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 upper gastrointestinal
(“GI”) endoscopy procedures. The Pure-Vu System has received a CE Mark in the EU for use in 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 received 510(k) clearance in February 2022 from the FDA for its Pure-Vu EVS System and
recently commenced commercialization of this product. The Company does not expect to generate significant revenue from product sales
until the COVID-19 pandemic has fully subsided and it further expands its commercialization efforts, 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 2021 10-K filed with the SEC on March 29, 2022. 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, 2021 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 2022.
The
Company has financed its operations primarily through sales of equity-related securities. In March 2021, we entered into an Equity
Distribution Agreement (the “Equity Distribution Agreement”) with Oppenheimer & Co. Inc. (“Oppenheimer”),
under which we may offer and sell from time to time common shares having an aggregate offering price of up to $25.0 million. During the
three months ended March 31, 2022, we sold approximately 6.0 million shares of our common stock under this agreement, resulting in net
cash proceeds of $3.0 million, after deducting issuance costs of $0.1 million.
Net cash used in operating activities
for the three months ended March 31, 2022 was $5,246. For the three months ended March 31, 2022 the Company
incurred a net loss of $4,811.
As of March 31, 2022, the Company had cash and cash
equivalents of $20,338.
Such
conditions 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, 2022 are consistent with those discussed in Note 3 to the consolidated financial statements in the Company’s 2021 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, 2022.
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.
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.
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, 2022 and December 31, 2021, the
Company had a full valuation allowance against its deferred tax assets.
For
the three months ended March 31, 2022 and 2021, 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, 2022 and 2021, due to a full valuation allowance to offset any deferred
tax asset related to net operating loss carry forwards attributable to the losses.
New
Accounting Pronouncements- Recently Adopted
In May 2021, the FASB issued ASU 2021-04, Earnings
Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718),
and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain
Modification or Exchanges of Freestanding Equity-Classified Written Call Options, which clarifies and reduces diversity in an
issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options due to a lack of
explicit guidance in the FASB Codification. ASU 2021-04 provides guidance on modifications or exchanges of freestanding
equity-classified written call options that are not within the scope of another Topic. Entities should treat a modification of the
terms or conditions, or an exchange of a freestanding equity-classified written call option that remains equity-classified after
modification or exchange, as an exchange of the original instrument for a new instrument. ASU 2021-04 provides further guidance on
measuring the effect of such modifications or exchanges, and also provides guidance on the recognition of such modifications or
exchanges on the basis of the substance of the transaction, in the same manner as if cash had been paid as consideration. ASU
2021-04 is effective for all entities for fiscal years beginning after December 15, 2021. The Company adopted this ASU
on January 1, 2022, prospectively to modifications that occurred after the date of initial application. The adoption of this
ASU did not result in a material impact to the condensed consolidated financial statements and disclosures.
Accounting
Pronouncements- 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. This guidance simplifies the accounting for convertible instruments primarily by eliminating the
existing cash conversion and beneficial conversion models within Subtopic 470-20, which will result in fewer embedded conversion options
being accounted for separately from the debt host. The guidance also amends and simplifies the calculation of earnings per share relating
to convertible instruments. This guidance is effective for annual periods beginning after December 15, 2021, including interim periods
within that reporting period, excluding smaller reporting companies. For all other entities, the amendments are effective for fiscal
years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier
than fiscal years beginning after December 15, 2020, including interim periods within that reporting period, using either a full or modified
retrospective approach. Since the Company is a smaller reporting company (“SRC”), implementation is not needed until after
December 15, 2023. We are currently evaluating the impact of the provisions of this guidance on our consolidated financial statements.
In
September 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 smaller reporting companies 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
Liabilities
measured and recorded at fair value on a recurring basis consisted of the following at March 31, 2022 and December 31, 2021:
Schedule of Fair Value of Financial Assets and Liabilities
| |
March 31, 2022 | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Fair Value | |
| |
| | |
| | |
| | |
| |
Liabilities | |
| | |
| | |
| | |
| |
Contingent royalty obligation | |
$ | - | | |
$ | - | | |
$ | 1,731 | | |
$ | 1,731 | |
| |
December 31, 2021 | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Fair Value | |
Liabilities | |
| | | |
| | | |
| | | |
| | |
Contingent royalty obligation | |
$ | - | | |
$ | - | | |
$ | 1,760 | | |
$ | 1,760 | |
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.
