Notes
to Condensed Consolidated Financial Statements
March
31, 2019
(Unaudited)
1.
Summary of Business, Basis of Presentation
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.
Going
Concern, Liquidity, and Management Plans
The
accompanying condensed consolidated financial statements have been prepared under the assumption that the Company will continue
to operate as a going concern, for the 12 months upon the issuance of these condensed consolidated financial statements, 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 is an early stage company with a limited operating history and has a limited number of commercialized products. As of
March 31, 2019, the Company had an accumulated deficit of $287,391,000, 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 March 31, 2019, the Company had working capital
of $15,145,000, including cash and cash equivalents of $13,586,000. In addition, as of March 31, 2019, the Company had debt and
debt due to related parties of $17,273,000 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. As of March 31, 2019, the Company had
a total of $1,560,000 of restricted cash relating to these debt agreements (see Note 6).
The Company’s operating results, including
historical prior periods of negative working capital, indicate that substantial doubt exists related to the Company’s
ability to continue as a going concern for the next 12 months from the date of issuance of these condensed consolidated financial
statements. However, the Company believes that its existing cash and cash equivalents of $10,899,000 at May 9, 2019 together
with expected revenues, expected future debt or equity financings and cost management as well as cost reductions will be sufficient
to fund operations as currently planned through one year from the date of the issuance of these condensed consolidated
financial statements. The Company anticipates securing additional sources of through equity and/or debt financings, collaborative
or other funding arrangements with partners, or through other sources of financing, consistent with historic results. The Company
cannot predict, with certainty, the outcome of its actions to grow revenue, to manage or reduce costs or to secure additional
financing from outside sources on terms acceptable to the Company or at all. 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.
The
actions discussed above cannot be considered probable of occurring and mitigating the substantial doubt raised by its operating
results and satisfying its estimated liquidity needs for 12 months from the issuance of these consolidated financial statements.
If the Company becomes unable to continue as a going concern, it may have to liquidate its assets, and stockholders may lose all
or part of their investment in the Company’s common stock.
2.
Significant Accounting Policies
Basis
of Presentation
The
accompanying condensed consolidated financial information as of March 31, 2019, and for the three months ended March 31, 2019
and 2018, 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, 2018.
In
the opinion of management, the condensed consolidated financial statements as of March 31, 2019, and for the three months ended
March 31, 2019 and 2018, 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 months ended March 31, 2019
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 assumptions and estimates associated with revenue recognition,
including assumptions and estimates used in determining the timing and amount of revenue to recognize for those transactions with
variable considerations, reserves for inventory obsolescence, share-based compensation, right-of-use, fair value of financial
instruments, warrants and in its going concern analysis.
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 97% and 91% of the Company’s total revenues for the three months ended March 31, 2019 and 2018, respectively.
Revenues
generated from international customers were 7% and 18% for the three months ended March 31, 2019 and 2018, 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
|
|
Three months ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
36
|
%
|
|
|
16
|
%
|
|
|
12
|
%
|
2018
|
|
|
14
|
%
|
|
|
23
|
%
|
|
|
6
|
%
|
Customers
to which 10% or more of the Company’s outstanding accounts receivable are attributable as of either March 31, 2019 or December
31, 2018, which may or may not correspond with the customers above, consist of the following:
|
|
CUSTOMER
|
|
|
CUSTOMER
|
|
|
CUSTOMER
|
|
|
CUSTOMER
|
|
|
|
A
|
|
|
B
|
|
|
C
|
|
|
D
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
35
|
%
|
|
|
21
|
%
|
|
|
11
|
%
|
|
|
4
|
%
|
December 31, 2018
|
|
|
52
|
%
|
|
|
8
|
%
|
|
|
3
|
%
|
|
|
24
|
%
|
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 relies on one supplier for 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 endeavors to keep 6 months of knotweed extract on hand 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.
