Notes
to the Interim Condensed Consolidated Financial Statements
(unaudited, in thousands, except share and per share amounts)
Note
1 – Description of Business
Motus GI Holdings, Inc. (the “Company”) was incorporated
in Delaware, U.S.A. in September 2016. The Company and its subsidiaries, Motus GI Technologies, Ltd. and Motus GI, LLC., are collectively
referred to as “Motus GI” or the “Company”.
The Company has developed the Pure-Vu
System, a medical device that has been cleared by the U.S. Food and Drug Administration (the “FDA”) to help facilitate the
cleansing of a poorly prepared gastrointestinal tract during colonoscopy and to help facilitate gastrointestinal (“GI”) endoscopy
procedures. The Pure-Vu System has received a CE Mark in the EU for use on colonoscopy. The Pure-Vu System integrates with
standard and slim colonoscopes, as well as gastroscopes, to improve visualization during colonoscopy and upper GI procedures while preserving
established procedural workflow and techniques. Through irrigation and evacuation of debris, the Pure-Vu System is designed to provide
better-quality exams. The Company began commercialization in the fourth quarter of 2019, with the first commercial placements of its second
generation Pure-Vu System as part of its initial U.S. market launch targeting early adopter hospitals. The Company does not expect to
generate significant revenue from product sales until the COVID-19 pandemic has subsided and it expands its commercialization efforts
for the Pure-Vu System, which is subject to significant uncertainty.
Note
2 – Basis of Presentation and Going Concern
The
accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the 2020 10-K filed with the SEC on March 16, 2021. The accompanying condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”)
for interim financial information, the instructions for Form 10-Q and the rules and regulations of the SEC. Accordingly, since they are
interim statements, the accompanying condensed consolidated financial statements do not include all of the information and notes required
by GAAP for annual financial statements, but reflect all adjustments consisting of normal, recurring adjustments, that are necessary
for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Interim results
are not necessarily indicative of the results that may be expected for any future periods. The December 31, 2020 balance sheet information
was derived from the audited financial statements as of that date.
To
date, the Company has generated minimal revenues, experienced negative operating cash flows and has incurred substantial operating losses
from its activities. Management expects the Company to continue to generate substantial operating losses and to continue to fund its
operations primarily through utilization of its current financial resources, future product sales, and through the issuance of debt or
equity. While the full impact of the COVID-19
pandemic continues to evolve, the financial markets have been subject to significant volatility that adversely impacts the Company’s
ability to enter into, modify, and negotiate favorable terms and conditions relative to equity and debt financing initiatives. The uncertain
financial markets, potential disruptions in supply chains, mobility restraints, and changing priorities could also affect the Company’s
ability to enter into key agreements. The outbreak and government measures taken in response to the pandemic have also had a significant
impact, both direct and indirect, on businesses and commerce, as worker shortages have occurred; supply chains have been disrupted; facilities
and production have been suspended; and demand for certain goods and services, such as certain medical services and supplies, have spiked,
while demand for other goods and services have fallen. The future progression of the outbreak and its effects on the Company’s
business and operations are uncertain. The Company and its third-party contract manufacturers, contract research organizations, and clinical
sites may also face disruptions in procuring items that are essential to the Company’s research and development activities, including,
for example, medical and laboratory supplies, in each case, that are sourced from abroad or for which there are shortages because of
ongoing efforts to address the outbreak. These disruptions may negatively impact the Company’s sales, its results of operations,
financial condition, and liquidity in 2021.
The Company has financed its operations primarily
through sales of equity-related securities. As of March 31, 2021, the Company had an accumulated deficit of $108,370, total current assets
of $29,814 and total current liabilities of $10,243 resulting in working capital of $19,571. For the three months ended March 31, 2021
the Company incurred a net loss of $4,649. As of March 31, 2021, the Company had cash and cash equivalents of $27,749. Under the terms
of the loan agreement with Silicon Valley Bank (“SVB”), the Company must maintain unrestricted cash in accounts held at SVB
of at least $10,000 (the “Liquidity Covenant”). The Company will need to raise additional capital or generate substantial
revenue in order to ensure compliance with the Liquidity Covenant to support its development and commercialization efforts. If adequate
funds are not available to the Company on a timely basis, or at all, it may breach the Liquidity Covenant, in which case, the Company
would be required to immediately pledge to the bank and thereafter maintain in a separate account, unrestricted and unencumbered cash
in an amount equal to the amount then outstanding under the loan agreement.
Such
conditions, as well as the terms of its Liquidity Covenant and the uncertainty of the impact of the COVID-19 pandemic, raise substantial
doubts about the Company’s ability to continue as a going concern. These condensed consolidated financial statements do not include
any adjustments relating to the recoverability and classification of assets, carrying amounts or the amount and classification of liabilities
that may be required should the Company be unable to continue as a going concern.
Note
3 – Summary of Significant Accounting Policies
Significant
Accounting Policies
The
significant accounting policies used in preparation of these condensed consolidated financial statements for the three months ended March
31, 2021 are consistent with those discussed in Note 3 to the consolidated financial statements in the Company’s 2020 Annual Report
on Form 10-K. There have been no material changes to the Company’s significant accounting policies during the three months ended
March 31, 2021.