In
estimating the fair value of the Company’s contingent royalty obligation (see Note 9), the Company used the discounted cash flow
method as of March 31, 2022 and December 31, 2021. Based on the fair value hierarchy, the Company classified contingent royalty obligation
within Level 3 because valuation inputs are based on projected revenues discounted to a present value.
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, 2022 was as follows:
Schedule of Estimated Fair Value of Level 3 Contingent Royalty Obligation
| |
Fair Value Measurements of Contingent Royalty Obligation (Level 3) | |
Balance at December 31, 2021 | |
$ | 1,760 | |
Change in estimated fair value of contingent royalty obligation | |
| (29 | ) |
Balance at March 31, 2022 | |
$ | 1,731 | |
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 (23% and 21% as of March 31, 2022 and December 31, 2021, respectively), and 5) rate of
royalty payment (3% as of March 31, 2022 and December 31, 2021).
In
accordance with ASC-820-10-50-2(g), the Company performed a sensitivity analysis of the liability, which was classified as a Level 3
financial instrument. The
Company recalculated the fair value of the liability by applying a +/- 2% change to the input variable in the discounted cash flow model;
the discount rate. A 2% decrease in the discount rate would increase the liability by $138 and a 2% increase in the discount rate
would decrease the liability by $125.
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. For the three months ended March 31, 2022 and 2021, an inventory impairment of
$159 and
$0,
respectively, was recorded.
Inventory
at March 31, 2022 and December 31, 2021 consisted of the following:
Schedule of Inventory
| |
March 31, 2022 | | |
December 31, 2021 | |
Raw materials | |
$ | 359 | | |
$ | 569 | |
Work-in-process | |
| 127 | | |
| - | |
Finished goods | |
| 307 | | |
| 292 | |
Inventory reserve | |
| (93 | ) | |
| (365 | ) |
Inventory, net | |
$ | 700 | | |
$ | 496 | |
Note
6 – Fixed assets, net
Fixed
assets, summarized by major category, consist of the following for the years ended:
Schedule of Fixed Assets Net
| |
March 31, 2022 | | |
December 31, 2021 | |
Office equipment | |
$ | 171 | | |
$ | 171 | |
Computers and software | |
| 306 | | |
| 305 | |
Machinery | |
| 817 | | |
| 807 | |
Lab and medical equipment | |
| 1,393 | | |
| 1,342 | |
Leasehold improvements | |
| 193 | | |
| 193 | |
Total | |
| 2,880 | | |
| 2,818 | |
Less: accumulated depreciation and amortization | |
| (1,514 | ) | |
| (1,390 | ) |
Fixed assets, net | |
$ | 1,366 | | |
$ | 1,428 | |
Depreciation
and amortization expense for the three months ended March 31, 2022 and 2021 was $124
and $98,
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 2024.
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:
Schedule of Lease Cost and Supplemental Balance Sheet Information
| |
Three Months Ended March 31, | | |
Three Months Ended March 31, | |
| |
2022 | | |
2021 | |
Lease Cost | |
| | | |
| | |
Operating lease cost, net of related party license fee | |
$ | 39 | | |
$ | 32 | |
Variable lease cost | |
| 30 | | |
| 30 | |
Total lease cost | |
$ | 69 | | |
$ | 62 | |
| |
As of March 31, | | |
As of December 31, | |
| |
2022 | | |
2021 | |
Assets | |
| | | |
| | |
Operating lease, right-of-use- asset | |
$ | 643 | | |
$ | 687 | |
Liabilities | |
| | | |
| | |
Current | |
| | | |
| | |
Operating lease liabilities | |
$ | 296 | | |
$ | 307 | |
Non-current | |
| | | |
| | |
Operating lease liabilities, net of current portion | |
| 346 | | |
| 385 | |
Total lease liabilities | |
$ | 642 | | |
$ | 692 | |
| |
| | | |
| | |
Other information: | |
| | | |
| | |
Weighted average remaining lease term - operating leases | |
| 2.28
years | | |
| 2.49
years | |
Weighted-average discount rate - operating leases | |
| 7.40 | % | |
| 7.66 | % |
The
Company records operating lease payments to lease expense using the straight-line method. The Company’s lease expense was $69
and $62
for the three months ended March 31, 2022
and 2021, respectively, included in general and administrative expenses which is net of the related party license fee of $47
for each of the three months ended
March 31, 2022 and 2021 (see Note 10).
