The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
During the year ended March 31, 2014, the warrant liability was reduced by approximately $10,874 as a result of warrant exercises.
During the year ended March 31, 2014, the warrant liability was reduced by approximately $767 for warrants reclassified as equity instruments.
During the year ended March 31, 2014, the Company issued 75,000 warrants to purchase shares of our common stock for consulting services. The warrants were valued at approximately $404.
During the year ended March 31, 2015, the warrant liability was reduced by approximately $55 as a result of warrant exercises.
During the year ended March 31, 2015, approximately $144 of leasehold improvements were funded by the Company’s landlord as a lease incentive. The Company capitalized these costs as property, plant and equipment, with a corresponding increase in deferred rent that will be amortized over the remaining lease term.
During the year ended March 31, 2016, the warrant liability was reduced by approximately $139 as a result of warrant exercises.
During the year ended March 31, 2016, approximately $374 of leasehold improvements were funded by the Company’s landlord as a lease incentive. The Company capitalized these costs as property, plant and equipment, with a corresponding increase in deferred rent that will be amortized over the remaining lease term.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
1. Description of Business and Summary of Significant Accounting Policies
A summary of significant accounting policies, consistently applied in the preparation of the accompanying consolidated financial statements follows:
Nature of operations and basis of presentation
References in these notes to the consolidated financial statements to “Organovo Holdings, Inc.,” “Organovo Holdings,” “we,” “us,” “our,” “the Company” and “our Company” refer to Organovo Holdings, Inc. and its consolidated subsidiaries. Our consolidated financial statements include the accounts of the Company as well as its wholly-owned subsidiaries, with all material intercompany accounts and transactions eliminated in consolidation. In December 2014, we established a wholly-owned subsidiary, Samsara Sciences, Inc., to focus on the acquisition of qualified cells in support of our commercial and research endeavors. In September 2015, we established another wholly-owned subsidiary in the United Kingdom, Organovo U.K., Ltd., for the primary purpose of establishing a sales presence in Europe.
Since its inception, the Company has devoted its efforts primarily to developing and commercializing a platform technology and functional human tissues that can be employed in drug discovery and development, biological research, and as therapeutic implants for the treatment of damaged or degenerating tissues and organs. The Company has also focused on raising capital and building infrastructure. In November 2014, the Company announced the commercial release of its first product, the exVive3D™ Human Liver Tissue for use in toxicology and other preclinical drug testing. As of March 31, 2016, the Company had not yet realized significant revenues from its planned principal operations. The Company’s activities are subject to significant risks and uncertainties including failing to successfully develop products and services based on its technology and to achieve the market acceptance necessary to generate sufficient revenues and to achieve and sustain profitability.
NYSE MKT listing
On July 9, 2013, the Company announced that its common stock had been approved to list on the NYSE MKT. Shares began trading on the New York Stock Exchange on July 11, 2013 under the symbol “ONVO”. Prior to that time, the Company’s shares were quoted on the OTC QX.
Liquidity
As of March 31, 2016, the Company had an accumulated deficit of approximately $160.9 million. The Company also had negative cash flows from operations of approximately $29.4 million during the year ended March 31, 2016.
Through March 31, 2016, the Company has financed its operations primarily through the sale of convertible notes, the private placement of equity securities, the sale of common stock through public offerings, and through revenue derived from grants, collaborative research agreements, and product and research service-based agreements. Based on its current operating plan and available cash resources, the Company believes it has sufficient resources to fund its business for at least the next twelve months.
The Company will need additional capital to further fund the development and commercialization of its human tissues that can be employed in drug discovery and development, biological research, and as therapeutic implants for the treatment of damaged or degenerating tissues and organs. The Company intends to cover its future operating expenses through cash on hand, through revenue derived from research service agreements, product sales, collaborative research agreements, grants, and through the issuance of additional equity or debt securities. Depending on market conditions, we cannot be sure that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to us or to our stockholders.
Having insufficient funds may require us to delay, scale back, or eliminate some or all of our development programs or relinquish rights to our technology on less favorable terms than we would otherwise choose. Failure to obtain adequate financing could eventually adversely affect our ability to operate as a going concern. If we raise additional funds from the issuance of equity securities, substantial dilution to our existing stockholders would likely result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business.
F-9
Use of estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Significant estimates used in preparing the consolidated financial statements include those assumed in computing the valuation of warrants, revenue recognized under the proportional performance model, the valuation of stock-based compensation expense, and the valuation allowance on deferred tax assets.
Financial instruments
For certain of the Company’s financial instruments, including cash and cash equivalents, inventory, prepaid expenses and other assets, accounts payable, accrued expenses, deferred revenue, and capital lease obligations, the carrying amounts are generally considered to be representative of their respective fair values because of the short-term nature of those instruments.
Cash and cash equivalents
The Company considers all highly liquid investments with original maturities of 90 days or less to be cash equivalents.
Derivative financial instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency.
The Company reviews the terms of convertible debt and equity instruments it issues to determine whether there are derivative instruments, including an embedded conversion option that is required to be bifurcated and accounted for separately as a derivative financial instrument. In circumstances where a host instrument contains more than one embedded derivative instrument, including a conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument. Also, in connection with the sale of convertible debt and equity instruments, the Company may issue freestanding warrants that may, depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity.
Derivative instruments are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported as non-operating income or expense. When the convertible debt or equity instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds allocated to the convertible host instruments are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the convertible instruments themselves, usually resulting in those instruments being recorded at a discount from their face value.
The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to interest expense, using the effective interest method.
Restricted cash
As of March 31, 2016 and 2015, the Company had approximately $79,000 of restricted cash deposited with a financial institution. The entire amount is held in certificates of deposit to support a letter of credit agreement related to the Company’s facility lease.
Inventory
Inventories are stated at the lower of the cost or market (first-in, first-out). Inventory at March 31, 2016 consists of approximately $206,000 in raw materials, approximately $15,000 in work-in-process inventory, and approximately $113,000 in finished goods. Inventory at March 31, 2015 consisted of approximately $66,000 in raw materials, net of reserves.
Fixed assets and depreciation
Property and equipment are carried at cost. Expenditures that extend the life of the asset are capitalized and depreciated. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets or, in the case of leasehold improvements, over the lesser of the useful life of the related asset or the remaining lease term. The estimated useful lives of the fixed assets range between one and seven years.
Impairment of long-lived assets
In accordance with authoritative guidance the Company reviews its long-lived assets, including property and equipment and other assets, for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully
F-10
recoverable. To determine recoverability of its long-lived assets, the Company evaluates whether future undiscounted net cash flows will be less than the car
rying amount of the assets and adjusts the carrying amount of its assets to fair value. Management has determined that no impairment of long-lived assets occurred as of
March 31, 2016
.
