Notes to Unaudited Condensed Consolidated Financial Statements
1. Change in Fiscal Year End
On March 31, 2013, the Board of Directors of the Company (the Board) approved a change in the
Companys fiscal year end from December 31
st
to March 31
st
. As a result of this change, the Company filed a Transition Report on
Form 10-KT for the three-month transition period ended March 31, 2013. References to any of the Companys fiscal years mean the fiscal year ending March 31
st
of that calendar year.
2. Description of Business and Summary of Significant Accounting Policies
Nature of operations and basis of presentation
References in these notes to the unaudited condensed 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 subsidiary Organovo, Inc. The Company is developing and
commercializing functional three-dimensional (3D) 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.
As of December 31, 2013, the Company has devoted substantially all of its efforts to product development, raising capital and building infrastructure.
The Company has not realized significant revenues from its planned principal operations. Accordingly, the Company is considered to be in the development stage.
The accompanying interim condensed consolidated financial statements have been prepared by the Company, without audit, in accordance with the instructions to
Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of its financial position, results of operations, stockholders equity (deficit) and cash flows in accordance with generally
accepted accounting principles (GAAP). The balance sheet at March 31, 2013 is derived from the audited balance sheet at that date.
In
the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments, which are only normal and recurring, necessary for a fair statement of the Companys financial position, results of
operations, stockholders equity (deficit) and cash flows. These financial statements should be read in conjunction with the financial statements included in the Companys Transition Report filed on Form 10-KT for the transition period
ended March 31, 2013 filed with the Securities and Exchange Commission (the SEC) on May 24, 2013. Operating results for interim periods are not necessarily indicative of operating results for the Companys fiscal year
ending March 31, 2014.
Reverse merger transaction
On February 8, 2012, Organovo, Inc., a privately held Delaware corporation, merged with and into Organovo Acquisition Corp., a wholly-owned subsidiary of
Organovo Holdings, Inc., a publicly traded Delaware corporation, with Organovo, Inc. surviving the merger as a wholly-owned subsidiary of the Company (the Merger). As a result of the Merger, the Company acquired the business of Organovo,
Inc., and will continue the existing business operations of Organovo, Inc.
Simultaneously with the Merger, on February 8, 2012 (the closing
date), all of the issued and outstanding shares of Organovo, Inc.s common stock converted, on a 1 for 1 basis, into shares of the Companys common stock, par value $0.001 per share. Also, on the closing date, all of the issued and
outstanding options to purchase shares of Organovo, Inc.s common stock and other outstanding warrants to purchase Organovo, Inc.s common stock, and all of the issued and outstanding bridge warrants to purchase shares of Organovo,
Inc.s common stock, converted on a 1 for 1 basis, into options, warrants and new bridge warrants to purchase shares of the Companys common stock.
Immediately following the consummation of the Merger: (i) the former security holders of Organovo, Inc. common stock had an approximate 75% voting
interest in the Company and the Company stockholders retained an approximate 25% voting interest, (ii) the former executive management team of Organovo, Inc. remained as the only continuing executive management team for the Company, and
(iii) the Companys ongoing operations consist solely of the ongoing operations of Organovo, Inc. Based primarily on these factors, the Merger was accounted for as a reverse merger and a recapitalization in accordance with GAAP. As a
result, these financial statements reflect the historical results of Organovo, Inc. prior to the Merger, and the combined results of the Company following the Merger. The par value of Organovo, Inc. common stock immediately prior to the Merger was
$0.0001 per share. The par value subsequent to the Merger is $0.001 per share, and therefore the historical results of Organovo, Inc. prior to the Merger have been retroactively adjusted to affect the change in par value.
8
In connection with three separate closings of a private placement transaction completed in connection with the
Merger (the Private Placement), the Company received gross proceeds of approximately $5.0 million, $1.8 million and $6.9 million on closings on February 8, 2012, February 29, 2012 and March 16, 2012, respectively. In
2011, the Company received $1.5 million from the purchase of 6% convertible notes which were automatically converted into 1,500,000 shares of common stock, plus 25,387 shares for accrued interest of $25,387 on the principal, on February 8,
2012.
The cash transaction costs related to the Merger were approximately $2.1 million.
Before the Merger, Organovo Holdings Board of Directors and stockholders adopted the 2012 Equity Incentive Plan (the 2012 Plan). In
addition, Organovo Holdings assumed and adopted Organovo, Inc.s 2008 Equity Incentive Plan.
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 Companys shares were quoted on the OTC QX.
Liquidity
As of December 31, 2013, the Company had an accumulated deficit of approximately $85.7 million. The Company also had negative cash flows from
operations of approximately $10.2 million during the nine months ended December 31, 2013.
In August of 2013, the Company raised net proceeds of
approximately $43.4 million through the sale of 10,350,000 shares of its common stock in a public offering (see Note 4).
In addition, 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 Companys effective shelf registration statement previously filed with the SEC. As of the three months ended December 31, 2013, the Company had
not sold any shares under the distribution agreement.
Through December 31, 2013, the Company has financed its operations primarily through the sale
of convertible notes, the private placement of equity securities, the public offering of common stock, and through revenue derived from grants or collaborative research agreements. Based on its current operating plan and available cash
resources, the Company has sufficient resources to fund its business for at least the next twelve months.
The Company cannot predict with certainty when,
if ever, it will require additional capital to further fund the product 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, and from revenue derived from grants and collaborative research agreements. However, the Company cannot provide
assurance that it will not require additional funding in the future. In addition, the Company cannot be sure that additional financing will be available if and when needed, or that, if available, financing will be obtained on terms favorable to the
Company and its stockholders. Having insufficient funds may require the Company to delay, scale back, or eliminate some or all of its development programs or relinquish rights to its technology on less favorable terms than it would otherwise
choose. Failure to obtain adequate financing could eventually adversely affect the Companys ability to operate as a going concern.
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 condensed 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 Companys
financial instruments, including cash and cash equivalents, grants receivable, inventory, prepaid expenses and other current 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.
9
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 December 31, 2013 and March 31, 2013, the Company had approximately $78,800 and $88,300, respectively, of restricted cash deposited with a
financial institution. The entire $78,800 as of December 31, 2013 and $38,300 of the balance as of March 31, 2013 is held in certificates of deposit to support a letter of credit agreement related to the facility lease entered into during
2012. In December 2013, the lease was amended to increase the rented area by 15,268 square feet, and as such, the Company was required to increase the amount held in certificates of deposit to support the increased letter of credit as required by
the lease amendment. The additional $50,000 included in the March 31, 2013 balance represents funds held by a financial institution as a guarantee for the Companys commercial credit cards. These funds were released from restriction during
the nine months ended December 31, 2013 as a result of the Company transferring its credit card program to a different financial institution.
Grant receivable
Grant receivable as of
December 31, 2013 represents the amount due under a private research grant that began in October 2013. Grant receivable as of December 31, 2012 represents the amount due from the National Institutes of Health (NIH) under a
research grant that concluded in April 2013. The Company considers the grants receivable to be fully collectible; and accordingly, no allowance for doubtful amounts has been established. If amounts become uncollectible, they are charged to
operations.
Inventory
Inventories are stated at the
lower of the cost or market (first-in, first-out). Inventory at December 31, 2013 and March 31, 2013 consisted of approximately $82,000 and $88,000 in raw materials, respectively.
The Company provides inventory allowances based on excess or obsolete inventories determined based on anticipated use in the final product. There was no
obsolete inventory reserve as of December 31, 2013 or March 31, 2013.
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 lease term. The estimated useful lives of the
fixed assets range between two and five 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 recoverable. To determine recoverability of its long-lived assets, the Company evaluates whether future undiscounted net cash flows will be
less than the carrying 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 in the period from inception through December 31, 2013.
10
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:
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Level 1 Quoted prices in active markets for identical assets or liabilities.
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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.
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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 3). The Companys 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 the Company uses to value the warrants, including the Companys current stock price, the remaining life of the warrants, the
volatility of the Companys stock price, and the risk-free interest rate. Future changes in these factors will have a significant impact on the computed fair value of the warrant liability. As such, the Company expects future changes in the
fair value of the warrants to continue to vary significantly from quarter to quarter.
The estimated fair values of the liabilities measured on a
recurring basis are as follows:
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Fair Value Measurements at December 31 and March 31, 2013 (in thousands):
|
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|
Balance at
December 31,
2013
|
|
|
Quoted
Prices in
Active
Markets
(Level 1)
|
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|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Other
Unobservable
Inputs
(Level 3)
|
|
Warrant liability
|
|
$
|
1,006
|
|
|
|
|
|
|
|
|
|
|
$
|
1,006
|
|
|
|
|
|
|
|
|
Balance at
March 31,
2013
|
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|
Quoted
Prices in
Active
Markets
(Level 1)
|
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|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Other
Unobservable
Inputs
(Level 3)
|
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Warrant liability
|
|
$
|
6,898
|
|
|
|
|
|
|
|
|
|
|
$
|
6,898
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|
11
The following table presents the activity for liabilities measured at estimated fair value using unobservable
inputs for 2012 through December 31, 2013:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
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Warrant
Derivative
Liability
($000s)
|
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Balance at December 31, 2011
|
|
$
|
1,267
|
|
Issuances
|
|
|
32,742
|
|
Adjustments to estimated fair value
|
|
|
9,931
|
|
Warrant liability removal due to settlements
|
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(23,321
|
)
|
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|
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Balance at December 31, 2012
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|
$
|
20,619
|
|
Issuances
|
|
|
|
|
Adjustments to estimated fair value
|
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|
12,034
|
|
Warrant liability removal due to settlements
|
|
|
(23,869
|
)
|
Warrant liability reclassified to equity
|
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(1,886
|
)
|
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|
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Balance at March 31, 2013
|
|
$
|
6,898
|
|
Issuances
|
|
|
|
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Adjustments to estimated fair value
|
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5,397
|
|
Warrant liability removal due to settlements
|
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|
(10,522
|
)
|
Warrant liability reclassified to equity
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|
(767
|
)
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|
|
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Balance at December 31, 2013
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|
$
|
1,006
|
|
|
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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 Companys revenues are
derived from collaborative research agreements, grants from the NIH, U.S. Treasury Department and private not-for-profit organizations, as well as the sale of Bioprinter related products and services, and license agreements.
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 December 31, 2013 and March 31, 2013, the Company had approximately $20,000 and $62,000, respectively, in deferred revenue related to its collaborative research programs.
12
Product Revenue
The Company recognizes product revenue at the time of shipment to the customer, provided all other revenue recognition criteria have been met. The Company
recognizes product revenues upon shipment to distributors, provided that (i) the price is substantially fixed or determinable at the time of sale; (ii) the distributors obligation to pay the Company is not contingent upon resale of
the products; (iii) title and risk of loss passes to the distributor at the time of shipment; (iv) the distributor has economic substance apart from that provided by the Company; (v) the Company has no significant obligation to the
distributor to bring about the resale of the products; and (vi) future returns can be reasonably estimated. For any sales that do not meet all of the above criteria, revenue is deferred until all such criteria have been met.
Research and Development Revenue Under Collaborative Agreements
The Companys 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 hours are incurred. The Company performs services as specified in each respective agreement on a best-efforts basis, and is reimbursed based on labor hours incurred on each contract. 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, based on total labor hours incurred relative to total labor hours
estimated under the contract.
In December 2010, the Company entered into a 12 month research contract agreement with a third party, whereby the Company
was engaged to perform research and development services on a fixed-fee basis for approximately $600,000. Based on the proportional performance criteria, total revenue recognized on the contract from inception through December 31, 2013 was
approximately $600,000.
In October 2011, the Company entered into a research contract agreement with a third party, whereby the Company is performing
research and development services on a fixed-fee basis for $1,365,000. The agreement included an initial payment to the Company of approximately $239,000 with remaining payments expected to occur over a twenty-one month period. On November 27,
2012, the agreement was amended to include additional research and development services up to an additional $135,000, bringing the total potential contract value to $1,500,000. The third party ultimately elected to have only $40,000 of these
additional research and development services performed by the Company, resulting in a total contract value of $1,405,000. The amendment extended the original contract (which runs concurrently) from twenty-one months to twenty-eight months. The
Company recorded approximately $59,000 and $207,000 of revenue related to the research contract in recognition of the proportional performance achieved, for the three months ended December 31, 2013 and 2012, respectively and $174,000 and
$765,000 of revenue for the nine months ended December 31, 2013 and 2012, respectively. Total revenue recognized on the contract from inception through December 31, 2013 was $1,395,000.
Revenue Arrangements with Multiple Deliverables
The Company
occasionally enters into 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.
The Company recognizes revenue for delivered elements only when it determines there are no uncertainties regarding
customer acceptance. 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 Companys results of operations.
The Company expects to
periodically receive 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.
13
Grant Revenues
During 2010, the U.S. Treasury awarded the Company two one-time grants totaling approximately $397,000 for investments in qualifying therapeutic discovery
projects under section 48D of the Internal Revenue Code. The grants cover reimbursement for qualifying expenses incurred by the Company in 2010 and 2009. The proceeds from these grants are classified in Revenues Grants for
the period from inception through December 31, 2013.
During 2012, 2010 and 2009, the NIH awarded the Company three research grants totaling
approximately $558,000. Revenues from the NIH grants are based upon internal and subcontractor costs incurred that are specifically covered by the grants, and where applicable, an additional facilities and administrative rate that provides funding
for overhead expenses. These revenues are recognized when expenses have been incurred by subcontractors and as the Company incurs internal expenses that are related to the grants. Revenue recognized under these grants was approximately $0 and
$67,000, for the three months ended December 31, 2013 and 2012, respectively, and $12,000 and $162,000 for the nine months ended December 31, 2013 and 2012, respectively. Total revenue recorded under these grants from inception through
December 31, 2013 was approximately $558,000.
During 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 $38,000 and $0, for the three months
ended December 31, 2013 and 2012, respectively, and $38,000 and $0 for the nine months ended December 31, 2013 and 2012, respectively. Total revenue recorded under this grant from inception through December 31, 2013 was approximately
$38,000.
Stock-based compensation
The Company
accounts for stock-based compensation in accordance with the Financial Accounting Standards Boards 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 employees 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 three and nine months ended December 31, 2013 and 2012, respectively, and for the period April 19, 2007 (inception) through
December 31, 2013, 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 would
be anti-dilutive. No dilutive effect was calculated for the three and nine months ended December 31, 2013 or 2012, as the Company reported a net loss for each respective period and the effect would have been anti-dilutive.
14
3. Derivative Liability
During 2012, in connection with the reverse Merger and the three offerings under the Private Placement, the Company issued 21,347,182
five-year warrants to purchase the Companys common stock. In October and November 2011, the Company issued 1,500,000 five-year warrants in connection with Convertible Notes. The exercise price of the warrants is protected against
down-round financing throughout the term of the warrant. Pursuant to ASC 815-15 and ASC 815-40, the fair value of the warrants of approximately $32.7 million and $1.3 million in 2012 and 2011, respectively, was recorded as a derivative liability on
the issuance dates.
The Company revalues the warrants as of the end of each reporting period, and the estimated fair value of the outstanding warrant
liabilities was approximately $1.0 million and $6.9 million, as of December 31, 2013 and March 31, 2013, respectively. The changes in fair value of the derivative liabilities for the three months ended December 31, 2013 and 2012
were increases of approximately $0.6 million and $4.8 million, respectively, and are included in other expense in the statement of operations. The changes in fair value of the derivative liabilities for the nine months ended December 31, 2013
and 2012 were an increase of approximately $5.4 million and a decrease of approximately $3.6 million, respectively.
During the three months ended
December 31, 2013 and 2012, 60,176 and 11,241,762 warrants, respectively, that were classified as derivative liabilities were exercised. During the nine months ended December 31, 2013 and 2012, 1,878,104 and 13,010,237 warrants,
respectively, that were classified as derivative liabilities were exercised. The warrants were revalued as of the settlement dates, and the change in fair value was recognized to earnings. In addition, during the nine months ended December 31,
2013, the Company entered into amendment agreements with certain of the warrant holders, which removed the down-round pricing protection provisions, 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.
The derivative liabilities were valued at the closing dates of the Private Placement and the end of each
reporting period using a Monte Carlo valuation model with the following assumptions:
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December 31,
2013
|
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
Closing price per share of common stock
|
|
$
|
11.07
|
|
|
$
|
3.68
|
|
|
$
|
2.60
|
|
Exercise price per share
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
Expected volatility
|
|
|
82.3
|
%
|
|
|
88.8
|
%
|
|
|
92.9
|
%
|
Risk-free interest rate
|
|
|
0.78
|
%
|
|
|
0.57
|
%
|
|
|
0.54
|
%
|
Dividend yield
|
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|
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Remaining expected term of underlying securities (years)
|
|
|
3.20
|
|
|
|
3.88
|
|
|
|
4.16
|
|
In addition, as of the valuation dates, management assessed the probabilities of future financing assumptions in the Monte
Carlo valuation models. Management also applied a discount for lack of marketability to the valuation of the derivative liabilities based on such trading restrictions due to certain of the shares not being registered.
4. Stockholders Equity
Common stock
A shelf registration
statement on Form S-3 (File No. 333-189995), or shelf, was filed 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,
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 shelf was declared effective by the SEC on
July 26, 2013.
On August 2, 2013, the Company, entered into an Underwriting Agreement (the Underwriting Agreement) with Lazard
Capital Markets LLC, acting as representative of the underwriters named in the Underwriting Agreement (the Underwriters) and joint book-runner with Oppenheimer & Co. Inc., relating to the issuance and sale of 10,350,000 shares
of the Companys 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. JMP Securities LLC and Maxim Group LLC each acted as co-managers
for the offering. The price to the public in the 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
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.
15
The Underwriting Agreement contained customary representations, warranties and agreements by the Company,
customary conditions to closing, indemnification obligations of the Company and the Underwriters, including for liabilities under the Securities Act, other obligations of the parties and termination provisions.
The representations, warranties and covenants contained in the Underwriting Agreement were made only for purposes of the Underwriting Agreement as of specific
dates indicated therein, were solely for the benefit of the parties to the Underwriting Agreement, and may be subject to limitations agreed upon by the parties, including being qualified by confidential disclosures exchanged between the parties in
connection with the execution of the Underwriting Agreement.
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 Companys effective shelf registration statement previously filed with the SEC. As of the three months ended December 31, 2013, the Company had not sold any shares under the distribution agreement (see Note 7).
In addition, during the three months ended December 31, 2013 and 2012, the Company issued 533,533 and 11,612,791 shares of common stock,
respectively, upon the exercise of warrants. During the nine months ended December 31, 2013 and 2012, the Company issued 2,404,519 and 13,423,622 shares of common stock, respectively, upon the exercise of warrants.
Restricted stock awards
In May 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 were issued under the 2008 Plan during 2012 or the nine months ended December 31, 2013, and the Company does not
intend to issue any additional shares from the 2008 Plan in the future.
From 2008 through December 31, 2011, the Company issued a total of 1,258,934
shares of restricted common stock to various employees, advisors, and consultants of the Company. Of those shares, 1,086,662 were issued under the 2008 Plan and the remaining 172,272 shares were issued outside the plan.
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. In
August 2013, the Board of Directors of the Company approved an amendment to the 2012 Plan to increase the number of shares of common stock that may be issued under the 2012 Plan by 5,000,000 shares, for an aggregate of 11,553,986 shares issuable
under the 2012 Plan. The 2012 Plan terminates ten years after its adoption.
There were 1,380,000 shares of restricted stock issued during the three and
nine months ended December 31, 2012, respectively.
During the nine months ended December 31, 2013, the Company issued an aggregate of 60,000
restricted stock units with immediate vesting to a consultant.
During the three months ended December 31, 2013 and 2012, there were 3,703 and 9,021
shares of restricted stock, respectively, cancelled related to shares of common stock returned to the Company, at the option of the holders, to cover the tax liability related to the vesting of 8,750 and 21,250 restricted stock units, respectively.
During the nine months ended December 31, 2013 and 2012, there were 164,243 and 89,674 shares of restricted stock, respectively, cancelled related to shares of common stock returned to the Company, at the option of the holders, to cover the tax
liability related to the vesting of 305,000 and 211,250 restricted stock units, respectively. Upon the return of the common stock, an equal number of stock options with immediate vesting were granted to the individuals at the vesting date market
value strike price.
16
A summary of the Companys restricted stock award activity for 2012 through December 31, 2013 is as
follows:
|
|
|
|
|
|
|
Number of
Shares
|
|
Unvested at December 31, 2011
|
|
|
1,111,295
|
|
Granted
|
|
|
1,380,000
|
|
Vested
|
|
|
(1,143,735
|
)
|
Canceled / forfeited
|
|
|
(185,516
|
)
|
|
|
|
|
|
Unvested at December 31, 2012
|
|
|
1,162,044
|
|
Granted
|
|
|
55,000
|
|
Vested
|
|
|
(196,612
|
)
|
Canceled / forfeited
|
|
|
(34,690
|
)
|
|
|
|
|
|
Unvested at March 31, 2013
|
|
|
985,742
|
|
Granted
|
|
|
60,000
|
|
Vested
|
|
|
(365,000
|
)
|
Canceled / forfeited
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2013
|
|
|
680,742
|
|
|
|
|
|
|
The fair value of each restricted common 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 $681,000 and $834,000 for the nine months ended December 31, 2013 and 2012, respectively. The
Company recorded restricted share-based compensation expense of approximately $1,837,000 for the period from April 19, 2007 (inception) through December 31, 2013. Share-based compensation expense included in research and development was
$12,000 and $82,000 for the nine months ended December 31, 2013 and 2012, respectively. Share-based compensation expense included in general and administrative expense was $669,000 and $750,000 for the nine months ended December 31, 2013
and 2012, respectively.
As of December 31, 2013, total unrecognized restricted stock-based compensation expense was approximately $883,000, which
will be recognized over a weighted average period of 1.7 years.
Stock options
Under the 2008 Plan, on October 12, 2011, the Company granted an officer incentive stock options to purchase 896,256 shares of common stock at an exercise
price of $0.08 per share, a quarter of which vested on the one year anniversary of employment, in May 2012, and the remaining options are vesting ratably over the remaining 36 month term. Other than this grant, the Company does not intend to
issue any additional shares under the 2008 Plan.
Under the 2012 Plan, 91,203 and 296,833 incentive stock options were issued during the three months
ended December 31, 2013 and 2012, respectively, and 372,243 and 1,829,394 incentive stock options were issued during the nine months ended December 31, 2013 and 2012, respectively, at various exercise prices. The stock options generally
vest 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. The Company
issued 293,500 and 124,000 non-qualified options during the nine months ended December 31, 2013 and 2012 respectively, which vest on the one year anniversary of the grant date or quarterly over three years.
A summary of the Companys stock option activity for 2012 through December 31, 2013 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2011
|
|
|
896,256
|
|
|
$
|
0.08
|
|
|
|
|
|
Options granted
|
|
|
2,023,394
|
|
|
$
|
1.95
|
|
|
|
|
|
Options canceled
|
|
|
(5,000
|
)
|
|
$
|
2.25
|
|
|
|
|
|
Options exercised
|
|
|
(224,064
|
)
|
|
$
|
0.08
|
|
|
$
|
564,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2012
|
|
|
2,690,586
|
|
|
$
|
1.48
|
|
|
$
|
3,041,476
|
|
Options granted
|
|
|
927,981
|
|
|
$
|
3.93
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Aggregate
Intrinsic
Value
|
|
Options canceled
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2013
|
|
|
3,618,567
|
|
|
$
|
2.11
|
|
|
$
|
5,909,154
|
|
Options granted
|
|
|
665,743
|
|
|
$
|
5.32
|
|
|
|
|
|
Options canceled
|
|
|
(18,455
|
)
|
|
|
3.31
|
|
|
|
|
|
Options exercised
|
|
|
(83,801
|
)
|
|
$
|
2.33
|
|
|
$
|
732,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2013
|
|
|
4,182,054
|
|
|
$
|
2.62
|
|
|
$
|
35,346,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and Exercisable at December 31, 2013
|
|
|
1,400,169
|
|
|
$
|
1.95
|
|
|
$
|
14,259,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average remaining contractual term of options exercisable and outstanding at December 31, 2013 was
approximately 8.5 years and 8.7 years, respectively.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31, 2013
|
|
|
Three Months Ended
December 31, 2012
|
|
|
Nine Months Ended
December 31, 2013
|
|
|
Nine Months Ended
December 31, 2012
|
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
82.3
|
%
|
|
|
96.2
|
%
|
|
|
83.9
|
%
|
|
|
90.8
|
%
|
Risk-free interest rate
|
|
|
0.78
|
%
|
|
|
0.89
|
%
|
|
|
0.82
|
%
|
|
|
1.04
|
%
|
Expected life of options
|
|
|
6.00 years
|
|
|
|
6.05 years
|
|
|
|
6.00 years
|
|
|
|
6.04 years
|
|
Weighted average grant date fair value
|
|
$
|
5.54
|
|
|
$
|
2.39
|
|
|
$
|
4.00
|
|
|
$
|
1.52
|
|
The assumed dividend yield was based on the Companys expectation of not paying dividends in the foreseeable future. Due
to the Companys 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.