Basis
of presentation and principles of consolidation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and include the accounts
of the Company and its wholly owned subsidiaries, Motus Ltd., an Israel corporation, which has operations in Tirat Carmel, Israel, and
Motus Inc., a Delaware corporation, which has operations in the U.S. All inter-company accounts and transactions have been eliminated
in consolidation.
Use
of estimates
The
preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of 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.
Revenue
recognition
Sales
contracts executed for the second generation Pure-Vu System are accounted for in accordance with ASC Topic 606 - Revenue from Contracts
with Customers (“ASC 606”) to depict the transfer of control to the Company’s customers in an amount reflecting the
consideration to which the Company expects to be entitled to. The Pure-Vu System consists of a Workstation and single use disposable
sleeves (“Disposables”). For contracts outside the scope of ASC 606, the Company determines income for proposed supply arrangements
under 1) ASC 842 as it pertains to an embedded lease of the Workstation within a proposed supply arrangement and 2) ASC 606 for the sale
of the Disposables within the proposed supply arrangement. The Company allocates the transaction price to the performance obligations
within the proposed supply arrangements using the total estimated purchases method for both (i) arrangements that contain minimum purchase
commitments and (ii) those arrangements that do not contain a minimum purchase commitment, but instead offer a volume discount for purchases
that exceed a specified tier. During the three months ended March 31, 2021, the Company recognized revenue of $51, which primarily consisted
of $36 in accordance with ASC 606 and $15 in accordance with ASC 842. During the three months ended March 31, 2020, the Company recognized
revenue of $28 in accordance with ASC 606.
Basic
and diluted net loss per share
Basic
loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the year. Diluted
loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the year, plus
the number of common shares that would have been outstanding if all potentially dilutive ordinary shares had been issued, using the treasury
stock method, in accordance with ASC 260-10 “Earnings per Share”. Potentially dilutive common shares were excluded from the
calculation of diluted loss per share for all periods presented due to their anti-dilutive effect due to losses in each period.
Net loss attributable to common stockholders consists of net income or loss, as adjusted for actual and deemed preferred stock dividends
declared, amortized or accumulated. The Company recorded a deemed dividend for the issuance of warrants during three months ended March
31, 2021 of $6,145. The deemed dividend is added to the net loss in determining the net loss available to common stockholders.
Income
taxes
The
Company provides for income taxes using the asset and liability approach. Deferred tax assets and liabilities are recorded based on the
differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect when these differences
are expected to reverse. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is
more likely than not that some or all of the deferred tax assets will not be realized. As of March 31, 2021, and December 31, 2020, the
Company had a full valuation allowance against its deferred tax assets.
For
the three months ended March 31, 2021 and 2020, the Company recorded zero income tax expense. No tax benefit has been recorded in relation
to the pre-tax loss for the three months ended March 31, 2021 and 2020, due to a full valuation allowance to offset any deferred tax
asset related to net operating loss carry forwards attributable to the losses.
Recently
Adopted Accounting Pronouncements
From
time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that the Company adopts as of the
specified effective date. Unless otherwise discussed below, the Company does not believe that the adoption of recently issued standards
have or may have a material impact on its consolidated financial statements and disclosures.
In
December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”,
or ASU 2019-12, which is intended to simplify the accounting for income taxes. ASU 2019-12 removes certain exceptions to the general
principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The new standard was adopted
on January 1, 2021. The adoption of ASU 2019-12 did not have a material impact on the Company’s financial position or results of
operations.
Recently
Issued Accounting Pronouncements
In
June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses” to improve information on credit losses
for financial assets and net investment in leases that are not accounted for at fair value through net income. ASU 2016-13 replaces the
current incurred loss impairment methodology with a methodology that reflects expected credit losses. In April 2019 and May 2019, the
FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815,
Derivatives and Hedging, and Topic 825, Financial Instruments” and ASU No. 2019-05, “Financial Instruments-Credit
Losses (Topic 326): Targeted Transition Relief” which provided additional implementation guidance on the previously issued
ASU. In November 2019, the FASB issued ASU 2019-10, “Financial Instruments - Credit Loss (Topic 326), Derivatives and Hedging (Topic
815), and Leases (Topic 842),” which defers the effective date for public filers that are considered small reporting companies
(“SRC”) as defined by the Securities and Exchange Commission to fiscal years beginning after December 15, 2022, including
interim periods within those fiscal years. Since the Company is an SRC, implementation is not needed until January 1, 2023. The Company
will continue to evaluate the effect of adopting ASU 2016-13 will have on the Company’s financial statements and disclosures.
Note
4 –Fair Value Measurements
Assets
and liabilities measured and recorded at fair value on a recurring basis consisted of the following at March 31, 2021 and December 31,
2020:
|
|
March 31, 2021
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent royalty obligation
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,697
|
|
|
$
|
1,697
|
|
|
|
December 31, 2020
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent royalty obligation
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,617
|
|
|
$
|
1,617
|
|
Financial
instruments with carrying values approximating fair value include cash and cash equivalents, accounts receivable, prepaid expenses and
other current assets, accounts payable and accrued expenses, and certain other current liabilities, due to their short-term nature.