Fair value measurement
Financial assets and liabilities are measured at fair value, which is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The following is a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:
|
·
|
Level 1 — Quoted prices in active markets for identical assets or liabilities.
|
|
·
|
Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
·
|
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
The Company has issued warrants, of which some are classified as derivative liabilities as a result of the terms in the warrants that provide for down-round protection in the event of a dilutive issuance. The Company uses Level 3 inputs for its valuation methodology for the warrant derivative liabilities. The estimated fair values were determined using a Monte Carlo option pricing model based on various assumptions (see Note 4). The Company’s derivative liabilities are adjusted to reflect estimated fair value at each period end, with any decrease or increase in the estimated fair value being recorded in other income or expense accordingly, as adjustments to the fair value of derivative liabilities. Various factors are considered in the pricing models we use to value the warrants, including the Company’s current stock price, the remaining life of the warrants, the volatility of the Company’s stock price, and the risk free interest rate.
Future changes in these factors may have an impact on the computed fair value of the warrant liability
.
The estimated fair values of the liabilities measured on a recurring basis are as follows:
|
|
Fair
Value Measurements at March 31, 2016 and 2015 (in thousands):
|
|
|
|
Balance at
March 31,
2016
|
|
|
Quoted
Prices in
Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Other
Unobservable
Inputs
(Level 3)
|
|
Warrant liability
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
March 31,
2015
|
|
|
Quoted
Prices in
Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Other
Unobservable
Inputs
(Level 3)
|
|
Warrant liability
|
|
$
|
126
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
126
|
|
F-11
The following table presents the activity for liabilities measured at estimated fair value using unobservable inputs for the years ended
March 31, 2016
and 201
5
:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
|
|
Warrant
Derivative
Liability
(in thousands)
|
|
Balance at March 31, 2014
|
|
$
|
377
|
|
Issuances
|
|
$
|
—
|
|
Adjustments to estimated fair value
|
|
$
|
(196
|
)
|
Warrant liability removal due to settlements
|
|
$
|
(55
|
)
|
Balance at March 31, 2015
|
|
$
|
126
|
|
Issuances
|
|
$
|
—
|
|
Adjustments to estimated fair value
|
|
$
|
17
|
|
Warrant liability removal due to settlements
|
|
$
|
(139
|
)
|
Balance at March 31, 2016
|
|
$
|
4
|
|
Research and development
Research and development expenses, including direct and allocated expenses, consist of independent research and development costs, as well as costs associated with sponsored research and development. Research and development costs are expensed as incurred.
Income taxes
Deferred income taxes are recognized for the tax consequences in future years for differences between the tax basis of assets and liabilities and their financial reporting amounts at each year end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the combination of the tax payable for the year and the change during the year in deferred tax assets and liabilities.
Revenue recognition
The Company’s revenues are derived from research service agreements, product sales, collaborative research agreements, and grants from the National Institutes of Health (“NIH”), U.S. Treasury Department and private not-for-profit organizations.
The Company recognizes revenue when the following criteria have been met: (i) persuasive evidence of an arrangement exists; (ii) services have been rendered or product has been delivered; (iii) price to the customer is fixed and determinable; and (iv) collection of the underlying receivable is reasonably assured.
Billings to customers or payments received from customers are included in deferred revenue on the balance sheet until all revenue recognition criteria are met. As of March 31, 2016 and 2015, the Company had approximately $1,110,000 and $259,000, respectively, in deferred revenue related to its commercial products and research service agreements, grants, and collaborative research programs.
Revenue arrangements with multiple deliverables
The Company follows ASC 605-25
Revenue Recognition – Multiple-Element Arrangements
for revenue arrangements that contain multiple deliverables. Judgment is required to properly identify the accounting units of the multiple deliverable transactions and to determine the manner in which revenue should be allocated among the accounting units. Moreover, judgment is used in interpreting the commercial terms and determining when all criteria of revenue recognition have been met for each deliverable in order for revenue recognition to occur in the appropriate accounting period. For multiple deliverable agreements, consideration is allocated at the inception of the agreement to all deliverables based on their relative selling price. The relative selling price for each deliverable is determined using vendor-specific objective evidence (“VSOE”) of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence of selling price exists, the Company uses its best estimate of the selling price for the deliverable.
F-12
While changes in the allocation of the arrangement consideration between the units of accounting will not affect the amount of total revenue recognized for a particular sales arrangement, any material changes in these
allocations could impact the timing of revenue recognition, which could affect the Company’s results of operations.
The Company periodically receives license fees for non-exclusive research licensing associated with funded research projects. License fees under these arrangements are recognized over the term of the contract or development period as it has been determined that such licenses do not have stand-alone value.
Revenue from research service agreements
For research service agreements that contain only a single or primary deliverable, the Company defers any up-front fees collected from customers, and recognizes revenue for the delivered element only when it determines there are no uncertainties regarding customer acceptance. For agreements that contain multiple deliverables, the Company follows ASC 605-25 as described above.
Research and development revenue under collaborative agreements
The Company’s collaboration revenue consists of license and collaboration agreements that contain multiple elements, including non-refundable up-front fees, payments for reimbursement of third-party research costs, payments for ongoing research, payments associated with achieving specific development milestones and royalties based on specified percentages of net product sales, if any. The Company considers a variety of factors in determining the appropriate method of revenue recognition under these arrangements, such as whether the elements are separable, whether there are determinable fair values and whether there is a unique earnings process associated with each element of a contract.
The Company recognizes revenue from research funding under collaboration agreements when earned on a “proportional performance” basis as research services are provided or substantive milestones are achieved. We recognize revenue that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. A milestone is considered substantive when the consideration payable to us for the milestone (i) is consistent with our performance necessary to achieve the milestone or the increase in value to the collaboration resulting from our performance, (ii) relates solely to our past performance and (iii) is reasonable relative to all of the other deliverables and payments within the arrangement. In making this assessment, we consider all facts and circumstances relevant to the arrangement, including factors such as the risks that must be overcome to achieve the milestone, the level of effort and investment required to achieve the milestone and whether any portion of the milestone consideration is related to future performance or deliverables.
The Company initially defers revenue for any amounts billed or payments received in advance of the services being performed, and recognizes revenue pursuant to the related pattern of performance, using the appropriate method of revenue recognition based on its analysis of the related contractual element(s).
In 2011, the Company entered into a research collaboration agreement with a third party to perform research and development services. The agreement, as amended in 2012, was for a total fixed fee of $1,405,000. The Company completed its obligations under this agreement and recognized the remaining revenue of approximately $184,000 during the year ended March 31, 2014, in recognition of the proportional performance achieved.
In September 2013, the Company entered into a research contract agreement with a third party to perform research and development services for fixed fees. The Company completed its obligations under this agreement during the year ended March 31, 2015. The Company recorded approximately $69,000 and $7,000 for the years ended March 31, 2015 and 2014, respectively, in revenue related to the research contract in recognition of the proportional performance achieved.
In October 2013, the Company entered into a research contract agreement with a third party to perform research and development services for fixed fees. The Company completed its obligations under this agreement during the year ended March 31, 2015. The Company recorded approximately $41,000 and $52,000 for the years ended March 31, 2015 and 2014, respectively, in revenue related to the research contract in recognition of the proportional performance achieved.
In November 2014, the Company entered into a collaborative nonexclusive research affiliation with a university medical school and a non-profit medical charity, under which the Company received a one-time grant from the charity towards the placement of a NovoGen Bioprinter at the university for the purpose of developing bioprinted tissues for surgical transplantation research. The Company has recorded approximately $50,000 and $18,000 for the years ended March 31, 2016 and 2015, respectively, in revenue related to this collaboration in recognition of the proportional performance achieved.
