All share and per share data reflect the impact of the reverse stock split effective March 14, 2022. See accompanying notes.
All share and per share data reflect the impact of the reverse stock split effective March 14, 2022. See accompanying notes.
All share and per share data reflect the impact of the reverse stock split effective March 14, 2022. See accompanying notes.
See accompanying notes.
Notes to Condensed Financial Statements
1. Organization
Organization, Nature of Business
Avinger, Inc. (the “Company”), a Delaware corporation, was incorporated in March 2007. The Company designs, manufactures and sells image-guided, catheter-based systems that are used by physicians to treat patients with peripheral artery disease (“PAD”). Patients with PAD have a build-up of plaque in the arteries that supply blood to areas away from the heart, particularly the pelvis and legs. The Company manufactures and sells a suite of products in the United States (“U.S.”) and in select international markets. The Company has developed its Lumivascular platform, which integrates optical coherence tomography ( “OCT”) visualization with interventional catheters and is the industry’s only system that provides real-time intravascular imaging during the treatment portion of PAD procedures. The Company’s Lumivascular platform consists of a capital component, our Lightbox consoles, as well as a variety of disposable catheter products. The Company’s current catheter products include Ocelot and Tigereye, which are designed to allow physicians to penetrate a total blockage in an artery, known as a chronic total occlusion (“CTO”). The Company also has image-guided atherectomy products, Pantheris and Pantheris SV, which are designed to allow physicians to precisely remove arterial plaque in PAD patients. The Company is in the process of developing next-generation CTO crossing devices to target coronary CTO markets. The Company is located in Redwood City, California.
Liquidity Matters
In the course of its activities, the Company has incurred losses and negative cash flows from operations since its inception. As of March 31, 2022, the Company had an accumulated deficit of $389.9 million. The Company expects to incur losses for the foreseeable future. The Company believes that its cash and cash equivalents of $20.0 million at March 31, 2022 and expected revenues and funds from operations will be sufficient to allow the Company to fund its current operations into the second quarter of 2023. The Company received net proceeds of approximately $6.7 million net proceeds from the January 2022 Series D preferred stock equity financing and $13.0 million from the sale of its common stock in February 2021. The Company may decide to raise additional funds in future equity offerings to meet its operational needs and capital requirements for product development, clinical trials and commercialization or other strategic objectives.
The Company can provide no assurance that it will be successful in raising funds pursuant to additional equity or debt financings or that such funds will be raised at prices that do not create substantial dilution for its existing stockholders. Given the volatility in the Company’s stock price, any financing that the Company may undertake in the next twelve months could cause substantial dilution to its existing stockholders, and there can be no assurance that the Company will be successful in acquiring additional funding at levels sufficient to fund its various endeavors. In addition, the COVID-19 pandemic and responses thereto have resulted in reduced consumer and investor confidence, instability in the credit and financial markets, volatile corporate profits, restrictions on elective medical procedures, and reduced business and consumer spending, which could increase the cost of capital and/or limit the availability of capital to the Company.
If the Company is unable to raise additional capital in sufficient amounts or on terms acceptable to it, the Company may have to significantly reduce its operations or delay, scale back or discontinue the development and sale of one or more of its products. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company’s ultimate success will largely depend on its continued development of innovative medical technologies, its ability to successfully commercialize its products and its ability to raise significant additional funding.
On September 22, 2021, the Company received a letter from Nasdaq’s Listing Qualifications Department notifying it that it was not in compliance with Nasdaq Listing Rule 5550(a)(2), as the minimum bid price for its listed securities was less than $1 for the previous 30 consecutive business days. The Company had a period of 180 calendar days, or until March 21, 2022, to regain compliance with the rule referred to in this paragraph. The Company did not regain compliance with the minimum bid price requirement by March 21, 2022. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company provided written notice to Nasdaq of its intent to cure the deficiency and, on March 22, 2022, the Company received notice that Nasdaq granted the Company an additional 180 calendar days, or until September 19, 2022, to regain compliance.
5
On March 29, 2022, the Company received a letter from Nasdaq notifying the Company that the Staff had determined that the closing bid price of the Company’s common stock had been at $1.00 per share or greater for at least 10 consecutive business days and, accordingly, that the Company had regained compliance with the minimum bid price requirement for continued listing on the Nasdaq Stock Market and that the matter is now closed. While the Company has regained compliance with the minimum bid price requirement, there can be no assurance that the Company will be able to maintain compliance with the minimum bid price requirement in the future.
Public Offerings
Past Offerings
On February 2, 2021, under the shelf registration statement, the Company completed a bought deal offering of 500,000 shares of common stock at an offering price of $28.80 per share. As a result, the Company received aggregate net proceeds of approximately $13.0 million after underwriting discounts, commissions, legal and accounting fees, and other ancillary expenses.