Changes in the fair value of recurring fair value measurements using
significant unobservable inputs (Level 3), which solely consisted of a contingent royalty obligation, during the three months ended
March 31, 2021 was as follows:
|
|
Fair Value Measurements of Contingent Royalty Obligation (Level 3)
|
Balance at December 31, 2020
|
|
$
|
1,617
|
|
Change in estimated fair value of contingent royalty obligation
|
|
|
80
|
|
Balance at March 31, 2021
|
|
$
|
1,697
|
|
The contingent royalty obligation is re-measured at each balance sheet
date using several assumptions, including the following: 1) estimated sales growth, 2) length of product cycle, 3) patent life, 4) discount
rate (21% as of March 31, 2021 and December 31, 2020), and 5) rate of royalty payment (3% as of March 31, 2021 and December 31, 2020).
In accordance with ASC-820-10-50-2(g),
the Company performed sensitivity analyses of the liability, which was classified as a Level 3 financial instrument. The contingent royalty
obligation estimate may be significantly impacted by changes in assumptions used in these analyses. For example, the Company recalculated
the fair value of the liability by applying a +/- 2% change to the input variable in the discounted cash flow model; the discount rate.
A 2% decrease in the discount rate would increase the liability by approximately $264 and a 2% increase in the discount rate would decrease
the liability by approximately $62.
Note
5 – Inventory
Inventory is stated at lower of cost or net realizable value using
the weighted average cost method and is evaluated at least annually for impairment. Write-downs for potentially obsolete or excess inventory
are made based on management’s analysis of inventory levels, historical obsolescence and future sales forecasts. There were no inventory
write-down charges for the three months ended March 31, 2021 and 2020.
Inventory
at March 31, 2021 and December 31, 2020 consisted of the following:
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
Raw materials
|
|
$
|
248
|
|
|
$
|
333
|
|
Work-in-process
|
|
|
5
|
|
|
|
211
|
|
Finished goods
|
|
|
766
|
|
|
|
529
|
|
Inventory reserve
|
|
|
(249
|
)
|
|
|
(268
|
)
|
Inventory, net
|
|
$
|
770
|
|
|
$
|
805
|
|
Note
6 – Fixed assets, net
Fixed
assets, summarized by major category, consist of the following for the years ended:
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
Office equipment
|
|
$
|
167
|
|
|
$
|
167
|
|
Computers and software
|
|
|
303
|
|
|
|
299
|
|
Machinery
|
|
|
649
|
|
|
|
455
|
|
Lab and medical equipment
|
|
|
1,072
|
|
|
|
1,039
|
|
Leasehold improvements
|
|
|
186
|
|
|
|
185
|
|
Total
|
|
|
2,377
|
|
|
|
2,145
|
|
Less: accumulated depreciation and amortization
|
|
|
(1,065
|
)
|
|
|
(967
|
)
|
Fixed assets, net
|
|
$
|
1,312
|
|
|
$
|
1,178
|
|
Depreciation and amortization expense for the three months ended March
31, 2021 and 2020 was $98 and $76, respectively. The Company incurred a loss on the impairment of fixed assets in the amount of $0 and
$9 for the three months ended March 31, 2021 and 2020, respectively.
Note
7 – Leases
The Company leases an office in Fort Lauderdale, Florida under an operating
lease. The term expires November 2024. The annual base rent is subject to annual increases of 2.75%. As described within Note 10, the
Company shares this space with a related party pursuant to the Shared Space Agreement, as defined below.
The
Company leases an office in Israel under an operating lease. The term expires on December 31, 2022. The annual base rent is subject to
increases of 4%.
The
Company leases vehicles under operating leases that expire at various dates through 2022.
Many
of these leases provide for payment by the Company, as the lessee, of taxes, insurance premiums, costs of maintenance and other costs
which are expenses as incurred. Certain operating leases include escalation clauses and some of which may include options to extend the
leases for up to 3 years.
The components of lease cost and supplemental balance sheet information
for the Company’s lease portfolio were as follows:
|
|
Three Months
Ended
March 31,
|
|
|
Three Months
Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Lease Cost
|
|
|
|
|
|
|
Operating lease cost, net of related party license fee
|
|
$
|
32
|
|
|
$
|
55
|
|
Variable lease cost
|
|
|
30
|
|
|
|
29
|
|
Total lease cost
|
|
$
|
62
|
|
|
$
|
84
|
|
|
|
As of
March 31,
|
|
|
As of
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Assets
|
|
|
|
|
|
|
Operating lease, right-of-use- asset
|
|
$
|
730
|
|
|
$
|
766
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Operating lease liabilities
|
|
$
|
243
|
|
|
$
|
238
|
|
Non-current
|
|
|
|
|
|
|
|
|
Operating lease liabilities, net of current portion
|
|
|
504
|
|
|
|
547
|
|
Total lease liabilities
|
|
$
|
747
|
|
|
$
|
785
|
|
|
|
|
|
|
|
|
|
|
Other information:
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term - operating leases
|
|
|
3.12 years
|
|
|
|
3.33 years
|
|
Weighted-average discount rate - operating leases
|
|
|
7.73
|
%
|
|
|
7.78
|
%
|
The Company records operating lease payments
to lease expense using the straight-line method. The Company’s lease expense was $62 and $84 for the three months ended March
31, 2021 and 2020, respectively, included in general and administrative expenses which is net of the related party license fee of $47
and $35 for the three months ended March 31, 2021 and 2020, respectively (see Note 10).