F-13
In April 2015, the Company entered into a research collaboration agreement with a third
party to develop custom tissue models for fixed fees
.
Based on the proportional performance achieved under this agreement for the year ended March 31, 2016, the Company has recorded approximately $352,000 in collaboration revenue for the year.
Also in April 2015, the Company entered into a multi-year research agreement with a third party to develop multiple custom tissue models for use in drug development. Approximately $80,000 under this agreement was recognized as revenue in recognition of the proportional performance achieved during the year ended March 31, 2016.
Product revenue
The Company recognizes product revenue at the time of shipment to the customer, provided all other revenue recognition criteria have been met. To date, the Company has not recognized significant revenue from commercial product sales.
As our commercial sales increase, we expect to establish a reserve for estimated product returns that will be recorded as a reduction to revenue. That reserve will be maintained to account for future return of products sold in the current period. The reserve will be reviewed quarterly and will be estimated based on an analysis of our historical experience related to product returns.
Grant revenues
During August of 2013, the Company was awarded a research grant by a private, not-for-profit organization for up to $251,700, contingent on go/no-go decisions made by the grantor at the completion of each stage of research as outlined in the grant award. Revenues from the grant are based upon internal costs incurred that are specifically covered by the grant, plus an additional rate that provides funding for overhead expenses. Revenue is recognized when the Company incurs expenses that are related to the grant. Revenue recognized under this grant was approximately $43,000, $49,000 and $119,000 for the years ended March 31, 2016, 2015 and 2014, respectively.
During September of 2014, the NIH awarded the Company a research grant totaling approximately $222,000. The grant provides for fixed payments based on the achievement of certain milestones. As such, revenue will be recognized upon completion of those milestones. Revenue recognized under this grant was approximately $148,000 and $74,000 for the years ended March 31, 2016 and 2015, respectively.
Stock-based compensation
The Company accounts for stock-based compensation in accordance with the Financial Accounting Standards Board’s ASC Topic 718,
Compensation — Stock Compensation,
which establishes accounting for equity instruments exchanged for employee services. Under such provisions, stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense, under the straight-line method, over the employee’s requisite service period (generally the vesting period of the equity grant).
The Company accounts for equity instruments, including restricted stock or stock options, issued to non-employees in accordance with authoritative guidance for equity based payments to non-employees. Stock options issued to non-employees are accounted for at their estimated fair value determined using the Black-Scholes option-pricing model. The fair value of options granted to non-employees is re-measured as they vest, and the resulting increase in value, if any, is recognized as expense during the period the related services are rendered. Restricted stock issued to non-employees is accounted for at its estimated fair value as it vests.
Comprehensive income (loss)
Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. The Company is required to record all components of comprehensive income (loss) in the financial statements in the period in which they are recognized. Net income (loss) and other comprehensive income (loss), including unrealized gains and losses on investments, are reported, net of their related tax effect, to arrive at comprehensive income (loss). For the years ended March 31, 2016, 2015 and 2014, the comprehensive loss was equal to the net loss.
Net loss per share
Basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period. The weighted-average number of shares used to compute diluted loss per share excludes any assumed exercise of stock options and warrants, the assumed release of restriction of restricted stock units, and shares subject to repurchase as the effect
F-14
would be anti-dilutive. No dilutive e
ffect was calculated for the years ended
March 31, 2016
, 2015
and 2014 as the Company reported a net loss for each respective period and the effect would have been anti-dilutive. Total common stock equivalents that were excluded from computing diluted net
loss per share were approximately
10.7
million,
8.6 million,
and
7.7 million for the years ended
March 31, 2016
,
2015
and 2014, respectively.
2. Fixed Assets
Fixed assets consisted of the following (in thousands):
|
|
March 31,
2016
|
|
|
March 31,
2015
|
|
Laboratory equipment
|
|
$
|
2,799
|
|
|
$
|
1,951
|
|
Construction in process
|
|
|
52
|
|
|
|
529
|
|
Computer software and equipment
|
|
|
488
|
|
|
|
274
|
|
Furniture and fixtures
|
|
|
337
|
|
|
|
135
|
|
Leasehold improvements
|
|
|
1,832
|
|
|
|
155
|
|
Vehicles
|
|
|
9
|
|
|
|
—
|
|
|
|
|
5,517
|
|
|
|
3,044
|
|
Less accumulated depreciation and amortization
|
|
|
(1,806
|
)
|
|
|
(1,002
|
)
|
|
|
$
|
3,711
|
|
|
$
|
2,042
|
|
Depreciation and amortization expense for the years end March 31, 2016, 2015 and 2014 was approximately $805,000, $464,000, and $380,000, respectively.
3. Accrued Expenses
Accrued expenses consisted of the following (in thousands):
|
|
March 31,
2016
|
|
|
March 31,
2015
|
|
Accrued compensation
|
|
$
|
2,221
|
|
|
$
|
1,917
|
|
Accrued legal and professional fees
|
|
|
168
|
|
|
|
195
|
|
Other accrued expenses
|
|
|
61
|
|
|
|
145
|
|
|
|
$
|
2,450
|
|
|
$
|
2,257
|
|
4. Derivative Liability
During 2011 and 2012, the Company issued 22,847,182 five-year warrants to purchase the Company’s common stock in connection with financing transactions. The exercise price of the warrants is protected against down-round financing throughout the term of the warrants, as described below. Pursuant to ASC 815-15 and ASC 815-40, the fair value of the warrants was recorded as a derivative liability on the issuance dates.
The Company revalued the warrants as of the end of each reporting period, and the estimated fair value of the outstanding warrant liabilities was $4,000 and $126,000 as of March 31, 2016 and 2015, respectively. The change in fair value of the derivative liabilities for the year ended March 31, 2016 was an increase of $17,000. The changes in fair value of the derivative liabilities for the year ended March 31, 2015 and 2014 were a decrease of $196,000 and an increase of $5,120,000, respectively. These changes are included in other income (expense) in the statements of operations.
During the years ended March 31, 2016 and 2015, 43,796 and 8,647 warrants that were classified as derivative liabilities were exercised. The warrants were revalued as of the settlement date, and the change in fair value was recognized to earnings. In addition, in the year ended March 31, 2014, the Company entered into amendment agreements with certain of the warrant holders, which removed the down-round pricing protection provision, resulting in 269,657 of these warrants being reclassified from liability instruments to equity instruments. The Company also recognized a reduction in the warrant liability based on the fair value as of the settlement date for the warrants exercised and as of the modification date for the warrants that were amended, with a corresponding increase in additional paid-in capital.