January 2022 Offering
On January 14, 2022, the Company entered into a securities purchase agreement with several institutional investors pursuant to which the Company agreed to sell and issue, in a registered direct offering ( “January 2022 Offering”), an aggregate of 7,600 shares of the Company’s Series D Convertible Preferred Stock, par value of $0.001 per share, at an offering price of $1,000 per share which is convertible into common stock at a conversion price of $8.00 per share. Concurrently, the Company agreed to issue to these investors warrants to purchase up to an aggregate of 807,500 shares of the Company’s common stock (the “Common Warrants”). As a result, the Company received aggregate net proceeds of approximately $6.7 million after underwriting discounts, commissions, legal and accounting fees, and other ancillary expenses.
In connection with the January 2022 Offering and in accordance with the securities purchase agreement, the Company held a special meeting of stockholders on March 11, 2022 to consider a proposal (the “Proposal”) to amend the Company’s Amended and Restated Certificate of Incorporation, as amended (the “Charter”) to effect a reverse split of the outstanding shares of the Company’s common stock at a ratio between 1-for-5 and 1-for-20 (the “Reverse Split Amendment”). The Company’s stockholders approved the Reverse Split Amendment at the special meeting. On March 11, 2022, following receipt of stockholder approval, the Company’s Board of Directors approved a reverse split ratio of 1-for-20 and the Company filed an amendment to the Company’s Charter to effect such reverse stock split, effective as of 5:00 pm Eastern Time on March 14, 2022.
Pursuant to the purchase agreement, the Company filed a certificate of designation (the “Certificate of Designation”) with the Secretary of State of Delaware designating the rights, preferences and limitations of the shares of Series D preferred stock, which became effective on January 14, 2022. The Certificate of Designation provided, in particular, that the Series D preferred stock will have no voting rights, other than the right to vote as a class on certain matters, except that each share of Series D preferred stock had the right to cast 37,500 votes per share of Series D preferred stock on the Proposal (the “Supermajority Voting Rights”); provided, that the votes cast by the holders of the Series D preferred stock must be counted in the same proportion as the aggregate shares of common stock voted on the Proposal. Because the Proposal was approved by our stockholders at the special meeting held on March 11, 2022, the Series D preferred stock no longer has Supermajority Voting Rights.
The holders of the Series D preferred stock are entitled to dividends, on an as-if converted basis, equal to dividends actually paid, if any, on shares of Common Stock. The Series D preferred stock is convertible into shares of common stock at a conversion price of $8.00 per share, as adjusted for the most recent reverse stock split. The conversion price can be adjusted pursuant to the Certificate of Designation for stock dividends and stock splits, subsequent rights offerings, pro rata distributions of dividends or the occurrence of a fundamental transaction (as defined in the Certificate of Designation). The Series D preferred stock can be converted at the option of the holders at any time. In addition, subject to the satisfaction of certain conditions, the Company may cause the holders of the Series D preferred stock to convert their shares of Series D preferred stock; provided, that shares of Series D preferred stock cannot be converted to common stock if the applicable holder would beneficially own in excess of 4.99% (or, upon election by such holder prior to the issuance of any shares of Series D preferred stock, 9.99%) of our outstanding common stock. A holder of Series D preferred stock may, upon notice to the Company, increase or decrease such beneficial ownership limitation, but not in excess of 9.99%.
The 807,500 Common Warrants have an exercise price of $9.60 per share and become exercisable beginning July 14, 2022. The Common Warrants will expire five years following the time they become exercisable, or July 14, 2027. The Company also issued to the Placement Agent or its designees warrants to purchase up to an aggregate of 66,500 shares of common stock (the “Placement Agent Warrants”). The Placement Agent Warrants are subject to the same terms as the Common Warrants, except that the Placement Agent Warrants have an exercise price of $10.00 per share and a term of five years from the commencement of the sales pursuant to the January 2022 Offering, or January 12, 2027.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and pursuant to the rules and regulations of the SEC (“SEC”). The accompanying unaudited condensed interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for a fair statement of the Company’s financial information. The results for the three months ended March 31, 2022 are not necessarily indicative of results to be expected for the year ending December 31, 2022, or for any other interim period or for any future year. The December 31, 2021 condensed balance sheet data has been derived from audited financial statements. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to SEC rules and regulations relating to interim financial statements. These unaudited condensed financial statements and notes should be read in conjunction with the financial statements included in the Company’s Form 10-K for the fiscal year ended December 31, 2021, which was filed with the SEC on March 22, 2022. The Company’s significant accounting policies are more fully described in Note 2 of the Notes to Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
On March 11, 2022, the Company’s Board of Directors approved an amendment to the Company’s amended and restated certificate of incorporation to effect a 1-for-20 reverse stock split of the Company’s issued and outstanding common stock. The reverse stock split became effective on March 14, 2022. The par value of the common stock was not adjusted as a result of the reverse stock split. All common stock, stock options, restricted stock units, and per share amounts in the financial statements have been retroactively adjusted for all periods presented to give effect to the reverse stock split.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements. Management uses significant judgment when making estimates related to its stock-based compensation, accruals related to compensation, the valuation of the common stock warrants, provisions for doubtful accounts receivable and excess and obsolete inventories, clinical trial accruals, and its reserves for sales returns and warranty costs. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may ultimately materially differ from these estimates and assumptions.