Note 8
– Term Debt
On
December 13, 2019 (the “Effective Date”), the Company entered into a Loan and Security Agreement (the “Loan Agreement”)
for $8,000 (the “Term Debt”) with Silicon Valley Bank (the “Bank” or “SVB”). On April 10, 2020, the
Company entered into a Deferral Agreement (the “Deferral Agreement”) with SVB, effective April 2, 2020, which amends certain
provisions of the Loan and Security Agreement, between the Company and SVB.
Pursuant
to and among other changes effected by, the Deferral Agreement, as of April 2, 2020, the originally scheduled period of monthly interest-only
payments under the Loan Agreement, and the originally scheduled maturity date of the Loan Agreement, have each been extended by six months.
As a result, pursuant to the Deferral Agreement, the Loan Agreement now provides for monthly interest-only payments through June 30,
2022, followed by monthly payments of principal and interest until June 1, 2024.
The
Term Debt of $8,000 bears an interest rate equal to the greater of (i) one-half of one percent (0.50%) above the Prime Rate and (ii)
five and one-half percent (5.50%). At March 31, 2021, the interest rate was 5.50%. The Term Debt is collateralized by substantially all
assets of the Company. Additionally, the Company has pledged 65% of the outstanding capital stock in the Company’s foreign subsidiary,
Motus GI Medical Technologies, Ltd., to collateralize the Term Debt.
Interest
payments have commenced on January 1, 2020, following each month until the maturity date. Principal payments will commence July 1, 2022
and continuing for 24 consecutive months thereafter. The Company may prepay all, but not less than all, of the outstanding principal
balance of the Term Debt subject to prepayment premium of $240, plus all other sums, if any, that shall have become due and payable.
The Company incurred $50 of debt issuance costs related to the Term
Debt. For the three months ended March 31, 2021 and 2020, $2 and $19 of debt issuance costs was amortized to interest expense, respectively,
using the effective interest method. The effective interest rate on the Term Debt for the three months ended March 31, 2021 was 5.69%.
The Company accounts for its bank indebtedness at amortized cost.
Further,
under the terms of the agreement, the Company must maintain unrestricted cash in accounts with the Bank of at least $10,000. The covenant
was met by the Company as of March 31, 2021. The Company’s cash forecast indicates that it will need to raise additional funds
during 2021, which is part of the current operating plan, in order to meet this liquidity requirement covenant during the coming year.
The
Term Debt includes a subjective acceleration clause. The Company has been continuously evaluating the actual and potential business impacts
related to the COVID-19 pandemic. In response to the pandemic, certain measures were taken by authorities that could result in adverse
financial impacts to the Company, including requiring Company workers to stay home. The Company considered the probability of a further
slow-down of its sales team and the related impact on the potential to trigger the Liquidity Covenant, along with the volatility of the
capital markets, which could cause SVB to exercise the subjective acceleration clause in determining the classification of the Company’s
Term Debt. When considering these factors, the Company determined the likelihood of acceleration could be probable as the pandemic continues,
and therefore the Company has classified the Term Debt in current liabilities.
Future maturities
under the amended terms of the Term Debt are as follows:
Years Ending December 31,
|
|
Amount
|
|
2021 (remaining nine months)
|
|
$
|
-
|
|
2022
|
|
|
2,000
|
|
2023
|
|
|
4,000
|
|
2024
|
|
|
2,000
|
|
Total
|
|
|
8,000
|
|
Less unamortized debt issuance costs
|
|
|
(19
|
)
|
Total Term Debt, less debt issuance costs
|
|
$
|
7,981
|
|
Note
9 – Commitments and Contingencies
Royalties
to the IIA
The Company has received grants from the Government of the State of
Israel through the Israeli National Authority for Technical Innovation (the “IIA”) for the financing of a portion of its research
and development expenditures. The total amount that was received and recorded between the periods ending December 31, 2011 through 2016
was $1,332. No amounts were received during the three months ended March 31, 2021 and 2020. The Company has a contingent obligation to
the IIA for the total amount received along with the accumulated LIBOR interest to date in the amount of $1,410 and $1,407 as of March
31, 2021 and December 31, 2020, respectively. This obligation is repaid in the form of royalties on revenues generated in any fashion
with a rate that is currently at 4% (which may be increased under certain circumstances). The Company may be obligated to pay up to 100%
(which may be increased under certain circumstances) of the U.S. dollar-linked value of the grants received, plus interest at the rate
of 12-month LIBOR.
