Notes
to Condensed Consolidated Financial Statements
September
30, 2018
(Unaudited)
1.
Summary of Business, Basis of Presentation and Liquidity
Marrone
Bio Innovations, Inc. (the “Company”), formerly Marrone Organic Innovations, Inc., was incorporated under the laws
of the State of Delaware on June 15, 2006, and is located in Davis, California. In July 2012, the Company formed a wholly-owned
subsidiary, Marrone Michigan Manufacturing LLC (“MMM LLC”), which holds the assets of a manufacturing plant the Company
purchased in July 2012. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. The Company makes bio-based
pest management and plant health products. The Company targets the major markets that use conventional chemical pesticides, including
certain agricultural and water markets where its bio-based products are used as alternatives for, or mixed with, conventional
chemical pesticides. The Company also targets new markets for which (i) there are no available conventional chemical pesticides
or (ii) the use of conventional chemical pesticides may not be desirable or permissible either because of health and environmental
concerns (including for organically certified crops) or because the development of pest resistance has reduced the efficacy of
conventional chemical pesticides. The Company delivers EPA-approved and registered biopesticide products and other bio-based products
that address the global demand for effective, safe and environmentally responsible products.
From
October 2017 through January 2018, the
Company borrowed, pursuant to a convertible promissory
note (the “Secured December 2017 Convertible Note”) as amended and restated on December 22, 2017, $6,000,000, including
$4,000,000 borrowed in 2017 and $2,000,000 borrowed in January 2018
.
Pursuant
to a securities purchase agreement (the “Securities Purchase Agreement”) entered into on December 15, 2017, in February
2018, the
Company issued, 70,514,000 unregistered shares of its common stock and converted
$51,000,000 in outstanding debt principal of which $6,000,000 was outstanding under the Secured December 2017 Convertible Note
and $45,000,000 was outstanding under long-term senior secured debt instruments (the “February Stock and Debt Conversion
Transaction”). The gross proceeds to the Company from the offering were approximately $24,000,000, which excludes the $6,000,000
in debt converted under the Secured December 2017 Convertible Note. After deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company, the aggregate net proceeds to the Company totaled $21,819,000. See Notes 6,
11 and 12 for further discussion of the February Stock and Debt Conversion Transaction.
In
April 2018, the Company completed a public offering of 8,366,250 registered
shares of its
common stock
. The public offering price of the shares sold in the offering was $1.65 per share. The total gross proceeds
to the Company from the offerings were $13,804,000. The aggregate net proceeds to the Company from common stock sold under the
shelf registration total $12,666,000.
The
Company is an early stage company with a limited operating history and has a limited number of commercialized products. As of
September 30, 2018, the Company had an accumulated deficit of $275,462,000, has incurred significant losses since inception
and expects to continue to incur losses for the foreseeable future. The Company had funded operations primarily with net proceeds
from public sales and private placements of equity and debt securities and from term loans, as well as with the proceeds from
the sale of its products and payments under strategic collaboration and distribution agreements and government grants. The Company
will need to generate significant revenue growth to achieve and maintain profitability. As of September 30, 2018, the Company
had working capital of $23,890,000, including cash and cash equivalents of $20,524,000. In addition, as of September 30,
2018, the Company had debt and debt due to related parties of $13,619,000 and $7,300,000, respectively, for which the underlying
debt agreements contain various financial and non-financial covenants, as well as certain material adverse change clauses. In
addition, as of September 30, 2018, the Company had a total of $1,606,000 of restricted cash relating to these debt agreements
(see Note 6).
The
June 2014 Secured Promissory Note (as defined in Note 6) contains a material adverse change clause that could be invoked by the
lender as a result of the uncertainty related to the Company’s ability to continue as a going concern. If the lender were
to declare an event of default, the entire amount of borrowings related to all debt agreements at that time would have to be reclassified
as current in the financial statements. The lender has waived their right to deem recurring losses, liquidity, going concern,
and financial condition a material adverse change through November 15, 2019. As a result, none of the long term portion of the
Company’s outstanding debt has been reclassified to current in these financial statements as of September 30, 2018.
If
the Company breaches any of the covenants contained within the debt agreements or if the material adverse change clauses are triggered,
the entire unpaid principal and interest balances would be due and payable upon demand. Without entering into a continuation of
its current waiver, which expires November 15, 2019, entering into strategic agreements that include significant cash payments
upfront, significantly increasing revenues from sales or raising additional capital through the issuance of equity, the Company
could exceed its maximum debt-to-worth requirement under a promissory note with Five Star Bank. A violation of a covenant in one
debt agreement will cause the Company to be in violation of certain covenants under each of its other debt agreements. Breach
of covenants included in the Company’s debt agreements, which could result in the lenders demanding payment of the unpaid
principal and interest balances, would have a material adverse effect upon the Company and would likely require the Company to
seek to renegotiate these debt arrangements with the lenders. If such negotiations are unsuccessful, the Company may be required
to seek protection from creditors through bankruptcy proceedings. The Company’s inability to maintain compliance with its
debt covenants could have a negative impact on the Company’s financial condition and ability to continue as a going concern.
The
Company participates in a heavily regulated and highly competitive crop protection industry and believes that adverse changes
in any of the following areas could have a material effect on the Company’s future financial position, results of operations
or cash flows: inability to obtain regulatory approvals, increased competition in the pesticide market, market acceptance of the
Company’s products, weather and other seasonal factors beyond the Company’s control, litigation or claims against
the Company related to intellectual property, patents, products or governmental regulation, and the Company’s ability to
support increased growth.
It
is possible the Company may need to raise additional funds in the future. If so, there can be no assurance that such efforts will
be successful or that, in the event that they are successful, the terms and conditions of such financing will be favorable. Any
future equity financing may result in dilution to existing shareholders and any debt financing may include additional restrictive
covenants. Any failure to obtain additional financing or to achieve the revenue growth or margin improvements necessary to fund
the Company with cash flows from operations will have a material adverse effect upon the Company and may result in a substantial
reduction in the scope of the Company’s operations and impact the Company’s ability to achieve its planned business
objectives.
The
accompanying financial statements have been prepared under the assumption that the Company will continue to operate as a going
concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The
condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts of liabilities that may result from any inability of the Company to continue as a
going concern.
The
Company believes that its existing cash and cash equivalents of $20,524,000 at September 30, 2018 and, expected revenues are sufficient
to fund operations as currently planned through at least one year from the date of the issuance of these financial statements.
However, the Company cannot predict, with certainty, the outcome of its actions to grow revenues. The Company has based this belief
on assumptions and estimates that may prove to be wrong, and the Company could spend its available financial resources less or
more rapidly than currently expected. The Company may continue to require additional sources of cash for general corporate purposes,
which may include operating expenses, working capital to improve and promote its commercially available products, advance product
candidates, expand international presence and commercialization, general capital expenditures and satisfaction of debt obligations.
Management may seek additional capital through debt financings, collaborative or other funding arrangements with partners, or
through other sources of financing. Should the Company seek additional financing from outside sources, the Company may not be
able to raise such financing on terms acceptable to the Company or at all. If the Company is unable to raise additional capital
when required or on acceptable terms, the Company may be required to scale back or to discontinue the promotion of currently available
products, scale back or discontinue the advancement of product candidates, reduce headcount, file for bankruptcy, reorganize,
merge with another entity, or cease operations.
2.
Significant Accounting Policies
Basis
of Presentation
The
accompanying financial information as of September 30, 2018, and for the three and nine months ended September 30, 2018 and 2017,
has been prepared by the Company, without audit, in accordance with generally accepted accounting principles in the United States
(“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding
interim financial reporting. Certain information and note disclosures normally included in annual financial statements prepared
in accordance with U.S. GAAP have been condensed or omitted pursuant to such SEC rules and regulations and accounting principles
applicable for interim periods. However, the Company believes that the disclosures are adequate to make the information presented
not misleading. The information included in this Quarterly Report on Form 10-Q should be read in connection with the consolidated
financial statements and accompanying notes included in the Company’s Annual Report filed on Form 10-K for the fiscal year
ended December 31, 2017.
In
the opinion of management, the condensed consolidated financial statements as of September 30, 2018, and for the three and nine
months ended September 30, 2018 and 2017, reflect all adjustments, which are normal recurring adjustments, necessary to present
a fair statement of financial position, results of operations and cash flows. The results of operations for the three and nine
months ended September 30, 2018 are not necessarily indicative of the operating results for the full fiscal year or any future
periods.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates. The Company used significant estimates in accounting for the useful lives of property, plant and equipment, reserves
for inventory obsolescence, fair value estimates and in its going concern analysis.