Concentration of Credit Risk, and Other Risks and Uncertainties
Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents and accounts receivable to the extent of the amounts recorded on the balance sheets.
The Company’s policy is to invest in cash and cash equivalents, consisting of money market funds. These financial instruments are held in Company accounts at one financial institution. The counterparties to the agreements relating to the Company’s investments consist of financial institutions of high credit standing. The Company provides for uncollectible amounts when specific credit problems arise. Management’s estimates for uncollectible amounts have been adequate, and management believes that all significant credit risks have been identified at March 31, 2022 and December 31, 2021.
The Company’s accounts receivable are due from a variety of healthcare organizations in the United States and select international markets. At March 31, 2022 and December 31, 2021, there was one customer that represented 13% and 21% of accounts receivable, respectively. For the three months ended March 31, 2022, there was one customer that represented 14% of revenues. For the three months ended March 31, 2021, there were no customers that represented 10% or more of revenues. Disruption of sales orders or a deterioration of financial condition of its customers would have a negative impact on the Company’s financial position and results of operations.
Product Warranty Costs
The Company typically offers a one-year warranty on its products commencing upon the transfer of title and risk of loss to the customer. The Company accrues for the estimated cost of product warranties upon invoicing its customers, based on historical results. Warranty costs are reflected in the statement of operations and comprehensive loss as a cost of revenues. The warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from these estimates, revisions to the estimated warranty liability would be required. Periodically the Company assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Warranty provisions and claims are summarized as follows (in thousands):
| | Three Months Ended March 31, | |
| | 2022 | | | 2021 | |
Beginning balance | | $ | 187 | | | $ | 193 | |
Warranty provision | | | 4 | | | | 20 | |
Usage/Release | | | (20 | ) | | | (2 | ) |
Ending balance | | $ | 171 | | | $ | 211 | |
Net Loss per Share Attributable to Common Stockholders
Basic net loss per share applicable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period, without consideration for potential dilutive common shares. Diluted net loss per share applicable to common stockholders is computed by dividing the net loss attributable to common stockholder by the weighted average number of shares of common stock and dilutive potential shares of common stock outstanding during the period. Any common stock shares subject to repurchase are excluded from the calculations as the continued vesting of such shares is contingent upon the holders’ continued service to the Company. As of March 31, 2022 and 2021, there were no shares subject to repurchase. Since the Company was in a loss position for both periods presented, basic net loss per share applicable to common stockholders is the same as diluted net loss per share applicable to common stockholders as the inclusion of all potentially dilutive common shares would have been anti-dilutive.
Net loss per share applicable to common stockholders was determined as follows (in thousands, except per share data):
| | Three Months Ended March 31, | |
| | 2022 | | | 2021 | |
Net loss applicable to common stockholders | | $ | (11,378 | ) | | $ | (6,096 | ) |
Weighted average common stock outstanding, basic and diluted | | | 4,889 | | | | 4,572 | |
Net loss per share attributable to common stockholders, basic and diluted | | $ | (2.33 | ) | | $ | (1.33 | ) |
The following potentially dilutive securities outstanding have been excluded from the computations of diluted weighted average shares outstanding because such securities have an anti-dilutive impact due to losses reported:
| | Three Months Ended March 31, | |
| | 2022 | | | 2021 | |
Common stock warrants equivalents | | | 871,808 | | | | 137,700 | |
Common stock options | | | 331 | | | | 339 | |
Convertible preferred stock | | | 62,002 | | | | 2,617 | |
Unvested restricted stock units | | | 9,866 | | | | 21,043 | |
| | | 944,007 | | | | 161,699 | |
Segment and Geographical Information
The Company operates and manages its business as one reportable and operating segment. The Company’s chief executive officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for purposes of allocating resources and evaluating financial performance. Primarily all of the Company’s long-lived assets, which are comprised of property and equipment, are based in the United States. For both the three months ended March 31, 2022 and 2021, 94% of the Company’s revenues were in the United States, based on the shipping location of the external customer.
As of March 31, 2022 and December 31, 2021, cash equivalents were all categorized as Level 1 and consisted of money market funds. As of March 31, 2022 and December 31, 2021, there were no financial assets and liabilities categorized as Level 2 or 3. There were no transfers between fair value hierarchy levels during the three months ended March 31, 2022.
Recent Accounting Pronouncements
Recently adopted accounting standards
In May 2021, ASU No. 2021-04, Issuer’s Accounting for Certain Modifications of Exchanges of Freestanding Equity-Classified Written Call Options was issued to clarify the accounting for modifications or exchanges of freestanding equity-classified written call options, such was warrants, that remain equity classified after modification or exchange. The standard was adopted by the Company on January 1, 2022. This new standard did not have a material impact on the Company’s financial statements.