F-15
The derivative liabilities were valued
upon issuance of the warrants
and
at
th
e end of each reporting period using a Monte Carlo valuation model with the following assumptions:
|
|
March 31,
2016
|
|
|
March 31,
2015
|
|
Closing price per share of common stock
|
|
$
|
2.17
|
|
|
$
|
3.54
|
|
Exercise price per share
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
Expected volatility
|
|
|
73.35
|
%
|
|
|
76.80
|
%
|
Risk-free interest rate
|
|
|
0.59
|
%
|
|
|
0.56
|
%
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
Remaining expected term of underlying securities (years)
|
|
|
0.96
|
|
|
|
1.96
|
|
In accordance with the terms of the warrant agreements, if, prior to the expiration date of the warrants, the Company issues additional shares of common stock, as defined below, without consideration or for a consideration per share less than the exercise price of the warrants in effect immediately prior to such issue, then the exercise price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such exercise price by a fraction, (A) the numerator of which shall be (1) the number of shares of common stock outstanding immediately prior to such issue plus (2) the number of shares of common stock which the aggregate consideration received or to be received by the Company for the total number of additional shares of common stock so issued would purchase at such exercise price; and (B) the denominator of which shall be the number of shares of common stock outstanding immediately prior to such issue plus the number of such additional shares of common stock so issued; provided that (i) all shares of common stock issuable upon conversion or exchange of convertible securities outstanding immediately prior to such issue shall be deemed to be outstanding, and (ii) the number of shares of common stock deemed issuable upon conversion or exchange of such outstanding convertible securities shall be determined without giving effect to any adjustments to the conversion or exchange price or conversion or exchange rate of such convertible securities resulting from the issuance of additional shares of common stock that is the subject of this calculation. For purposes of the warrants, “additional shares of common stock” shall mean all shares of common stock issued by the Company after the effective date (including without limitation any shares of common stock issuable upon conversion or exchange of any convertible securities or upon exercise of any option or warrant, on an as-converted basis), other than: (i) shares of common stock (and/or warrants for any class of equity securities of the Company) issued or issuable upon conversion or exchange of any convertible securities or exercise of any options or warrants outstanding on the effective date; (ii) shares of common stock issued or issuable by reason of a dividend, stock split, split-up or other distribution on shares of common stock; (iii) shares of common stock (or options with respect thereto) issued or issuable to employees or directors of, or consultants to, the Company or any of its subsidiaries pursuant to a plan, agreement or arrangement approved by the Board of Directors of the Company; (iv) any securities issued or issuable by the Company pursuant to (A) the Private Placement; or (B) the Merger; (v) securities issued pursuant to acquisitions or strategic transactions approved by a majority of disinterested directors of the Company, provided that any such issuance shall only be to a person which is, itself or through its subsidiaries, an operating company in a business synergistic with the business of the Company and in which the Company receives benefits in addition to the investment of funds, but shall not include a transaction in which the Company is issuing securities primarily for the purpose of raising capital or to an entity whose primary business is investing in securities and (vi) securities issued to financial institutions, institutional investors or lessors in connection with credit arrangements, equipment financings or similar transactions approved by a majority of disinterested directors of the Company, but shall not include a transaction in which the Company is issuing securities primarily for the purpose of raising capital or to an entity whose primary business is investing in securities.
Upon each adjustment of the exercise price pursuant to the provisions stated above, the number of warrant shares issuable upon exercise of the warrants shall be adjusted by multiplying a number equal to the exercise price in effect immediately prior to such adjustment by the number of warrant shares issuable upon exercise of the warrant immediately prior to such adjustment and dividing the product so obtained by the adjusted exercise price.
5. Stockholders’ Equity
Common stock
In May of 2008, the Board of Directors of the Company approved the 2008 Equity Incentive Plan (the “2008 Plan”). The 2008 Plan authorized the issuance of up to 1,521,584 common shares for awards of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock award units, and stock appreciation rights. The 2008 Plan terminates on July 1, 2018. No shares have been issued under the 2008 Plan since 2011, and the Company does not intend to issue any additional shares from the 2008 Plan in the future.
F-16
In January 2012, the Board of Directors of the Company approved the 2012 Equity Incentive Plan (the “2012 Plan”). The 2012 Plan authorized the issuance of up to 6,553,986 shares of common stock for awards of incentive stock options
, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, performance shares, and other stock or cash awards. The Board of Directors and stockholders of the Company approved an amendment to the 2
012 Plan in August 2013 to increase the number of shares of common stock that may be issued under the 2012 Plan by 5,000,000 shares
. In addition, the Board of Directors and stockholders of the Company approved an amendment to the 2012 Plan in August 2015
to further increase the number of shares of common stock that may be issued under the 2012 Plan by 6,000,000 shares, bringing the
aggregate
shares issuable under the 2012 Plan to
1
7
,553,986. The 2012 Plan
as amended and restated became effective on August
20, 2015 and
terminates ten years after
such date
.
As of March 31, 2016, 6,486,736 shares remain available for issuance under the 2012 plan.
The Company filed a shelf registration statement on Form S-3 (File No. 333-189995), or the 2013 Shelf, with the SEC on July 17, 2013 authorizing the offer and sale in one or more offerings of up to $100,000,000 in aggregate of common stock, preferred stock, debt securities, or warrants to purchase common stock, preferred stock or debt securities, or any combination of the foregoing, either individually or as units comprised of one or more of the other securities. This 2013 Shelf was declared effective by the SEC on July 26, 2013.
On August 2, 2013, the Company entered into an Underwriting Agreement with Lazard Capital Markets LLC, acting as representative of the underwriters named in the Underwriting Agreement and joint book-runner with Oppenheimer & Co. Inc., relating to the issuance and sale of 10,350,000 shares of the Company’s common stock, which includes the issuance and sale of 1,350,000 shares pursuant to an overallotment option exercised by the Underwriters on August 5, 2013 (the “2013 Offering”). JMP Securities LLC and Maxim Group LLC each acted as co-managers for the 2013 Offering. The price to the public in the 2013 Offering was $4.50 per share, and the Underwriters purchased the shares from the Company pursuant to the Underwriting Agreement at a price of $4.23 per share. The net proceeds to the Company from the 2013 Offering were approximately $43.4 million, after deducting underwriting discounts and commissions and other offering expenses of $3.2 million payable by the Company, including the Underwriters’ exercise of the overallotment option. The transactions contemplated by the Underwriting Agreement closed on August 7, 2013.
In November 2013, the Company entered into an equity distribution agreement with an investment banking firm. Under the terms of the distribution agreement, the Company may offer and sell up to 4,000,000 shares of its common stock, from time to time, through the investment bank in at-the-market offerings, as defined by the SEC, and pursuant to the 2013 Shelf. During the years ended March 31, 2016, 2015 and 2014, the Company issued 0, 2,197,768 and 334,412 shares of common stock in at-the-market offerings under the distribution agreement with net proceeds of $0, $16.1 million and $3.5 million, respectively.
In December 2014, the Company entered into an equity offering sales agreement with another investment banking firm. Under the terms of the sales agreement, the Company may offer and sell shares of its common stock, from time to time, through the investment bank in at-the-market offerings, as defined by the SEC, and pursuant to the Company’s 2013 Shelf. During the years ended March 31, 2016 and 2015, the Company issued 0 and 1,000,000 shares of common stock in at-the-market offerings under the sales agreement with net proceeds of $0 and $6.2 million, respectively. The Company intends to use the net proceeds raised through any at-the-market sales for general corporate purposes, including research and development, the commercialization of the Company’s products, general administrative expenses, and working capital and capital expenditures.