Repayment of the grants is contingent upon the successful completion
of the Company’s R&D programs and generating sales. The Company has no obligation to repay these grants if the R&D program
fails, is unsuccessful, or aborted, or if no sales are generated. The Company has recorded an immaterial expense for the three months
ended March 31, 2021 and 2020, and an immaterial liability at March 31, 2021 and December 31, 2020.
Royalty
Payment Rights on Royalty Payment Rights Certificates
The
Company filed a Certificate of Designation of Preferences, Rights and Limitations (the “Certificate of Designation”), establishing
the rights and preferences of the holders of the Series A Convertible Preferred Stock, including certain directors and officers of the
Company (the “Royalty Payment Rights”). As set forth in the Certificate of Designation, the Royalty Payment Rights initially
entitled the holders in aggregate, to a royalty in an amount of:
●
|
3%
of net sales subject to a maximum in any calendar year equal to the total dollar amount of Units closed on in the Company’s
2017 private placement (the “2017 Private Placement”); and
|
●
|
5%
of licensing proceeds subject to a maximum in any calendar year equal to the total dollar amount of Units closed on in the 2017 Private
Placement.
|
In
addition, in connection with completion of the 2017 Private Placement, the Company issued the placement agent royalty payment rights
certificates (the “Placement Agent Royalty Payment Rights Certificates”) which grants the placement agent, and its designees,
the right to receive, in the aggregate, 10% of the amount of payments paid to the holders of the Series A Convertible Preferred Stock,
or the holders of the Royalty Payment Rights Certificates (the “Royalty Payment Rights Certificates”), upon the conversion
of the Series A Convertible Preferred Stock into shares of the Company’s common stock. The Placement Agent Royalty Payment Rights
Certificates are on substantially similar terms as the Royalty Payment Rights of the Series A Convertible Preferred Stock.
The
Royalty Payment Rights Certificate obligation and Placement Agent Royalty Payment Rights Certificate obligation (the “Contingent
Royalty Obligation”) was recorded as a liability at fair value as “Contingent royalty obligation” in the consolidated
balance sheets at March 31, 2021 and December 31, 2020 (see Contingent Royalty Obligation below). The fair value at inception was allocated
to the royalty rights and the residual value was allocated to the preferred shares and recorded as equity.
The
Company amended its Certificate of Designation to modify the Royalty Payment Rights when the Company consummated its Initial Public Offering
(“IPO”) on February 16, 2018, at which time the Company converted the Series A Convertible Preferred Stock into shares of
the Company’s common stock and issued the Royalty Payment Rights Certificates. Pursuant to the terms of the Royalty Payment Rights
Certificates, if and when the Company generates sales of the current and potential future versions of the Pure-Vu System, including disposables,
parts, and services, or if the Company receives any proceeds from the licensing of the current and potential future versions of the Pure-Vu
System, then the Company will pay to the holders of the Royalty Payment Rights Certificates a royalty (the “Royalty Amount”)
equal to, in the aggregate, in royalty payments in any calendar year for all products:
●
|
3%
of Net Sales* for commercialized product directly; and
|
●
|
5%
of any Licensing Proceeds** for rights to commercialize the product if sublicensed by the Company to a third-party.
|
|
*
|
Notwithstanding
the foregoing, with respect to Net Sales based Royalty Amounts, (a) no Net Sales based Royalty Amount shall begin to accrue or become
payable until the Company has first generated, in the aggregate, since its inception, Net Sales equal to $20,000 (the “Initial
Net Sales Milestone”), and royalties shall only be computed on, and due with respect to, Net Sales generated in excess of the Initial
Net Sales Milestone, and (b) the total Net Sales based Royalty Amount due and payable in any calendar year shall be subject to a royalty
cap amount per calendar year of $30,000. “Net Sales” is defined in the Royalty Payment Rights Certificates. The Company has
not reached the Initial Net Sales Milestone as of March 31, 2021.
|
|
**
|
Notwithstanding
the foregoing, with respect to Licensing Proceeds based Royalty Amounts, (a) no Licensing Proceeds based Royalty Amount shall begin to
accrue or become payable until the Company has first generated, in the aggregate, since its inception, Licensing Proceeds equal to $3,500
(the “Initial Licensing Proceeds Milestone”), and royalties shall only be computed on, and due with respect to, Licensing
Proceeds in excess of the Initial Licensing Proceeds Milestone and (b) the total Licensing Proceeds based Royalty Amount due and payable
in any calendar year shall be subject to a royalty cap amount per calendar year of $30,000. “Licensing” Proceeds is defined
in the Royalty Payment Rights Certificate. The Company has not reached the Initial Licensing Proceeds Milestone as of March 31, 2021.
|
The Royalty Amount will be payable up to the later of (i) the latest
expiration date of the Company’s patents issued as of December 22, 2016, or (ii) the latest expiration date of any pending patents
as of December 22, 2016 that have since been issued or may be issued in the future (which is currently May 2036). Following the expiration
of all such patents, the holders of the Royalty Payment Rights Certificates and the holders of the Placement Agent Royalty Payment Rights
Certificates will no longer be entitled to any further royalties for any period following the latest to occur of such patent expiration.