The total stock option-based compensation recorded as operating expense was
approximately $2,160,000 and $598,000 for the nine months ended December 31, 2013 and 2012, respectively. The Company recorded stock-based compensation expense of approximately $3,139,000 for the period from April 19, 2007 (inception)
through December 31, 2013. Expense included in research and development was $262,000 and $113,000 for the nine months ended December 31, 2013 and 2012, respectively. Expense included in general and administrative was $1,898,000 and
$485,000 for the nine months ended December 31, 2013 and 2012, respectively.
The total unrecognized compensation cost related to unvested stock
option grants as of December 31, 2013 was approximately $5,241,000 and the weighted average period over which these grants are expected to vest is 2.8 years.
Warrants
During the three months ended December 31,
2013 and 2012, 450,176 and 220,000 warrants, respectively, were exercised through a cashless exercise provision for issuance of 383,403 and 121,279 shares of common stock, respectively. During the nine months ended December 31, 2013 and 2012,
2,485,233 and 272,500 warrants, respectively, were exercised through a cashless exercise provision for issuance of 2,010,889 and 163,635 shares of common stock, respectively. During the three and nine months ended December 31, 2013, 150,130 and
393,630 warrants, respectively, were exercised at prices ranging from $1.00 to $3.24 for total proceeds of $284,696 and $935,876, respectively, and during the three and nine months ended December 31, 2012, 11,491,512 and 13,259,987 warrants,
respectively, were exercised at prices of $0.80 and $1.00 for total proceeds of $9,562,776 and $11,331,251, respectively.
18
In December 2012, the Company consummated a warrant tender offer to the holders of outstanding warrants to
purchase approximately 14.5 million shares of the Companys common stock. In accordance with the tender offer, for those warrant holders that elected to participate, this resulted in a reduction of the exercise price of the warrants from
$1.00 per share to $0.80 per share of common stock in cash, shortened the exercise period of the warrants so that they expired concurrently with the tender offer, and removed the price-based anti-dilution provisions contained in the
warrants. The Company completed the tender offer on December 21, 2012, resulting in approximately 9.6 million warrants being exercised for gross proceeds of approximately $7,700,000. In connection with the transaction, the
Company recognized an expense for the inducement to exercise the warrants of approximately $1,900,000. The Company also incurred approximately $400,000 in placement agent fees, legal costs, and other related fees, which have been recognized as
an offset to the proceeds received from the warrant exercises.
60,176 and 11,241,762 of the warrants exercised during the three months ended
December 31, 2013 and 2012, and 1,878,104 and 13,010,237 of the warrants exercised during the nine months ended December 31, 2013 and 2012, respectively, were derivative liabilities and were valued at the settlement date. For the three
months ended December 31, 2013 and 2012, and the nine months ended December 31, 2013 and 2012, respectively, approximately $375,000, $19,593,000, $10,522,000 and $23,321,000 of the warrant liability was removed due to the exercise of
warrants. (See Note 3).
During March 2013, the Company entered into amendment agreements for 600,065 warrants to purchase common stock which reduced
the exercise price of the warrants from $1.00 to $0.90, extended the exercise term to five years from the effective date of the amendment, and 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 $65,000 was recognized as interest expense for the three months ended March 31, 2013.
During April 2013, 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 and 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 of $767,000. 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 nine months ended December 31, 2013.
During the year ended December 31, 2012, the Company entered into four agreements
with consultants for services. In connection with the agreements, the Company issued a total of 650,000 warrants to purchase common stock, 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. The fair value of the warrants was estimated to be approximately $890,000, which was recognized as a prepaid asset and was amortized over the term of the consulting agreements. These warrants were classified as equity
instruments because they do not contain any anti-dilution provisions. The Black-Scholes model, using volatility rates ranging from 79.8% to 103.8% and risk-free interest rate factors ranging from 0.24% to 0.63%, were used to determine the value. The
value has been amortized over the term of the agreements. The Company recognized approximately $72,000 and $890,000 during the nine months ended December 31, 2013 and for the period from April 19, 2007 (inception) through December 31,
2013, respectively, related to these services.
Additionally, 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 $62,000 during the three and nine months ended December 31, 2013 and for
the period from April 19, 2007 (inception) through December 31, 2013, respectively, related to these services.
19
The following table summarizes warrant activity for 2012 through December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
Weighted-
Average
Exercise Price
|
|
Balance at December 31, 2011
|
|
|
2,909,750
|
|
|
$
|
1.00
|
|
Granted
|
|
|
21,997,182
|
|
|
$
|
1.04
|
|
Exercised
|
|
|
(13,532,487
|
)
|
|
$
|
0.84
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
|
11,374,445
|
|
|
$
|
1.08
|
|
Granted
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(7,090,556
|
)
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2013
|
|
|
4,283,889
|
|
|
$
|
1.17
|
|
Granted
|
|
|
112,500
|
|
|
$
|
7.36
|
|
Exercised
|
|
|
(2,878,863
|
)
|
|
$
|
1.22
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
|
1,517,526
|
|
|
$
|
1.61
|
|
|
|
|
|
|
|
|
|
|
The warrants outstanding at December 31, 2013 are immediately exercisable at prices between $0.85 and
$7.36 per share, and have a weighted average remaining term of approximately 2.86 years.
Common stock reserved for future issuance
Common stock reserved for future issuance consisted of the following at December 31, 2013:
|
|
|
|
|
Common stock warrants outstanding
|
|
|
1,517,526
|
|
Common stock options outstanding under the 2008 Plan
|
|
|
672,192
|
|
Common stock options outstanding and reserved under the 2012 Plan
|
|
|
9,580,572
|
|
|
|
|
|
|
Total
|
|
|
11,770,290
|
|
|
|
|
|
|
5. Commitments and Contingencies
Operating leases
The Company leases
office and laboratory space under a non-cancelable operating lease which was entered into in February 2012 and amended in December 2013, with the future minimum lease payments from the lease included below. The Company records rent expense on a
straight-line basis over the life of the lease and records the excess of expense over the amounts paid as deferred rent. Deferred rent is included in accrued expenses in the condensed consolidated balance sheets.
Rent expense was approximately $112,000 and $109,000 for the three months ended December 31, 2013 and 2012, respectively, $322,000 and $266,000 for the
nine months ended December 31, 2013 and 2012, respectively, and $1,078,000 for the period from April 19, 2007 (inception) through December 31, 2013.
On February 27, 2012, the Company entered into a facilities lease at 6275 Nancy Ridge Drive (the Original Lease), San Diego, CA 92121, with
occupancy as of July 15, 2012. The base rent under the lease was approximately $38,800 per month with 3% annual escalators. The lease term was 48 months with an option for the Company to extend the lease at the end of the lease term.
On December 5, 2013, the Company entered into a First Amendment (the Amendment) to the Original Lease, together with the Amendment, (the
Amended Lease). Pursuant to the Amendment, the Company expanded the size of its facility by approximately 15,268 square feet (the Expansion Premises) from approximately 15,539 square feet (the Original Premises)
for a total of approximately 30,807 square feet. The Amended Lease provides for base rent (i) on the Original Premises to continue at approximately $38,800 per month, with annual escalators, until August 1, 2016, at which point the base
rent shall be payable at the same rate per rentable square foot as the Expansion Premises and (ii) on the Expansion Premises of approximately $38,934 per month, with 3% annual escalators, not to commence until two months after the earlier of
(A) the date that the landlord delivers possession of the Expansion Premises to the Company with the work in the Expansion Lab Premises (as defined in the Amendment) substantially complete and (B) the date the landlord could have delivered
the Expansion Premises with the work in the Expansion Lab Premises (as defined in the Amendment) substantially complete but for certain delays of the Company. Additionally, the Company has a right of first refusal on adjacent additional premises of
approximately 14,500 square feet. The term of the Amended Lease expires on the seven-year anniversary of the earlier of (A) the date that the landlord delivers possession of the Expansion Premises to the Company
20
and (B) the date the landlord could have delivered the Expansion Premises but for certain delays of the Company (the Expansion Premises Commencement Date). The target Expansion
Premises Commencement Date is September 1, 2014. The Company also has the option to terminate the Amended Lease on the 5-year anniversary of the Expansion Premises Commencement Date. The Company intends for the Expansion Premises to contain
office, laboratory, and clean room areas.