The Company will limit future sales under the 2013 distribution agreement and the 2014 sales agreement to ensure that it does not exceed the maximum amount available for sale under its effective shelf registration statement previously filed with the SEC. Based on its use of the shelf registration statement through March 31, 2016, the Company cannot sell more than an aggregate of $26,777,785 in shares of common stock under the 2013 distribution agreement and the 2014 sales agreement.
A shelf registration statement on Form S-3 (File No. 333-202382), or the 2015 shelf, was filed with the SEC on February 27, 2015 authorizing the offer and sale in one or more offerings of up to $190,000,000 in aggregate of common stock, preferred stock, debt securities, warrants to purchase common stock, preferred stock or debt securities, or any combination of the foregoing, either individually or as units comprised of one or more of the other securities. The 2015 shelf was declared effective by the SEC on March 17, 2015.
In addition, during the years ended March 31, 2016 and 2015, the Company issued 32,914 and 210,600 shares of common stock upon exercise of 43,796 and 211,647 warrants, respectively.
During the years ended March 31, 2016 and 2015, the Company issued 116,001 and 205,033 shares of common stock upon exercise of 116,001 and 205,684 stock options, respectively.
On June 18, 2015, the Company entered into an Underwriting Agreement with Jefferies LLC and Piper Jaffray & Co., acting as representatives of the underwriters named in the 2015 Underwriting Agreement and as joint book-running managers, relating to the issuance and sale of 9,425,000 shares of the Company’s common stock, par value $0.001 per share (the “2015 Offering”). The price to
F-17
the pub
lic in the 2015 Offering was $4.25 per share, and the Underwriters have agreed to purchase the shares from the Company pursuant to the 2015 Underwriting Agreement at a price of $3.995 per share. Under the terms of the 2015 Underwriting Agreement, the Compa
ny granted the Underwriters an option, exercisable for 30 days, to purchase up to an additional 1,413,750 shares. The Company issued 10,838,750 shares of common stock pursuant to the 2015 Underwriting Agreement, including shares issuable upon the exercise
of the over-allotment option, with net proceeds of approximately $43.1 million, after deducting underwriting discounts and commissions and expenses payable by the Company. The shares were issued pursuant to the 2015 Shelf.
Restricted stock awards
On August 6, 2012, 200,000 restricted stock awards were issued to a member of senior management, the vesting of which was performance based with achievement to be measured at December 31, 2014 or earlier if the metric was achieved. As of December 31, 2014, the Company had determined that three of the four target metrics had been achieved with the fourth performance metric criterion not met resulting in 150,000 shares of restricted stock vested and the remaining 50,000 restricted stock awards surrendered back to the Company unvested. The Company recognized the related stock-based compensation expense over the requisite service period ending on March 31, 2015.
During the year ended December 31, 2012, the Company issued an aggregate 950,000 of restricted stock awards to certain members of senior management and 130,000 restricted stock awards to non-executive employees. The vesting schedule is 25% on each anniversary of the vesting start date over four years. Additionally, the Company issued 100,000 restricted stock awards to a consultant. The vesting schedule is 100% after six months.
During the year ended March 31, 2014, 218,655 restricted stock awards were surrendered related to shares of common stock returned to the Company, at the option of the holder, to cover the tax liability related to the vesting of 405,000 restricted stock awards. Upon the return of the common stock, 218,655 stock option grants with immediate vesting were granted to the individual at the vesting date market value strike price.
During the year ended March 31, 2014, the Company issued an aggregate of 60,000 restricted stock units with immediate vesting to a consultant.
During the year ended March 31, 2015, 137,816 restricted stock awards were surrendered related to shares of common stock returned to the Company, at the option of the holder, to cover the tax liability related to the vesting of 255,000 restricted stock awards. Upon the return of the common stock, 137,816 stock option grants with immediate vesting were granted to the individual at the vesting date market value strike price.
During the year ended March 31, 2016, 129,900 restricted stock awards were surrendered related to shares of common stock returned to the Company, at the option of the holder, to cover the tax liability related to the vesting of 250,000 restricted stock awards. Upon the return of the common stock, 129,900 stock option grants with immediate vesting were granted to the individual at the vesting date market value strike price.
During the year ended March 31, 2016, there were 2,500 restricted stock awards forfeited by one employee upon termination of their employment with the Company.
A summary of the Company’s restricted stock award activity is as follows:
|
|
Number of
Shares
|
|
Unvested at March 31, 2013
|
|
|
985,742
|
|
Granted
|
|
|
60,000
|
|
Vested
|
|
|
(472,247
|
)
|
Canceled / forfeited
|
|
|
—
|
|
Unvested at March 31, 2014
|
|
|
573,495
|
|
Granted
|
|
|
—
|
|
Vested
|
|
|
(262,245
|
)
|
Canceled / forfeited
|
|
|
(52,500
|
)
|
Unvested at March 31, 2015
|
|
|
258,750
|
|
Granted
|
|
|
—
|
|
Vested
|
|
|
(250,000
|
)
|
Canceled / forfeited
|
|
|
(2,500
|
)
|
Unvested at March 31, 2016
|
|
|
6,250
|
|
F-18
The fair value of each restricted stock award is recognized as stock-based compensation expense over the vesting term of the award. The Company recorded restricted stock-based compensation expense in operating expenses for employees and non-employees of approximately $215,000, $421,000, and $817,000, during the years ended March 31, 2016, 2015 and 2014, respectively. Expense for each of the periods included approximately $5,000, $15,000, and $16,000, for research and development during the years ended March 31, 2016, 2015 and 2014, respectively. General and administrative expense for the years ended March 31, 2016, 2015 and 2014 were approximately $210,000, $406,000, and $801,000, respectively.
As of March 31, 2016, total unrecognized restricted stock-based compensation expense was approximately $3,000, which will be recognized over a weighted average period of 0.25 years.
Stock options
During the years ended March 31, 2016 and 2015, under the 2012 Equity Incentive Plan, 2,966,778 and 1,429,191 incentive stock options were issued, respectively, at various exercise prices. The stock options generally vest on the one year anniversary of the grant date, quarterly over a three year period, or over a four-year period, with a quarter vesting on either the one year anniversary of employment or the one year anniversary of the vesting commencement date, and the remainder vesting ratably over the remaining 36 month terms with the exception of 129,900 and 139,316 of the incentive stock option grants during the years ended March 31, 2016 and 2015, respectively, that have immediate vesting at the grant date, 0 and 56,500 of the incentive stock option grants in the years ended March 31, 2016 and 2015, respectively, that vest quarterly over three years, and 185,000 and 128,500 of the incentive stock option grants in the years ended March 31, 2016 and 2015, respectively, that vest after one full year.