On
February 16, 2018, the date of the closing of the IPO, (1) the amendment to the Certificate of Designation became effective, (2) all
outstanding shares of Series A Convertible Preferred Stock were converted into shares of the Company’s common stock pursuant to
a mandatory conversion, and (3) the Royalty Payment Rights Certificates were issued to the former holders of the Series A Convertible
Preferred Stock.
Contingent
Royalty Obligation
The Contingent Royalty Obligation was recorded as a non-current liability
at fair value in the consolidated balance sheets at March 31, 2021 and December 31, 2020 in the amount of $1,697 and $1,617, respectively.
A loss on change in fair value of Contingent Royalty Obligation of $80 and a gain on change in fair value of Contingent Royalty Obligation
of $321 was recorded for the three months ended March 31, 2021 and 2020, respectively.
Other
Commitments and Contingencies
The Company has a severance contingency for severance
payments to its CEO, COO, and CFO in the aggregate of approximately $1,408, in the event that they are terminated without cause or leave
due to good reason, as outlined in their employee agreements. Management estimates that the likelihood of payment is remote; therefore,
no liability was reflected in these consolidated financial statements.
Any
serious disruption with the Company’s operations due to the COVID-19 outbreak could impair the Company’s ability to generate
sufficient cash to repay its debt obligations when they become due and payable, either when they mature, or in the event of a default,
which will cause the Company to breach its covenants and may negatively impact the Company’s business operations, financial condition,
and results of operations. The Company is unable to predict the outcome of these matters and is unable to make a meaningful estimate
of the amount or range of loss, if any, that could result from an unfavorable outcome.
Note
10 – Related Party Transactions
Shared
Space Agreement
In January 2020, the Company entered into a license agreement (the
“Shared Space Agreement”) with Orchestra BioMed, Inc., formerly a greater than 5% holder of the Company’s common stock
and entity in which David Hochman, the Chairman of the Company’s board of directors, serves as the Chairman of the board of directors
and Chief Executive Officer, and Darren Sherman, a member of the Company’s board of directors, serves as a director and as President
and Chief Operating Officer. During the three months ended March 31, 2021 and 2020, the Company recorded license fee of $47 and $35,
respectively, in relation to the Shared Space Agreement. This amount is netted with rent expense in general and administrative expenses.
As of March 31, 2021 and December 31, 2020, the Company recorded a related party receivable of $2 and $0, respectively.
Orchestra
BioMed, Inc. will continue to pay a monthly license fee based on the shared space to the Company until the expiration of the Shared Space
Agreement in September 2024. Aggregate license fees will range from $162 to $198 in any given calendar year during the term of the Shared
Space Agreement.
Note
11 – Stock-based compensation
Issuance
of Common Stock
On January
13, 2021, the non-employee members of the Board of Directors were granted an aggregate of 52,317 shares of Common Stock as compensation,
in lieu of cash compensation, for service as directors during the fourth quarter of 2021, pursuant to the Company’s non-employee
director compensation policy. The Company recorded $56 in accrued expenses as of December 31, 2020 for director services during the three
months ended December 31, 2020. The number of shares granted to the Company’s directors, in lieu of cash compensation, was determined
by the dollar amount of quarterly fees due under the non-employee director compensation policy divided by the fair market value of a
share of Common Stock as of the grant date which was $1.08.
On February 17, 2021, the Company’s Compensation
Committee approved a modification to the non-employee director compensation policy to permit payment of the fees for service as directors
for 2021 in grants of the Company’s common stock, in lieu of cash compensation. Non-employee members of the Board of Directors were
granted an aggregate of 121,237 shares of common stock at a price equal to $1.78 per share of common stock, as compensation, in lieu of
$216 of cash compensation, for service as directors for 2021. As of March 31, 2021, the Company recorded $162 in prepaid board of directors’
compensation. For the three months ended March 31, 2021, the Company recorded $55 of expense in relation to the board of directors’
compensation.
Issuance
of Warrants to Purchase Common Stock
On February 6, 2020, the Company entered into a services
agreement whereby it agreed to issue warrants to purchase 120,000 shares of common stock of the Company. The warrants will vest over a
one-year period on a monthly basis and expire three years from the date of issuance. 60,000 of the granted warrants are exercisable at
a price equal to $2.16 per share of common stock and 60,000 of the remaining warrants granted are exercisable at a price equal to $3.50
per share of common stock. The fair value of the warrants were valued on the date of grant at $112 using the Black-Scholes option-pricing
model with the following parameters: (1) risk-free interest rate of 1.43%; (2) expected life in years of 3.0; (3) expected stock volatility
of 74.82%; and (4) expected dividend yield of 0%. The Company recorded $9 and $19 as general and administrative expense in the accompanying
condensed consolidated statement of comprehensive loss in relation to the consulting agreement for the three months ended March 31, 2021
and 2020, respectively.
