
Company has analyzed its operations subsequent to June 30, 2018 and noted the following subsequent events:
On July 2, 2018, the Company also entered into
a consulting agreement pursuant to which the Company agreed to issue, provided the consultant is still engaged at the respective
time of issuance, (i) within 30 days of the date of the agreement, a warrant to purchase 25,000 shares of common stock of the Company
with an exercise price of $7.39 per share, which warrant has an exercise period of 12 months from the date of agreement, (ii) within
30 days of the date of the agreement, a warrant to purchase 25,000 shares of common stock of the Company with an exercise price
of $7.39 per share, which warrant has an exercise period of 18 months from the date of the agreement, (iii) upon the three month
anniversary of the date of the agreement, a warrant to purchase 25,000 shares of common stock of the Company with an exercise price
of $8.75 per share, which warrant has an exercise period of 18 months from the date of the agreement and (iv) upon the six month
anniversary of the date of the agreement, a warrant to purchase 25,000 shares of common stock of the Company with an exercise price
of $10.00 per share, which warrant has an exercise period of 24 months from the date of the agreement. The warrants issued under
this agreement are callable by the Company.
On July 3, 2018, the Company entered into an amendment
to a consulting agreement and issued 30,000 shares of common stock of the Company and a warrant to purchase 90,000 shares of common
stock of the Company. The warrants are fully vested, are exercisable at $8.50 per share and expire five years from the date of
issuance.
On July 5, 2018, the Company issued 773 shares
of its common stock upon the exercise of 773 employee options at an exercise price of $4.50 per share. In connection with the
exercise, the Company received $3 in proceeds.
On July 31, 2018, the Company issued 1,792 shares
of its common stock upon the exercise of 1,792 employee options at an exercise price of $2.52 per share. In connection with the
exercise, the Company received $5 in proceeds.
On August 9, 2018, the Company’s Board of
Directors approved the issuance of 100,000 options to 1 employee which vests over a three-year period on a quarterly basis to
purchase shares of the Company’s common stock at $5.75, the closing share price of the Company’s common stock on
the Nasdaq Capital Market on August 9, 2018.