The following table summarizes stock option activity for the years ended March 31, 2016 and 2015:
|
|
Options
Outstanding
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at March 31, 2014
|
|
|
5,935,888
|
|
|
$
|
4.87
|
|
|
$
|
20,482,823
|
|
Options granted
|
|
|
1,429,191
|
|
|
$
|
6.18
|
|
|
|
|
|
Options canceled
|
|
|
(45,847
|
)
|
|
$
|
7.17
|
|
|
|
|
|
Options exercised
|
|
|
(205,684
|
)
|
|
$
|
1.73
|
|
|
$
|
883,795
|
|
Outstanding at March 31, 2015
|
|
|
7,113,548
|
|
|
$
|
5.21
|
|
|
$
|
4,969,499
|
|
Options granted
|
|
|
2,966,778
|
|
|
$
|
3.87
|
|
|
|
|
|
Options canceled
|
|
|
(349,698
|
)
|
|
$
|
6.30
|
|
|
|
|
|
Options exercised
|
|
|
(116,001
|
)
|
|
$
|
2.76
|
|
|
$
|
112,441
|
|
Outstanding at March 31, 2016
|
|
|
9,614,627
|
|
|
$
|
4.79
|
|
|
$
|
1,927,137
|
|
Vested and Exercisable at March 31, 2016
|
|
|
5,165,836
|
|
|
$
|
4.45
|
|
|
$
|
1,860,789
|
|
The weighted-average remaining contractual term of options exercisable and outstanding at March 31, 2016 was approximately 6.16 years.
The Company uses the Black-Scholes valuation model to calculate the fair value of stock options. Stock-based compensation expense is recognized over the vesting period using the straight-line method. The fair value of stock options was estimated at the grant date using the following weighted average assumptions:
|
|
Year Ended
March 31, 2016
|
|
|
Year Ended
March 31, 2015
|
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
Volatility
|
|
|
73.96
|
%
|
|
|
76.90
|
%
|
Risk-free interest rate
|
|
|
1.57
|
%
|
|
|
1.60
|
%
|
Expected life of options
|
|
6.00 years
|
|
|
6.00 years
|
|
Weighted average grant date fair value
|
|
$
|
2.52
|
|
|
$
|
4.14
|
|
The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future. Due to the Company’s limited historical data, the estimated volatility incorporates the historical and implied volatility of comparable companies whose share prices are publicly available. The risk-free interest rate assumption was based on the U.S. Treasury rates. The weighted average expected life of options was estimated using the average of the contractual term and the weighted average vesting term of the options. Certain options granted to consultants are subject to variable accounting treatment and are required to be revalued until vested.
F-19
The total stock option based compensation recorded as operating expense was approximately $
8,341,00
0
, $
6,599
,000,
and
$
3,783
,000
for
the years ended
March 31, 2016
, 2015
and 2014, respectively.
Research and development e
xpense
for the years ended March 31, 2016, 2015 and 2014 were
approximately $
1,243,00
0
, $
1,175
,000,
and
$
462
,000, respectively.
General and administrative expense for the years ended
March 31, 2016
, 2015
and 2014 were approximately $
7,098,00
0
, $
5,424
,000, $
3,321
,000, respectively.
Included in total stock option-based compensation for the year ended March 31, 2016 is additional expense resulting from acceleration of the vesting schedule to fully vest options held by a terminated executive as pursuant to the 2012 Equity Incentive Plan. Additionally, as part of the severance agreement, a modification was made to extend the exercise period of the fully vested options, resulting in an incremental expense.
The total unrecognized compensation cost related to unvested stock option grants as of March 31, 2016 was approximately $13,385,000 and the weighted average period over which these grants are expected to vest is 2.48 years.
Warrants
During the years ended December 31, 2012 and 2011, the Company issued warrants to investors to purchase 21,347,182 and 2,909,750 shares, respectively, of its common stock.
During the years ended March 31, 2016, 2015 and 2014, 0, 203,000 and 225,000 of these warrants were exercised for cash proceeds of approximately $0, $445,000 and $210,000, respectively, and 43,796, 8,647 and 2,628,003 of these warrants were exercised through a cashless exercise for issuance of 32,914, 7,600 and 2,139,577 shares of common stock, respectively.
During the year ended March 31, 2014, derivative liability warrants of 1,920,874 were exercised.
During the year ended March 31, 2014, the Company entered into amendment agreements for 269,657 warrants to purchase common stock which reduced the exercise price of the warrants from $1.00 to $0.85, which removed the down-round price protection provision of the warrant agreement related to the adjustment of exercise price upon issuance of additional shares of common stock. As a result of the removal of the down-round price protection provision, the warrants were reclassified from liability to equity instruments at their fair value. The Company determined the incremental expense associated with the modification based on the fair value of the awards prior to and subsequent to the modification. The fair value of the awards subsequent to modification was calculated using the Black-Scholes model. The incremental expense associated with the modification of approximately $12,000 was recognized as interest expense for the year ended March 31, 2014.
In 2012 the Company issued a total of 650,000 warrants to purchase common stock, in connection with consulting agreements, at prices ranging from $1.70 to $3.24, with lives ranging from two to five years, to be earned over service periods of up to six months. During the years ended March 31, 2016 and 2015, no warrants held by consultants were exercised. During the year ended March 31, 2014, 348,630 warrants held by consultants were exercised resulting in proceeds to the Company of approximately $891,000. As of March 31, 2016, 1,370 of these warrants are outstanding.
During November 2013, the Company entered into an agreement with a consultant for services. In connection with the agreement, the Company issued 75,000 warrants to purchase common stock, at a price of $7.36, with a life of five years, to be earned over a twelve month service period. The fair value of the warrants was estimated to be approximately $404,000, which was recognized as a prepaid asset and is being amortized over the term of the consulting agreement. These warrants were classified as equity instruments because they do not contain any anti-dilution provisions. The Black-Scholes model, using a volatility rate of 96.90% and a risk-free interest rate factor of 0.60%, was used to determine the value. The Company recognized approximately $0 and $43,000 during the years ended March 31, 2016 and 2015, respectively, related to these services. As of December 31, 2014, these warrants were fully expensed.
Additionally, during September 2014, the Company issued 50,000 warrants to a consultant in recognition of services previously provided. These warrants were classified as equity instruments because they do not contain any anti-dilution provisions. As of December 31, 2014, the full amount of the warrants related to these services, approximately $237,000 had been recognized.
During November 2014 the Company entered into an agreement with a consultant for services. In connection with the agreement, the Company issued 145,000 warrants to purchase common stock, at a price of $6.84, with a life of five years, to be earned over a seventeen month service period ending on March 31, 2016. The final number of vested warrant shares was 95,000, based on management’s judgment of the satisfaction of specific performance metrics. The fair value of the warrants was estimated to be approximately $74,000, which was revalued and amortized over the term of the consulting agreement. These warrants were classified as equity instruments because they do not contain any anti-dilution provisions. The Black-Scholes model, using a volatility rate of 73.4% and a risk-free interest rate factor of 1.21%, was used to determine the value as of March 31, 2016. The Company recognized approximately $41,000 and $36,000 during the years ended March 31, 2016 and 2015, respectively, related to these services. As of March 31, 2016, these warrants were fully expensed.
F-20
The following table summarizes warrant activity for the years ended
March 31, 2016
and
2015
:
|
|
Warrants
|
|
|
Weighted-Average
Exercise Price
|
|
Balance at March 31, 2014
|
|
|
1,194,756
|
|
|
$
|
1.79
|
|
Granted
|
|
|
195,000
|
|
|
$
|
7.04
|
|
Expired / Canceled
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
(211,647
|
)
|
|
$
|
2.14
|
|
Balance at March 31, 2015
|
|
|
1,178,109
|
|
|
$
|
2.59
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Expired / Canceled
|
|
|
(87,500
|
)
|
|
$
|
7.06
|
|
Exercised
|
|
|
(43,796
|
)
|
|
$
|
1.00
|
|
Balance at March 31, 2016
|
|
|
1,046,813
|
|
|
$
|
2.29
|
|
The warrants outstanding at March 31, 2016 are immediately exercisable at prices between $0.85 and $7.62 per share, and have a weighted average remaining term of approximately 1.28 years.