The
Company continues to rely on third parties to formulate Grandevo and Zequanox into spray-dried powders, for all of its production
of Venerate, Majestene/Zelto, Stargus/Amplitude and Haven, and from time to time, third-party manufacturers for supplemental production
capacity to meet excess seasonal demand and for packaging. The Company’s products have been produced in quantities, and
on timelines, sufficient to meet commercial demand and for the Company to satisfy its delivery schedules. However, the Company’s
dependence upon others for the production of a portion of its products, or for a portion of the manufacturing process, particularly
for drying and for all of its production of Venerate, may adversely affect its ability to satisfy demand and meet delivery obligations,
as well as to develop and commercialize new products, on a timely and competitive basis. The Company has not entered into any
long-term manufacturing or supply agreements for any of its products, and it may need to enter into additional agreements for
the commercial development, manufacturing and sale of its products. There can be no assurance that it can do so on favorable terms,
if at all.
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):
|
|
MARCH 31, 2019
|
|
|
DECEMBER 31, 2018
|
|
Product revenues
|
|
$
|
398
|
|
|
$
|
457
|
|
Financing costs
|
|
|
600
|
|
|
|
604
|
|
License revenues
|
|
|
1,708
|
|
|
|
1,776
|
|
|
|
|
2,706
|
|
|
|
2,837
|
|
Less current portion
|
|
|
(379
|
)
|
|
|
(438
|
)
|
|
|
$
|
2,327
|
|
|
$
|
2,399
|
|
Revenue
Recognition
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 March 31, 2019, the Company had deferred product revenue in the amount of $398,000 associated
primarily with billings in excess of SSP and will be recognized in future periods in conjunction with the transfer of control
of such products to the customers.
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. As of March 31, 2019 and 2018, the Company recognized
$72,000 and $51,000, respectively of financing component revenues within both product and license revenues in the condensed
consolidated financial statements.
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 March 31, 2019 and 2018, research and development expenses totaled $2,627,000
and $2,287,000, respectively, and patent expenses totaled $315,000 and $248,000, 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 March 31, 2019
and 2018 were $281,000 and $174,000, respectively.
Advertising
The
Company expenses advertising costs as incurred. Advertising costs for the three months ended March 31, 2019 and 2018 were $191,000
and $206,000, 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):
|
|
MARCH 31,
|
|
|
|
2019
|
|
|
2018
|
|
Stock options outstanding
|
|
|
6,965
|
|
|
|
5,343
|
|
Warrants to purchase common stock
|
|
|
52,647
|
|
|
|
52,725
|
|
Restricted stock units outstanding
|
|
|
1,217
|
|
|
|
931
|
|
Common shares to be issued in lieu of agent fees
|
|
|
498
|
|
|
|
498
|
|
|
|
|
61,327
|
|
|
|
59,497
|
|
Recently
Adopted 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 lease liabilities on the balance sheet and disclosing key information about leasing arrangements.
The
Company adopted ASU 2016-02 in the first quarter of 2019 using the modified-retrospective method. This adoption primarily affected
the Company’s condensed consolidated balance sheet based on the recording of Right-of-use assets and Lease liability, current
and non-current for its operating leases. The adoption of ASU 2016-02, did not change the Company’s historical classification
of these leases or the straight-line recognition of related expenses.
See Note 4 for the effects of the adoption
of ASU 2016-02 on the Company’s condensed consolidated financial statements as of January 1, 2019 and for the three
months ended March 31, 2019. The adoption of this standard had a material impact on the Company’s condensed consolidated
financial statements and is expected to continue to have a material impact for the foreseeable future.
3.
Inventories
Inventories,
net consist of the following (in thousands):
|
|
MARCH 31,
|
|
|
DECEMBER 31,
|
|
|
|
2019
|
|
|
2018
|
|
Raw materials
|
|
$
|
1,411
|
|
|
$
|
1,844
|
|
Work in progress
|
|
|
1,058
|
|
|
|
1,580
|
|
Finished goods
|
|
|
5,085
|
|
|
|
4,800
|
|
|
|
$
|
7,554
|
|
|
$
|
8,224
|
|
As
of March 31, 2019 and December 31, 2018, the Company had $526,000 and $579,000, respectively, in reserves against its inventories.
4.
Right-Of-Use and Lease Liability
On
January 1, 2019, the Company adopted Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (ASU 2016-02) using
the modified retrospective transition method allowing it to apply the new standard at the adoption date and to recognize a cumulative-effect
adjustment to the opening balance of retained earnings on the date of adoption. Under this transition method, the prior comparative
period continues to be reported under the accounting standards in effect for that period.