Cash
and Cash Equivalents and Restricted Cash
The
following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts shown in the statement of cash
flows in thousands:
|
|
SEPTEMBER 30,
|
|
|
|
2018
|
|
|
2017
|
|
Cash and cash equivalents
|
|
$
|
20,524
|
|
|
$
|
3,737
|
|
Restricted cash, current portion
|
|
|
46
|
|
|
|
933
|
|
Restricted cash, less current portion
|
|
|
1,560
|
|
|
|
1,560
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
22,130
|
|
|
$
|
6,230
|
|
Restricted
Cash
The
Company’s restricted cash consists of cash that the Company is contractually obligated to maintain in accordance with the
terms of its June 2014 Secured Promissory Note. See Note 6 for further discussion.
Concentrations
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents,
accounts receivable and debt. The Company deposits its cash and cash equivalents with high credit quality domestic financial institutions
with locations in the U.S. Such deposits may exceed federal deposit insurance limits. The Company believes the financial risks
associated with these financial instruments are minimal.
The
Company’s customer base is dispersed across many different geographic areas, and currently most customers are pest management
distributors in the U.S. Generally, receivables are due up to 120 days from the invoice date and are considered past due after
this date, although the Company may offer extended terms from time to time.
The
Company’s principal sources of revenues are its Regalia, Grandevo and Venerate product lines. These three product lines
accounted for 95% and 87% of the Company’s total revenues for the three months ended September 30, 2018 and 2017, respectively.
These three product lines accounted for 93% and 87% of the Company’s total revenues for the nine months ended September
30, 2018 and 2017, respectively.
Revenues
generated from international customers were 11% and 4% for the three months ended September 30, 2018 and 2017, respectively, and
11% and 9% for each of the nine months ended September 30, 2018 and 2017, respectively.
Customers
to which 10% or more of the Company’s total revenues are attributable for any one of the periods presented consist of the
following:
|
|
CUSTOMER A
|
|
|
CUSTOMER B
|
|
|
CUSTOMER C
|
|
|
CUSTOMER
D
|
|
Three months ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
31
|
%
|
|
|
19
|
%
|
|
|
13
|
%
|
|
|
6
|
%
|
2017
|
|
|
16
|
%
|
|
|
20
|
%
|
|
|
7
|
%
|
|
|
10
|
%
|
|
|
CUSTOMER
A
|
|
|
CUSTOMER
B
|
|
|
CUSTOMER
C
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
22
|
%
|
|
|
20
|
%
|
|
|
12
|
%
|
2017
|
|
|
4
|
%
|
|
|
25
|
%
|
|
|
9
|
%
|
Customers
to which 10% or more of the Company’s outstanding accounts receivable are attributable as of either September 30, 2018 or
December 31, 2017 consist of the following:
|
|
CUSTOMER
|
|
|
CUSTOMER
|
|
|
CUSTOMER
|
|
|
CUSTOMER
|
|
|
CUSTOMER
|
|
|
CUSTOMER
|
|
|
|
A
|
|
|
B
|
|
|
C
|
|
|
D
|
|
|
E
|
|
|
F
|
|
September 30, 2018
|
|
|
31
|
%
|
|
|
20
|
%
|
|
|
13
|
%
|
|
|
0
|
%
|
|
|
2
|
%
|
|
|
0
|
%
|
December 31, 2017
|
|
|
9
|
%
|
|
|
22
|
%
|
|
|
2
|
%
|
|
|
16
|
%
|
|
|
11
|
%
|
|
|
11
|
%
|
Concentrations
of Supplier Dependence
The
active ingredient in the Company’s Regalia product line is derived from the giant knotweed plant, which the Company obtains
from China. The Company currently has one supplier of this plant. Such single supplier acquires raw knotweed from numerous regional
sources and performs an extraction process on this plant, creating a dried extract that is shipped to the Company’s manufacturing
plant. While the Company does not have a long-term supply contract with this supplier, the Company does have a long term business
relationship with this supplier. The Company maintains 6-12 months of knotweed extract at any given time, but an unexpected disruption
in supply could have an effect on Regalia supply and revenues. Although the Company has identified additional sources of raw knotweed,
there can be no assurance that the Company will continue to be able to obtain dried extract from China at a competitive price.
Additionally, tariffs placed on Chinese goods exported to the United States may impact the cost of this active ingredient.
Deferred
Cost of Product Revenues
Deferred
cost of product revenues are stated at the lower of cost or net realizable value and include product sold where title has transferred
but the criteria for revenue recognition have not been met. As of September 30, 2018 and December 31, 2017, the Company recorded
deferred cost of product revenues of $1,000 and $3,063,000 respectively.
Deferred
Revenue
When
the Company receives consideration, or such consideration is unconditionally due, from a customer prior to transferring control
of goods or services to the customer under the terms of a sales contract, the Company records deferred revenue, which represents
a contract liability. The Company recognizes deferred revenue as net sales after the Company has transferred control of the goods
or services to the customer and all revenue recognition criteria are met. The Company’s deferred revenue is broken out as
follows (in thousands):
|
|
SEPTEMBER 30, 2018
|
|
|
DECEMBER 31, 2017
|
|
Product revenues
|
|
$
|
532
|
|
|
$
|
6,449
|
|
Financing costs
(1)
|
|
|
611
|
|
|
|
-
|
|
License revenues
|
|
|
1,845
|
|
|
|
1,790
|
|
|
|
|
2,988
|
|
|
|
8,239
|
|
Less current portion
|
|
|
(356
|
)
|
|
|
(6,193
|
)
|
|
|
$
|
2,632
|
|
|
$
|
2,046
|
|
(1)
Financing costs relate to the implementation of ASC 606. Refer to the Company’s revenue recognition policy in this
note.
Revenue
Recognition
On
January 1, 2018, the Company adopted the Accounting Standards Codification (“ASC”) 606,
Revenue from Contracts
with Customers
and all the related amendments (“the new revenue standard”) and applied it to all contracts using
the modified retrospective method. The Company recognized the cumulative effect of initially applying the new revenue standard
as an adjustment to the opening balance of accumulated deficit. The comparative information has not been restated and continues
to be reported under the accounting standards in effect for those periods. For the three and nine months ended September 30, 2018,
the adoption of this standard had a material impact on the Company’s financial statements, and it is expected to have a
material impact on future periods, because the Company will no longer recognize revenue on a sell-through basis.
The
cumulative effect of the changes made to the Company’s condensed consolidated balance sheet on January 1, 2018 for the adoption
of the new revenue standard was as follows (in thousands):
BALANCE SHEET
|
|
As Reported
December 31, 2017
|
|
|
Adjustments
Due to ASC 606
|
|
|
Balance at
January 1, 2018
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred cost of product revenues
|
|
$
|
3,063
|
|
|
$
|
(3,058
|
)
|
|
$
|
5
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue, current portion
|
|
|
6,193
|
|
|
|
(5,893
|
)
|
|
|
300
|
|
Deferred revenue, less current portion
|
|
|
2,046
|
|
|
|
524
|
|
|
|
2,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
$
|
(265,572
|
)
|
|
$
|
2,311
|
|
|
$
|
(263,261
|
)
|
In
accordance with the new revenue standard requirements, the disclosure of the impact of adoption on the Company’s Condensed
Consolidated Balance Sheet and Condensed Consolidated Statement of Operations was as follows (in thousands):
|
|
SEPTEMBER 30, 2018
|
|
BALANCE SHEET
|
|
As Reported
|
|
|
Impacts
Due to ASC 606
|
|
|
As Reported
without Impacts of ASC 606
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred cost of product revenues
|
|
$
|
1
|
|
|
$
|
2,377
|
|
|
$
|
2,378
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue, current portion
|
|
|
356
|
|
|
|
4,822
|
|
|
|
5,178
|
|
Deferred revenue, less current portion
|
|
|
2,632
|
|
|
|
(611
|
)
|
|
|
2,021
|
|
Accrued liabilities
|
|
|
5,933
|
|
|
|
-
|
|
|
|
5,933
|
|
Accumulated deficit
|
|
|
(275,462
|
)
|
|
$
|
(1,834
|
)
|
|
$
|
(277,296
|
)
|
|
|
For the Three Months Ended SEPTEMBER 30, 2018
|
|
|
|
As Reported
|
|
|
Impacts Due to ASC 606
|
|
|
Results without Impacts of ASC 606
|
|
STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
5,310
|
|
|
$
|
972
|
|
|
$
|
6,282
|
|
License
|
|
|
115
|
|
|
|
(41
|
)
|
|
|
74
|
|
Cost of product revenues
|
|
|
2,803
|
|
|
|
455
|
|
|
|
3,258
|
|
Interest expense
|
|
|
(300
|
)
|
|
|
72
|
|
|
|
(228
|
)
|
Net loss
(1)
|
|
$
|
(4,439
|
)
|
|
$
|
548
|
|
|
$
|
(3,891
|
)
|
|
|
For the Nine Months Ended SEPTEMBER 30, 2018
|
|
|
|
As Reported
|
|
|
Impacts Due to ASC 606
|
|
|
Results without Impacts of ASC 606
|
|
STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
15,171
|
|
|
$
|
1,062
|
|
|
$
|
16,233
|
|
License
|
|
|
330
|
|
|
|
(135
|
)
|
|
|
195
|
|
Cost of product revenues
|
|
|
8,075
|
|
|
|
681
|
|
|
|
8,756
|
|
Interest expense
|
|
|
(1,759
|
)
|
|
|
231
|
|
|
|
(1,528
|
)
|
Net loss
(1)
|
|
$
|
(12,201
|
)
|
|
$
|
477
|
|
|
$
|
(11,724
|
)
|
(1)
The impact in conjunction with the adoption of ASC 606 did not change the basic and diluted net loss per common share as
reported.