Common stock reserved for future issuance
Common stock reserved for future issuance consisted of the following at March 31, 2016:
Common stock warrants outstanding
|
|
|
1,046,813
|
|
Common stock options outstanding under the 2008 Plan
|
|
|
622,192
|
|
Common stock options outstanding and reserved under the 2012 Plan
|
|
|
15,479,171
|
|
Total
|
|
|
17,148,176
|
|
Preferred stock
The Company is authorized to issue 25,000,000 shares of preferred stock. There are no shares of preferred stock currently outstanding, and the Company has no present plans to issue shares of preferred stock.
6. Commitments and Contingencies
Operating leases
The Company leases laboratory and office space in San Diego, California under three non-cancelable leases as described below.
Since July 2012, the Company has leased its main facility at 6275 Nancy Ridge Drive, San Diego, CA 92121. The lease, as amended in 2013 and 2015, consists of approximately 30,895 rentable square feet containing laboratory, clean room and office space. Monthly rental payments are currently approximately $83,000 per month with 3% annual escalators. The lease term expires September 1, 2021 with the option to terminate on or after September 1, 2019. The Company also has a right of first refusal on adjacent additional premises of approximately 14,500 square feet.
On January 9, 2015, the Company entered into an agreement to lease a second facility consisting of 5,803 rentable square feet of office and lab space located at 6310 Nancy Ridge Drive, San Diego, CA 92121. The term of the lease is 36 months, beginning on February 1, 2015 and ending on January 31, 2018, with monthly rental payments of approximately $12,000 commencing on April 1, 2015. In addition, there are annual rent escalations of 3% on each 12-month anniversary of the lease commencement date.
On December 28, 2015, the Company entered into an agreement to lease a third facility consisting of 12,088 rentable square feet of office space located at 6166 Nancy Ridge Drive, San Diego, CA 92121. The term of the lease is 12 months, beginning on February 1, 2016 and ending on January 31, 2017, with monthly rental payments of $15,000 commencing on February 1, 2016.
The Company records rent expense on a straight-line basis over the life of the leases and records the excess of expense over the amounts paid as deferred rent. In addition, one of the leases provides for certain improvements made for the Company’s benefit to be funded by the landlord. Such costs, totaling approximately $518,000 to date, have been capitalized as fixed assets and included in deferred rent.
Rent expense was approximately $1,088,000, $968,000, and $561,500 for the years ended March 31, 2016, 2015 and 2014, respectively.
F-21
Future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of
March 31, 2016
, are as follows (in thousands):
Fiscal year ended March 31, 2017
|
|
$
|
1,313
|
|
Fiscal year ended March 31, 2018
|
|
|
1,148
|
|
Fiscal year ended March 31, 2019
|
|
|
1,044
|
|
Fiscal year ended March 31, 2020
|
|
|
1,072
|
|
Fiscal year ended March 31, 2021
|
|
|
1,104
|
|
Thereafter
|
|
|
467
|
|
Total
|
|
$
|
6,148
|
|
Legal matters
In addition to commitments and obligations in the ordinary course of business, the Company may be subject, from time to time, to various claims and pending and potential legal actions arising out of the normal conduct of its business. The Company assesses contingencies to determine the degree of probability and range of possible loss for potential accrual in its financial statements. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing litigation contingencies is highly subjective and requires judgments about future events. When evaluating contingencies, the Company may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. In addition, damage amounts claimed in litigation against it may be unsupported, exaggerated or unrelated to possible outcomes, and as such are not meaningful indicators of its potential liability.
The Company regularly reviews contingencies to determine the adequacy of its accruals and related disclosures. During the period presented, the Company has not recorded any accrual for loss contingencies associated with such claims or legal proceedings; determined that an unfavorable outcome is probable or reasonably possible; or determined that the amount or range of any possible loss is reasonably estimable. However, the outcome of legal proceedings and claims brought against the Company is subject to significant uncertainty. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company in a reporting period, the Company’s consolidated financial statements for that reporting period could be materially adversely affected.
7. Licensing Agreements and Research Contracts
University of Missouri
In March 2009, the Company entered into a license agreement with the Curators of the University of Missouri to in-license certain technology and intellectual property relating to self-assembling cell aggregates and to intermediate cellular units. The Company received the exclusive worldwide rights to commercialize products comprising this technology for all fields of use. The Company is required to pay the University of Missouri royalties ranging from 1% to 3% of net sales of covered tissue products, and of the fair market value of covered tissues transferred internally for use in the Company’s commercial service business, depending on the level of net sales achieved by the Company each year. A minimum annual royalty of $25,000 is due beginning in calendar 2017 and will be credited against royalties due during the subsequent twelve months. The license agreement terminates upon expiration of the patents licensed and is subject to certain conditions as defined in the license agreement, which are expected to expire after 2029.
In March 2010, the Company entered into a license agreement with the Curators of the University of Missouri to in-license certain technology and intellectual property relating to engineered biological nerve grafts. The Company received the exclusive worldwide rights to commercialize products comprising this technology for all fields of use. The Company is required to pay the University of Missouri royalties ranging from 1% to 3% of net sales of covered tissue products depending on the level of net sales achieved by the Company each year. The license agreement terminates upon expiration of the patents licensed and is subject to certain conditions as defined in the license agreement.
Clemson University
In May 2011, the Company entered into a license agreement with Clemson University Research Foundation to in-license certain technology and intellectual property relating to ink-jet printing of viable cells. The Company received the exclusive worldwide rights to commercialize products comprising this technology for all fields of use. The Company is required to pay the University royalties ranging from 1.5% to 3% of net sales of covered tissue products and the fair market value of covered tissues transferred internally for use in the Company’s commercial service business, depending on the level of net sales reached each year. The license agreement terminates upon expiration of the patents licensed, which is expected to expire in May 2024, and is subject to certain conditions as defined in the license agreement. Minimum annual royalty payments of $20,000 were due for each of the two years beginning with
F-22
calendar 2014
, and
$40,000 per year
beginning with calendar 2016.
The annual minimum royalty is creditable against royalties owed during the same calend
ar year.
Capitalized license fees consisted of the following (in thousands):
|
|
March 31,
2016
|
|
|
March 31,
2015
|
|
License fees
|
|
$
|
148
|
|
|
$
|
114
|
|
Less accumulated amortization
|
|
|
(43
|
)
|
|
|
(34
|
)
|
License fees, net
|
|
$
|
105
|
|
|
$
|
80
|
|
The above license fees, net of accumulated amortization, are included in Other Assets in the accompanying balance sheets and are being amortized over the life of the related patents. Amortization expense of licenses was approximately $9,700, $8,500, and $8,500 for the years ended March 31, 2016, 2015 and 2014, respectively. At March 31, 2016, the weighted average remaining amortization period for all licenses was approximately 11 years. The annual amortization expense of licenses for the next five years is estimated to be approximately $10,300 per year.
8. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s net deferred tax assets are as follows as of March 31, 2016 and 2015 (in thousands):
|
|
March 31,
2016
|
|
|
March 31,
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
—
|
|
|
$
|
—
|
|
Research and development credits
|
|
|
—
|
|
|
|
—
|
|
Depreciation and amortization
|
|
|
(105
|
)
|
|
|
(48
|
)
|
Accrued expenses and reserves
|
|
|
862
|
|
|
|
826
|
|
Stock compensation
|
|
|
5,584
|
|
|
|
3,462
|
|
Other, net
|
|
|
12
|
|
|
|
6
|
|
Total deferred tax assets
|
|
|
6,353
|
|
|
|
4,246
|
|
Valuation allowance
|
|
|
(6,353
|
)
|
|
|
(4,246
|
)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
A full valuation allowance has been established to offset the deferred tax assets as management cannot conclude that realization of such assets is more likely than not. Under the Internal Revenue Code (“IRC”) Sections 382 and 383, annual use of our net operating loss and research tax credit carryforwards to offset taxable income may be limited based on cumulative changes in ownership. We have not completed an analysis to determine whether any such limitations have been triggered as of March 31, 2016. Until this analysis is completed, we have removed the deferred tax assets related to net operating losses and research credits from our deferred tax asset schedule. Further, until a study is completed and any limitation known, no amounts are being considered as an uncertain tax position or disclosed as an unrecognized tax benefit. Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact its effective tax rate. Any carryforwards that will expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of the valuation allowance. The valuation allowance increased by approximately $2,107,000 and $2,002,000 for the years ended March 31, 2016 and 2015, respectively.
The Company had federal and state net operating loss carryforwards of approximately $89,814,000 and $89,063,000 at March 31, 2016, respectively. The federal and state net operating loss carryforwards will begin expiring in 2028, unless previously utilized. The net operating loss carryforwards included approximately $6,332,000 of windfall tax benefits related to stock compensation that will be recorded as an increase to additional paid in capital if and when realized.
The Company had federal and state research tax credit carryforwards of approximately $1,351,000 and $1,578,000 at March 31, 2016, respectively. The federal research tax credit carryforwards begin expiring in 2028. The state research tax credit carryforwards do not expire.
In 2009 the Company adopted the accounting guidance for uncertainty in income taxes pursuant to ASC 740-10. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements. The Company did not record any accruals for income tax accounting uncertainties for the year ended March 31, 2016.
F-23
The Company’s policy is to recognize interest and penalties that would be assessed in relation to the settlement value of unrecognized tax benefits as a compon
ent of income tax expense. The Company did not accrue either interest or penalties from inception through
March 31, 2016
.
The Company does not have any unrecognized tax benefits that will significantly decrease or increase within 12 months of March 31, 2016.
The Company is subject to tax in the United States and in various state jurisdictions. As of March 31, 2016, the Company’s tax years from inception are subject to examination by the tax authorities. The Company is not currently under examination by any U.S. federal or state jurisdictions.
9. Concentrations
Credit risk and significant customers
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments. The Company maintains cash balances at various financial institutions primarily located within the United States. Accounts at these institutions are secured by the Federal Deposit Insurance Corporation. Balances may exceed federally insured limits. The Company has not experienced losses in such accounts, and management believes that the Company is not exposed to any significant credit risk with respect to its cash and cash equivalents.
The Company is also potentially subject to concentrations of credit risk in its revenues and accounts receivable. Because it is in the early commercial stage, the Company’s revenues to date have been derived from a relatively small number of customers and collaborators. However, the Company has not historically experienced any accounts receivable write-downs and management does not believe significant credit risk exists as of March 31, 2016.
10. Defined Contribution Plan
The Company has a defined contribution 401(k) plan covering substantially all employees. During the year ended March 31, 2015, the 401(k) plan was amended (“the Amended Plan”) to include an employer matching provision. Under the terms of the Amended Plan, the Company will make matching contributions on up to the first 6 % of compensation contributed by its employees. Amounts expensed under the Company’s 401(k) plan for the years ended March 31, 2016 and 2015 were approximately $277,000 and $57,000, respectively.
11. Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers
, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard was originally effective for public companies for annual reporting periods beginning after December 15, 2016, with no early application permitted. In August 2015, the FASB issued ASU No. 2015-14 that defers by one year the effective date for all entities, with application permitted as of the original effective date. The updated standard becomes effective for us on April 1, 2018, with early adoption permitted as of April 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that these updates will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of these standards on our ongoing financial reporting.
In February 2016, the FASB issued ASU 2016-02, Leases, which requires an entity to recognize lease assets and lease liabilities on the balance sheet for leases with terms of more than 12 months and to disclose key information about leasing arrangements. This new guidance is effective for us on April 1, 2019, with early adoption permitted in any interim or annual period. The Company is currently evaluating the impact that this guidance will have on its financial statements and related disclosures.
In November 2015, the FASB issued an ASU 2015-17, which requires noncurrent classification of all deferred tax assets and liabilities for annual periods beginning after December 31, 2016, with early adoption permitted. The Company has elected to early adopt this update for the year ended March 31, 2017. The Company will apply this standard on a prospective basis. The effect of this update is not expected to be material to our financial statements.
F-24
12
.
Quarterly Financial Data (
u
naudited
)
The following quarterly financial data, in the opinion of management, fairly presents the results for the periods presented (
in thousands, except per share data):
|
|
Year Ended March 31, 2016
|
|
|
|
First Quarter
|
|
|
Second Quarter
|
|
|
Third Quarter
|
|
|
Fourth Quarter
|
|
Revenue
|
|
$
|
306
|
|
|
$
|
301
|
|
|
$
|
328
|
|
|
$
|
548
|
|
Net loss
|
|
|
(8,491
|
)
|
|
|
(11,257
|
)
|
|
|
(10,455
|
)
|
|
|
(8,372
|
)
|
Net loss per common share - basic and diluted
|
|
|
(0.10
|
)
|
|
|
(0.12
|
)
|
|
|
(0.11
|
)
|
|
|
(0.09
|
)
|
Weighted average shares used in computing net
loss per common share—basic and diluted
|
|
|
82,993,966
|
|
|
|
92,385,150
|
|
|
|
92,396,358
|
|
|
|
92,402,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, 2015
|
|
|
|
First Quarter
|
|
|
Second Quarter
|
|
|
Third Quarter
|
|
|
Fourth Quarter
|
|
Revenue
|
|
$
|
99
|
|
|
$
|
50
|
|
|
$
|
155
|
|
|
$
|
267
|
|
Net loss
|
|
|
(6,433
|
)
|
|
|
(8,858
|
)
|
|
|
(6,993
|
)
|
|
|
(7,798
|
)
|
Net loss per common share - basic and diluted
|
|
|
(0.08
|
)
|
|
|
(0.11
|
)
|
|
|
(0.09
|
)
|
|
|
(0.10
|
)
|
Weighted average shares used in computing net
loss per common share—basic and diluted
|
|
|
78,241,373
|
|
|
|
78,933,884
|
|
|
|
80,491,120
|
|
|
|
80,946,849
|
|
13. Subsequent Events
None.
F-25