10-Q 1 onvo-10q_20190630.htm 10-Q onvo-10q_20190630.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 001-35996

 

Organovo Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

27-1488943

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

6275 Nancy Ridge Drive, Suite 110,

San Diego, CA 92121

 

(858) 224-1000

(Address of principal executive offices and zip code)

 

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

 

Title of each class

Trading symbol

Name of Each Exchange on which registered

Common Stock, $0.001 par value

ONVO

The Nasdaq Stock Market LLC

 

 

(Nasdaq Global Market)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

Non-accelerated filer

 

 

 

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No

As of August 1, 2019, a total of 130,279,463 shares of the registrant’s Common Stock, $0.001 par value, were outstanding.

 

 

 

 

 


 

ORGANOVO HOLDINGS, INC.

INDEX

PART I. FINANCIAL INFORMATION

 

Item 1.

 

Financial Statements

 

3

 

 

Condensed Consolidated Balance Sheets as of June 30, 2019 (Unaudited) and March 31, 2019

 

3

 

 

Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Loss for the Three Months Ended June 30, 2019 and 2018

 

4

 

 

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended June 30, 2019 and 2018

 

5

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2019 and 2018

 

6

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

20

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

25

Item 4.

 

Controls and Procedures

 

25

 

PART II. OTHER INFORMATION

Item 1.

 

Legal Proceedings

 

26

Item 1A.

 

Risk Factors

 

26

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

43

Item 3.

 

Defaults Upon Senior Securities

 

44

Item 4.

 

Mine Safety Disclosure

 

44

Item 5.

 

Other Information

 

44

Item 6.

 

Exhibits

 

45

 

 

 

2


 

PART I—FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

Organovo Holdings, Inc.

Condensed Consolidated Balance Sheets

(in thousands except for share and per share data)

 

 

 

June 30, 2019

 

 

March 31, 2019

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

35,487

 

 

$

36,477

 

Accounts receivable

 

 

538

 

 

 

503

 

Grant receivable

 

 

99

 

 

 

55

 

Inventory, net

 

 

506

 

 

 

490

 

Prepaid expenses and other current assets

 

 

726

 

 

 

1,049

 

Total current assets

 

 

37,356

 

 

 

38,574

 

Fixed assets, net

 

 

1,594

 

 

 

1,832

 

Restricted cash

 

 

79

 

 

 

79

 

Operating lease right-of-use assets

 

 

4,288

 

 

 

 

Other assets, net

 

 

134

 

 

 

138

 

Total assets

 

$

43,451

 

 

$

40,623

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

553

 

 

$

628

 

Accrued expenses

 

 

1,407

 

 

 

2,549

 

Deferred revenue

 

 

532

 

 

 

525

 

Deferred rent

 

 

 

 

 

35

 

Operating lease liability, current portion

 

 

1,046

 

 

 

 

Total current liabilities

 

 

3,538

 

 

 

3,737

 

Deferred rent, net of current portion

 

 

 

 

 

588

 

Operating lease liability, net of current portion

 

 

3,774

 

 

 

 

Total liabilities

 

 

7,312

 

 

 

4,325

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 200,000,000 shares authorized,

   130,279,463 and 124,015,429 shares issued and outstanding at

   June 30, 2019 and March 31, 2019, respectively

 

 

130

 

 

 

124

 

Additional paid-in capital

 

 

303,087

 

 

 

296,929

 

Accumulated deficit

 

 

(267,078

)

 

 

(260,755

)

Total stockholders’ equity

 

 

36,139

 

 

 

36,298

 

Total Liabilities and Stockholders’ Equity

 

$

43,451

 

 

$

40,623

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

3


 

Organovo Holdings, Inc.

Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Loss

(in thousands except share and per share data)

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

June 30, 2019

 

 

June 30, 2018

 

Revenues

 

 

 

 

 

 

 

 

Products and services

 

$

606

 

 

$

546

 

Collaborations and licenses

 

 

10

 

 

 

43

 

Grants

 

 

52

 

 

 

100

 

Total Revenues

 

 

668

 

 

 

689

 

Cost of revenues

 

 

51

 

 

 

120

 

Research and development expenses

 

 

3,823

 

 

 

3,379

 

Selling, general and administrative expenses

 

 

3,315

 

 

 

4,767

 

Total costs and expenses

 

 

7,189

 

 

 

8,266

 

Loss from Operations

 

 

(6,521

)

 

 

(7,577

)

Other Income (Expense)

 

 

 

 

 

 

 

 

Gain on fixed asset disposals

 

 

1

 

 

 

2

 

Interest income

 

 

197

 

 

 

162

 

Total Other Income

 

 

198

 

 

 

164

 

Income Tax Expense

 

 

 

 

 

(3

)

Net Loss

 

$

(6,323

)

 

$

(7,416

)

Comprehensive Loss

 

$

(6,323

)

 

$

(7,416

)

Net loss per common share—basic and diluted

 

$

(0.05

)

 

$

(0.07

)

Weighted average shares used in computing net

   loss per common share—basic and diluted

 

 

126,854,907

 

 

 

111,458,445

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

4


 

Organovo Holdings, Inc.

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

(in thousands)

 

 

 

Three Months Ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Accumulated Other

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income (Loss)

 

 

Total

 

Balance at March 31, 2018

 

 

111,033

 

 

$

111

 

 

$

278,595

 

 

$

(234,120

)

 

$

 

 

$

44,586

 

Issuance of common stock under employee and

   director stock option, RSU, and purchase plans

 

 

200

 

 

 

 

 

 

(103

)

 

 

 

 

 

 

 

 

(103

)

Issuance of common stock from public offering,

   net

 

 

2,085

 

 

 

2

 

 

 

3,008

 

 

 

 

 

 

 

 

 

3,010

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,279

 

 

 

 

 

 

 

 

 

1,279

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(7,416

)

 

 

 

 

 

 

(7,416

)

Balance at June 30, 2018 (Unaudited)

 

 

113,318

 

 

$

113

 

 

$

282,779

 

 

$

(241,536

)

 

$

 

 

$

41,356

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Accumulated Other

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income (Loss)

 

 

Total

 

Balance at March 31, 2019

 

 

124,015

 

 

$

124

 

 

$

296,929

 

 

$

(260,755

)

 

$

 

 

$

36,298

 

Issuance of common stock under employee and

   director stock option, RSU, and purchase plans

 

 

177

 

 

 

 

 

 

(52

)

 

 

 

 

 

 

 

 

(52

)

Issuance of common stock from public offering,

   net

 

 

6,087

 

 

 

6

 

 

 

4,990

 

 

 

 

 

 

 

 

 

4,996

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,220

 

 

 

 

 

 

 

 

 

1,220

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(6,323

)

 

 

 

 

 

(6,323

)

Balance at June 30, 2019 (Unaudited)

 

 

130,279

 

 

$

130

 

 

$

303,087

 

 

$

(267,078

)

 

$

 

 

$

36,139

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


 

Organovo Holdings, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

June 30, 2019

 

 

June 30, 2018

 