Recent accounting standards not yet adopted
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which among other things, simplifies the accounting models for the allocation of proceeds attributable to the issuance of a convertible debt instrument. As a result, after adopting the ASU’s guidance, entities will not separately present in equity an embedded conversion feature in such debt. Instead, they will account for a convertible debt instrument wholly as debt, and for convertible preferred stock wholly as preferred stock (i.e., as a single unit of account), unless (i) a convertible instrument contains features that require bifurcation as a derivative under ASC 815 or (ii) a convertible debt instrument was issued at a substantial premium. The standard becomes effective for the Company, as a smaller reporting company as defined by the SEC, in the first quarter of 2024 and early adoption is permitted. This new standard is not expected to have a material impact on the Company’s financial statements.
3. Inventories
Inventories consisted of the following (in thousands):
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
Raw materials |
|
$ |
2,530 |
|
|
$ |
2,503 |
|
Work-in-process |
|
|
989 |
|
|
|
1 |
|
Finished products |
|
|
1,831 |
|
|
|
2,097 |
|
Total inventories |
|
$ |
5,350 |
|
|
$ |
4,601 |
|
4. Borrowings
CRG
On September 22, 2015, the Company entered into a Term Loan Agreement, as amended (the “Loan Agreement”) with CRG under which, subject to certain conditions, the Company had the right to borrow up to $50 million in principal amount from CRG on or before March 29, 2017. The Company borrowed $30 million on September 22, 2015. The Company borrowed an additional $10 million on June 15, 2016 under the Loan Agreement.
On February 14, 2018, the Company and CRG further amended the Loan Agreement concurrent with the conversion of $38 million of the principal amount of the senior secured term loan (plus $3.8 million in back-end fees and prepayment premium applicable thereto) into a newly authorized Series A convertible preferred stock (see below).
We have entered into several amendments to the Term Loan Agreement (the “Amendments”) with CRG since September 2015, the most recent of which, was entered into on January 22, 2021. The Amendments, among other things: (1) extended the interest-only period through December 31, 2023; (2) extended the period during which we may elect to pay a portion of interest in payment-in-kind, or PIK, interest payments through December 31, 2023 so long as no default has occurred and is continuing; (3) permitted us to make our entire interest payments in PIK interest payments for through December 31, 2023 so long as no default has occurred and is continuing; (4) extended the maturity date to December 31, 2025; (5) reduced the minimum liquidity requirement to $3.5 million at all times; (6) eliminated the minimum revenue covenant for 2018, 2019 and 2020; (7) reduced the minimum revenue covenant to $8 million for 2021, $10 million for 2022; (8) added minimum revenue covenants for of $12 million for 2023, $14.5 million for 2024 and $17 million for 2025; (9) changed the date under the on-going stand-alone representation regarding no “Material Adverse Change” to December 31, 2020; (10) amended the on-going stand-alone representation and stand-alone event of default regarding Material Adverse Change such that any adverse change in or effect upon the revenue of us and our subsidiaries due to the outbreak of COVID-19 will not constitute a Material Adverse Change; and (11) provided CRG with board observer rights.
Under the amended Loan Agreement, no cash payments for either principal or interest are due until the first quarter of 2024. The interest will be accrued and included in the debt balance based (to the extent not paid) on principal amounts outstanding at the beginning of the quarter at an interest rate of 12.5%. Beginning in the first quarter of 2024, the Company will be required to make quarterly principal payments (in addition to the interest) of $1.9 million with total principal payments of $7.5 million in 2024, and $7.5 million in 2025. The maturity date of the Loan is December 31, 2025.
The Company may voluntarily prepay the borrowings in full, with a prepayment premium beginning at 5.0% and declining by 1.0% annually thereafter, with no premium being payable if prepayment occurs after seven and half years of the loan. Each tranche of borrowing required the payment, on the borrowing date, of a financing fee equal to 1.5% of the borrowed loan principal, which is recorded as a discount to the debt. In addition, a facility fee equal to 15.0% of the amounts borrowed plus any payment-in-kind (“PIK”) is to be payable at the end of the term or when the borrowings are repaid in full. A long-term liability is being accreted using the effective interest method for the facility fee over the term of the Loan Agreement with a corresponding discount to the debt. The borrowings are collateralized by a security interest in substantially all of the Company’s assets.