The
Company elected to use the package of practical expedients permitted which allows (i) an entity not to reassess whether any expired
or existing contracts are or contain leases; (ii) an entity need not reassess the lease classification for any expired or existing
leases; and iii) an entity need not reassess any initial direct costs for any existing leases. The Company made an accounting
policy election to adopt the short-term lease exception which allows the Company to not recognize on the balance sheet those leases
with terms of 12 months or less resulting in short-term lease payments being recognized in the condensed consolidated statements
of income on a straight-line basis over the lease term. All of the Company’s leases were previously classified as operating
and are similarly classified as operating lease under the new standard.
Adoption of the new standard resulted in recognition
of both right-of-use assets and lease liabilities of approximately $5,324,000 and $5,510,000 as of January 1, 2019,
respectively. As the right-of-use assets and lease liabilities were substantially the same at adoption, the Company did not record
a cumulative effect adjustment to the opening balance of retained earnings.
The
Company’s operating leases have remaining terms ranging from less than one year to six years. The leases are for office
space and various office equipment. The Company determines if an arrangement includes a lease at the inception of the agreement
and the right-of-use asset and lease liability is determined at the lease commencement date and is based on the present value
of estimated lease payments. The Company’s lease agreements contain both fixed and variable lease payments, none of which
are based on a rate or an index. Fixed lease payments are included in the determination of the right-of-use asset and lease liability.
Variable lease payments that are not based on a rate or index are expensed when incurred. The present value of estimated lease
payments is determined utilizing the rate implicit in the lease agreement if that rate can be determined. If the implicit rate
cannot be determined, the present value of estimated lease payments is determined utilizing the Company’s incremental borrowing
rate. The incremental borrowing rate is determined at the lease commencement date and is estimated utilizing similar or collateralized
borrowing instruments adjusted for the terms of leasing arrangement as necessary. Some of the leases include an option to renew
that can extend the lease term. For those leases which are reasonably certain to be renewed, the Company included the renewal
period in the lease term. The Company’s lease agreements do not contain any material residual value guarantees or material
restrictive covenants. As of March 31, 2019, the weighted average incremental borrowing rate and the weighted average remaining
lease term for the operating leases held by the Company were 7.04% and 5.5 years, respectively.
The
components of lease expense were as follows:
|
|
THREE MONTHS ENDED
|
|
|
|
MARCH 31, 2019
|
|
|
|
(in thousands)
|
|
|
|
|
|
Operating lease cost
|
|
$
|
297
|
|
Short-term lease cost
|
|
|
13
|
|
Sublease income
|
|
|
(23
|
)
|
|
|
$
|
287
|
|
|
|
|
|
|
Other information
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
222
|
|
Right-of-use assets obtained in exchange for operating lease liabilities
|
|
$
|
199
|
|
Maturities
of lease liabilities for each future calendar year as of March 31, 2019 are as follows:
|
|
OPERATING
|
|
|
|
LEASES
|
|
|
|
(in thousands)
|
|
|
|
|
|
2019,
remaining 9 months
|
|
$
|
813
|
|
2020
|
|
|
1,182
|
|
2021
|
|
|
1,205
|
|
2022
|
|
|
1,241
|
|
2023 and beyond
|
|
|
2,036
|
|
Total lease payments
|
|
|
6,477
|
|
Less: imputed interest
|
|
|
1,118
|
|
Total lease obligation
|
|
|
5,359
|
|
Less lease obligation, current portion
|
|
|
752
|
|
Lease obligation, non-current portion
|
|
$
|
4,607
|
|
5.
Accrued Liabilities
Accrued
liabilities consist of the following (in thousands):
|
|
MARCH 31,
|
|
|
DECEMBER 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Accrued compensation
|
|
$
|
2,726
|
|
|
$
|
2,570
|
|
Accrued warranty costs
|
|
|
360
|
|
|
|
320
|
|
Accrued legal costs
|
|
|
315
|
|
|
|
69
|
|
Accrued customer incentives
|
|
|
2,432
|
|
|
|
2,170
|
|
Accrued liabilities, other
|
|
|
1,182
|
|
|
|
1,742
|
|
|
|
$
|
7,015
|
|
|
$
|
6,871
|
|
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 months ended March 31, 2019 and 2018, the Company recognized $94,000 and $44,000, respectively in warranty expense associated
with product shipments for the period. This expense was reduced by $54,000 for the three months ended March 31, 2019 as a result
of the historical usage of warranty reserves being lower than previously estimated and during the three months ended March 31,
2019 the Company settled no warranty claims. 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, 2018
|
|
$
|
320
|
|
Warranties issued (released) during the period
|
|
|
40
|
|
Settlements made during the period
|
|
|
-
|
|
Balance at March 31, 2019
|
|
$
|
360
|
|
6.