Future minimum rental payments required under operating leases that have initial or remaining non-cancelable
lease terms in excess of one year as of December 31, 2013, are as follows (in thousands):
|
|
|
|
|
Fiscal year ended March 31, 2014
|
|
$
|
121
|
|
Fiscal year ended March 31, 2015
|
|
|
766
|
|
Fiscal year ended March 31, 2016
|
|
|
981
|
|
Fiscal year ended March 31, 2017
|
|
|
986
|
|
Fiscal year ended March 31, 2018
|
|
|
1,004
|
|
Thereafter
|
|
|
3,473
|
|
|
|
|
|
|
Total
|
|
$
|
7,331
|
|
|
|
|
|
|
Legal Matters
In
addition to commitments and obligations in the ordinary course of business, the Company is subject 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. An estimated loss contingency is accrued in its financial statements if it is probable that a liability has been incurred and the
amount of the loss can be reasonably estimated. 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. The amount of ultimate loss may differ from these estimates. It is possible that cash flows or results of operations could be
materially affected in any particular period by the unfavorable resolution of one or more of these contingencies. Whether any losses finally determined in any claim, action, investigation or proceeding could reasonably have a material effect on the
Companys business, financial condition, results of operations or cash flows will depend on a number of variables, including: the timing and amount of such losses; the structure and type of any remedies; the monetary significance any such
losses, damages or remedies may have on our condensed consolidated financial statements; and the unique facts and circumstances of the particular matter that may give rise to additional factors.
Spencer Trask Matter
. On June 28, 2013, the Company filed a lawsuit for declaratory relief in the Supreme Court for the State of New York (case #
652305/2013) against Spencer Trask Ventures, Inc. (STV or Spencer Trask) in connection with a Warrant Solicitation Agency Agreement (the WSAA) that the Company entered into with STV in February 2013 (the New
York Action). In the New York Action, the Company is seeking a declaration that the WSAA remains a valid and enforceable agreement. Over the course of several weeks in February 2013, Organovo and STV, through their respective attorneys,
negotiated the WSAA pursuant to which the Company engaged STV as the Companys warrant solicitation agent in connection with the Companys efforts to solicit the exercise of outstanding Organovo warrants during the first quarter of 2013.
STVs President signed the WSAA on behalf of STV, and the Companys CEO executed the agreement on behalf of Organovo. Spencer Trask provided services to the Company pursuant to the WSAA, and the Company has paid STV for those services.
The Companys dispute with Spencer Trask arose in March 2013 after the Company approached Spencer Trask about exercising its outstanding warrants to
help the Company qualify for up-listing its common stock on the NYSE:MKT. Previously, Spencer Trask had not asserted any claims for additional compensation as a result of the warrant tender offer the Company completed in December 2012. In March
2013, the Company received two demand letters from STV, and a demand for arbitration notice in June 2013. In the first demand letter, STV alleges that it is entitled to compensation (including a cash fee and warrants to purchase common stock) as a
result of the warrant tender offer the Company completed in December 2012 and as a result of the notice of warrant redemption the Company completed in March 2013. In the second letter, STV alleges it is entitled to damages because the Company
allegedly violated confidentiality provisions in the Placement Agency Agreement (the PAA) the Company had previously entered into with STV in December 2012 in connection with the private placement financings the Company completed in
February and March 2012 (the Private Placements), by contacting the warrant holders who participated in the warrant tender offer. In response, on June 28, 2013, the Company filed a lawsuit for declaratory relief in the Supreme Court
for the State of New York against STV. The Companys tender offer was made to warrant holders of record relating to warrants already owned by them and whose identity was public
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information via a Registration Statement on Form S-1 the Company was required to file to register the resale of the shares underlying their warrants. For these and other reasons, including
applicability of the WSAA, the Company believes STV is not entitled to compensation under the PAA and there was no violation of confidentiality. The Company received notice on August 5, 2013 that STV had filed its arbitration demand with the
arbitrator (the Arbitration). In July, 2013, the Company filed a motion to stay the arbitration pending determination of the New York Action. In January 2014, the New York Court stayed the New York Action, finding that the arbitrator
should determine in the first instance which disputes between the Company and Spencer Trask should proceed in the Arbitration and which disputes between the Company and Spencer Trask should proceed in the New York Court.
The Company believes that the assertions made against it by STV are without merit and the Company intends to continue to vigorously defend against the claims
made by STV. The Company has not established a loss contingency accrual for these claims because any potential liability is not probable or estimable. Nonetheless, an unfavorable resolution of these claims could have a material adverse effect on the
Companys business, liquidity or financial condition in the reporting period in which such resolution occurs.
Other Legal Matters
. In
addition to the matter described above, the Company is subject to normal and routine litigation in the ordinary course of business. The Company has not accrued any loss contingencies for such matters. The Company intends to defend itself in any such
matters and does not currently believe that the outcome of such matters will have a material adverse effect on its business, liquidity or financial position.
6. Concentrations
Credit risk
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 in San Diego. 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.
7. Subsequent Events
On January 2
, 2014, the Company sold 280,000 shares of its common stock in an
at the market offering under its distribution agreement with an investment banking firm (see Note 4), for net proceeds of approximately $3,018,000.
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