The Loan Agreement requires that the Company adheres to certain affirmative and negative covenants, including financial reporting requirements, certain minimum financial covenants for pre-specified liquidity and revenue requirements and a prohibition against the incurrence of indebtedness, or creation of additional liens, other than as specifically permitted by the terms of the Loan Agreement. In particular, the covenants of the amended Loan Agreement included a covenant that the Company maintain a minimum of $3.5 million of cash and certain cash equivalents, and the Company has to achieve certain minimum revenues. If the Company fails to meet the applicable minimum revenue target in any calendar year, the Loan Agreement provides the Company with a cure right if it prepays a portion of the outstanding principal equal to 2.0 times the revenue shortfall. In addition, the Loan Agreement prohibits the payment of cash dividends on the Company’s capital stock and also places restrictions on mergers, sales of assets, investments, incurrence of liens, incurrence of indebtedness and transactions with affiliates. CRG may accelerate the payment terms of the Loan Agreement upon the occurrence of certain events of default set forth therein, which include the failure of the Company to make timely payments of amounts due under the Loan Agreement, the failure of the Company to adhere to the covenants set forth in the Loan Agreement, the insolvency of the Company or upon the occurrence of a material adverse change.
As of March 31, 2022, the Company was in compliance with all applicable covenants under the Loan Agreement.
As of March 31, 2022, principal, final facility fee and PIK payments under the Loan Agreement, which incorporates all aforementioned amendments, were as follows (in thousands):
Year Ending December 31, |
|
|
|
|
2022 (remaining nine months of the year) |
|
$ |
— |
|
2023 |
|
|
— |
|
2024 |
|
|
9,045 |
|
2025 |
|
|
10,339 |
|
Total |
|
|
19,384 |
|
Less: Amount of PIK additions and final facility fee to be incurred subsequent to March 31, 2022 |
|
|
(6,345 |
) |
Less: Amount representing debt financing costs |
|
|
(312 |
) |
Borrowings, long-term portion, as of March 31, 2022 |
|
$ |
12,727 |
|
In connection with drawdowns under the Loan Agreement, the Company recorded aggregate debt discounts of $1.3 million as contra-debt. The debt discounts are being amortized as non-cash interest expense using the effective interest method over the term of the Loan Agreement. As of March 31, 2022 and December 31, 2021, the balance of the aggregate debt discount was approximately $312,000 and $333,000, respectively. The Company’s interest expense associated with the amortization of debt discount was approximately $21,000 and $38,000 during the three months ended March 31, 2022 and 2021, respectively. For the three months ended March 31, 2022 and 2021, the Company incurred total interest expense of approximately $440,000 and $393,000, respectively.
As of March 31, 2022, all of the CRG borrowings and associated aggregate debt discount were classified as non-current.
Paycheck Protection Program
On April 23, 2020, the Company received loan proceeds of $2.3 million (the “PPP Loan”) pursuant to the PPP under the CARES Act. The PPP Loan, which was in the form of a promissory note, dated April 20, 2020 (the “Promissory Note”), between the Company and Silicon Valley Bank (“SVB”) as the lender, was set to mature on April 20, 2022 and bore interest at a fixed rate of 1% per annum, payable monthly commencing six months from the date of the Loan. The Company may voluntarily prepay the borrowings in full with no associated penalty or premium.
The PPP Loan was administered by the U.S. Small Business Administration (the “SBA”). The SBA was given the authority under the PPP to forgive loans if all employees were kept on the payroll for a required period and the loan proceeds were used for payroll, rent and utilities. The Company applied for debt forgiveness in December 2020.
On April 17, 2021, the Company was notified by SVB that its PPP Loan had been fully forgiven by the SBA and that there was no remaining balance on the PPP Loan. The Company recorded the forgiveness as other income in April 2021 in the amount of $2.4 million, of which approximately $23,000 was accrued interest. For the quarter ended March 31, 2021, the Company incurred interest expense of approximately $6,000 related to the PPP Loan.
5. Leases
The Company’s operating lease obligations primarily consist of leased office, laboratory, and manufacturing space under a non-cancelable operating lease. In addition to the minimum future lease commitments presented below, the lease requires the Company to pay property taxes, insurance, maintenance, and repair costs. The lease includes a rent holiday concession and escalation clauses for increased rent over the lease term. Rent expense is recognized using the straight-line method over the term of the lease. The Company records deferred rent calculated as the difference between rent expense and the cash rental payments.
The lease will expire on November 30, 2024. The Company is obligated to pay approximately $5.8 million in base rent payments through November 2024, beginning on December 1, 2019. The weighted average remaining lease term as of March 31, 2022 is 2.7 years.
The operating lease was included on the balance sheet at the present value of the future base payments discounted at a 6.5% discount rate using the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term and amount equal to the lease payments in a similar economic environment as the lease does provide an implicit rate.
The Company’s operating lease expense, excluding variable maintenance fees and other expenses on a monthly basis, was approximately $105,000. Rent expense for both the three months ended March 31, 2022 and 2021 was approximately $314,000. The Company’s variable expenses for the three months ended March 31, 2022 and 2021 were approximately $66,000 and $59,000, respectively. Operating right-of-use asset amortization for the three months ended March 31, 2022 and 2021 was approximately $264,000 and $249,000, respectively. Due to payments being made in excess of operating lease expense recognized, the Company recorded approximately $150,000 and $158,000 as prepaid rent included in other assets on the condensed balance sheet as of March 31, 2022 and December 31, 2021, respectively.
The following table presents the future operating lease payments and leasehold liability included on the balance sheet related to the Company’s operating lease as of March 31, 2022 (in thousands):
Year Ending December 31, | | | | |
2022 (remaining nine months of the year) | | $ | 873 | |
2023 | | | 1,203 | |
2024 | | | 1,138 | |
Total | | | 3,214 | |
Less: Imputed interest | | | (274 | ) |
Leasehold liability as of March 31, 2022 | | $ | 2,940 | |
The following table shows ROU assets and lease liabilities, and the associated financial statement line items, as of March 31, 2022 and December 31, 2021 (in thousands):
Lease-Related Assets and Liabilities | | Financial Statement Line Items | | March 31, 2022 | | | December 31, 2021 | |
Right of use assets: | | | | | | | | | | |
Operating lease | | Right of use asset | | $ | 2,940 | | | $ | 3,179 | |
Total right of use assets | | $ | 2,940 | | | $ | 3,179 | |
Lease liabilities: | | | | | | | | | | |
Operating lease | | Leasehold liability, current portion | | $ | 1,011 | | | $ | 985 | |
| | Leasehold liability, long-term portion | | | 1,929 | | | | 2,194 | |
Total lease liabilities | | $ | 2,940 | | | $ | 3,179 | |
6. Commitments and Contingencies
Purchase Obligations
Purchase obligations consist of agreements to purchase goods and services entered into in the ordinary course of business. The Company had non-cancelable commitments to suppliers for purchases totaling approximately $1.2 million as of March 31, 2022. The majority of this amount is related to commitments to purchase inventory components for our various product lines.
Legal Proceedings
The Company is not currently involved in any pending legal proceedings that the Company believes could have a material adverse effect on our financial condition, results of operations or cash flows. From time to time, the Company may be involved in legal proceedings or investigations, which could harm our reputation, business and financial condition and divert the attention of our management from the operation of our business.
7. Stockholders’ Equity
Convertible Preferred Stock
As of March 31, 2022 and December 31, 2021, the Company’s certificate of incorporation, as amended and restated, authorizes the Company to issue up to 5,000,000 shares of convertible preferred stock with $0.001 par value per share. As of March 31, 2022 and December 31, 2021, 58,851 and 56,451 shares were issued and outstanding, respectively.
Series A Convertible Preferred Stock
The holders of Series A preferred stock are entitled to receive annual accruing dividends at a rate of 8%, payable in additional shares of Series A preferred stock or cash, at the Company’s option. The shares of Series A preferred stock have a liquidation preference of $1,000 per share, no voting rights and rank senior to all other classes and series of the Company’s equity in terms of repayment and certain other rights. During the year ended December 31, 2021, 4,175 additional shares were issued to CRG as payment of dividends. As of March 31, 2022 and December 31, 2021, 56,366 shares of Series A preferred stock were outstanding, which are currently convertible into shares of the Company’s common stock at $400 per share. The Series A preferred stock accrued additional dividends of approximately $1.1 million and $1.0 million during the quarters ended March 31, 2022 and 2021, respectively.
Series B Convertible Preferred Stock
The Series B preferred stock has a liquidation preference of $0.001 per share, full ratchet price based anti-dilution protection, has no voting rights and is subject to certain ownership limitations. The Series B preferred stock is immediately convertible at the option of the holder, has no stated maturity, and does not pay regularly stated dividends or interest. During the year ended December 31, 2021, 93 of these shares converted into 18,600 shares of common stock. As of March 31, 2022 and December 31, 2021, 85 shares of Series B preferred stock remained outstanding, which are currently convertible into shares of the Company’s common stock at $5 per share.
Series D Convertible Preferred Stock
On January 14, 2022, the Company entered into a security purchase agreement with several institutional investors, pursuant to which the Company agreed to sell and issue, in a registered direct offering ( “January 2022 Offering”), an aggregate of 7,600 shares of the Company’s Series D convertible preferred stock, par value $0.001 per share at an offering price of $1,000 per share. Concurrently, the Company agreed to issue to these investors warrants to purchase up to an aggregate of 807,500 shares of the Company’s common stock (the “Common Warrants”). The shares of Series D preferred stock has a stated value of $1,000 per share and are convertible into an aggregate of 950,000 shares of common stock at a conversion price of $8.00 per share. During the three months ended March 31, 2022, 5,200 of these shares converted into 650,000 shares of common stock. As of March 31, 2022, 2,400 shares of Series D preferred stock were outstanding, which are currently convertible into shares of the Company’s common stock at $8 per share.
On April 1, 2022 and on May 6, 2022, a holder of Series D preferred stock opted to convert some of their Series D preferred stock into common stock. A total of 600 and 1,200 shares of Series D preferred stock were converted resulting in the issuance of an aggregate of 75,000 and 150,000 shares of common stock, respectively. After giving effect to these conversion, there remains 600 shares of Series D preferred stock, which if converted, would result in the issuance of 75,000 shares of common stock.