Debt
Debt,
including debt due to related parties, consists of the following (in thousands):
|
|
MARCH 31,
|
|
|
DECEMBER 31,
|
|
|
|
2019
|
|
|
2018
|
|
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.
|
|
$
|
3,425
|
|
|
$
|
3,425
|
|
Secured promissory note (“June 2014 Secured Promissory Note”) bearing interest at prime plus 2% (7.5% as of March 31, 2019) 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 March 31, 2019 and December 31, 2018 of $200 and $205.
|
|
|
8,572
|
|
|
|
8,639
|
|
Secured revolving borrowing (“LSQ Financing”) bearing interest at (12.8% annually) payable through the lenders direct collection of certain accounts receivable through June 2019, collateralized by substantially all of the Company’s personal property.
|
|
|
5,276
|
|
|
|
2,073
|
|
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.
|
|
|
7,300
|
|
|
|
7,300
|
|
Debt, including debt due to related parties
|
|
|
24,573
|
|
|
|
21,437
|
|
Less debt due to related parties, non-current
|
|
|
(7,300
|
)
|
|
|
(7,300
|
)
|
Less current portion
|
|
|
(5,541
|
)
|
|
|
(2,318
|
)
|
|
|
|
|
|
|
|
|
|
Debt, non-current
|
|
$
|
11,732
|
|
|
$
|
11,819
|
|
As
of March 31, 2019, aggregate contractual future principal payments on the Company’s debt, including debt due to related
parties for each calendar year, are due as follows (in thousands):
Period ended March 31, 2019
|
|
Debt
|
|
|
Debt to Related Party
|
|
2019
|
|
$
|
5,464
|
|
|
$
|
-
|
|
2020
|
|
|
270
|
|
|
|
-
|
|
2021
|
|
|
292
|
|
|
|
-
|
|
2022
|
|
|
2,766
|
|
|
|
5,000
|
|
2023
|
|
|
340
|
|
|
|
-
|
|
Thereafter
|
|
|
7,365
|
|
|
|
-
|
|
Total future principal payments
|
|
|
16,497
|
|
|
|
5,000
|
|
Interest payments included in debt balance
(1)
|
|
|
975
|
|
|
|
2,300
|
|
|
|
$
|
17,472
|
|
|
$
|
7,300
|
|
|
(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.
|
The
following is a reconciliation of interest expense for the debt outstanding during the three months ended (in thousands).
|
|
MARCH 31, 2019
|
|
|
|
Interest
|
|
Three Months
|
|
Expense
|
|
|
Related Party, Net
|
|
|
Non cash
|
|
|
|
|
|
|
|
|
|
|
|
June 2014 Secured Promissory Note
|
|
|
158
|
|
|
|
—
|
|
|
|
5
|
|
LSQ Financing
|
|
|
76
|
|
|
|
—
|
|
|
|
—
|
|
ASC 606 Financing Component
|
|
|
68
|
|
|
|
—
|
|
|
|
68
|
|
Other
|
|
|
4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
306
|
|
|
$
|
—
|
|
|
$
|
73
|
|
|
|
MARCH 31, 2018
|
|
|
|
Interest
|
|
Three Months
|
|
Expense
|
|
|
Related Party, Net
|
|
|
Non cash
|
|
|
|
|
|
|
|
|
|
|
|
October 2012 and April 2013 Secured Promissory Notes
|
|
$
|
213
|
|
|
$
|
—
|
|
|
$
|
42
|
|
June 2014 Secured Promissory Notes
|
|
|
152
|
|
|
|
—
|
|
|
|
6
|
|
Secured December 2017 Convertible Notes
(1)
|
|
|
529
|
|
|
|
—
|
|
|
|
322
|
|
LSQ Financing
|
|
|
152
|
|
|
|
—
|
|
|
|
54
|
|
August 2015 Senior Secured Promissory Notes
|
|
|
—
|
|
|
|
434
|
|
|
|
114
|
|
ASC 606 Financing Component
|
|
|
73
|
|
|
|
—
|
|
|
|
73
|
|
|
|
$
|
1,119
|
|
|
$
|
434
|
|
|
$
|
611
|
|
|
(1)
|
This
agreement was terminated in February 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.
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 March 31, 2019. 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.
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 $3,015,000 for the three ended March 31, 2018 on partial extinguishment
of the October 2012 and April 2013 Secured Promissory Notes, which included the recognition of the debt discount. 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 consolidated 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):
Principal (pre-conversion)
|
|
$
|
12,450
|
|
Discount (pre-conversion)
|
|
|
(134
|
)
|
Consideration of common stock and warrants provided at conversion
|
|
|
(6,196
|
)
|
Gain on extinguishment
|
|
|
(2,695
|
)
|
Principal and future interest at March 31, 2019
|
|
$
|
3,425
|
|
Additionally, in conjunction with the terms
of the October 2012 Secured Promissory Notes and the April 2013 Secured Promissory Notes, the Company agreed to pay a fee of 7%
of the funded principal amount to the agent that facilitated the 2018 February Financing Transactions between the Company and
the collective lenders. As part of the Snyder Debt Conversion, the Company renegotiated the Agent Fee, which resulted in 498,000
shares of the Company’s common stock being issuable to the agent in lieu of a cash payment for services. These
shares are issuable at the Maturity Date of the note. The Company has included this liability in other non-current liabilities.
The change in the value of the agent fee and the fair value of the common stock granted in lieu of cash was also included in the
gain on partial extinguishment of debt as follows:
Agent fee, included in other liabilities, long term (pre-conversion)
|
|
$
|
827
|
|
Gain on extinguishment
|
|
|
(319
|
)
|
Agent fee payable in common shares
|
|
$
|
508
|
|
June 2014
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 that bears interest at 7.5% as of March 31, 2019. 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 $74,997 and adjusted from time-to-time as the interest rate changes, with the final payment due in June 2036. The Company is
required to maintain a deposit balance with the Five Star Bank of $1,560,000, which is recorded as restricted cash included in
non-current assets.
Under this note the Company is required to
maintain a current ratio of not less than 1.25-to-1.0, a debt-to-worth ratio of no greater than 4.0-to-1.0 and a loan-to-value
ratio of no greater than 70% as determined by Five Star Bank. The Company is also required to comply with certain affirmative
and negative covenants under the loan agreement discussed above. In the event of default on the debt, Five Star Bank may declare
the entire unpaid principal and interest immediately due and payable. As of March 31, 2019, the Company was in compliance with
each of these covenants except, potentially, a requirement that no material adverse situation shall have occurred,
given the Company’s current going concern assessment and the requirement that her be no unapproved compensation
increases for the Company’s executives for calendar year 2019. However, the Company has obtained a waiver from the
lender for any non-compliance through November 15, 2020.
The
following table reflects the activity under this note:
Principal balance, net at December 31, 2018
|
|
$
|
8,639
|
|
Principal payments
|
|
|
(225
|
)
|
Interest
|
|
|
153
|
|
Debt discount amortization
|
|
|
5
|
|
Principal balance, net at March 31, 2019
|
|
$
|
8,572
|
|
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, was subject to Anderson’s approval and due on October 23, 2020 (the
“Anderson Maturity Date”).
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”). Under the amendment, the Secured December 2017 Convertible Note became a secured promissory note and the
maturity date was reverted to the original terms, due on October 12, 2020 (the “Maturity Date”). The interest rate
and conversion terms of the Secured December 2017 Convertible Note remain unchanged from the terms of the October 2017 Convertible
Note as described above. As of December 31, 2017, the outstanding principal balance under the Secured December Convertible Note
was $4,000,000, exclusive of a $510,000 discount. In January 2018, the Company borrowed the remaining available principal under
the Secured December 2017 Convertible Note of $2,000,000, exclusive of an additional derivative liability discount of $574,000.