Cash Flows From Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(6,323

)

 

$

(7,416

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Gain on disposal of fixed assets

 

 

(1

)

 

 

(2

)

Depreciation and amortization

 

 

205

 

 

 

288

 

Stock-based compensation

 

 

1,220

 

 

 

1,279

 

Increase (decrease) in cash resulting from changes in:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(35

)

 

 

255

 

Grants receivable

 

 

(44

)

 

 

45

 

Inventory

 

 

(16

)

 

 

(202

)

Prepaid expenses and other assets

 

 

360

 

 

 

236

 

Accounts payable

 

 

(75

)

 

 

(68

)

Accrued expenses

 

 

(1,142

)

 

 

(1,346

)

Deferred revenue

 

 

7

 

 

 

(42

)

Deferred rent

 

 

 

 

 

(49

)

Operating lease right-of-use assets and liabilities, net

 

 

(91

)

 

 

 

Net cash used in operating activities

 

 

(5,935

)

 

 

(7,022

)

Cash Flows From Investing Activities

 

 

 

 

 

 

 

 

Proceeds from disposals of fixed assets

 

 

1

 

 

 

2

 

Net cash provided by investing activities

 

 

1

 

 

 

2

 

Cash Flows From Financing Activities

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock and exercise of warrants, net

 

 

4,996

 

 

 

3,010

 

Employee taxes paid related to net share settlement of equity awards

 

 

(52

)

 

 

(103

)

Net cash provided by financing activities

 

 

4,944

 

 

 

2,907

 

Net decrease in cash, cash equivalents, and restricted cash

 

 

(990

)

 

 

(4,113

)

Cash, cash equivalents, and restricted cash at beginning of period

 

 

36,556

 

 

 

43,853

 

Cash, cash equivalents, and restricted cash at end of period

 

$

35,566

 

 

$

39,740

 

Reconciliation of cash, cash equivalents, and restricted cash to the condensed

   consolidated balance sheets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

35,487

 

 

$

39,613

 

Restricted cash

 

 

79

 

 

 

127

 

Total cash, cash equivalent and restricted cash

 

$

35,566

 

 

$

39,740

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

 

Income taxes paid

 

$

 

 

$

(3

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

6


 

Organovo Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 1. Description of Business

Nature of operations

Organovo Holdings, Inc. (“Organovo Holdings,” “we,” “us,” “our,” “the Company” and “our Company”) is a biotechnology company pioneering the development of bioprinted human tissues that emulate human biology and disease. We have been developing our in vivo liver tissues to treat end-stage liver disease and a select group of life-threatening, orphan diseases, for which there are limited treatment options other than organ transplantation.

Except where specifically noted or the context otherwise requires, references to “Organovo Holdings,” “the Company,” “we,” “our,” and “us” in these notes to the unaudited condensed consolidated financial statements refers to Organovo Holdings, Inc. and its wholly owned subsidiaries, Organovo, Inc. and Samsara Sciences, Inc.

The Company’s activities are subject to significant risks and uncertainties including failing to successfully develop products and services based on its technology, failing to achieve regulatory approvals for its therapeutic candidates, and failing to achieve the market acceptance necessary to generate sufficient revenues to achieve and sustain profitability.

 

Note 2. Summary of Significant Accounting Policies

Basis of presentation and principles of consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not necessarily include all information and notes required by GAAP for complete financial statements. The balance sheet at March 31, 2019 is derived from the Company’s audited consolidated balance sheet at that date.

The unaudited condensed consolidated financial statements include the accounts of Organovo Holdings and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. 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 Company’s financial position, results of operations, stockholders’ equity and cash flows. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2019, as filed with the Securities and Exchange Commission (“SEC”). Operating results for interim periods are not necessarily indicative of operating results for the Company’s fiscal year ending March 31, 2020.

Liquidity

As of June 30, 2019, the Company had cash and cash equivalents of approximately $35.5 million and restricted cash of approximately $0.1 million. The restricted cash was pledged as collateral for a letter of credit that the Company is required to maintain as a security deposit under the terms of the lease of its facilities. The Company had an accumulated deficit of approximately $267.1 million at June 30, 2019. The Company also had negative cash flows from operations of approximately $5.9 million during the three months ended June 30, 2019.

Through June 30, 2019, the Company has financed its operations primarily through the sale of convertible notes, warrants, the private placement of equity securities, the sale of common stock through public and at-the-market (“ATM”) offerings, and through revenue derived from product and research service-based agreements, collaborative agreements, licenses, and grants. During the three months ended June 30, 2019, the Company issued 6,087,382 shares of its common stock through its ATM facility and received net proceeds of approximately $5.0 million.

After a rigorous assessment of the Company’s liver therapeutic tissue program following completion of various preclinical studies, it has concluded that the variability of biological performance and related duration of potential benefits presents development challenges and lengthy timelines that no longer support an attractive opportunity. As a result, the Company has suspended development of its lead program and its Board of Directors has engaged a financial advisory firm to explore its available strategic alternatives, including evaluating a range of ways to generate value from our technology platform and intellectual property, our commercial and development capabilities, and our financial assets. These strategic alternatives may include possible mergers and business combinations, a sale of part or all of its assets, collaboration and licensing arrangements and/or equity and debt financings. This strategic process is both active and ongoing, and includes a range of interactions with potential transaction counterparties. The Company believes it is in its

7


 

stockholders’ best interests at this time to continue to pursue one or more of these transactions, or other strategic alternatives it may identify in the near term. The Company is also taking restructuring steps to manage its resources and extend its cash runway as the Company evaluates these strategic alternatives. While the Company believes that it can maintain its current operations for at least the next 12 months, based on its current plans and available resources, the assessment by the Company discussed above with respect to its liver therapeutic tissue program raises substantial doubt over the Company’s ability to successfully finance its other programs on a long-term basis. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Although the Company is actively pursuing strategic alternatives, there is no assurance that it will be able to successfully negotiate and consummate a transaction on a timely basis, or at all. Further, the Company’s expenses may exceed its current plans and expectations, which could require the Company to complete a transaction or wind-down its operations sooner than anticipated. Additionally, any transaction the Company consummates may offer limited value for the Company’s existing business and proprietary technology and may not enhance stockholder value or provide the expected benefits. If the Company is unable to successfully complete a strategic transaction or secure additional capital on a timely basis and on terms that are acceptable to its stockholders, the Company may be required to cease its operations altogether.

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 revenue recognition, the measurement of operating lease right-of-use assets and lease liabilities, the valuation of stock-based compensation expense, and the valuation allowance on deferred tax assets. On an ongoing basis, management reviews these estimates and assumptions.

Revenue recognition

The Company generates revenues from payments received from research service agreements, product sales, collaborative agreements with partners including pharmaceutical and biotechnology companies and academic institutions, licenses, and grants from the National Institutes of Health (“NIH”) and private not-for-profit organizations.