Product
Sales.
The Company recognizes revenue for product sales at a point in time following the transfer of control of such products
to the customers, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts. The Company
may enter into contracts in which the standalone selling prices (“SSP”) is different from the amount the Company is
entitled to bill the customer. As of September 30, 2018, the Company had deferred product revenue in the amount of $532,000 associated
primarily with billings in excess of SSP.
Licenses
Revenues.
The Company recognizes license revenues pursuant to strategic collaboration and distribution agreements under which
the Company receives payments for the achievement of certain testing validation, regulatory progress and commercialization events.
As these activities and payments are associated with exclusive rights that the Company provides in connection with strategic collaboration
and distribution agreements over the term of the agreements, revenues related to the payments received are deferred and recognized
over the term of the exclusive distribution period of the respective agreement.
Financing
Component Revenues.
The Company recognizes a financing component, if material, when the Company receives consideration from
the customer, and when the Company expects control of the product or service to be transferred to the customer in a period of
greater than one year from the date of receipt of the consideration.
Revenue
recognition requires the Company to make a number of estimates that include variable consideration. For example, customers may
receive sales or volume-based pricing incentives or receive incentives for providing the Company with marketing-related information.
The Company makes estimates surrounding variable consideration and the net impact to revenues. In making such estimates, significant
judgment is required to evaluate assumptions related to the amount of net contract revenues, including the impact of any performance
incentives and the likelihood that customers will achieve them. In the event estimates related to variable consideration change,
the cumulative effect of these changes is recognized as if the revised estimates had been used since revenue was initially recognized
under the contract. Such revisions could occur in any reporting period, and the effects may be material.
From
time to time, the Company offers certain product rebates to its distributors and growers, which are estimated and recorded as
reductions to product revenues, and an accrued liability is recorded at the later of when the revenues are recorded or the rebate
is being offered.
Contract
Assets.
The Company does not have contract assets since revenue is recognized as control of goods are transferred or as services
are performed or such contract assets are incurred or expensed within one year of the recognition of the revenue.
Contract
Liabilities.
The contract liabilities consist of deferred revenue. The Company classifies deferred revenue as current or noncurrent
based on the timing of when the Company expects to recognize revenue. Generally all contract liabilities, excluding deferred revenue,
are expected to be recognized within one year and are included in accounts payable in the Company’s condensed consolidated
balance sheet.
Research,
Development and Patent Expenses
Research
and development expenses include payroll-related expenses, field trial costs, toxicology costs, regulatory costs, consulting costs
and lab costs. Patent expenses include legal costs relating to the patents and patent filing costs. These costs are expensed to
operations as incurred. For the three months ended September 30, 2018 and 2017, research and development expenses totaled $2,381,000
and $2,890,000, respectively, and patent expenses totaled $277,000 and $262,000, respectively. For the nine months ended September
30, 2018 and 2017, research and development expenses totaled $6,898,000 and $7,881,000, respectively, and patent expenses
totaled $787,000 and $568,000, respectively.
Shipping
and Handling Costs
Amounts
billed for shipping and handling are included as a component of product revenues. Related costs for shipping and handling have
been included as a component of cost of product revenues. Shipping and handling costs for the three months ended September 30,
2018 and 2017 were $249,000 and $111,000, respectively. Shipping and handling costs for the nine months ended September 30, 2018
and 2017 were $705,000 and $315,000, respectively.
Advertising
The
Company expenses advertising costs as incurred. Advertising costs for the three months ended September 30, 2018 and 2017 were
$192,000 and $80,000, respectively. Advertising costs for the nine months ended September 30, 2018 and 2017 were $794,000 and
$284,000, respectively.
Segment
Information
The
Company is organized as a single operating segment, whereby its chief operating decision maker assesses the performance of and
allocates resources to the business as a whole.
Net
Loss Per Share
Net
loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding for the period.
The calculation of basic and diluted net loss per share is the same for all periods presented as the effect of certain potential
common stock equivalents, which consist of stock options and warrants to purchase common stock and restricted stock units, are
anti-dilutive due to the Company’s net loss position. Anti-dilutive common stock equivalents are excluded from diluted net
loss per share. The following table sets forth the potential shares of common stock as of the end of each period presented that
are not included in the calculation of diluted net loss per share because to do so would be anti-dilutive (in thousands):
|
|
SEPTEMBER 30,
|
|
|
|
2018
|
|
|
2017
|
|
Stock options outstanding
|
|
|
7,179
|
|
|
|
3,198
|
|
Warrants to purchase common stock
|
|
|
52,647
|
|
|
|
4,232
|
|
Restricted stock units outstanding
|
|
|
1,075
|
|
|
|
672
|
|
|
|
|
60,901
|
|
|
|
8,102
|
|
Recently
Adopted Accounting Pronouncements
In
May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
, to clarify the principles of
recognizing revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards.
Under ASU 2014-09, revenue is recognized when a customer obtains control of promised goods or services and is recognized at an
amount that reflects the consideration expected to be received in exchange for such goods or services. In addition, ASU 2014-09
requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
The
Company adopted ASU 2014-09 in the first quarter of 2018 using the modified-retrospective method. This adoption primarily affected
the Company’s product revenues accounted for using the sell-through method under ASC 605
, Revenue Recognition,
and
also the accounting for variable consideration in the form of customer incentives.
The
Company adopted Accounting Standards Update 2014-09 (“ASU 2014-09”), which supersedes the revenue guidance under ASC
605, generally requires the Company to recognize revenue and profit from its product sales arrangements earlier and in a more
linear fashion than historical practice under ASC 605, including the estimation of sell-through revenue and variable consideration
that would otherwise have been deferred. Following the adoption of ASU 2014-09, the revenue recognition for the Company’s
license arrangements remained materially consistent with its historical practice. See the tables above in this note for the effects
of the adoption of ASU 2014-09 on the Company’s condensed consolidated financial statements as of January 1, 2018 and for
the nine months ended September 30, 2018. See “Revenue Recognition” above for further discussion of the effects of
the adoption of ASU 2014-09 on the Company’s significant accounting policies. The adoption of this standard had a material
impact on the Company’s condensed consolidated financial statements as disclosed above and is expected to continue to have
a material impact for the foreseeable future.
The
Company adopted Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments (“ASU 2016-15”). The amendment updated and clarified how certain cash receipts and cash payments
are to be presented and classified in the statement of cash flows. The adoption of this standard did not have a material impact
on the condensed consolidated financial statements and is not expected to have a material impact on future periods.
The
Company adopted Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”).
The amendment requires that the statement of cash flows explain the change during the period in the total cash, cash equivalents,
and amounts generally described as restricted cash or restricted cash equivalents. The Company adopted ASU 2016-18 in the first
quarter of 2018. The adoption primarily resulted in the inclusion of the restricted cash balances within the overall cash balances
and a reconciliation of cash, cash equivalents and restricted cash reported on the condensed consolidated balance sheet. The adoption
of this standard did not have a material impact on the condensed consolidated financial statements and is not expected to have
a material impact for the foreseeable future. See “Cash and Cash Equivalents and Restricted Cash” above for further
discussion of the effects of the adoption of ASU 2016-18 on the Company’s significant accounting policies.
In
March 2018, the Financial Accounting Standards Board (“FASB”) issued guidance pertaining to the accounting of the
Tax Cuts and Jobs Act (“TCJA”), allowing companies a year to finalize and record any provisional or inestimable impacts
of the TCJA. This guidance is effective upon issuance during this quarter. The adoption of this particular guidance did not have
a material effect on the Company’s condensed consolidated financial statements.
In
July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic
480); Derivatives and Hedging (Topic 815), (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part
II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and
Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception,” (ASU No. 2017-11) which allows for the
exclusion of a down round feature, when evaluating whether or not an instrument or embedded feature requires derivative classification.
The Company early adopted this guidance beginning January 1, 2018. The adoption of this standard had a material impact on the
Company’s condensed consolidated financial statements as the Company was not required to classify the warrants issued in
conjunction with the February 5, 2018 equity financing as derivatives.