On
February 5, 2018, the holder converted the entire outstanding principal of $6,000,000 under the Secured December 2017 Convertible
Note into 12,000,000 each common stock and warrants units 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. Upon the conversion on February 5, 2018,
the outstanding principal balance under the Secured December 2017 Convertible Note was reduced to zero.
The
Company accounted for the full conversion of the Secured December 2017 Convertible Note using the accounting guidance related
to an induced debt conversion. Under the induced conversion guidance, the Company recognized a loss on conversion in the amount
of $11,634,000 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 related to the fair value
of the derivative liability on the date of conversion.
The
following table reflects the accounting for the activities under the Secured December 2017 Convertible Note as follows (in thousands):
Principal (pre-conversion)
|
|
$
|
6,000
|
|
Discount (pre-conversion)
|
|
|
(791
|
)
|
Consideration of common stock and warrants provided at conversion
|
|
|
(16,843
|
)
|
Derivative liability extinguished
|
|
|
6,424
|
|
Loss on extinguishment
|
|
|
5,210
|
|
Balance at March 31, 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.
Advances
by LSQ may be made at an advance rate of up to 80% of the face value of the receivables being sold. Upon the sale of the receivable,
the Company will not maintain servicing. LSQ may require the Company to repurchase accounts receivable if (i) the payment is disputed
by the account debtor, with the purchaser being under no obligation to determine the bona fides of such dispute, (ii) the account
debtor has become insolvent or (iii) upon the effective date of the termination of the LSQ Financing. LSQ will retain its security
interest in any accounts repurchased from the Company.
The
Company will also pay 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 would be
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 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
June 2018, the Company amended the LSQ Financing arrangement which effectively (i) decreased the invoice purchase fee from 1.00%
to a range of 0.40% to 1.00%, (ii) decreased the funds usage fee from 0.035% to a range of 0.020% to 0.035% and (iii) extended
the terms of the agreement to June 30, 2019. As of March 31, 2019, $5,276,000 was outstanding under the LSQ Financing.
7.
Warrants
The
following table summarizes information about the Company’s common stock warrants outstanding as of March 31, 2019 (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 March 31, 2019, no warrants have been exercised. The weighted average remaining contractual life and exercise price for these
warrants is 1.98 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 March 31, 2019, there were options to purchase 6,965,000 shares of common stock outstanding, 1,217,000 restricted stock units
outstanding and 10,151,000 share-based awards available for grant under the outstanding equity incentive plans.
For
the three months ended March 31, 2019 and 2018, the Company recognized share-based compensation of $558,000 and $491,000, respectively.
During
the three months ended March 31, 2019 and 2018, the Company granted options to purchase 48,000 and 31,000 shares of common stock,
respectively, at a weighted average exercise price of $1.59 and $1.87, respectively. During the three months ended March 31, 2019
and 2018 there were no options exercised.
The
following table summarizes the activity of stock options from December 31, 2018 to March 31, 2019 (in thousands, except weighted
average exercise price):
|
|
|
|
|
WEIGHTED-
|
|
|
|
|
|
|
AVERAGE
|
|
|
|
|
|
|
EXERCISE
|
|
|
|
OPTIONS
|
|
|
PRICE
|
|
Balances at December 31, 2018
|
|
|
7,136
|
|
|
$
|
3.31
|
|
Options granted
|
|
|
48
|
|
|
$
|
1.59
|
|
Options exercised
|
|
|
-
|
|
|
$
|
-
|
|
Options cancelled
|
|
|
(219
|
)
|
|
$
|
1.82
|
|
Balances at March 31, 2019
|
|
|
6,965
|
|
|
$
|
3.34
|
|
The
following table summarizes the activity of restricted stock units from December 31, 2018 to March 31, 2019 (in thousands, except
weighted average grant date fair value):
|
|
RESTRICTED UNITS
|
|
|
|
OUTSTANDING
|
|
Outstanding at December 31, 2018
|
|
|
1,146
|
|
Granted
|
|
|
71
|
|
Exercised
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
Outstanding at March 31, 2019
|
|
|
1,217
|
|
|
|
|
|
|
WEIGHTED
|
|
|
|
|
|
|
AVERAGE
|
|
|
|
|
|
|
GRANT
|
|
|
|
SHARES
|
|
|
DATE FAIR
|
|
|
|
OUTSTANDING
|
|
|
VALUE
|
|
Non-vested at December 31, 2018
|
|
|
404
|
|
|
$
|
1.40
|
|
Granted
|
|
|
71
|
|
|
$
|
1.53
|
|
Vested
|
|
|
(133
|
)
|
|
$
|
1.42
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
Non-vested at March 31, 2019
|
|
|
342
|
|
|
$
|
1.42
|
|
During
the three and months ended March 31, 2018, the Company granted 105,000 restricted stock units, respectively, in partial satisfaction
of incentive compensation due to certain executives as of December 31, 2017. These grants resulted in the reclassification of
$205,000 from accrued liabilities to additional paid in capital as of March 31, 2018. There were no such grants during the three
months ended March 31, 2019.