Note
8 – Convertible Note and Long-Term Debt
On
July 16, 2021 (the “Effective Date”), the Company entered into a loan facility (the “Kreos Loan Agreement”) with
Kreos Capital VI (Expert Fund) LP (the “Lender”). Under the Kreos Loan Agreement, the Lender will provide the Company with
access to term loans in an aggregate principal amount of up to $12,000 (the “Loan”) in three tranches as follows: (a) on
the Effective Date, a loan in the aggregate principal amount of $4,000 (the “Convertible Note”, or “Tranche A”),
(b) on the Effective Date, a loan in the aggregate principal amount of $5,000 (“Tranche B”), and (c) available until December
31, 2021, a loan in the aggregate principal amount of $3,000 (“Tranche C”, together with Tranche B, the “Long-term
Debt”). The Kreos Loan Agreement contains customary representations and warranties, indemnification provisions in favor of the
Lender, events of default and affirmative and negative covenants, including, among others, covenants that limit or restrict the Company’s
ability to, among other things, incur additional indebtedness, merge or consolidate, make acquisitions, pay dividends or other distributions
or repurchase equity, make investments, dispose of assets and enter into certain transactions with affiliates, in each case subject to
certain exceptions. Outstanding borrowings under the Loan are secured by a first priority security interest on substantially all of the
personal property assets of the Company, including the Company’s material intellectual property and equity interests in its subsidiaries.
There are no liquidity or financial covenants.
The
Convertible Note and Tranche B were funded on the Effective Date. As of December 31, 2021,
the Company drew down the full $3,000
aggregate principal amount of Tranche C.
The
Convertible Note requires forty-eight monthly interest only payments at 7.75% per annum commencing after the Effective Date and thereafter
full payment of the then outstanding principal balance of the Convertible Note on July 1, 2025. The Kreos Loan Agreement contains features
that would permit the Lender to convert all or any portion of the outstanding principal balance of the Convertible Note at any time,
pursuant to which the converted part of the Convertible Note will be converted into that number of shares of common stock of the Company
to be issued to the Lender at a price per share equal to the conversion price, of $1.40
per share. Following
the conversion of any portion of the outstanding principal balance of the Convertible Note, the principal balance of the Convertible
Note remaining outstanding shall continue to bear interest at 7.75%
per annum. The Tranche B loan requires interest only monthly payments commencing on the Effective Date until September 30, 2022 and,
thereafter, thirty-three monthly payments of principal and interest accrued thereon until June 1, 2025. The Tranche C loan requires interest
only monthly payments commencing on the on the date of the draw down until September 30, 2022 and, thereafter, thirty-two monthly payments
of principal and interest accrued thereon until June 1, 2025. Notwithstanding the foregoing, in the event the Company completes a capital
raise of a minimum of $20,000
prior to September 30,
2022, the repayment terms of the Tranche B and Tranche C loans shall automatically be amended so that the interest only period will be
extended to June 30, 2023, and, thereafter, the Company shall pay twenty-four monthly payments of principal and interest accrued thereon
until June 1, 2025. Interest on the Tranche B and Tranche C loans accrues at 9.5%
per annum.
In
connection with the Kreos Loan Agreement, the Company also issued to the Lender a warrant (“Warrant”), dated July 16, 2021,
to purchase up to 190,949 shares of the Company’s common stock, at an exercise price of $1.0474 per share, payable in cash or on
a cashless basis according to the formula set forth in the Warrant. The exercise price of the Warrant and the number of shares issuable
upon exercise of the Warrant are subject to adjustments for stock splits, combinations, stock dividends or similar events. The Warrant
is exercisable until the date that is ten years after the date of issuance. The Company concluded that the Warrant is indexed to its
own stock and, accordingly is classified as equity. See note 11 for further discussion of the Warrant.