The Company recognizes revenue under Topic 606, Revenue from Contracts with Customers (“Topic 606”) when (or as) the promised services are transferred to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those services. To determine revenue recognition for arrangements the Company concludes are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) the performance obligation(s) are satisfied. At contract inception, the Company assesses the goods or services promised within each contract, assesses whether each promised good or service is distinct and identifies those that are performance obligations. The Company recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

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 June 30, 2019 and March 31, 2019, the Company had approximately $532,000 and $525,000, respectively, in deferred revenue related to its research service agreements, collaborative agreements, and licenses within the scope of Topic 606. In the three months ended June 30, 2019, the Company recognized revenue on approximately $25,000 that had been recorded as deferred revenue at March 31, 2019.

Service revenues

The Company’s service-based business, Organovo, Inc., utilizes its NovoGen® bioprinting platform to provide customers access to its highly specialized tissues that model human biology and disease, and to in vitro testing services based on that technology. These contracts with customers contain multiple performance obligations including: (i) bioprinting tissues for the customer, (ii) reporting the results of tests performed on the printed tissues pursuant to the agreed upon work plan through exposure of the tissue to various factors (including the customer’s proprietary compound), and (iii) delivering specific byproduct study materials, which are satisfied, respectively, at each of the following points in time: (i) upon completion of manufacturing of the bioprinted tissue for the customer, (ii) upon delivery of the report on tests performed on the tissue, and (iii) upon making certain study materials generated from the aforementioned testing process available to the customer. The customer does not have access or control of any performance obligation prior to the point in time of full completion of the corresponding performance satisfying event as defined above. Furthermore, although the service can be customized for each customer, it is not so highly customized as to not have an alternative use either to other customers or to the Company without significant economic consequences or rework. Accordingly, the Company’s service-based business utilizes point-in-time recognition under Topic 606.

8


 

For service contracts, the Company allocates the transaction price to each performance obligation based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations. The transaction price for service business contracts is a fixed consideration.

Product sales, net

The Company’s product-based business, Samsara Sciences, Inc., produces high-quality cell-based products for use in Organovo’s 3D tissue manufacturing and for use by life science customers. The Company recognizes product revenue when the performance obligation is satisfied, which is at the point in time the customer obtains control of the Company’s product, typically upon delivery. Product revenues are recorded at the transaction price, net of any estimates for variable consideration under Topic 606. The Company’s process for estimating variable consideration does not differ materially from its historical practices. Variable consideration is estimated using the expected value method which considers the sum of probability-weighted amounts in a range of possible amounts under the contract. Product revenue reflects the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the individual contracts. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results vary materially from the Company’s estimates, the Company will adjust these estimates, which will affect revenue from product sales and earnings in the period such estimates are adjusted.

The Company provides no right of return to its customers except in cases where a customer obtains authorization from the Company for the return. To date, there have been no product returns. The Company will continue to assess its estimates of variable consideration as it accumulates additional historical data and will adjust its estimates accordingly.

Collaborative research, development, and licenses

The Company enters into collaborative agreements with partners that typically include one or more of the following: (i) non-exclusive license fees; (ii) non-refundable up-front fees; (iii) payments for reimbursement of research costs; (iv) payments associated with achieving specific development milestones; and (v) royalties based on specified percentages of net product sales, if any. At the initiation of an agreement, the Company analyzes whether it results in a contract with a customer under Topic 606 or in an arrangement with a collaborator subject to guidance under ASC 808, Collaborative Arrangements (“Topic 808”).

The Company considers a variety of factors in determining the appropriate estimates and assumptions under these arrangements, such as whether the elements are distinct performance obligations, whether there are determinable stand-alone prices, and whether any licenses are functional or symbolic. The Company evaluates each performance obligation to determine if it can be satisfied and recognized as revenue at a point in time or over time. Typically, non-exclusive license fees, non-refundable upfront fees, and funding of research activities are considered fixed, while milestone payments are identified as variable consideration which must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price.

The Company’s collaborative agreements that were not completed at the implementation of Topic 606 on April 1, 2018, consisted of research collaboration and limited technology access licenses. These agreements provide the licensee with a non-exclusive, non-transferable, limited, royalty-free technology license, including access to Organovo’s proprietary bioprinter platform, training, and continued support by means of consumables and consultation throughout the duration of the contract. The Company has determined the intellectual property license is not distinct from the continued support promised under the agreement and is therefore a single combined performance obligation. The Company recognizes revenue for these combined performance obligations over time for the duration of the license period, as the combined performance obligation will not be fully satisfied until the end of the contract.

For the three months ended June 30, 2019, all collaborations and licenses revenue was within the scope of Topic 606 and recognized accordingly. See “Note 4. Collaborative Research, Development, and License Agreements” for more information on the Company’s collaborative agreements.

Grant revenue

In July 2017, the NIH awarded the Company a “Research and Development” grant totaling approximately $1,657,000 of funding over three years. The Company has concluded this government grant is not within the scope of Topic 606, as government entities do not meet the definition of a “customer” as defined by Topic 606, as there is not considered to be a transfer of control of goods or services to the government entity funding the grant. Additionally, the Company has concluded this government grant does meet the definition of a contribution and is a non-reciprocal transaction, however, Subtopic 958-605, Not-for-Profit-Entities-Revenue Recognition does not apply, as the Company is a business entity and the grant is with a governmental agency.

9


 

Revenues from this 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 as the Company incurs expenses that are related to the grant. The Company believes this policy is consistent with the overarching premise in Topic 606, to ensure that it recognizes revenues to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services, even though there is no “exchange” as defined in the ASC. The Company believes the recognition of revenue as costs are incurred and amounts become earned/realizable is analogous to the concept of transfer of control of a service over time under Topic 606.

Revenue recognized under this grant was approximately $52,000 and $100,000 for the three months ended June 30, 2019 and 2018, respectively.

Cost of revenues

The Company reported approximately $0.1 million in cost of revenues for the three months ended June 30, 2019 and 2018. Cost of revenues consists of costs related to manufacturing and delivering product and service revenue.

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, shares reserved for purchase under the Company’s 2016 Employee Stock Purchase Plan (“ESPP”), 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 months ended June 30, 2019 or 2018, as the Company reported a net loss for each respective period and the effect would have been anti-dilutive.

Common stock equivalents excluded from computing diluted net loss per share were approximately 14.6 million at June 30, 2019 and 2018.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies. Unless otherwise stated, the Company believes that the impact of the recently issued accounting pronouncements that are not yet effective will not have a material impact on its consolidated financial position or results of operations upon adoption.

Adoption of New Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases (“ASC 842”), which supersedes the lease guidance under ASC 840 – Leases. The new accounting standard requires an entity to recognize right-of-use assets and corresponding lease liabilities on the balance sheet for all leases with terms of more than 12 months and to disclose key information about leasing arrangements. This new guidance became effective for the Company on April 1, 2019. The Company adopted ASC 842 on April 1, 2019 and elected the optional transition method that allows for a cumulative-effect adjustment in the period of adoption and did not require restatement of prior periods. The Company elected the package of practical expedients permitted under the transition guidance, but not the hindsight practical expedient. Please refer to “Note 6. Leases” for more information regarding the Company’s adoption of the new lease standard.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (“Topic 220”), which allows stranded tax effects resulting from the Tax Cuts and Jobs Act to be reclassified from accumulated other comprehensive income to retained earnings. The amendment only relates to the reclassification of the income tax effects of the Tax Cuts and Jobs Act; thus, the underlying guidance relating to the effect of a change in tax laws be included in income from continuing operations is not affected. The amendments in Topic 220 are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. This new guidance became effective for the Company on April 1, 2019. The requirements of ASU 2018-02 did not have a significant impact on the Company’s financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting, which aligns the measurement and classification guidance for share-based payment to non-employees with the guidance for share-based payments to employees. Under the new guidance, the measurement period for equity-classified non-employee awards will be fixed at the grant date. This new guidance became effective for the Company on April 1, 2019. The requirements of ASU 2018-07 did not have a significant impact on the Company’s financial statements.

10


 

Recent Accounting Pronouncements Not Yet Adopted

In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, which provides guidance on whether certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606. The amendments in this update provide more comparability in the presentation of revenue for certain transactions between collaborative arrangement participants. The key improvements to GAAP for collaborative arrangements resulting from this amendment are to (i) clarify that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit-of-account, (ii) add unit-of-account guidance in Topic 808 to align with the guidance in Topic 606, and (iii) require that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under Topic 606 is precluded if the collaborative arrangement participant is not a customer. The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years with early adoption permitted. This new guidance is effective for us on April 1, 2020. The Company is currently evaluating the impact that this guidance will have on its financial statements.

Note 3. Stockholders’ Equity

Stock-based compensation expense and valuation information

Stock-based awards include stock options and restricted stock units under the 2012 Equity Incentive Plan, as amended (“2012 Plan”) and Inducement Awards, performance-based restricted stock units under an Incentive Award Performance-Based Restricted Stock Unit Agreement, and rights to purchase stock under the 2016 Employee Stock Purchase Plan (“ESPP”). The Company calculates the grant date fair value of all stock-based awards in determining the stock-based compensation expense.

Stock-based compensation expense for all stock-based awards consists of the following (in thousands):

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

June 30, 2019

 

 

June 30, 2018

 

Research and development

 

$

164

 

 

$

202

 

General and administrative

 

$

1,056

 

 

$

1,077

 

Total

 

$

1,220

 

 

$

1,279

 

 

The total unrecognized compensation cost related to unvested stock option grants as of June 30, 2019 was approximately $6,528,000 and the weighted average period over which these grants are expected to vest is 2.55 years.

The total unrecognized compensation cost related to unvested restricted stock units (not including performance-based restricted stock units) as of June 30, 2019 was approximately $3,295,000, which will be recognized over a weighted average period of 2.56 years.

The total unrecognized compensation cost related to unvested performance-based restricted stock units as of June 30, 2019 was approximately $127,000, which will be recognized over a weighted average period of 3.82 years.

The total unrecognized stock-based compensation cost related to unvested employee stock purchase plan shares as of June 30, 2019 was approximately $4,000, which will be recognized over a period of 2 months.

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

 

 

Three Months Ended

 

 

 

June 30, 2019*

 

 

June 30, 2018

 

Dividend yield

 

 

 

 

 

 

Volatility

 

 

0.00

%

 

 

72.25

%

Risk-free interest rate

 

 

0.00

%

 

 

2.82

%

Expected life of options

 

0 years

 

 

6 years

 

Weighted average grant

   date fair value

 

$

 

 

$

1.21

 

 

*No options were granted during the three months ended June 30, 2019, as such the weighted average assumptions are not applicable.

11


 

 

The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future. Prior to fiscal year 2020, the Company used a blend of historical volatility and implied volatility of comparable companies. As of April 1, 2019, the Company is using the Company-specific historical volatility rate as it is more reflective of market conditions and a better indicator of expected volatility. The risk-free interest rate assumption was based on 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. Prior to fiscal year 2020, certain options granted to consultants were subject to variable accounting treatment and were required to be revalued until vested. As of April 1, 2019, the measurement and classification of share-based payment to non-employees is consistent with the measurement and classification of share-based payment to employees.

 

The fair value of each restricted stock unit and performance-based restricted stock unit is recognized as stock-based compensation expense over the vesting term of the award. The fair value is based on the closing stock price on the date of the grant.

The Company uses the Black-Scholes valuation model to calculate the fair value of shares issued pursuant to the Company’s ESPP. Stock-based compensation expense is recognized over the purchase period using the straight-line method. The fair value of ESPP shares was estimated at the purchase period commencement date using the following assumptions:

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

June 30, 2019

 

 

June 30, 2018

 

Dividend yield

 

 

 

 

 

 

Volatility

 

 

43.69

%

 

 

61.35

%

Risk-free interest rate

 

 

2.52

%

 

 

1.85

%

Expected term

 

6 months

 

 

6 months

 

Grant date fair value

 

$

0.29

 

 

$

0.30

 

 

The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future. The Company uses the Company-specific historical volatility rate as the indicator of expected volatility. The risk-free interest rate assumption was based on U.S. Treasury rates. The expected life is the 6-month purchase period.

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 current plans to issue shares of preferred stock.

Common stock

On June 25, 2019, the Company received a notice letter from the Listing Qualifications Staff of the Nasdaq Stock Market LLC (“Nasdaq”) indicating that, based upon the closing bid price of the Company’s common stock for the last 30 consecutive business days, the Company no longer meets the requirement to maintain a minimum closing bid price of $1 per share, as set forth in Nasdaq Listing Rule 5450(a)(1).

In accordance with Nasdaq Listing Rule 5810(c)(3)(A), Nasdaq will provide the Company with a period of 180 calendar days, or until December 23, 2019, in which to regain compliance. In order to regain compliance with the minimum bid price requirement, the closing bid price of the Company’s common stock must be at least $1 per share for a minimum of ten consecutive business days during this 180-day period. In the event that the Company does not regain compliance within this 180-day period, the Company may be eligible to seek an additional compliance period of 180 calendar days if it elects to transfer to The Nasdaq Capital Market to take advantage of the additional compliance period offered on that market. To qualify, the Company would be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the bid price requirement, and would need to provide written notice of its intention to cure the bid price deficiency during the second compliance period. The Company’s failure to regain compliance during this second compliance period could result in delisting.   

The June 25, 2019 Notice does not result in the immediate delisting of the Company’s common stock from the Nasdaq Global Market. The Company will continue to monitor the closing bid price of its common stock over the 180-day period to see if its closing bid price may increase based on its future filings with the Securities and Exchange Commission or any future announcements the Company may be able to issue regarding its business. The Company will also consider its available options to regain compliance, including effecting a reverse stock split, which would be subject to the prior approval of the Company’s stockholders. On July 26, 2019, the Company filed a proxy statement in connection with the Company’s annual meeting of stockholders to be held on

12


 

September 5, 2019. At the annual meeting, the Company is requesting stockholders to authorize the Board, in its discretion but in no event later than the date of the 2020 annual meeting of stockholders, to amend the Company’s Certificate of Incorporation, as previously amended, to effect a reverse stock split of the Company’s common stock, at a ratio in the range of 1-for-5 to 1-for-20, such ratio to be determined by the Board of Directors and included in a public announcement. There can be no assurance that the Company will be able to regain compliance with the minimum bid price requirement or maintain compliance with the other listing requirements necessary for the Company to maintain the listing of its common stock on the Nasdaq Global Market. In addition, there is no assurance that our stockholders will authorize our Board of Directors to effect a reverse stock split at the 2019 annual meeting of stockholders.

The Company has an effective shelf registration statement on Form S-3 (File No. 333-222929) and the related prospectus previously declared effective by the Securities and Exchange Commission (the “SEC”) on February 22, 2018 (the “2018 Shelf”), that expires on February 22, 2021, which registered $100,000,000 of common stock, preferred stock, warrants and units, or any combination of the foregoing.

On March 16, 2018, the Company entered into a Sales Agreement (“2018 Sales Agreement”) with H.C. Wainwright & Co., LLC and Jones Trading Institutional Services LLC (each an “Agent” and together, the “Agents”) and filed a prospectus supplement to the 2018 Shelf, pursuant to which the Company may offer and sell, from time to time through the Agents, shares of its common stock in “at the market” sales transactions having an aggregate offering price of up to $50,000,000 (the “Shares”). Any shares offered and sold will be issued pursuant to the Company’s 2018 Shelf.

During the three months ended June 30, 2019, the Company issued 6,087,382 shares of common stock for net proceeds of $5.0 million in at-the-market offerings under the 2018 Sales Agreement. During the three months ended June 30, 2018, the Company issued 2,085,540 shares of common stock for net proceeds of approximately $3.0 million under the 2018 Sales Agreement.

As of June 30, 2019, the Company has sold an aggregate of 17,719,185 shares of common stock in at-the-market offerings under the 2018 Sales Agreement, with gross proceeds of approximately $18.7 million. Based on these sales, the Company cannot raise more than an aggregate of $81.3 million in future offerings under the 2018 Shelf, including the $31.3 million remaining available for future issuance through its at-the-market program under the 2018 Sales Agreement. The Company intends to use the net proceeds raised through any at-the-market sales for general corporate purposes, general administrative expenses, and working capital and capital expenditures.

On July 26, 2018, the Company filed an amendment to its certificate of incorporation to increase the number of authorized shares of common stock to 200,000,000 shares.

Restricted stock units

During the three months ended June 30, 2019, the Company issued restricted stock units for an aggregate of 585,926 shares of common stock to its employees and directors. These shares of common stock will be issued upon vesting of the restricted stock units.

A summary of the Company’s restricted stock unit (not including performance-based restricted stock units) activity from March 31, 2019 through June 30, 2019 is as follows:

 

 

 

Number of

Shares

 

 

Weighted

Average Price

 

Unvested at March 31, 2019

 

 

2,080,723

 

 

$

1.80

 

Granted

 

 

585,926

 

 

$

0.97

 

Vested

 

 

(253,219

)

 

$

2.49

 

Cancelled / forfeited

 

 

(88,992

)

 

$

1.53

 

Unvested at June 30, 2019

 

 

2,324,438

 

 

$

1.53

 

Performance-based restricted stock units

On April 24, 2017, the Company issued a Performance-Based Restricted Stock Unit Award for 208,822 shares of common stock (the “PBRSU”) to its newly hired Chief Executive Officer. The PBRSU was issued outside of the 2012 Plan, in the Inducement Award Agreement, as an “inducement award” within the meaning of Nasdaq Marketplace Rule 5635(c)(4). While outside the Company’s 2012 Plan, the terms and conditions of these awards are consistent with awards granted to the Company’s executive officers pursuant to the 2012 Plan. On August 23, 2017, the Board of Directors formally approved the vesting criteria for the PBRSU. The vesting of the PBRSU is divided into five separate tranches each with independent vesting criteria. The first four tranches had performance criteria related to annual revenue goals with measurement at the end of fiscal year 2018 (20 percent), fiscal year 2019 (20 percent),

13


 

fiscal year 2020 (20 percent), and fiscal year 2021 (20 percent). The fifth tranche had a performance metric related to a path to profitability goal measured as Negative Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) achievable at any point between the grant date and the end of fiscal year 2020 (20 percent). The number of units that ultimately vest for each tranche will range from 0 percent to 120 percent of the target amount, not to exceed 208,822 in aggregate. Based on changes to the Company’s strategy, on December 12, 2018, the Board of Directors formally approved an amendment to the vesting criteria for the PBRSUs. As of December 12, 2018, 100% of the Negative Adjusted EBITDA tranche, or 41,764 shares had vested and 8,352 units had been forfeited. Based on the amendment to the vesting criteria, the remaining 158,706 units eligible to vest upon future performance were divided into three separate but equal tranches with independent vesting criteria based on the achievement of certain regulatory milestones. As of June 30, 2019, no tranches are currently expected to vest in fiscal year 2020.

Based on the amended PBRSU vesting terms, which the Company believes are probable of being achieved, a Type III modification, the modified grant date fair value of the PBRSUs is $165,000 of which one-third is being recognized over the expected service period of each tranche ending on April 23, 2023. The Company began recording stock-based compensation expense for the initial performance tranches after the August 23, 2017 grant date when the initial financial performance goals were established and approved and has modified its recording of compensation expense in accordance with the amended performance tranches beginning on December 12, 2018.

A summary of the Company’s performance-based restricted stock unit activity from March 31, 2019 through June 30, 2019 is as follows:

 

 

 

Number of

Shares

 

 

Weighted

Average Price

 

Unvested at March 31, 2019

 

 

158,706

 

 

$

1.04

 

Granted

 

 

 

 

$

 

Vested

 

 

 

 

$

 

Cancelled / forfeited

 

 

 

 

$

 

Unvested at June 30, 2019

 

 

158,706

 

 

$

1.04

 

 

Stock options

A summary of the Company’s stock option activity from March 31, 2019 to June 30, 2019 is as follows:

 

 

 

Options

Outstanding

 

 

Weighted

Average

Exercise Price

 

 

Aggregate

Intrinsic

Value

 

Outstanding at March 31, 2019

 

 

12,039,264

 

 

$

2.24

 

 

$

 

Options granted

 

 

 

 

$

 

 

$

 

Options cancelled / forfeited

 

 

(101,077

)

 

$

1.88

 

 

$

 

Options exercised

 

 

 

 

$

 

 

$

 

Outstanding at June 30, 2019

 

 

11,938,187

 

 

$

2.24

 

 

$

 

Vested and Exercisable at June 30, 2019

 

 

4,108,458

 

 

$

3.60

 

 

$

 

 

The weighted average remaining contractual term of options exercisable and outstanding at June 30, 2019 was approximately 6.74 years.

Employee Stock Purchase Plan

In June 2016, our Board of Directors adopted, and in August 2016 stockholders subsequently approved, the 2016 Employee Stock Purchase Plan (“ESPP”). The Company reserved 1,500,000 shares of common stock for issuance thereunder. The ESPP permits employees after five months of service to purchase common stock through payroll deductions, limited to 15 percent of each employee’s compensation up to $25,000 per employee per year or 10,000 shares per employee per six-month purchase period. Shares under the ESPP are purchased at 85 percent of the fair market value at the lower of (i) the closing price on the first trading day of the six-month purchase period or (ii) the closing price on the last trading day of the six-month purchase period. The initial offering period commenced in September 2016. At June 30, 2019, there were 1,188,718 shares available for purchase under the ESPP.

14


 

Warrants

The following table summarizes warrant activity for the three months ended June 30, 2019:

 

 

 

Warrants

 

 

Weighted

Average

Exercise Price

 

Balance at March 31, 2019

 

 

145,000

 

 

$

7.11

 

Granted

 

 

 

 

$

 

Exercised

 

 

 

 

$

 

Cancelled

 

 

 

 

$

 

Balance at June 30, 2019

 

 

145,000

 

 

$

7.11

 

 

The warrants outstanding at June 30, 2019 are exercisable at prices of $6.84 and $7.62 per share and have a weighted average remaining term of approximately 0.28 years.

Common stock reserved for future issuance

Common stock reserved for future issuance consisted of the following at June 30, 2019:

 

Common stock warrants outstanding

 

 

145,000

 

Common stock options outstanding and reserved under the 2012 Plan

 

 

8,875,281

 

Common stock reserved under the 2012 Plan

 

 

13,068,863

 

Common stock reserved under the 2016 Employee Stock Purchase Plan

 

 

1,188,718

 

Restricted stock units outstanding under the 2012 Plan

 

 

2,163,724

 

Common stock options outstanding and reserved under the Incentive

   Award Agreement

 

 

3,062,906

 

Restricted stock units outstanding under the Incentive Award Agreement

 

 

160,714

 

Performance-based restricted stock units outstanding under the Incentive Award

   Agreement

 

 

158,706

 

Total at June 30, 2019

 

 

28,823,912

 

 

 

Note 4. Collaborative Research, Development, and License Agreements

In December 2016, the Company signed a collaborative non-exclusive 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 a kidney organoid for potential therapeutic applications. The Company received up-front payments in January and March 2017, which has been recorded as deferred revenue. Revenue of $10,000 has been recorded under this agreement for the three months ended June 30, 2019 and 2018.

In April 2017, the Company signed a collaborative non-exclusive research affiliation with a university, under which the Company received a one-time non-refundable payment toward the placement of a NovoGen® Bioprinter at the university for the purpose of specific research projects mutually agreed upon by the university and the Company in the field of volumetric muscle loss. The Company received an up-front payment in May 2017, which was recorded as deferred revenue. Revenue of approximately $0 and $14,000 has been recorded under this agreement for the three months ended June 30, 2019 and 2018, respectively. In addition, during April 2017, the Company signed a non-exclusive patent license agreement with the university including an annual fee of $75,000 for each of the two years for the license to the Company patents for research use limited to the field of volumetric muscle loss. The Company received the first annual payment of $75,000 in April 2017 and the second annual payment of $75,000 in May 2018, which were initially recorded as deferred revenue. Revenue of $0 and $19,000 has been recorded under this agreement for the three months ended June 30, 2019 and 2018, respectively.

15


 

Note 5. Commitments and Contingencies

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 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.

As of June 30, 2019, the Company had no claims outstanding.

Note 6. Leases

Adoption of ASC 842

As of April 1, 2019, the Company adopted ASC 842, which requires lessees to recognize a right-of-use asset (ROU asset) and lease liability for leases with terms of greater than twelve months. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The Company implemented this new accounting standard using the modified retrospective method for its existing leases, which did not cause any adjustments to prior year financial statements. The Company elected the package of practical expedients available for existing contracts, which allowed it to carry forward its historical assessments of whether contracts are or contain leases and the classification of its existing operating leases. Additionally, the Company elected the practical expedient to treat lease and non-lease components as a single lease component.

The Company leases property and equipment under operating leases, specifically its office building and various copier machines. The Company also has a short-term lease (lease term is less than 12 months), which is not required to be recorded on the balance sheet under ASC 842. Instead, under ASC 842, the Company has elected the accounting policy for short term leases to recognize lease payments as an expense on a straight-line basis over the lease term. Upon adoption of ASC 842, the Company recognized ROU assets and corresponding lease liabilities based on the present value of remaining lease payments over the lease terms. ROU assets were measured as lease liabilities plus prepaid rent less any deferred rent. As interest rates were not implicitly stated in the respective lease agreements, nor were they readily determinable, the Company used its incremental borrowing rate as the discount rate when measuring lease liabilities. Upon adoption of ASC 842, the Company recorded ROU assets and lease liabilities of $4.5 million and $5.0 million, respectively. The Company also classified deferred rent of $0.6 million as an offset to the Company’s ROU asset upon adoption.

The impact of the adoption of ASC 842 on the consolidated balance sheet as of April 1, 2019 is as follows (in thousands):

 

 

ASC 840

 

 

 

 

 

 

ASC 842

 

 

March 31, 2019

 

 

Impact of Adoption

 

 

April 1, 2019

 

Deferred Rent

$

35

 

 

$

(35

)

 

$

 

Deferred Rent, net of current portion

$

588

 

 

$

(588

)

 

$

 

Prepaid Rent

$

88

 

 

$

(88

)

 

$

 

Operating right-of-use assets

$

 

 

$

4,451

 

 

$

4,451

 

Operating lease liability

$

 

 

$

1,038

 

 

$

1,038

 

Operating lease liability, net of current

   portion

$

 

 

$

3,948

 

 

$

3,948

 

 

16


 

After the initial adoption of ASC 842, on an on-going basis, the Company evaluates all contracts upon inception and determines whether the contract contains a lease by assessing whether there is an identified asset and whether the contract conveys the right to control the use of identified asset in exchange for consideration over a period of time. If a lease is identified, the Company will apply the guidance from ASC 842 to properly account for the lease.

Operating Leases

Since July 2012, the Company has leased its main facilities at 6275 Nancy Ridge Drive, San Diego, California 92121. The lease, as amended in 2013, 2015, 2016, 2018, and 2019, consisted of approximately 45,580 rentable square feet containing laboratory, clean room and office space. Monthly rental payments are approximately $87,000 with 3% annual escalators. The lease for 14,685 of the total rentable square footage was amended to accelerate the expiration date from December 15, 2018 to October 31, 2018. On November 30, 2018, the Company agreed to extend the term for the remainder of the total rentable square footage under the lease from August 31, 2021 to August 31, 2024 in exchange for $500,000 of landlord funded tenant improvements and a rescission of its option to terminate the lease on or after September 1, 2019 with 9 months prior written notice.

In addition to the Company’s main facilities’ lease, on March 21, 2019, the Company entered into an agreement to lease several copy machines for a term of 36 months. The lease contains fixed monthly payments through the entire term of the lease, and it does not contain an option to extend the term or a bargain purchase option. This lease was also carried forward as an operating lease through the adoption of Topic 842.

The table below summarizes the Company’s lease liabilities and corresponding right-of-use assets as of June 30, 2019 (in thousands):

 

 

 

June 30, 2019

 

ASSETS

 

 

 

 

Operating lease right-of-use assets

 

$

4,288

 

Total lease right-of-use assets

 

$

4,288

 

 

 

 

 

 

LIABILITIES

 

 

 

 

Current

 

 

 

 

Operating lease liability

 

$

1,046

 

Noncurrent

 

 

 

 

Operating lease liability, net of current portion

 

$

3,774

 

Total lease liabilities

 

$

4,820

 

 

 

 

 

 

Weighted average remaining lease term:

 

5.15 years

 

Weighted average discount rate:

 

 

8

%

 

The Company records operating lease expense on a straight-line basis over the life of the leases. This is consistent with the Company’s historical treatment of the lease costs included in operating expenses (referred to as “Rent Expense” prior to adoption of Topic 842). For the three months ended June 30, 2019, the Company recorded operating lease expense of approximately $262,000. For the three months ended June 30, 2018, the Company recorded rent expense of approximately $325,000. Variable lease costs associated with the Company’s leases, such as payments for additional monthly fees to cover the Company’s share of certain facility expenses (common area maintenance, or CAM) are not included in operating lease right-of use assets and lease liabilities, but rather expensed as incurred. Variable lease expense was approximately $107,000 for the three months ended June 30, 2019. Short term lease cost for the three months ended June 30, 2019 was approximately $15,000.

The table below is a summary of the cash flows associated with the Company’s leases for the three months ended June 30, 2019 (in thousands):

 

 

 

For the Three

Months Ended

 

 

 

June 30, 2019

 

Cash paid for amount included in measurement of liabilities:

 

 

 

 

Operating cash flows from operating leases

 

$

265

 

 

17


 

Future lease payments relating to the Company’s operating lease liabilities as of June 30, 2019, are as follows (in thousands):

 

Fiscal year ended March 31, 2020

 

$

729

 

Fiscal year ended March 31, 2021

 

 

1,113

 

Fiscal year ended March 31, 2022

 

 

1,153

 

Fiscal year ended March 31, 2023

 

 

1,183

 

Fiscal year ended March 31, 2024

 

 

1,219

 

Thereafter

 

 

514

 

Total future lease payments

 

 

5,911

 

Less: Imputed interest

 

 

(1,091

)

Total lease obligations

 

 

4,820

 

Less: Current obligations

 

 

(1,046

)

Noncurrent lease obligations

 

$

3,774

 

 

Note 7. 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 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 June 30, 2019.

Note 8. Related Parties

From time to time, the Company will enter into an agreement with a related party in the ordinary course of its business and on terms and conditions it believes are as fair as those it offers and receives from independent third parties. These agreements are ratified by the Company’s Board of Directors or a committee thereof pursuant to its related party transaction policy.

In August 2017, the Company entered into a research services agreement with Cirius Therapeutics, Inc. (“Cirius”), an entity for which Robert Baltera, Jr., a director of the Company, serves as Chief Executive Officer and President. Under this agreement, the Company is providing standard research services to Cirius utilizing its ExVive™ Liver Tissue platform. The Company has provided and recognized revenue for ExVive™ Liver Tissue Services for Cirius in the amount of $281,000 to date. Organovo completed its obligations as of December 2018. No further revenues are expected.

In November 2018, the Company entered into a research services Quote with Viscient Biosciences (“Viscient”), an entity for which Keith Murphy, the Company’s former director, Chief Executive Officer, and President, serves as the Chief Executive Officer and President. Under this Quote, the Company is providing research services in the amount of $142,000, amended in April 2019 to include an additional $7,000 of services. As of March 31, 2019, the Company recognized revenue of $42,000 for services provided and the remaining amount of $107,000 was recognized as revenue in the three months ended June 30, 2019. In addition to the services provided by Organovo, Viscient has purchased primary human cell-based products from our subsidiary, Samsara. Pursuant to the terms of multiple Quotes, $12,000 and $2,000 was recognized as revenue in the three months ended June 30, 2019 and 2018, respectively.

18


 

Note 9. Subsequent Events

On August 7, 2019, the Company undertook a business restructuring to better focus and align resources, reducing approximately 40 positions, or 69% of its overall workforce. This restructuring allows the Company to manage resources and extend its cash runway as the Company explores its available strategic alternatives, including as it evaluates a range of ways to generate value from its technology platform and intellectual property, its commercial and development capabilities, and its financial assets. As a result, the Company expects to record a restructuring charge in the fiscal second quarter of approximately $1.3 million, primarily related to employee severance and benefits costs. The actions associated with the restructuring announcement are anticipated to be complete by the end of fiscal second quarter 2020, with liabilities anticipated to be paid by the end of fiscal second quarter 2020 and yield approximately $5.3 million of annual savings to employee costs.

In accordance with ASC 360-10, the Company records an impairment loss on long-lived assets used in operations when events and circumstances indicate that long-lived assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets (i.e. not able to be recovered). On August 7, 2019, events and circumstances relating to a forecast of operating cash flow losses and the expectation that, more likely than not, an asset group will be sold or disposed of significantly before the end of its previously estimated useful life indicated that long-lived assets of approximately $5.9 million might be impaired. The Company performed an asset impairment analysis on its long-lived asset group, consisting of its property, plant and equipment, leases, and intangibles, which concluded that the carrying amount is not recoverable. Further, the Company’s analysis indicated that carrying amount of the asset group does not exceed its fair value. Thus, no impairment loss is required to be recognized. Nonetheless, it is reasonably possible that the impairment analysis may change in the near term resulting in the need to write down those assets to fair value. The Company will continue to monitor assets for impairment.

19


 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our historical consolidated financial statements and the related notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2019. This discussion and analysis contains forward-looking statements, such as statements related to our plans, objectives, expectations and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect” and the like, and/or future tense or conditional constructions such as “will,” “may,” “could,” “should,” or similar expressions, identify certain of these forward-looking statements. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to risks and uncertainties, including those described in this Quarterly Report on Form 10-Q, as well as the risk factors disclosed in our Annual Report on the Form 10-K for the fiscal year ended March 31, 2019, filed with the Securities and Exchange Commission on June 3, 2019, that could cause our actual results or events to differ materially from those expressed or implied by such forward-looking statements. Except to the limited extent required by applicable law, the Company does not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report.

Basis of Presentation

The condensed consolidated financial statements included in this Form 10-Q have been prepared in accordance with the Securities and Exchange Commission (the “SEC”) instructions to Quarterly Reports on Form 10-Q. Accordingly, the condensed consolidated financial statements presented elsewhere in this Form 10-Q and discussed below are unaudited and do not contain all the information required by U.S. generally accepted accounting principles (“GAAP”) to be included in a full set of financial statements. The audited financial statements for the year ended March 31, 2019, filed with the SEC on Form 10-K on June 3, 2019 include a summary of our significant accounting policies and should be read in conjunction with this Form 10-Q. In the opinion of management, all material adjustments necessary to present fairly the results of operations for such periods have been included in this Form 10-Q. All such adjustments are of a normal recurring nature. The results of operations for interim periods are not necessarily indicative of the results of operations for the entire year.