On January 20, 2021, the Company entered into a services agreement
with a service provider whereby it agreed to issue warrants to purchase an aggregate 340,020 shares of common stock of the Company with
an exercise price equal to $1.75 per share of common stock, which will vest over a one-year period on a monthly basis and will have an
exercise period of three years from the date of issuance. The fair value of the warrants were valued on the date of grant at $355 using
the Black-Scholes option-pricing model with the following parameters: (1) risk-free interest rate of 0.19%; (2) expected life in years
of 3.0; (3) expected stock volatility of 100.99%; and (4) expected dividend yield of 0%. The Company recorded $59 as general and administrative
expense in the accompanying consolidated statement of comprehensive loss in relation to the consulting agreement for the three months
ended March 31, 2021.
On August 28,
2020 the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) under which it sold and
issued to an institutional investor (the “Holder”), in a registered direct offering, an aggregate of 3,200,000 shares of the
Company’s common stock par value $0.0001 per share (the “Common Stock”), and pre-funded warrants to purchase an aggregate
of 5,533,625 shares of Common Stock (the “Pre-Funded Warrants”) at an exercise price of $0.001 per share. During the
three months ended March 31, 2021, the Pre-Funded Warrants for 5,533,625 shares of common stock
were exercised which resulted in aggregate proceeds of $6.
Pursuant
to the Securities Purchase Agreement, as described above, in a concurrent private placement, the Company also agreed to issue to the
purchaser warrants to purchase up to 8,733,625 shares of Common Stock (the “Private Placement Warrants”). These
warrants were immediately exercisable at an exercise price of $1.30 per share and expire on the fifth anniversary of the date of
issuance. On January 27, 2021, the Company entered into a Warrant Exercise Agreement (the “Exercise
Agreement”) with the Holder, at which time 8,000,000 of the Private Placement Warrants remained outstanding, due to the prior
exercise of 733,625 of the Private Placement Warrants on January 22, 2021. Pursuant to the Exercise Agreement, the Holder agreed to
exercise the remaining outstanding 8,000,000 Private Placement Warrants. In consideration of the exercise, the Company agreed to
sell to the Holder, new warrants (the “New Warrants”) to purchase 0.75 shares of Common Stock for each share of Common
Stock issued upon such exercise of the remaining 8,000,000 Private Placement Warrants pursuant to the Exercise Agreement, or an
aggregate of 6,000,000 New Warrants. In addition, the Holder paid a cash payment of $0.10 for each New Warrant issued to the Holder,
for an aggregate of $600,000 to the Company. The Company received aggregate gross proceeds before expenses of approximately $11.0
million from the exercise of all of the remaining 8,000,000 outstanding Private Placement Warrants held by the Holder and the
payment of the purchase price for the New Warrants. The terms of the New Warrants are substantially similar to those of the Private
Placement Warrants, except that the New Warrants will have an exercise price of $2.12, will be immediately exercisable and will
expire five years from the date of the Exercise Agreement. The aggregate of 6,000,000 New Warrants were issued in four tranches
during the first quarter of 2021 as the 8,000,000 Private Placement Warrants were exercised. The fair values of the 6,000,000 New
Warrants were valued on the date of grant of each tranche and totaled in aggregate of $6,745 using the Black-Scholes option-pricing
model with the following parameters: (1) risk-free interest rates with a range of 0.41%-0.57%.; (2) expected life in years with a
range of 4.95-5.00; (3) expected stock volatilities with a range of 103.00%-103.23%; and (4) expected dividend yields of 0%. The
Company recognized the excess fair value of the New Warrants above the aggregate purchase price as a deemed dividend of $6,145.
However, as the Company is in an accumulated deficit position as of the issuance dates, the resulting deemed dividend was recorded
as a reduction of additional paid-in capital, however the deemed divided was included in net loss attributable to common
shareholders in the calculation of loss per share.
In connection with the Exercise Agreement, the Company
entered into a financial advisory agreement (the “Letter Agreement”) with A.G.P./Alliance Global Partners (“A.G.P.”),
pursuant to which A.G.P. acted as exclusive financial advisor to the Company in this transaction and received a cash fee of $300 upon
full cash exercise of the Private Placement Warrants, which was included in financing fees in the consolidated statement of shareholders’
equity, as of March 31, 2021. As additional compensation, A.G.P. will receive a cash fee equal to $200 upon the cash exercise in full
of the New Warrants.
Warrants
A
summary of the Company’s warrants to purchase common stock activity is as follows:
|
|
Shares
Underlying
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (years)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding and exercisable at December 31, 2020
|
|
|
17,058,051
|
|
|
$
|
1.86
|
|
|
|
5.78
|
|
|
$
|
-
|
|
Granted
|
|
|
6,340,020
|
|
|
|
2.10
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(14,267,250
|
)
|
|
|
1.24
|
|
|
|
|
|
|
|
387
|
|
Outstanding at March 31, 2021
|
|
|
9,130,821
|
|
|
$
|
3.00
|
|
|
|
3.95
|
|
|
$
|
-
|
|
As of March 31, 2021, 8,847,471 warrants were exercisable.