The
Company treated Tranche A, Tranche B and Tranche C, and the Warrant as three separate freestanding financial instruments with the
proceeds received in connection with the transaction allocated amongst the instruments based on relative fair value. The proceeds
received in connection with the transaction allocated amongst the instruments based on relative fair value resulted in $165 being
allocated to the Warrant and a corresponding amount recorded as a debt discount to the Convertible Note and Long-term Debt. The
Company recorded an aggregate debt discount of $845 related
to the Loan, inclusive of the debt discount of $165 in
connection to the Warrant, which will be amortized
to interest expense over the term of each respective tranche using the effective interest method. The
Company also paid $540 in
cash for debt issuance costs. Additionally, per the
Kreos Loan Agreement, with respect to the Long-term Debt, there is an advance payment
of $274 that
is recorded at a debt discount. The advance payment represents the last month’s payment in relation to the Long-term Debt.
There is also an end of loan payment of $140 which
is included on the balance sheet as a liability within the Long-term Debt and also within the total debt discount of $845 as
of March 31, 2022 and December 31, 2021. Subsequent to the issuance of the consolidated financial statements for
the year ended December 31, 2021, the Company identified that the current portion of long-term debt was incorrectly classified as non-current
on the balance sheet as of December 31, 2021. Management evaluated this misstatement and concluded it was not material to the financial
statements and therefore, the Company elected to correct the current portion of long-term debt as of December 31, 2021 in these condensed
consolidated financial statements for comparative purposes.
For
the three months ended March 31, 2022, interest expense for the Loan was as follows:
Schedule of Interest Expense for Loan
Contractual interest expense | |
$ | 268 | |
Amortization of debt issuance costs | |
| 59 | |
Total interest expense | |
$ | 327 | |
Future
principal payments under the Convertible Note as of March 31, 2022 are as follows:
Schedule of Future Principal Payments
Years Ending December 31, | |
Amount | |
2022 | |
$ | - | |
2023 | |
| - | |
2024 | |
| - | |
2025 | |
| 4,000 | |
Total future principal payments | |
| 4,000 | |
End of loan payments | |
| - | |
Less unamortized debt issuance costs | |
| (153 | ) |
Total balance | |
$ | 3,847 | |
Future
principal payments under the Long-term Debt as of March 31, 2022 are as follows:
Years Ending December 31, | |
Amount | |
2022 | |
$ | 702 | |
2023 | |
| 2,714 | |
2024 | |
| 2,983 | |
2025 | |
| 1,601 | |
Total future principal payments | |
| 8,000 | |
End of loan payments | |
| 140 | |
Less unamortized debt issuance costs | |
| (542 | ) |
Total term-debt balance | |
$ | 7,598 | |
Less current portion of long-term debt | |
| (1,083 | ) |
Total long-term
debt | |
$ | 6,515 | |
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, 2022 and 2021. 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 $1,422
and $1,419
as of March 31, 2022 and December 31, 2021,
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, 2022 and 2021, and an immaterial liability as of
March 31, 2022 and December 31, 2021.
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 as of March 31, 2022 and December 31, 2021 (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, 2022. |
|
|
** |
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, 2022. |
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 April 2035). 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 condensed consolidated balance sheets
at March 31, 2022 and December 31, 2021 in the amount of $1,731
and $1,760,
respectively. The Company recorded a gain
on change in fair value of Contingent Royalty Obligation in the amount of $29
for the three months ended March 31, 2022 and
a loss on change in fair value of Contingent Royalty Obligation in the amount of $80,
for the three months ended March 31, 2021.
Manufacturing Component Purchase Obligations
The
Company utilizes two outsourcing partners to manufacture its workstation and disposable portions of the Pure-Vu System, and to perform final assembly and testing of
finished products. These outsourcing partners acquire components and build product based on demand information supplied by the Company.
As of March 31, 2022, the Company expects to pay $237 under manufacturing-related supplier arrangements within the next year, substantially
all of which is noncancelable.
Other
Commitments and Contingencies
The
Company has a severance contingency for severance payments to its CEO, COO, and CFO in the aggregate of $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 condensed 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.
(OBIO), 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. Pursuant to the Shared Space Agreement, the Company granted a license to OBIO for the use of portions
of the office space not being used by the Company in the Company’s leased facility in Fort Lauderdale, Florida (the “Premises”),
and a proportionate share of common areas of such Premises, which previously covered approximately 35% of the Premises and was to expand
incrementally to approximately 60 to 70% of the Premises by September 2024. During each of the three months ended March 31,
2022 and 2021, the Company recorded a license fee of $47
in relation to the Shared Space Agreement.
This amount is netted with rent expense in general and administrative expenses.