In
March 2018, the FASB issued ASU No. 2018-05, “Income Taxes (Topic 740)—Amendments to SEC Paragraphs Pursuant to SEC
Staff Accounting Bulletin No. 118,” (ASU No. 2018-05) which amends certain Securities and Exchange Commission (SEC) material
in Topic 740 for the income tax accounting implications of the recently issued Tax Reform. This guidance clarifies the application
of Topic 740 in situations where a registrant does not have the necessary information available, prepared, or analyzed in reasonable
detail to complete the accounting under Topic 740 for certain income tax effects of Tax Reform for the reporting period in which
Tax Reform was enacted. The adoption of this guidance did not have a material impact on the condensed consolidated financial statements
of the Company.
In
June 2018, the FASB issued ASU No. 2018-07, “Compensation – Stock Compensation (Topic 718); Improvements to Nonemployee
Share-Based Payment Accounting” (ASU No. 2018-07) which aligned certain aspects of share based payments accounting between
employees and non-employees. Specifically nonemployee share-based payment awards within the scope of Topic 718 are measured at
grant-date fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service
has been rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied and
an entity considers the probability of satisfying performance conditions when nonemployee share-based payment awards contain such
conditions. The Company early adopted this guidance beginning January 1, 2018 using the modified –retrospective method.
The adoption of this standard did not have a material impact on the condensed consolidated financial statements.
Recently
Issued Accounting Pronouncements
In
February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) Leases: Amendments to the FASB Accounting
Standards Codifications (“ASU 2016-02”), to increase transparency and comparability among organizations by recognizing
lease assets and liabilities on the balance sheet and disclosing key quantitative and qualitative disclosures regarding leasing
arrangements with terms longer than 12 months. ASU 2016-02 is effective for public companies for financial statements issued for
fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted.
Companies must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning
of the earliest comparative period presented in the financial statements with certain practical expedients available. The modified
retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period
presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently evaluating its
leasing arrangements under ASU 2016-02, and related ASUs issued after February 2016, including Accounting Standard Update No.
2018-10, Codification Improvements to Topic 842, Leases (“ASU 2018-10”) and Accounting Standard Update No. 2018-11,
Leases (Topic 842): Targeted Improvement (“ASU 2018-11”) issued in July 2018, to determine the potential impact to
its condensed consolidated financial statements and related disclosures.
In
June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement
of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 introduces a new forward looking approach,
based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. The
estimate of expected credit losses will require entities to incorporate considerations of historical information, current information
and reasonable and supportable forecasts. ASU 2016-13 also expands the disclosure requirements to enable users of financial statements
to understand the entity’s assumptions, models and methods for estimating expected credit losses. For public business entities
that meet the definition of a Securities and Exchange
Commission
filer, ASU 2016-13 is effective for annual and interim reporting periods beginning after December 15, 2019, and the guidance is
to be applied using the modified-retrospective approach. Earlier adoption is permitted for annual and interim reporting periods
beginning after December 15, 2018. The Company is currently evaluating ASU 2016-13 to determine the impact to its condensed consolidated
financial statements and related disclosures.
In
February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220),”
(ASU No. 2018-02) which allows for the stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (Tax Reform) to be
reclassified from accumulated other comprehensive income to retained earnings. The provisions of ASU No. 2018-02 are effective
for annual reporting periods beginning after December 15, 2018, and interim reporting periods within those annual periods, with
early adoption permitted. This ASU shall be applied either at the beginning of the annual or interim period of adoption or retrospectively
to each period in which the income tax effects of Tax Reform affects the items remaining in accumulated other comprehensive income
(loss). The Company has not yet determined the impact of implementing this new standard, on its condensed consolidated financial
statements.
In
August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820),” (ASU No. 2018-13), which modifies
the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The provisions of ASU No. 2018-13
are effective for annual reporting periods beginning after December 15, 2019 and interim reporting periods within those annual
periods, with early adoption permitted. Amendments on changes in unrealized gains and losses, the range and weighted average of
significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurements
uncertainty should be applied prospectively for only the most recent interim or annual periods presented in the initial year of
adoption with all other amendments applied retroactively to all periods presented upon their effective date. The Company has not
yet determined the impact of implementing this new standard on its condensed consolidated financial statements.
In
August 2018, the FASB issued ASU No. 2018-15, “Intangibles – Goodwill and Other-Internal-Use Software (Subtopic 350-40),”
(ASU No. 2018-15), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that
is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.
The provisions of ASU No. 2018-15 are effective for annual reporting periods beginning after December 15, 2019 and interim reporting
periods within those annual periods, with early adoption permitted. This ASU shall be applied either retrospectively or prospectively
to all implementation costs incurred after the date of adoption. The Company has not yet determined the impact of implementing
this new standard on its condensed consolidated financial statements.
In
August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, “Disclosure Update and Simplification”,
amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the
amendments expanded the disclosure requirements on the analysis of stockholder’s equity for interim financial statements.
Under the amendments, an analysis of changes in each caption of stockholder’s equity presented in the balance sheet must
be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending
balance of each period for which a statement of comprehensive income is required to be filed. This final rule is effective on
November 5, 2018. The Company intends to apply the new guidance to its condensed consolidated financial statements in the first
interim period of fiscal year 2019.
3.
Fair Value Measurements
Accounting
Standards Codification (“ASC”) 820,
Fair Value Measurements
(“ASC 820”), clarifies that fair value
is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a market-based measurement that should be determined based on
assumptions that market participants would use in pricing an asset or liability.
ASC
820 requires that the valuation techniques used to measure fair value must maximize the use of observable inputs and minimize
the use of unobservable inputs. ASC 820 establishes a three tier value hierarchy, which prioritizes inputs that may be used to
measure fair value as follows:
|
●
|
Level
1—Quoted prices in active markets for identical assets or liabilities.
|
|
|
|
|
●
|
Level
2—Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for
identical or similar assets or liabilities in inactive markets or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the assets or liabilities.
|
|
|
|
|
●
|
Level
3—Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market
participants would use in pricing the asset or liability.
|
The
following table presents the Company’s financial assets measured at fair value on a recurring basis as of September 30,
2018 and December 31, 2017 (in thousands):
|
|
|
SEPTEMBER 30, 2018
|
|
|
|
|
TOTAL
|
|
|
|
LEVEL 1
|
|
|
|
LEVEL 2
|
|
|
|
LEVEL 3
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
DECEMBER 31, 2017
|
|
|
|
TOTAL
|
|
|
LEVEL 1
|
|
|
LEVEL 2
|
|
|
LEVEL 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
674
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
674
|
|
The
Company estimated the fair value of the derivative liability as of February 5, 2018 and as of December 31, 2017 using an option
pricing model. See Note 6 for further discussion of the extinguishment of the derivative liability in conjunction with the conversion
of debt into common shares and issuance of warrants. The fair value is subjective and is affected by certain significant inputs
to the valuation model, which are disclosed in the table below. The fair value of the derivative liability is based upon the outputs
of the option pricing model. As the option pricing model estimates the fair value of derivative liability using unobservable inputs,
it is considered to be a Level 3 fair value measurement.
As
a result of the change in the estimated fair value between December 31, 2017 and February 5, 2018, the Company recognized a net
loss from the total change in estimated fair value of the derivative liabilities as shown in the tables below. This loss is included
in the change in estimated fair value of derivative liability in the Company’s condensed consolidated statement of operations.
The
following table provides a reconciliation of the activity between the beginning date and ending balances for the derivative liability
measured at fair value using significant unobservable inputs (Level 3) (in thousands):
|
|
DERIVATIVE
LIABILITY
|
|
Fair value at December 31, 2017
|
|
$
|
674
|
|
Derivative liability issued
|
|
|
573
|
|
Change fair value of financial instruments
|
|
|
5,177
|
|
Derivative liability extinguished
|
|
|
(6,424
|
)
|
Fair value at September 30, 2018
|
|
$
|
—
|
|
The
following table represents significant unobservable inputs used in determining the fair value of the derivative liability:
|
|
FEBRUARY 5, 2018
|
|
|
DECEMBER 31, 2017
|
|
Stock Price volatility
|
|
|
60
|
%
|
|
|
60
|
%
|
Risk-free rate
|
|
|
1.46
|
%
|
|
|
1.28
|
%
|
Probability weighted term in years
|
|
|
0.18
|
|
|
|
0.42
|
|
4.
Inventories
Inventories,
net consist of the following (in thousands):
|
|
SEPTEMBER 30, 2018
|
|
|
DECEMBER 31, 2017
|
|
Raw materials
|
|
$
|
2,829
|
|
|
$
|
2,310
|
|
Work in progress
|
|
|
2,026
|
|
|
|
2,441
|
|
Finished goods
|
|
|
3,988
|
|
|
|
5,076
|
|
|
|
$
|
8,843
|
|
|
$
|
9,827
|
|
As
of September 30, 2018 and December 31, 2017, the Company had $421,000 and $252,000, respectively, in reserves against its
inventories.
5.
Accrued Liabilities
Accrued
liabilities consist of the following (in thousands):
|
|
SEPTEMBER 30, 2018
|
|
|
DECEMBER 31, 2017
|
|
Accrued compensation
|
|
$
|
1,656
|
|
|
$
|
1,825
|
|
Accrued warranty costs
|
|
|
402
|
|
|
|
556
|
|
Accrued legal costs
|
|
|
284
|
|
|
|
1,558
|
|
Accrued customer incentives
|
|
|
1,725
|
|
|
|
1,986
|
|
Accrued liabilities, other
|
|
|
1,866
|
|
|
|
2,264
|
|
|
|
$
|
5,933
|
|
|
$
|
8,189
|
|
The
Company warrants the specifications of its products through implied product warranties and has extended product warranties to
qualifying customers on a contractual basis. The Company estimates the costs that may be incurred during the warranty period and
records a liability in the amount of such costs at the time product is shipped. The Company’s estimate is based on historical
experience and estimates of future warranty costs as a result of increasing usage of the Company’s products. During the
three and nine months ended September 30, 2018, the Company recognized $58,000 and $162,000, respectively, in warranty
expense associated with product shipments for the period. This expense was reduced by $89,000 and $287,000, respectively, for
the three and nine months ended September 30, 2018 as a result of the historical usage of warranty reserves being lower than previously
estimated. Additionally, during the three and nine months ended September 30, 2018 the Company settled warranty claims in the
amounts of $22,000 and $29,000, respectively. The Company periodically assesses the adequacy of its recorded warranty liability
and adjusts the amount as necessary. Changes in the Company’s accrued warranty costs during the period are as follows (in
thousands):
Balance at December 31, 2017
|
|
$
|
556
|
|
Warranties issued (released) during the period
|
|
|
(125
|
)
|
Settlements made during the period
|
|
|
(29
|
)
|
Balance at September 30, 2018
|
|
$
|
402
|
|
6.
Debt
Debt,
including debt due to related parties, consists of the following (in thousands):
|
|
SEPTEMBER 30, 2018
|
|
|
DECEMBER 31, 2017
|
|
Secured promissory notes (“October 2012 and April 2013 Secured Promissory Notes”) bearing interest at 8.00% per annum, interest and principal due at maturity (December 31, 2022), collateralized by substantially all of the Company’s assets, net of unamortized debt discount as of September 30, 2018 and December 31, 2017 of $0 and $103, respectively, with imputed interest rate of 0%
|
|
$
|
3,425
|
|
|
$
|
12,347
|
|
Secured promissory note (“June 2014 Secured Promissory Note”) bearing interest at prime plus 2% (7.0% as of September 30, 2018) per annum, payable monthly through June 2036, collateralized by certain of the Company’s deposit accounts and MMM LLC’s inventories, chattel paper, accounts, equipment and general intangibles, net of unamortized debt discount as of September 30, 2018 and December 31, 2017 of $210 and $226, respectively, with discount based on imputed interest rate of 7.0%
|
|
|
8,697
|
|
|
|
8,872
|
|
Senior secured convertible promissory notes
(“Secured December 2017 Convertible Note”) bearing interest at 10% per annum, interest and principal through the
conversion date in February 2018, collateralized by substantially all of the Company’s assets, net of unamortized
discount as of September 30, 2018 and December 31, 2017 of $0 and $510, respectively
|
|
|
—
|
|
|
|
3,490
|
|
Secured revolving borrowing (“LSQ Financing”) bearing interest at (12.8% annually) payable through the lenders direct collection of certain accounts receivable through May 2018, collateralized by substantially all of the Company’s personal property, net of unamortized debt discount as of September 30, 2018 and December 31, 2017 of $0 and $54, respectively, with an imputed interest rate of 29.2%
|
|
|
1,497
|
|
|
|
1,222
|
|
Senior secured promissory notes due to related parties
(“August 2015 Senior Secured Promissory Notes”) bearing interest at 8% per annum, interest and principal payable
at maturity (December 31, 2022), collateralized by substantially all of the Company’s assets, net of unamortized
discount as of September 30, 2018 and December 31, 2017 of $0 and $2,178, respectively, with debt discount based on imputed
interest rate of 0% (see Note 11 and 12)
|
|
|
7,300
|
|
|
|
37,822
|
|
Debt, including debt due to related parties
|
|
|
20,919
|
|
|
|
63,753
|
|
Less debt due to related parties
|
|
|
(7,300
|
)
|
|
|
(37,822
|
)
|
Less current portion
|
|
|
(1,737
|
)
|
|
|
(1,524
|
)
|
|
|
$
|
11,882
|
|
|
$
|
24,407
|
|
As
of September 30, 2018, aggregate contractual future principal payments on the Company’s debt, including debt due to related
parties, are due as follows (in thousands):
Period ended September, 2018
|
|
|
|
|
2018
|
|
$
|
1,562
|
|
2019
|
|
|
265
|
|
2020
|
|
|
283
|
|
2021
|
|
|
305
|
|
2022
|
|
|
7,778
|
|
Thereafter
|
|
|
7,663
|
|
Total future principal payments
|
|
|
17,856
|
|
Interest payments included in debt balance
(1)
|
|
|
3,275
|
|
|
|
$
|
21,131
|
|
|
(1)
|
Due
to the debt extinguishment requirement, the Company has included both accrued interest
and future interest in the debt balance for certain outstanding debt, as further discussed
in Notes 11 and 12.
|
The
fair value of the Company’s outstanding debt obligations as of September 30, 2018 and December 31, 2017 was $12,296,000
and $21,133,000, respectively, which as of September 30, 2018 was estimated based on a discounted cash flow model using an estimated
market rate of interest of 15% for the fixed rate debt and 7.0% for the variable rate debt, and is classified as Level 3 within
the fair value hierarchy. As of December 31, 2017, for the October 2012 and April 2013 Secured Promissory Notes, the debt was
valued by applying the ratio of the value of common stock the lender agreed to take as consideration in connection with the conversion
to equity and applying this ratio to the outstanding principal balance. The Company used 7.0%, the current interest rate, to value
the variable rate debt. This debt is classified as Level 3 within the fair value hierarchy. The debt entered into during 2017
was valued using the outstanding principal balance.
The
following is a reconciliation of interest expense for the debt outstanding during the three and nine months ended (in thousands).
|
|
SEPTEMBER 30, 2018
|
|
|
|
Interest
|
|
|
|
Expense
|
|
|
Related Party, Net
|
|
|
Non
cash
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2012 and April 2013 Secured Promissory Notes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
June 2014 Secured Promissory Note
|
|
|
166
|
|
|
|
—
|
|
|
|
5
|
|
Secured December 2017 Convertible Note
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
LSQ Financing
|
|
|
56
|
|
|
|
—
|
|
|
|
—
|
|
August 2015 Senior Secured Promissory Notes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
ASC 606 Financing Component
(2)
|
|
|
78
|
|
|
|
—
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
300
|
|
|
$
|
—
|
|
|
$
|
83
|
|
|
|
SEPTEMBER 30, 2017
|
|
|
|
Interest
|
|
|
|
Expense
|
|
|
Related Party, Net
|
|
|
Non cash
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
October 2012 and April 2013 Secured Promissory Notes
|
|
$
|
482
|
|
|
$
|
—
|
|
|
$
|
46
|
|
June 2014 Secured Promissory Note
|
|
|
148
|
|
|
|
—
|
|
|
|
7
|
|
Secured December 2017 Convertible Note
(1)
|
|
|
—
|
|
|
|
1,098
|
|
|
|
291
|
|
LSQ Financing
|
|
|
108
|
|
|
|
—
|
|
|
|
54
|
|
August 2015 Senior Secured Promissory Notes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
ASC 606 Financing Component
(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Capital leases and other
|
|
|
66
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
804
|
|
|
$
|
1,098
|
|
|
$
|
398
|
|
|
|
SEPTEMBER 30, 2018
|
|
|
|
Interest
|
|
|
|
Expense
|
|
|
Related Party, Net
|
|
|
Non cash
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
October 2012 and April 2013 Secured Promissory Notes
|
|
$
|
213
|
|
|
$
|
—
|
|
|
$
|
42
|
|
June 2014 Secured Promissory Note
|
|
|
474
|
|
|
|
—
|
|
|
|
16
|
|
Secured December 2017 Convertible Note
(1)
|
|
|
529
|
|
|
|
—
|
|
|
|
322
|
|
LSQ Financing
|
|
|
306
|
|
|
|
—
|
|
|
|
57
|
|
August 2015 Senior Secured Promissory Notes
|
|
|
—
|
|
|
|
451
|
|
|
|
133
|
|
ASC 606 Financing Component
(2)
|
|
|
237
|
|
|
|
—
|
|
|
|
237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,759
|
|
|
$
|
451
|
|
|
$
|
807
|
|
|
|
SEPTEMBER 30, 2017
|
|
|
|
Interest
|
|
|
|
Expense
|
|
|
Related Party, Net
|
|
|
Non cash
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
October 2012 and April 2013 Secured Promissory Notes
|
|
$
|
1,444
|
|
|
$
|
—
|
|
|
$
|
138
|
|
June 2014 Secured Promissory Note
|
|
|
424
|
|
|
|
—
|
|
|
|
17
|
|
Secured December 2017 Convertible Note
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
LSQ Financing
|
|
|
336
|
|
|
|
—
|
|
|
|
108
|
|
August 2015 Senior Secured Promissory Notes
|
|
|
—
|
|
|
|
3,257
|
|
|
|
867
|
|
ASC 606 Financing Component
(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Capital leases and other
|
|
|
104
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
2,308
|
|
|
$
|
3,257
|
|
|
$
|
1,130
|
|
|
(1)
|
This
agreement was terminated in February 2018
|
|
(2)
|
The
Company adopted ASC 606 on January 1, 2018.
|
Secured
Promissory Notes
On
October 2, 2012, the Company borrowed $7,500,000 pursuant to senior notes (the “October 2012 Secured Promissory Notes”)
with a group of lenders. On April 10, 2013 (“Conversion Date”), the Company entered into an amendment to increase,
by up to $5,000,000, the amount available under the terms of the loan agreement with respect to the October 2012 Secured Promissory
Notes. Under this amendment, an additional $4,950,000 was issued in partial consideration for $3,700,000 in cash received and
in partial conversion for the cancellation of a $1,250,000 subordinated convertible note (collectively, the “April 2013
Secured Promissory Notes”). The total amount borrowed under the amended loan agreement for the October 2012 Secured Promissory
Notes and the April 2013 Secured Promissory Notes increased from $7,500,000 to $12,450,000 as of the Conversion Date. The October
2012 and April 2013 Secured Promissory Notes bore interest at 14% at until February 5, 2018.
On
February 5, 2018, the Company converted, pursuant to an amendment, dated December 15, 2017, to the October 2012 and April 2013
Secured Promissory Notes, $10,000,000 aggregate principal amount of indebtedness outstanding under the October 2012 and April
2013 Secured Promissory Notes to an aggregate of 5,714,285 shares of common stock and warrants to purchase 1,142,856 shares of
common stock (such conversion, the “Snyder Debt Conversion”), such that $2,450,000 of principal under the October
2012 and April 2013 Secured Promissory Notes is outstanding as of September 30, 2018. Simultaneously with the Snyder Debt Conversion,
the maturity of the October 2012 and April 2013 Secured Promissory Notes was extended to December 31, 2022 (“Maturity Date”),
the interest was reduced from 14% to 8% and all interest payments under the October 2012 and April 2013 Secured Promissory Notes
were deferred to the Maturity Date. This loan is collateralized by substantially all of the Company’s assets. The October
2012 and April 2013 Secured Promissory Notes contain representations and warranties by the Company and the lender, certain indemnification
provisions in favor of the lenders and customary covenants (including limitations on other debt, liens, acquisitions, investments
and dividends), and events of default (including payment defaults, breaches of covenants, a material impairment in the lender’s
security interest or in the collateral, and events relating to bankruptcy or insolvency). The October 2012 and April 2013 Secured
Promissory Notes contain several restrictive covenants. The Company is in compliance with all related covenants, or has received
an appropriate waiver of these covenants.
In
conjunction with the Snyder Debt Conversion, the Company accounted for the partial debt extinguishment under the troubled debt
restructuring accounting guidance. The Company recognized a gain of $2,821,000 for the nine months ended September 30, 2018 on
partial extinguishment of the October 2012 and April 2013 Secured Promissory Notes. Because the Company recognized a gain on the
partial extinguishment of debt, the Company was required to include all future interest and additional consideration, which included
accrued interest, under the terms of this agreement as a reduction of the gain. As a result, the amount of the debt on the Company’s
balance sheet related to the October 2012 and April 2013 Secured Promissory Notes is $3,425,000, as compared to $2,450,000 of
contractual principal outstanding thereunder. Going forward, subject to future amendments to debt agreement or costs, the Company
will not recognize future interest expense on the October 2012 and April 2013 Secured Promissory Notes.
The
accounting for the change due to the Snyder Debt Conversion is as follows (in thousands):
December 31, 2017
|
|
$
|
12,347
|
|
Conversion of debt into equity
|
|
|
(10,000
|
)
|
Change in discount, net
|
|
|
103
|
|
Future interest expense
|
|
|
975
|
|
September 30, 2018
|
|
$
|
3,425
|
|
Secured
Promissory Note
In
June 2014, the Company borrowed $10,000,000 pursuant to a business loan agreement and promissory note (“June 2014 Secured
Promissory Note”) with Five Star Bank (“Lender”) which bears interest at 7.0% as of September 30, 2018. The
interest rate is subject to change and is based on the prime rate plus 2.00% per annum. The June 2014 Secured Promissory Note
is repayable in monthly payments of $71,051 and adjusted from time-to-time as the interest rate changes, with the final payment
due in June 2036. Certain of the Company’s deposit accounts and MMM LLC’s inventories, chattel paper, accounts, equipment
and general intangibles have been pledged as collateral for the promissory note. The Company is required to maintain a deposit
balance with the Lender of $1,560,000, which is recorded as restricted cash included in non-current assets. In addition, until
the Company provides documentation that the proceeds were used for construction of the Company’s manufacturing plant, proceeds
from the loan will be maintained in a restricted deposit account with the Lender. As of September 30, 2018, the Company had $46,000
remaining in this restricted deposit account, which is recorded as restricted cash included in current assets. The June 2014 Secured
Promissory Note contains representations and warranties by the Company and the Lender, certain indemnification provisions in favor
of the Lender and customary covenants (including limitations on other debt, liens, acquisitions, investments and dividends), and
events of default (including payment defaults, breaches of covenants, a material impairment in the Lender’s security interest
or in the collateral, and events relating to bankruptcy or insolvency). The June 2014 Secured Promissory Note contains several
restrictive covenants and the most significant of which requires the Company to maintain a debt to net worth ratio of no greater
than 4.0 to 1.0 at all times. The Company is in compliance with all related covenants, or has received an appropriate waiver of
these covenants.
Secured
Convertible Promissory Note
On
October 12, 2017, the Company and Dwight W. Anderson (“Anderson”) entered into a $1,000,000 convertible promissory
note, which was restated in its entirety by a convertible promissory note entered into by the Company and Anderson on October
23, 2017 (the “October 2017 Convertible Note”). The October 2017 Convertible Note was an unsecured promissory note
in the aggregate principal amount of up to $6,000,000. The Company’s ability to borrow under the October 2017 Convertible
Note was subject to Anderson’s approval and due on October 23, 2020 (the “Anderson Maturity Date”). Under the
terms of the October 2017 Convertible Note, from the date of the closing through December 31, 2017, the October 2017 Convertible
Note bore interest at a rate of 1% per annum, payable in arrears on the Anderson Maturity Date, unless earlier converted into
shares of the Company’s common stock as described below. Thereafter, beginning January 1, 2018, the October 2017 Convertible
Note bore interest at a rate of 10% per annum, payable in arrears on the Anderson Maturity Date, unless earlier converted into
shares of the Company’s common stock as described below.
Any
or all of the principal or accrued interest under the October 2017 Convertible Note was convertible into shares of the Company’s
common stock at a rate of one share of common stock per $1.00 of converting principal or interest, rounded down to the nearest
share with any fractional amounts cancelled, at the election of Anderson by delivery of written notice to the Company. In addition,
upon the consummation of a qualified equity financing of the Company prior to the Anderson Maturity Date, the aggregate outstanding
principal balance of the October 2017 Convertible Note and all accrued and unpaid interest thereon could be converted, at the
option of Anderson, into that number of the securities issued and sold in such financing, determined by dividing (a) such aggregate
principal and accrued interest amounts, by (b) the purchase price per share or unit paid by the purchasers of the Company’s
securities issued and sold in such financing. Notwithstanding the foregoing, Anderson’s ability to affect any such conversions
was limited by applicable provisions governing issuances of shares of the Company’s common stock under the rules of The
Nasdaq Capital Market, subject to the Company’s receipt of any applicable waivers thereof, and any amounts not issuable
to Anderson in the Company’s equity securities as a result of this limitation will be payable in cash.
On
December 15, 2017, the Company entered into the Securities Purchase Agreement with an affiliate of Anderson and certain other
accredited investors (collectively, the “Buyers”). In conjunction with the transaction contemplated in the Securities
Purchase Agreement, Anderson was entitled to convert any portion of the balance outstanding under the October 2017 Convertible
Note and any accrued interest into shares of the Company’s common stock at a rate of one share of common stock per $0.50.
Anderson’s ability to affect conversions at the $0.50 rate was subject to, among other things, approval of the Company’s
shareholders, which was received on January 31, 2018.
On
December 22, 2017, the Company and Anderson amended and restated in its entirety the terms of the October 2017 Convertible Note
(“Secured December 2017 Convertible Note”). The Secured December 2017 Convertible Note was a secured promissory note
in the aggregate principal amount of up to $6,000,000, at Anderson’s sole discretion, due on October 12, 2020 (the “Maturity
Date”). As of February 5, 2018, the outstanding principal balance under the Secured December Convertible Note was $6,000,000.
The interest rate and conversion terms of the Secured December 2017 Convertible Note remained unchanged from the terms of the
October 2017 Convertible Note as described above.
On
February 5, 2018, the holder converted the outstanding principal of $6,000,000 under the Secured December 2017 Convertible Note
into common shares of the Company in accordance with the terms of the Securities Purchase Agreement which provided for conversion
of the outstanding balance at a rate of $0.50 per common share. After the conversion into common shares on February 5, 2018, there
was no outstanding balance under the Secured December 2017 Convertible Note.
The
Company accounted for the full conversion of the Secured December 2017 Convertible Note using the accounting guidance related
to an induced debt conversion of convertible notes. Under the induced conversion guidance, the Company recognized a loss on conversion
in the amount of $9,867,000 associated with the change between the debt’s original terms and the induced conversion terms.
This loss related to the induced conversion feature was partially offset by a gain on extinguishment of $6,424,000 of certain
other elements of the Secured December 2017 Convertible Note.
The
accounting for the change due to the Secured December 2017 Convertible Note is as follows (in thousands):
December 31, 2017
|
|
$
|
3,490
|
|
Increase in debt
|
|
|
2,000
|
|
Conversion of debt into equity
|
|
|
(6,000
|
)
|
Change in discount, net
|
|
|
510
|
|
September 30, 2018
|
|
$
|
-
|
|
LSQ
Financing
On
March 24, 2017, the Company entered into an Invoice Purchase Agreement (the “LSQ Financing”) with LSQ Funding Group,
L.C. (“LSQ”), pursuant to which LSQ may elect to purchase up to $7,000,000 of eligible customer invoices from the
Company. The Company’s obligations under the LSQ Financing are secured by a lien on substantially all of the Company’s
personal property; such lien is first priority with respect to the Company’s accounts receivable, inventory, and related
property, pursuant to an intercreditor agreement, dated March 22, 2017 (the “Three Party Intercreditor Agreement”),
with Gordon Snyder, an individual, as administrative agent for the Snyder lenders (the “Snyder Agent”), on behalf
of the Snyder lenders, and the agent for the holders of the August 2015 Senior Secured Promissory Notes.
Advances
by LSQ may be made at an advance rate of 80% of the face value of the receivables being sold. The Company also pays to LSQ (i)
an invoice purchase fee equal to 1% of the face amount of each purchased invoice, at the time of the purchase, and (ii) a funds
usage fee equal to 0.035%, payable monthly in arrears. An aging and collection fee is charged at the time when the purchased invoice
is collected, calculated as a percentage of the face amount of such invoice while unpaid (which percentage ranges from 0% to 0.35%
depending upon the duration the invoice remains outstanding). The original LSQ Financing was effective for one year with automatic
one year renewals thereafter unless terminated within a 30-day window near the end of the then-effective term; a termination fee
is due upon early termination by the Company if such termination is not requested within such 30-day window. The agreement contains
representations and warranties by the Company and LSQ, certain indemnification provisions in favor of LSQ and customary covenants
(including limitations on other debt, liens, acquisitions, investments and dividends), and events of default (including payment
defaults, breaches of covenants, a material impairment in LSQ’s security interest or in the collateral, and events relating
to bankruptcy or insolvency). The Company is in compliance with all terms of the agreement.
In
January 2018, the Company notified LSQ that it would be terminating the LSQ Financing in March 2018. In March 2018, the Company
and LSQ amended the LSQ Financing agreement and extended the term for an additional 60 days. In June 2018, the Company amended
the LSQ Financing arrangement which effectively decreased the (i) invoice purchase fee from 1.00% to a range of 0.40% to 1.00%
ii) funds usage fee from 0.035% to a range of 0.020% to 0.035% and extended the terms of the agreement to June 30, 2019. The events
of default under the LSQ Financing include failure to pay amounts due, failure to turn over amounts due to LSQ within a cure period,
breach of covenants, falsity of representations, and certain insolvency events. As of September 30, 2018, $1,497,000 was outstanding
under the LSQ Financing.
7.
Warrants
The
following table summarizes information about the Company’s common stock warrants outstanding as of September 30, 2018 (in
thousands, except exercise price data):
|
|
|
|
|
|
NUMBER OF
|
|
|
|
|
|
|
|
|
|
|
SHARES
|
|
|
|
|
|
|
|
|
|
|
SUBJECT TO
|
|
|
|
|
|
|
|
|
EXPIRATION
|
|
WARRANTS
|
|
|
EXERCISE
|
|
DESCRIPTION
|
|
ISSUE DATE
|
|
DATE
|
|
ISSUED
|
|
|
PRICE
|
|
In connection with June 2013 Credit Facility
(June 2013 Warrants)
|
|
June 2013
|
|
June 2023
(1)
|
|
|
27
|
|
|
$
|
8.40
|
|
In connection with August 2015 Senior Secured Promissory Notes (August 2015 Warrants)
|
|
August 2015
|
|
August 2023
|
|
|
4,000
|
|
|
$
|
1.91
|
|
In connection with October 2012 and April 2013 Secured Promissory Notes (November 2016 Warrants)
|
|
November 2016
|
|
November 2026
|
|
|
125
|
|
|
$
|
2.38
|
|
In connection with June 2017 Consulting Agreement (November 2017 Warrants)
|
|
June 2017
|
|
June 2027
|
|
|
80
|
|
|
$
|
1.10
|
|
In connection with February 2018 Financing Transaction (February 2018 Warrants 1)
|
|
February 2018
|
|
December 2020
|
|
|
43,350
|
|
|
$
|
1.00
|
|
In connection with February 2018 Financing Transaction (February 2018 Warrants 2)
|
|
February 2018
|
|
December 2020
|
|
|
5,065
|
|
|
$
|
1.25
|
|
|
|
|
|
|
|
|
52,647
|
|
|
|
|
|
As
of September 30, 2018, the weighted average remaining contractual life and exercise price for these warrants is 2.48 years and
$1.10, respectively.
(1)
|
The
June 2013 Warrants expire upon the earlier to occur of (i) the date listed above; (ii) the acquisition of the Company by another
entity by means of any transaction or series of related transactions (including, without limitation, any transfer of more
than 50% of the voting power of the Company, reorganization, merger or consolidation, but excluding any merger effected exclusively
for the purpose of changing the domicile of the Company); or (iii) a sale of all or substantially all of the assets of the
Company unless the Company’s stockholders of record as constituted immediately prior to such acquisition or sale will,
immediately after such acquisition or sale (by virtue of securities issued as consideration for the Company’s acquisition
or sale or otherwise), hold at least fifty percent (50%) of the voting power of the surviving or acquiring entity.
|
8.
Share-Based Plans
As
of September 30, 2018, there were options to purchase 7,179,000 shares of common stock outstanding, 1,075,000 restricted stock
units outstanding and 6,249,000 share-based awards available for grant under the outstanding equity incentive plans.
For
the three months ended September 30, 2018 and 2017, the Company recognized share-based compensation of $437,000 and $555,000,
respectively. For the nine months ended September 30, 2018 and 2017, the Company recognized share-based compensation of $1,310,000
and $1,724,000, respectively.
During
the three months ended September 30, 2018 and 2017, the Company granted options to purchase 39,000 and 29,000 shares of common
stock, respectively, at a weighted average exercise price of $1.99 and $1.18, respectively. During the three months ended September
30, 2018, options to purchase 53,000 shares of common stock were exercised at a weighted average exercise price of $1.17. During
the three months ended September 30, 2017 there were no options exercised.
During
the nine months ended September 30, 2018 and 2017, the Company granted options to purchase 4,509,000 and 85,000 shares of common
stock, respectively, at a weighted-average exercise price of $1.78 and $1.56, respectively. During the nine months ended September
30, 2018 and 2017, options to purchase 56,000 and 14,000 shares were exercised at a weighted average exercise prices of $1.17
and $1.21 per share, respectively.
The
following table summarizes the activity of restricted stock units from December 31, 2017 to September 30, 2018 (in thousands,
except weighted average grant date fair value):
|
|
|
|
|
WEIGHTED
|
|
|
|
|
|
|
AVERAGE
|
|
|
|
|
|
|
GRANT
|
|
|
|
SHARES
|
|
|
DATE FAIR
|
|
|
|
OUTSTANDING
|
|
|
VALUE
|
|
Nonvested at December 31, 2017
|
|
|
335
|
|
|
$
|
0.94
|
|
Granted
|
|
|
635
|
|
|
|
1.70
|
|
Vested
|
|
|
(491
|
)
|
|
|
1.18
|
|
Forfeited
|
|
|
(46
|
)
|
|
|
1.24
|
|
Nonvested at September 30, 2018
|
|
|
433
|
|
|
$
|
1.37
|
|
During
the three and nine months ended September 30, 2018, the Company granted 0 and 105,000 restricted stock units, respectively, in
partial satisfaction of incentive compensation due to certain executives as of December 31, 2017. There were no such grants during
the three and nine months ended September 30, 2017.