The Series D preferred stock can be converted at the option of the holders at any time. In addition, subject to the satisfaction of certain conditions, the Company may cause the holders of the Series D preferred stock to convert their shares of Series D preferred stock; provided, that shares of Series D preferred stock cannot be converted to common stock if the applicable holder would beneficially own in excess of 4.99% (or, upon election by such holder prior to the issuance of any shares of Series D preferred stock, 9.99%) of our outstanding common stock. A holder of Series D preferred stock may, upon notice to us, increase or decrease such beneficial ownership limitation, but not in excess of 9.99%. The Series D preferred stock have a liquidation preference equal to $0.01 per share of Series D preferred stock.
The Series D preferred stock does not have any mandatory redemption provisions, contingently redeemable redemption provisions, preferential dividend rights, or voting rights, apart from mirrored, non-discretionary voting rights with common stock as a single class, equal to 37,500 votes per share of common stock underlying the preferred stock on a one-time proposal (the “Proposal”) to amend to the Company’s Amended and Restated Certificate of Incorporation, as amended (the “Charter”) to effect a reverse split of the outstanding shares of the Company’s common stock at a ratio between 1-for-5 and 1-for-20 (the “Reverse Split Amendment”) which was approved by the Company’s stockholders at a special stockholder meeting on March 11, 2022.
The Company evaluated the classification of the Series D preferred stock and determined equity classification was appropriate due to no mandatory or contingently redeemable redemption features. The warrants issued to the investors were considered freestanding equity classified instruments. The Company first allocated gross proceeds from the registered direct offering between the preferred stock and the warrants issued to investors using a relative fair value approach, resulting in an initial allocation to each instrument of $4,009 and $3,591, respectively. On the issuance date, the Company estimated the fair value of the warrants issued to investors (the “Common Warrants”) and to placement agent designees using a Black-Scholes option pricing model using the following assumptions: (i) contractual term of 5.5 years, (ii) expected volatility rate of 136.61%, (iii) risk-free interest rate of 1.51%, (iv) expected dividend rate of 0%, and (v) closing price of the Company’s common stock of the day immediately preceding the registered direct offering. The fair value of preferred stock was estimated based upon equivalent common shares that preferred stock could have been converted into at the closing price of the day immediately preceding the purchase date.
The embedded conversion feature was evaluated and bifurcation from the preferred stock equity host was not considered necessary. The issuance of the Series D convertible preferred stock generated a beneficial conversion feature (“BCF”) which arose as the equity security was issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective conversion price that is less than the market price of the underlying stock at the commitment date. The Company recorded the BCF as a discount to the preferred stock resulting in the amount of $5,111 based on the intrinsic value of the beneficial conversion. As the preferred stock was immediately convertible into common stock subject to the consummation of the reverse stock split on March 14, 2022, a deemed dividend related to the discount associated with the beneficial conversion feature was recorded on that date. This one-time, non-cash charge impacted net loss applicable to common stockholders and net loss per share attributable to common stockholders for the three months ended March 31, 2022.
Common Stock
As of March 31, 2022, the Company’s certificate of incorporation, as amended and restated, authorizes the Company to issue up to 100,000,000 shares of common stock with $0.001 par value per share, of which 5,454,849 shares were issued and outstanding.
Common Stock Warrants
As of March 31, 2022, the Company had outstanding warrants to purchase common stock as follows:
| | Total Outstanding and Exercisable | | | Underlying Shares of Common Stock | | | Exercise Price per Share | | Expiration Date |
Series 1 Warrants issued in the February 2018 Series B financing | | | 8,979,000 | | | | 44,895 | | | $ | 400.00 | | February 2025 |
Series 2 Warrants issued in the February 2018 Series B financing | | | 8,709,500 | | | | 43,548 | | | $ | 400.00 | | February 2025 |
Warrants issued in the November 2018 financing | | | 8,768,395 | | | | 43,842 | | | $ | 80.00 | | November 2023 |
Total as of December 31, 2021 | | | 26,456,895 | | | | 132,265 | | | | | | |
Placement agent warrants issued in the January 2022 financing | | | 1,330,000 | | | | 66,500 | | | $ | 10.00 | | January 2027 |
Warrants issued in the January 2022 financing | | | 16,150,000 | | | | 807,500 | | | $ | 9.60 | | July 2027 |
Total as of March 31, 2022 | | | 43,936,895 | | | | 1,006,285 | | | | | | |
Pursuant to the purchase agreement entered into on January 14, 2022, the Company issued the Common Warrants to purchase up to an aggregate of 807,500 shares of the Company’s common stock at an exercise price of $9.60 per share and which become exercisable beginning July 14, 2022. The Common Warrants will expire five years following the time they become exercisable, or July 14, 2027. The exercise price and the number of shares of common stock issuable upon exercise of each common warrant is subject to appropriate adjustments in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the common stock. In addition, in certain circumstances, upon a fundamental transaction, a holder of Common Warrants will be entitled to receive, upon exercise, the kind and amount of securities, cash or other property that such holder would have received had they exercised the Common Warrants immediately prior to the fundamental transaction.