9.
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.
In
November 2018, the Company elected to exercise the first extension option under the lease, extending the lease term for another
60 months and an amended lease agreement was executed on April 25, 2019. The Company recognizes expense under its operating
leases on a straight-line basis over the terms of the leases. As of March 31, 2019 and 2018, the Company incurred $287,000
and $151,000, respectively of rent expense, net. See Note 4 for future maturities of the Company’s operating lease
commitments.
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.
As of March 31, 2019, a trial date for the matter has been scheduled for July 2020. 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.
10.
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. In connection with the note, the Company incurred $302,000 in financing-related costs. These costs were recorded
as deferred financing costs as a component of current and non-current other assets to amortized to interest expense over the term
of the note. In connection with the August 2015 Senior Secured Promissory Notes, the Company issued warrants (“August 2015
Warrants”) to purchase 4,000,000 shares of common stock of the Company. The August 2015 Warrants are immediately exercisable
at an exercise price of $1.91 per share and may be exercised at a holder’s option at any time on or before August 20, 2023
(subject to certain exceptions). The fair value of the August 2015 Warrants at the date of issuance of $4,610,000 was recorded
as a discount to the August 2015 Senior Secured Promissory Notes as a component of non-current other liabilities and amortized
to interest expense to related parties over the term of the arrangement.
The August 2015 Senior Secured Promissory
Notes provide for various events of default, including, among others, default in payment of principal or interest, breach of any
representation or warranty by the Company or any subsidiary under any agreement or document delivered in connection with the notes,
a continued breach of any other condition or obligation under any loan document, certain bankruptcy, liquidation, reorganization
or change of control events, the acquisition by any person or persons acting as group, other than the lenders, of beneficial ownership
of 40% or more of the outstanding voting stock of the Company and certain events in which Pamela G. Marrone, Ph.D. ceases to serve
as the Company’s Chief Executive Officer. Upon an event of default, the entire principal and interest may be declared immediately
due and payable. As of March 31, 2019, the Company was in compliance with its covenants under the August 2015 Senior
Secured Promissory Notes.
On
February 5, 2018, the holders of the August 2015 Senior Secured Promissory Notes, pursuant to an amendment, 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 (See Note 6 for
further discussion).
In
conjunction with the Waddell Debt Conversion, the Company accounted for the partial debt extinguishment under the troubled debt
restructuring accounting guidance, including consideration for the treatment of the transaction as a gain given the terms of the
agreement. The Company recognized a gain of $9,183,000, including $2,171,000 related to debt discount and other cost, on partial
extinguishment of the August 2015 Senior Secured Promissory Notes as of December 31, 2018. 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):
Principal (pre-conversion)
|
|
$
|
40,000
|
|
Accrued interest to be paid at maturity
|
|
|
339
|
|
Discount (pre-conversion)
|
|
|
(2,171
|
)
|
Consideration of common stock and warrants provided at conversion
|
|
|
(21,685
|
)
|
Gain on extinguishment
|
|
|
(9,183
|
)
|
Principal and future interest at March 31, 2019
|
|
$
|
7,300
|
|
11.
Subsequent Events
The
Company has evaluated its subsequent events from March 31, 2019 through the date these condensed consolidated financial statements
were issued, and has determined that there are no subsequent events required to be disclosed in these condensed consolidated financial
statements.