Overview

We are a biotechnology company pioneering the development of bioprinted human tissues that emulate human biology and disease. We have been developing our in vivo liver tissues to treat end-stage liver disease and a select group of life-threatening, orphan diseases, for which there are limited treatment options other than organ transplantation.

In May 2019, we announced plans to conduct additional preclinical studies necessary to optimize our manufacturing processes and complete additional preclinical studies that generate consistent scientific data regarding the prolonged functionality and therapeutic benefits of our in vivo liver tissues. After a rigorous assessment of our liver therapeutic tissue program following completion of these additional studies, we have concluded that the variability of biological performance and related duration of potential benefits presents development challenges and lengthy timelines that no longer support an attractive opportunity. As a result, we have suspended development of our lead program and our Board of Directors has engaged a financial advisory firm to explore our available strategic alternatives, including evaluating a range of ways to generate value from our technology platform and intellectual property, our commercial and development capabilities, and our financial assets. These strategic alternatives may include possible mergers and business combinations, a sale of part or all of our assets, collaboration and licensing arrangements and/or equity and debt financings. We are also taking restructuring steps to manage our resources and extend our cash runway as we explore these strategic alternatives. This strategic process is both active and ongoing, and includes a range of interactions with potential transaction counterparties. We believe it is in our stockholders’ best interests at this time to continue to pursue one or more of these transactions, or other strategic alternatives we may identify in the near term. Although we are actively pursuing our strategic alternatives, there is no assurance that we will be able to successfully negotiate and consummate a transaction on a timely basis, or at all. Additionally, any transaction we consummate may offer limited value for our existing business and proprietary technology and may not enhance stockholder value or provide the expected benefits. Based on our current plans and available resources, we believe that we can maintain our current operations for at least the next 12 months, however, if we are unable to successfully complete a strategic transaction or secure additional capital on a timely basis and on terms that are acceptable to our stockholders, we may be required to cease our operations altogether.

20


 

Critical Accounting Policies, Estimates, and Judgments

Our financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to revenue recognition, stock-based compensation expense, and the valuation allowance on deferred tax assets. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known. Besides the estimates identified above that are considered critical, we make many other accounting estimates in preparing our financial statements and related disclosures. All estimates, whether or not deemed critical, affect reported amounts of assets, liabilities, revenues and expenses, as well as disclosures of contingent assets and liabilities. These estimates and judgments are also based on historical experience and other factors that are believed to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known, even for estimates and judgments that are not deemed critical.

There have been no significant changes to our critical accounting policies since March 31, 2019, with the exception of changes made upon adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (“ASC 842”) and the related supplemental ASUs. For a description of critical accounting policies that affect our significant judgments and estimates used in the preparation of our consolidated financial statements, refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Note 1. Description of Business and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended March 31, 2019, filed with the SEC on June 3, 2019. For a description of accounting policy changes resulting from the adoption of ASC 842 and the related supplemental ASUs, refer to Note 1 to our unaudited condensed consolidated financial statements contained in this quarterly report on Form 10-Q.

Results of Operations

Comparison of the three months ended June 30, 2019 and 2018

The following table summarizes our results of operations for the three months ended June 30, 2019 and 2018 (in thousands, except %):

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

Increase (decrease)

 

 

 

2019

 

 

2018

 

 

$

 

 

%

 

Revenues

 

$

668

 

 

$

689

 

 

$

(21

)

 

 

(3

%)

Cost of revenues

 

$

51

 

 

$

120

 

 

$

(69

)

 

 

(58

%)

Research and development

 

$

3,823

 

 

$

3,379

 

 

$

444

 

 

 

13

%

Selling, general and administrative

 

$

3,315

 

 

$

4,767

 

 

$

(1,452

)

 

 

(30

%)

Other income

 

$

198

 

 

$

164

 

 

$

34

 

 

 

21

%

 

Revenues

For the three months ended June 30, 2019, total revenue was $0.7 million, a decrease of less than $0.1 million, or 3%, from the three months ended June 30, 2018, primarily due to lower grant revenue. Product and service revenues of approximately $0.6 million for the three months ended June 30, 2019 increased 11% from the prior year period. The increase in product and services revenues was primarily driven by increased revenue from sales of primary human liver cells and related products. Collaboration revenue and licensing revenue of less than $0.1 million for the three months ended June 30, 2019 decreased 77% from the prior year period due to the absence of revenue from a collaboration agreement that concluded in the prior year. Grant revenue decreased by less than $0.1 million for the three months ended June 30, 2019 due to a lower level of activity under our National Institutes of Health (“NIH”) grant during the first quarter of fiscal 2020.

Costs and Expenses

Cost of Revenues

Cost of product and service revenues, which reflects expenses related to manufacturing our products and delivering services was less than $0.1 million for the three months ended June 30, 2019, compared to $0.1 million for the three months ended June 30, 2018. The decrease was primarily due to the sale of previously reserved primary human liver cells and related products and a higher margin on liver tissue research services during the three months ended June 30, 2019.

21


 

Research and Development Expenses

The following table summarizes our research and development expenses for the three months ended June 30, 2019 and 2018 (in thousands, except %):

 

 

 

Three months ended

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

Increase (decrease)

 

 

 

June 30, 2019

 

 

% of total

 

 

June 30, 2018

 

 

% of total

 

 

$

 

 

%

 

Research and development

 

$

3,528

 

 

 

92

%

 

$

3,034

 

 

 

90

%

 

$

494

 

 

 

16

%

Non-cash stock-based compensation

 

 

164

 

 

 

4

%

 

 

202

 

 

 

6

%

 

 

(38

)

 

 

(19

%)

Depreciation and amortization

 

 

131

 

 

 

4

%

 

 

143

 

 

 

4

%

 

 

(12

)

 

 

(8

%)

Total research and development

   expenses

 

$

3,823

 

 

 

100

%

 

$

3,379

 

 

 

100

%

 

$

444

 

 

 

13

%

 

Research and development expenses were approximately $3.8 million, an increase of $0.4 million, or 13%, from the prior year period. The increase was primarily due to a $0.3 million increase in professional services costs, a $0.2 million increase in allocated facilities costs, and a $0.1 million increase in lab supply costs, which were offset by a $0.2 million decrease in personnel related costs, which was driven by a reduction in staffing. The Company’s average full-time research and development staff decreased from an average of fifty-one full-time employees for the three months ended June 30, 2018 to an average of forty-one full-time employees for the three months ended June 30, 2019.

Selling, General and Administrative Expenses

The following table summarizes our selling, general and administrative expenses for the three months ended June 30, 2019 and 2018 (in thousands, except %):

 

 

 

Three months ended