These
grants resulted in the reclassification of $205,000 from accrued liabilities to additional paid in capital as of September 30,
2018.
9.
Common Stock Offering
In
April 2018, the Company completed an underwritten public offering of 8,366,250 registered
shares
of its common stock
. The public offering price of the shares sold in the offering was $1.65 per share. The total gross
proceeds to the Company from the offerings were $13,804,000. The aggregate net proceeds to the Company from common stock sold
in the offering totaled approximately $12,666,000.
10.
Commitments and Contingencies
Operating
Leases
In
June 2013 and then amended in April 2014, the Company entered into a lease agreement for approximately 27,300 square feet of office
and laboratory space located in Davis, California. The initial term of the lease is for a period of 60 months and commenced in
August 2014. The monthly base rent is $44,000 per month for the first 12 months with a 3% increase each year thereafter. Concurrent
with this amendment, in April 2014, the Company entered into a lease agreement with an affiliate of the landlord to lease approximately
17,400 square feet of office and laboratory space in the same building complex in Davis, California. The initial term of the lease
is for a period of 60 months and commenced in August 2014. The monthly base rent is $28,000 with a 3% increase each year thereafter.
On
January 19, 2016, the Company entered into an agreement with a sublessee to sublease approximately 3,800 square feet of vacant
office space located in Davis, California pursuant to the terms of its lease agreement. The initial term of the sublease is for
a period of approximately 43 months and commenced on February 1, 2016. The monthly base rent is approximately $5,000 per month
for the first 12 months with a 5% increase each year thereafter.
Litigation
On
April 3, 2018, the Company was named as a defendant in a complaint filed by Piper Jaffray, Inc. (“Piper”) with the
Superior Court of the State of Delaware. The Company was informed of and received Piper’s complaint and related documents
on April 5, 2018, following the filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
Piper’s complaint alleges one breach of contract claim, specifically, that the Company breached an engagement letter with
Piper by failure to pay a $2,000,000 transaction fee, which Piper alleges is due under the engagement letter as a result of the
Company’s consummation of its private placement and debt refinancing transactions in February 2018. Piper’s complaint
includes a demand for payment the foregoing transaction fee, in addition to interest and costs and expenses incurred in pursuing
the action, including reasonable attorneys’ fees. While the Company believes Piper’s complaint is without merit, this
matter is at an early stage, and the outcome of this matter is not presently determinable.
11.
Related Party Transactions
August
2015 Senior Secured Promissory Notes
On
August 20, 2015, the Company entered into a purchase agreement with Ivy Science & Technology Fund, Waddell & Reed Advisors
Science & Technology Fund and Ivy Funds VIP Science and Technology, each an affiliate of Waddell & Reed, which is a beneficial
owner of more than 5% of the Company’s common stock. Pursuant to such purchase agreement, the Company sold to such affiliates
senior secured promissory notes (“August 2015 Senior Secured Promissory Notes”) in the aggregate principal amount
of $40,000,000. The August 2015 Senior Secured Promissory Notes bear interest at a rate of 8% per annum. The first interest payment
was payable December 31, 2015 and until February 5, 2018, interest was payable semi-annually on June 30 and December 31. Until
February 5, 2018, principal payments of $10,000,000, $10,000,000, and $20,000,000 were payable on the third, fourth and fifth
anniversaries of the closing date of the August 2015 Senior Secured Promissory Notes. Debt due to related parties as of September
30, 2018 was $7,300,000. The fair value of the Company’s debt due to related parties was $4,028,000 and $21,714,000 as of
September 30, 2018 and December 31, 2017, respectively. This debt was valued by applying the same ratio of the value of common
stock the lender agreed to take as consideration for a reduction in the outstanding principal balance and applying this ratio
to the outstanding principal balance. The August 2015 Senior Secured Promissory Notes contain representations and warranties by
the Company and the lenders, certain indemnification provisions in favor of the lenders and customary covenants (including limitations
on other debt, liens, acquisitions, investments and dividends), and events of default (including payment defaults, breaches of
covenants, a material impairment in the Lender’s security interest or in the collateral, and events relating to bankruptcy
or insolvency). The August 2015 Senior Secured Promissory Notes contain several restrictive covenants and the most significant
of which requires the Company to maintain a minimum cash balance of $15,000,000. In May 2016, the agreement was amended to remove
this minimum cash balance requirement. The Company is in compliance with all other related covenants, or has received an appropriate
waiver of these covenants.
On
February 5, 2018, the holders of the August 2015 Senior Secured Promissory Notes, pursuant to an amendment dated December 15,
2017, converted $35,000,000 of the then outstanding debt into 20,000,000 shares of common stock and warrants to purchase 4,000,000
shares of common stock (such conversion, the “Waddell Debt Conversion”). After the conversion, $5,000,000 in principal
remained outstanding. Simultaneously with the Waddell Debt Conversion, the maturity of the August 2015 Senior Secured Promissory
Notes was extended to December 31, 2022, and payment of all future interest was deferred to maturity on December 31, 2022, and
Ospraie was granted a right of first refusal to acquire the August 2015 Senior Secured Promissory Notes.
In
conjunction with the Waddell Debt Conversion, the Company accounted for the partial debt extinguishment under the troubled debt
restructuring accounting guidance. The Company recognized a gain of $9,622,000 for the nine months ended September 30, 2018, on
partial extinguishment of the August 2015 Senior Secured Promissory Notes. Because the Company recognized a gain on the partial
extinguishment of debt, the Company was required to include all future interest and additional consideration, which included accrued
interest, under the terms of this agreement as a reduction of the gain. As a result, the amount of the debt on the Company’s
balance sheet related to the August 2015 Senior Secured Promissory Notes is $7,300,000, as compared to $5,000,000 of contractual
principal amount outstanding thereunder. Going forward, subject to future amendments to debt agreement or costs, the Company will
not recognize future interest expense on the August 2015 Senior Secured Promissory Notes.
The
accounting for the change due to the August 2015 Senior Secured Promissory Notes is as follows (in thousands):
December 31, 2017
|
|
$
|
37,822
|
|
Conversion of debt into equity
|
|
|
(35,000
|
)
|
Change in discount, net
|
|
|
2,178
|
|
Accrued and future interest expense
(1)
|
|
|
2,300
|
|
September 30, 2018
|
|
$
|
7,300
|
|
|
(1)
|
Includes
reclassification of $598,000 in accrued interest to debt.
|
12.
Equity Offering and Related Transactions
On
February 5, 2018, pursuant to a private placement, the Company issued 70,514,000 shares of common stock and warrants to purchase
48,493,000 shares of common stock. Of the shares issued, 44,000,000, 25,714,000 and 800,000 shares were issued pursuant to the
Securities Purchase Agreement, certain debt agreement amendments (see Notes 6 and 11) and as part of a placement agent fee, respectively.
Of the warrants, warrants to purchase 41,333,000, 5,143,000 and 2,017,000 shares were issued pursuant to the Securities Purchase
Agreement, certain debt agreements (see Notes 6 and 11) and as part of a placement agent fee, respectively. For further discussion
of the warrants, see Note 7.
The
gross proceeds from the 44,000,000 shares issued under the Securities Purchase Agreement were $30,000,000 which included the conversion
of $6,000,000 in convertible debt under the then outstanding December 2017 Convertible Note. Also, the Company converted $10,000,000
in debt under the October 2012 and April 2013 Secured Promissory Notes and $35,000,000 in debt under the Senior Secured Promissory
Notes into a total of 25,714,000 shares. The estimated net proceeds from this private placement, inclusive of the cash received
from the December 2017 Convertible Note, was $27,300,000. The Company incurred $2,700,000 in expenses associated with the private
placement and debt conversion of which $2,180,000 was related to the equity component of these transactions.
The
Company classified the warrants issued in connection with the Securities Purchase Agreement and conversion of debt into equity
as equity. As a result of the financing transaction discussed above, the Company’s additional paid in capital and common
stock increased by $64,312,000 and $1,000, respectively. The Company allocated the value of the financing transaction to the common
shares issued in the amount of $53,385,000 and to the warrants issued in the amount of $10,928,000 based on the relative fair
values of each on the transaction date.
In
April 2018, the Company completed an underwritten public offering of 8,366,250 registered
shares
of its common stock
. The public offering price of the shares sold in the offering was $1.65 per share. The total gross
proceeds to the Company from the offerings were $13,804,000. The aggregate net proceeds to the Company from common stock sold
in the offering totaled approximately $12,666,000.
13.
Subsequent Events
None.