Stock
Options
2016
Equity Incentive Plan
In December 2016, the Company adopted the Motus GI Holdings, Inc. 2016
Equity Incentive Plan (the “2016 Plan”). Pursuant to the 2016 Plan, the Company’s board of directors may grant options
to purchase shares of the Company’s common stock, stock appreciation rights, restricted stock, stock units, performance shares,
performance units, incentive bonus awards, other cash-based awards and other stock-based awards to employees, officers, directors, consultants
and advisors. Pursuant to the terms of an annual evergreen provision in the 2016 Plan, the number of shares of common stock available
for issuance under the 2016 Plan shall increase annually by six percent (6%) of the total number of shares of common stock outstanding
on December 31st of the preceding calendar year; provided, however, that the board of directors may act prior to the first day of any
calendar year to provide that there shall be no increase such calendar year, or that the increase shall be a lesser number of shares of
the Company’s common stock than would otherwise occur. On January 1, 2021, pursuant to an annual evergreen provision, the number
of shares of common stock reserved for future grants was increased by 1,936,669 shares. Under the 2016 Plan, effective as of January 1,
2021, the maximum number of shares of the Company’s common stock authorized for issuance is 7,592,663. As of March 31, 2021, there
were 371,577 shares of common stock available for future grant under the 2016 Plan.
A
summary of the Company’s stock option activity is as follows:
|
|
Shares Underlying Options
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life (years)
|
|
|
Aggregate Intrinsic Value
|
|
Outstanding at December 31, 2020
|
|
|
5,029,119
|
|
|
$
|
3.00
|
|
|
|
7.96
|
|
|
$
|
-
|
|
Granted
|
|
|
1,109,500
|
|
|
|
1.78
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(143,905
|
)
|
|
|
3.73
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2021
|
|
|
5,994,714
|
|
|
$
|
2.76
|
|
|
|
8.26
|
|
|
$
|
-
|
|
The
Company estimated the fair value of each stock option award using the Black-Scholes option pricing model based on the following weighted
average assumptions:
|
|
Three Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Expected term, in years
|
|
|
5.7
|
|
|
|
5.8
|
|
Expected volatility
|
|
|
106.90
|
%
|
|
|
79.59
|
%
|
Risk-free interest rate
|
|
|
0.71
|
%
|
|
|
1.49
|
%
|
Dividend yield
|
|
|
-
|
|
|
|
-
|
|
Grant date fair value
|
|
$
|
1.43
|
|
|
$
|
0.95
|
|
As of March 31, 2021, unamortized share-based
compensation for stock options was $3,006, with a weighted-average recognition period of 1.07 years.
As of March 31, 2021, outstanding options to purchase
2,645,219 shares of common stock were exercisable with a weighted-average exercise price per share of $4.14.
For the three months ended March 31, 2021 and
2020, the Company recorded $669 and $682, respectively, for share based compensation expense related to stock options.
Restricted
Stock Units
On February 17, 2021, the Company’s Compensation
Committee approved the issuance of 160,000 restricted stock unit awards to non-employee directors which vest on the first anniversary
of the date of grant, and 266,000 restricted stock unit awards, to executives which vest over a three-year period on a quarterly basis.
The aggregate fair value of the restricted stock unit awards granted was estimated to be $758 using the market price of the stock on the
date of the grant which is expensed using the straight-line method over a three-year period.
The Company recorded $182 as general and administrative expense in
the accompanying condensed consolidated statement of comprehensive loss for the three months ended March 31, 2021, in relation to the
aggregate 501,265 restricted stock units issued to date to the CEO, executives, and directors.
A
summary of the Company’s restricted stock unit awards activity is as follows:
|
|
Number of Shares
|
|
|
Weighted Average Grant Date Fair Value
|
|
Nonvested at December 31, 2020
|
|
|
337,925
|
|
|
$
|
3.10
|
|
Granted
|
|
|
426,000
|
|
|
|
1.78
|
|
Vested
|
|
|
(65,915
|
)
|
|
|
2.75
|
|
Nonvested at March 31, 2021
|
|
|
698,010
|
|
|
$
|
2.33
|
|
As of March 31, 2021, unamortized share compensation
for restricted stock units was $1,473, with a weighted-average recognition period of 1.12 years.
Share-based Compensation
The following table sets forth total non-cash
share-based compensation for the issuance of options to purchase common stock, warrants to purchase common stock, and restricted
stock unit award by operating statement classification for the three months ended March 31, 2021 and 2020:
|
|
Three Months ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Research and development
|
|
$
|
134
|
|
|
$
|
223
|
|
Sales and marketing
|
|
|
117
|
|
|
|
128
|
|
General and administrative
|
|
|
668
|
|
|
|
453
|
|
Total
|
|
$
|
919
|
|
|
$
|
804
|
|
Note
12 – Subsequent Events
Effective April 1, 2021, the Company entered into a services agreement
with a service provider whereby it agreed to issue 50,000 shares of common stock of the Company.