The Common Warrants can be exercised at the option of the holders at any time after they become exercisable provided that shares of the Common Warrants cannot be exercised into common stock if the applicable holder would beneficially own in excess of 4.99% (or, upon election by such holder prior to the issuance of any shares of Common Warrants, 9.99%) of the Company’s outstanding common stock immediately after giving effect to the exercise. A holder of the Common Warrants may, upon notice to the Company, increase or decrease such beneficial ownership limitation, but not in excess of 9.99%.
The Company also issued to the placement agent of the January 2022 Offering warrants to purchase up to an aggregate of 66,500 shares of common stock (the “Placement Agent Warrants”). The Placement Agent Warrants are subject to the same terms as the Common Warrants, except that the Placement Agent Warrants have an exercise price of $10.00 per share and a term of five years from the commencement of the sales pursuant to the January 2022 Offering, or January 12, 2027.
As of March 31, 2022 and December 31, 2021, warrants to purchase an aggregate of 1,006,285 and 132,265 shares of common stock were outstanding, respectively.
Stock Plans
In January 2015, the Board of Directors adopted and the Company’s stockholders approved the 2015 Equity Incentive Plan (“2015 Plan”). As of March 31, 2022, 8,564 shares were available for grant under the 2015 Plan.
The Company’s RSUs generally vest annually over three years in equal increments. The Company measures the fair value of RSUs using the closing stock price of a share of the Company’s common stock on the grant date and is recognized as expense on a straight-line basis over the vesting period of the award. A summary of all RSU activity is presented below:
| | Number of Shares | | | Weighted Average Grant Date Fair Value | | | Weighted Average Remaining Contractual Term | |
Awards outstanding at December 31, 2021 | | | 10,060 | | | $ | 24.39 | | | | 0.72 | |
Awarded | | | — | | | $ | — | | | | — | |
Released | | | (417 | ) | | $ | 11.64 | | | | — | |
Forfeited | | | (84 | ) | | $ | 23.00 | | | | — | |
Awards outstanding at March 31, 2022 | | | 9,559 | | | $ | 24.95 | | | | 0.48 | |
As of March 31, 2022, there was approximately $0.1 million of remaining unamortized stock-based compensation expense associated with RSUs, which will be expensed over a weighted average remaining service period of approximately 0.5 years. The outstanding non-vested and expected to vest RSUs at March 31, 2022 have an aggregate fair value of less than $0.1 million. The Company used the closing market price of $3.63 per share at March 31, 2022, to determine the aggregate fair value for the RSUs outstanding at that date. For the three months ended March 31, 2022 and 2021, the fair value of RSUs vested was approximately $3,000 and $87,000 respectively. For the three months ended March 31, 2022 and 2021, stock-based compensation expense recognized associated with the vesting of RSUs was $52,000 and $0.4 million, respectively.
2018 Officer and Director Share Purchase Plan
On August 22, 2018, the Board of Directors of the Company approved the adoption of an Officer and Director Share Purchase Plan (“ODPP”), which allows executive officers and directors to purchase shares of our common stock at fair market value in lieu of salary or, in the case of directors, director fees. Eligible individuals may voluntarily participate in the ODPP by authorizing payroll deductions or, in the case of directors, deductions from director fees for the purpose of purchasing common stock. The Board of Directors authorized 1,000 shares to be made available for purchase by officers and directors under the ODPP. Effective on August 28, 2019 and March 10, 2020, the Board of Directors approved an additional 2,000 and 6,250 shares, respectively, to be made available under the ODPP. There was no common stock issued under the ODPP during either the three months ended March 31, 2022 or 2021. As of March 31, 2022, there were 4,609 shares reserved for issuance under the ODPP.
8. Stock-Based Compensation
Total non-cash stock-based compensation expense relating to the Company’s stock options and RSUs recognized during the three months ended March 31, 2022 and 2021, is as follows (in thousands):
|
|
Three Months Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
Cost of revenues |
|
$ |
7 |
|
|
$ |
34 |
|
Research and development expenses |
|
|
13 |
|
|
|
111 |
|
Selling, general and administrative expenses |
|
|
32 |
|
|
|
273 |
|
|
|
$ |
52 |
|
|
$ |
418 |
|
9. Subsequent Events
Departure of Officer
On April 29, 2022, Mark Weinswig, the Chief Financial Officer of the Company, provided notice to the Company of his resignation as Chief Financial Officer of the Company effective end-of-day May 12, 2022. Concurrent with his departure, the Company expects to adjust certain accrued compensation in the amount of $0.1 million that will no longer have to be paid with respect to Mr. Weinswig.