As further described in note 12,
effective May 1, 2022, the Company entered into an amendment to the Shared Space Agreement. Pursuant to the amendment, the area
covered by the Shared Space Agreement was expanded to 95% of the premises and the aggregate license fees will generally range from
approximately $212 to approximately $270 in any given calendar year during the term of the Shared Space Agreement until the termination
of the lease in November 2024.
Note
11 – Share-based compensation
Issuance
of Common Stock
On
January 5, 2022, non-employee members of the Board of Directors were granted an aggregate of 489,167 shares
of fully-vested common stock with a fair value of $0.48 per
share of common stock, as compensation, in lieu of $235 of
cash compensation, for service as directors for 2022. The Company recorded $57 in
expense for director services during the three months ended March 31, 2022. The Company recorded $178 in
prepaid expenses for director services as of March 31, 2022.
Issuance
of Warrants to Purchase Common Stock
In
February 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
fully vested over a one-year period on a monthly basis and expire three years from the date of issuance and were exercisable at weighted
average exercise price equal to $2.83
per share of common stock. In March 2022,
the Company granted new warrants as a replacement to the vested warrants held by the service provider, for which all the share-based
compensation expense had been recognized in prior fiscal periods. The issuance of new warrants concurrently with the cancellation of
the existing warrants was treated as a modification. The Company agreed to issue replacement warrants to purchase 120,000
shares of common stock of the Company exercisable
at a price equal to $0.50
per share of common stock. The replacement warrants
immediately vested upon issuance and expire three years from the date of issuance. As a result, the Company recognized $26
of share-based compensation related to the incremental
fair value which is equal to the excess of the fair value of the new stock options granted over the fair value of the original award
on the cancellation date.
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 $30
and $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, 2022 and 2021, respectively.
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 $11,000
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
for the three months ended March
31, 2021. 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.
In
connection with the Kreos Loan Agreement as described in Note 8, the Company issued to the Lender a Warrant, dated July 16, 2021, to
purchase up to 190,949 shares of the Company’s common stock. The Warrant is immediately exercisable at an exercise price of $1.0474
per share, payable in cash or on a cashless basis according to the formula set forth in the Warrant. The exercise price of the Warrant
and the number of shares issuable upon exercise of the Warrant are subject to adjustments for stock splits, combinations, stock dividends
or similar events. The Warrant is exercisable until the date that is ten years after the date of issuance. The fair value of the warrant
was valued on the date of grant at $168 using the Black-Scholes option-pricing model with the following parameters: (1) risk-free interest
rate of 1.31%; (2) expected life in years of 10; (3) expected stock volatility of 108.87%; and (4) expected dividend yield of 0%. As
described in Note 8, in connection with the Kreos Loan Agreement, the Company treated the Warrant as a separate freestanding financial
instrument amongst the other financial instruments in the Loan with the proceeds received in connection with the transaction allocated
amongst the instruments based on relative fair value which resulted in $165 being allocated to the Warrant and a corresponding amount
recorded as a debt discount to the Convertible Note and Long-term Debt. See Note 8 for further detail.
Warrants
A
summary of the Company’s warrants to purchase common stock activity is as follows:
Schedule of Warrants
| |
Shares Underlying Warrants | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Life (years) | | |
Aggregate
Intrinsic Value | |
Outstanding and exercisable at December 31, 2021 | |
| 8,406,616 | | |
$ | 2.74 | | |
| 3.40 | | |
$ | - | |
Granted | |
| 120,000 | | |
| 0.50 | | |
| | | |
| | |
Cancelled | |
| (120,000 | ) | |
| 2.83 | | |
| | | |
| | |
Forfeited | |
| (513,632 | ) | |
| 5.18 | | |
| | | |
| | |
Outstanding at March 31, 2022 | |
| 7,892,984 | | |
$ | 2.54 | | |
| 2.37 | | |
$ | - | |
As
of March 31, 2022, 7,892,984
warrants were exercisable with
a weighted-average exercise price per share of $2.54.
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,
2022, pursuant to an annual evergreen provision, the number of shares of common stock reserved for future grants was increased by 1,728,665
shares. Under the 2016 Plan, effective as of
January 1, 2022, the maximum number of shares of the Company’s common stock authorized for issuance is 10,495,679.
As of March 31, 2022, there were 299,952
shares of common stock available for future
grant under the 2016 Plan.
A
summary of the Company’s stock option activity is as follows: