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, 2020

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.)

 

 

440 Stevens Ave, Suite 200,

Solana Beach, CA 92075

 

(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 Capital 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, 2020, a total of 130,618,203 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, 2020 (Unaudited) and March 31, 2020

 

3

 

 

Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Loss for the Three Months Ended June 30, 2020 and 2019

 

4

 

 

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended June 30, 2020 and 2019

 

5

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2020 and 2019

 

6

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

Item 2.

 

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

 

19

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

25

Item 4.

 

Controls and Procedures

 

26

 

PART II. OTHER INFORMATION

Item 1.

 

Legal Proceedings

 

27

Item 1A.

 

Risk Factors

 

27

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

44

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, 2020

 

 

March 31, 2020

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

24,787

 

 

$

27,356

 

Accounts receivable

 

 

84

 

 

 

111

 

Prepaid expenses and other current assets

 

 

630

 

 

 

851

 

Total current assets

 

 

25,501

 

 

 

28,318

 

Other assets, net

 

 

120

 

 

 

123

 

Total assets

 

$

25,621

 

 

$

28,441

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

110

 

 

$

720

 

Accrued expenses

 

 

725

 

 

 

1,090

 

Total current liabilities

 

 

835

 

 

 

1,810

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

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

   130,618,203 and 130,558,098 shares issued and outstanding at

   June 30, 2020 and March 31, 2020, respectively

 

 

131

 

 

 

131

 

Additional paid-in capital

 

 

306,889

 

 

 

305,965

 

Accumulated deficit

 

 

(282,234

)

 

 

(279,465

)

Total stockholders’ equity

 

 

24,786

 

 

 

26,631

 

Total Liabilities and Stockholders’ Equity

 

$

25,621

 

 

$

28,441

 

 

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, 2020

 

 

June 30, 2019

 

Revenues

 

 

 

 

 

 

 

 

Products and services

 

$

 

 

$

606

 

Collaborations and licenses

 

 

 

 

 

10

 

Grants

 

 

 

 

 

52

 

Total Revenues

 

 

 

 

 

668

 

Cost of revenues

 

 

 

 

 

51

 

Research and development expenses

 

 

 

 

 

3,823

 

Selling, general and administrative expenses

 

 

2,786

 

 

 

3,315

 

Total costs and expenses

 

 

2,786

 

 

 

7,189

 

Loss from Operations

 

 

(2,786

)

 

 

(6,521

)

Other Income (Expense)

 

 

 

 

 

 

 

 

Gain on fixed asset disposals

 

 

6

 

 

 

1

 

Interest income

 

 

8

 

 

 

197

 

Other Income

 

 

5

 

 

 

 

Total Other Income

 

 

19

 

 

 

198

 

Income Tax Expense

 

 

(2

)

 

 

 

Net Loss

 

$

(2,769

)

 

$

(6,323

)

Net loss per common share—basic and diluted

 

$

(0.02

)

 

$

(0.05

)

Weighted average shares used in computing net

   loss per common share—basic and diluted

 

 

130,588,481

 

 

 

126,854,907

 

Comprehensive Loss:

 

 

 

 

 

 

 

 

Net loss

 

$

(2,769

)

 

$

(6,323

)

Comprehensive loss

 

$

(2,769

)

 

$

(6,323

)

 

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, 2019

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

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 expense

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Total

 

Balance at March 31, 2020

 

 

130,558

 

 

$

131

 

 

$

305,965

 

 

$

(279,465

)

 

$

26,631

 

Issuance of common stock under employee and

   director stock option, RSU, and purchase plans

 

 

60

 

 

 

 

 

 

(1

)

 

 

 

 

 

(1

)

Stock-based compensation

 

 

 

 

 

 

 

 

925

 

 

 

 

 

 

925

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(2,769

)

 

 

(2,769

)

Balance at June 30, 2020 (Unaudited)

 

 

130,618

 

 

$

131

 

 

$

306,889

 

 

$

(282,234

)

 

$

24,786

 

 

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, 2020

 

 

June 30, 2019

 

Cash Flows From Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(2,769

)

 

$

(6,323

)

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

 

 

 

 

 

 

 

 

Gain on disposal of fixed assets

 

 

(6

)

 

 

(1

)

Depreciation and amortization

 

 

4

 

 

 

205

 

Stock-based compensation

 

 

925

 

 

 

1,220

 

Increase (decrease) in cash resulting from changes in:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

27

 

 

 

(35

)

Grants receivable

 

 

 

 

 

(44

)

Inventory

 

 

 

 

 

(16

)

Prepaid expenses and other assets

 

 

224

 

 

 

360

 

Accounts payable

 

 

(610

)

 

 

(75

)

Accrued expenses

 

 

(365

)

 

 

(1,142

)

Deferred revenue

 

 

 

 

 

7

 

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

 

 

 

 

 

(91

)

Net cash used in operating activities

 

 

(2,570

)

 

 

(5,935

)

Cash Flows From Investing Activities

 

 

 

 

 

 

 

 

Proceeds from disposals of fixed assets

 

 

2

 

 

 

1

 

Net cash provided by investing activities

 

 

2

 

 

 

1

 

Cash Flows From Financing Activities

 

 

 

 

 

 

 

 

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

 

 

 

 

 

4,996

 

Employee taxes paid related to net share settlement of equity awards

 

 

(1

)

 

 

(52

)

Net cash provided by (used in) financing activities

 

 

(1

)

 

 

4,944

 

Net decrease in cash, cash equivalents, and restricted cash

 

 

(2,569

)

 

 

(990

)

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

 

 

27,356

 

 

 

36,556

 

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

 

$

24,787

 

 

$

35,566

 

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

   consolidated balance sheets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

24,787

 

 

$

35,487

 

Restricted cash

 

 

 

 

 

79

 

Total cash, cash equivalent and restricted cash

 

$

24,787

 

 

$

35,566

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

 

Receivable related to fixed asset sales

 

$

5

 

 

$

 

Assets held for sale

 

$

1

 

 

$

 

Income taxes paid

 

$

(2

)

 

$

 

 

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,” “Organovo,” and “the Company”) is an early-stage biotechnology company that has focused on pioneering the development of bioprinted 3D human tissues that emulate key aspects of human biology and disease. Except where specifically noted or the context otherwise requires, references to “Organovo Holdings,” “the Company,” and “Organovo” in these notes to the unaudited condensed consolidated financial statements refers to Organovo Holdings, Inc. and its wholly owned subsidiaries, Organovo, Inc. and Opal Merger Sub, Inc.

Historical Operations and Strategic Alternatives Process

Prior to August 2019, the Company has focused its efforts on developing its 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. The Company also explored the development of other potential pipeline in vivo tissue constructs in-house and through collaborations with academic and government researchers. In the past, the Company also explored the development of in vitro tissues, including proof of concept models of diseased tissues, for use in drug discovery and development.

In August 2019, after a rigorous assessment of its in vitro liver therapeutic tissue program, the Company concluded that the variability of biological performance and related duration of potential benefits no longer supported an attractive opportunity due to redevelopment challenges and lengthening timelines to compile sufficient data to support an IND filing. As a result, the Company suspended development of its lead program and all other related in-house pipeline development activities.

The Company’s Board also engaged a financial advisory firm to explore the Company’s available strategic alternatives, including evaluating a range of ways to generate value from its technology platform and intellectual property, its commercial and development capabilities, its listing on the Nasdaq Capital Market, and the Company’s remaining financial assets. These strategic alternatives included possible mergers and business combinations, sales of part or all of our assets, and licensing and partnering arrangements. The Company implemented various restructuring steps to manage its resources and extend its cash runway, including reducing commercial activities related to its liver tissues, except for sales of primary human cells out of inventory, negotiating an exit from its long-term facility lease, selling various assets, and reducing its workforce. Additionally, in November 2019, the Company sold certain inventory and equipment and related proprietary information held by its wholly-owned subsidiary, Samsara Sciences, Inc. (“Samsara”), and as a result of such sale, Samsara ceased its operations.

After conducting a diligent and extensive process of evaluating strategic alternatives and identifying and reviewing potential candidates for a strategic acquisition or other transaction, which included the receipt of more than 27 non-binding indications of interest from interested parties and careful evaluation and consideration of those proposals, and following extensive negotiation with Tarveda, on December 13, 2019, the Company entered into a merger agreement with Tarveda (the “Merger Agreement”). Pursuant to the Merger Agreement, and subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, the Company’s wholly-owned merger subsidiary would merge (the “Merger”) into Tarveda, with Tarveda surviving the Merger. The Merger Agreement included various conditions to the consummation of the Merger, including approval by the Company’s stockholders at a Special Meeting of Stockholders to be held on April 7, 2020 (the “Special Meeting”).

At the Special Meeting, the Merger was not approved by the Company’s stockholders. As a result, the Company terminated the Merger Agreement with Tarveda. Pursuant to the terms of the Merger Agreement, the Company was obligated to reimburse certain of Tarveda’s merger-related expenses not to exceed $300,000, which was offset by Tarveda’s portion of shared expenses incurred by Organovo in fiscal 2020.

The Cooperation Agreement and Advisory Nominees Proposal

Following the Special Meeting and the termination of the Merger Agreement, the Company’s Board continued to solicit stockholder feedback regarding the Company’s strategic alternatives and how to maximize stockholder value. In response to feedback from its largest stockholder regarding its desire for the Board to consider opportunities in the 3D bioprinting field and suggestion that the Board should speak with Keith Murphy, the Company’s founder, stockholder and former Chief Executive Officer and Chairman, for potential business ideas, the Company’s Board initiated discussions with Mr. Murphy. Based on these discussions, the Company entered into a Cooperation Agreement with Mr. Murphy on July 14, 2020 (the “Cooperation Agreement”). Under the terms of the Cooperation Agreement, the Board appointed Mr. Murphy and Adam K. Stern to the Board as Class III directors, and two of the

7


 

Company’s existing directors, Richard Maroun and David Shapiro, resigned from the Board and all Board committees. The Board also agreed to nominate, recommend, support and solicit proxies for the re-election of Messrs. Murphy and Stern at the Company’s 2020 Annual Meeting of Stockholders (the “2020 Annual Meeting”). The Board also agreed to nominate, recommend, support and solicit proxies for an advisory stockholder vote (the “Advisory Nominees Proposal”) at the 2020 Annual Meeting to appoint three individuals, Douglas Jay Cohen, David Gobel and Alison Tjosvold Milhous (collectively, the “Advisory Nominees”), to the Board. Mr. Murphy identified each of the Advisory Nominees. If the final vote tabulation for the Advisory Nominees Proposal receives more votes cast “FOR” than “AGAINST” its approval, the Board has approved the appointment of the Advisory Nominees, to be automatically effective immediately following the final adjournment of the 2020 Annual Meeting. In addition, immediately following the appointment of the Advisory Nominees, each of our existing directors (other than Messrs. Murphy and Stern) will resign from the Board, which will result in Messrs. Murphy and Stern and the Advisory Nominees constituting the full membership of the Board (collectively, the “New Director Slate”).

Proposed Drug Discovery Business

The New Director Slate has advised the Company that if the Advisory Nominees Proposal is approved at the 2020 Annual Meeting, the New Director Slate intends to recommence operations and focus the Company’s efforts on developing highly customized human tissues as living, dynamic models of human biology and disease for use in drug discovery and development. The New Director Slate has advised the Company that it believes the Company’s proprietary technology can be used to build functional 3D human tissues that mimic key aspects of native human tissue composition, architecture, and function. The New Director Slate also believes the Company can utilize its proprietary technology to develop highly customized and dynamic models of human disease, including cell type-specific compartments, prevalent intercellular tight junctions, and microvascular structures. They believe these features can facilitate the Company’s development of complex, multicellular disease models for use in the development of targeted therapeutics for various diseases including, among others, intestine, kidney, skin and breast diseases. Market opportunities may include externally-partnered or internally-directed drug discovery and the clinical development of new molecular entities or repurposed drugs in-licensed from other pharmaceutical companies. The goal of the New Director Slate is for the Company to establish a pipeline of drug candidates in high-value disease areas, aiming to commence human clinical testing for at least one drug candidate within a three to four year timeframe.

If the Advisory Nominees Proposal is approved, the New Director Slate intends to restart the Company’s research operations by hiring a team of R&D professionals with the experience required to develop bioprinted and other 3D tissues for use in drug discovery, to leverage 3D models of disease to discover new drug candidates, and to develop new drug candidates for the initiation of clinical studies.

The New Director Slate has advised the Company that they expect our research and development staff to grow to seven to ten employees. They also expect to maintain or grow a general and administrative staff of three to five employees to support the Company’s operations and reporting requirements as a public company.

If the Advisory Nominees Proposal is approved, the New Director Slate has advised us that the Company expects to lease sufficient office and laboratory space to support its requirements. They expect that the Company will need space in the short term in the 3,000-7,000 sq. ft. range, with mixed office and laboratory space. They expect to lease a new facility in San Diego at prevailing market terms.

COVID-19

In December 2019 a respiratory illness caused by a novel strain of coronavirus, SARS-CoV-2, causing the Coronavirus Disease 2019, also known as COVID-19 or coronavirus emerged. While initially the outbreak was largely concentrated in China it has spread globally. Global health concerns relating to the COVID-19 pandemic have been weighing on the macroeconomic environment, and the pandemic has significantly increased economic volatility and uncertainty. The pandemic has resulted in government authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place or stay-at-home orders, and business shutdowns.

The extent to which the coronavirus impacts the Company’s operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak and travel bans and restrictions, quarantines, shelter-in-place or stay-at-home orders, and business shutdowns. In particular, the continued coronavirus pandemic could adversely impact the Company’s operations, including among others, the timing and ability to pursue strategic alternatives, given the impact it may have on the manufacturing and supply chain, sales and marketing and clinical trial operations of potential strategic partners, and the ability, if we elect to do so, to advance our research and development activities and pursue development of any of our pipeline products, each of which could have an adverse impact on the Company’s business and financial results.

 

8


 

 

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 condensed consolidated balance sheet at March 31, 2020 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, 2020, 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, 2021 (see “Note 1. Description of Business”).

Liquidity

As of June 30, 2020, the Company had cash and cash equivalents of approximately $24.8 million and an accumulated deficit of approximately $282.2 million. The Company also had negative cash flows from operations of approximately $2.6 million during the three months ended June 30, 2020.

Through June 30, 2020, 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, 2020, the Company issued no shares of its common stock through its ATM facility.

Throughout the strategic alternatives assessment process, the Company has taken steps to manage its resources and extend its cash runway including selling various assets and reducing its workforce to the minimum level necessary to explore and support these strategic alternatives as well as to support the remainder of the Company’s on-going business activities and assets, including its intellectual property platform and collaborations with research institutions and universities.

The Company believes its cash and cash equivalents on hand will be sufficient to meet its financial obligations for at least the next 12 months of operations. If the Advisory Proposal is approved, this will trigger a “Change of Control” under Organovo’s severance plan, as well as its Directors and Officers (“D&O”) liability insurance policies, requiring the following cash outlays: i) approximately $3.0 million for severance obligations and ii) approximately $2.0 million (or $1.7 million net of returned premium) for a six year D&O tail insurance policy. In addition, to the extent the New Director Slate recommences the Company’s operations and focus its efforts on drug discovery and development, the Company will need to raise additional capital to implement this new business plan. The Company cannot predict with certainty the exact amount or timing for any future capital raises. If required, the Company may seek to raise additional capital through debt or equity financings, or through some other financing arrangement. However, the Company cannot be sure that additional financing will be available if and when needed, or that, if available, it can obtain financing on terms favorable to its stockholders. Any failure to obtain financing when required will have a material adverse effect on the Company’s business, operating results, financial condition and ability to continue 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 unaudited condensed consolidated financial statements include those assumed in the valuation of stock-based compensation expense, the valuation of impairment of long-lived assets, our assessment of contingent liabilities that would require the establishment of a reserve, and the valuation allowance on deferred tax assets. On an ongoing basis, management reviews these estimates and assumptions. Though the impact of the COVID-19 pandemic to its business and operating results presents additional uncertainty, the Company continues to use the best information available to inform its critical accounting estimates.

9


 

Impairment of long-lived assets

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). The Company’s pursuit of strategic alternatives requires the reevaluation of the recoverability of the gross carrying value of its long-lived assets. The Company performed an asset impairment analysis on its long-lived asset group, consisting primarily of licensed intangible assets, computer equipment, and software following the completion of various asset sales prior to June 30, 2020, which concluded that the carrying amount is not recoverable. However, the Company’s analysis indicated that carrying amount of the asset group does not exceed its fair value. As such, 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.

Revenue recognition

The Company has generated 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 recognized revenue under Topic 606, Revenue from Contracts with Customers (“Topic 606”) when (or as) the promised services were transferred to customers in an amount that reflects the consideration to which it expected to be entitled in exchange for those services. To determine revenue recognition for arrangements the Company concluded were within the scope of ASC 606, the Company performed the following five steps: (i) identified the contract(s) with a customer; (ii) identified the performance obligation(s) in the contract; (iii) determined the transaction price; (iv) allocated the transaction price to the performance obligation(s) in the contract; and (v) recognized revenue when (or as) the performance obligation(s) were satisfied. At contract inception, the Company assessed the goods or services promised within each contract, assessed whether each promised good or service was distinct and identified those that were performance obligations. The Company recognized as revenue the amount of the transaction price that was allocated to the respective performance obligation when (or as) the performance obligation was satisfied.

Billings to customers or payments received from customers were included in deferred revenue on the consolidated balance sheet until all revenue recognition criteria were met. As of June 30, 2020 and March 31, 2020, the Company had no deferred revenue.

Service revenues

The Company’s service-based business, Organovo, Inc., utilized 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 contained 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 were 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 did 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 could be customized for each customer, it was 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 utilized point-in-time recognition under Topic 606.

For service contracts, the Company allocated 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 was not observable through past transactions, the Company estimated 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 was a fixed consideration.

In connection to the Company’s decision to pursue its strategic alternatives, the Company halted commercial activities related to its liver tissues. The Company is expected to continue to maintain its external research collaborations and its intellectual property portfolio.

Product sales, net

The Company’s former product-based business, Samsara Sciences, Inc., produced high-quality cell-based products for use in Organovo’s 3D tissue manufacturing and for use by life science customers. The Company recognized product revenue when the performance obligation was satisfied, which was at the point in time the customer obtained control of the Company’s product,

10


 

typically upon delivery. Product revenues were recorded at the transaction price, net of any estimates for variable consideration under Topic 606. The Company’s process for estimating variable consideration did not differ materially from its historical practices. Variable consideration was 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 reflected the Company’s best estimates of the amount of consideration to which it was entitled based on the terms of the individual contracts. Actual amounts of consideration ultimately received may have differed from the Company’s estimates. If actual results varied materially from the Company’s estimates, the Company would have adjusted these estimates, which would have affected revenue from product sales and earnings in the period such estimates were adjusted.

The Company provided no right of return to its customers except in cases where a customer obtained authorization from the Company for the return. To date, there have been no product returns.

In March 2020, the Company dissolved Samsara.

Collaborative research, development, and licenses

The Company has entered 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 analyzed 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 considered a variety of factors in determining the appropriate estimates and assumptions under these arrangements, such as whether the elements were distinct performance obligations, whether there were determinable stand-alone prices, and whether any licenses were functional or symbolic. The Company evaluated each performance obligation to determine if it could 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 were considered fixed, while milestone payments were identified as variable consideration which must be evaluated to determine if it was 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 provided 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 determined that the intellectual property license was not distinct from the continued support promised under the agreement and was therefore a single combined performance obligation. The Company recognized revenue for these combined performance obligations over time for the duration of the license period, as the combined performance obligation would not be fully satisfied until the end of the contract.

As of September 30, 2019, the Company completed its obligations under the existing agreements with respect to receipts of revenue and does not anticipate recording any further revenue. 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 concluded this government grant was 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 concluded this government grant did meet the definition of a contribution and is a non-reciprocal transaction, however, Subtopic 958-605, Not-for-Profit-Entities-Revenue Recognition did not apply, as the Company is a business entity and the grant was with a governmental agency.

Revenues from this grant were based upon internal costs incurred that are specifically covered by the grant, plus an additional rate that provides funding for overhead expenses. Revenue was recognized as the Company incurred expenses that were related to the grant. The Company believes this policy was consistent with the overarching premise in Topic 606, to ensure that it recognized revenues to reflect the transfer of promised goods or services to customers in an amount that reflected the consideration to which it expected to be entitled in exchange for those goods or services, even though there was no “exchange” as defined in the ASC. The Company believed the recognition of revenue as costs were incurred and amounts became earned/realizable was analogous to the concept of transfer of control of a service over time under Topic 606.

11


 

In connection to the Company’s decision to pursue its strategic alternatives, specific to the NIH NASH grant, all internal research activities have been halted and transferred to the University of California, San Diego, leaving a remaining available balance of approximately $0.5 million that will not be utilized by the Company.

Cost of revenues

The Company reported no cost of revenues for the three months ended June 30, 2020 and approximately $0.1 million in cost of revenues for the three months ended June 30, 2019. Cost of revenues consisted 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, 2020 or 2019, 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 due to their anti-dilutive effect were approximately 12.0 million at June 30, 2020 and 14.6 million at June 30, 2019.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“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 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 became effective for the Company on April 1, 2020 and did not have a significant impact on the Company’s unaudited condensed consolidated 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.

12


 

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

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

June 30, 2020

 

 

June 30, 2019

 

Research and development

 

$

 

 

$

164

 

General and administrative

 

$

925

 

 

$

1,056

 

Total

 

$

925

 

 

$

1,220

 

 

The total unrecognized compensation cost related to unvested stock option grants as of June 30, 2020 was approximately $2,651,000 and the weighted average period over which these grants are expected to vest is 1.58 years, assuming no change of control.

The total unrecognized compensation cost related to unvested restricted stock units (not including performance-based restricted stock units) as of June 30, 2020 was approximately $702,000, which will be recognized over a weighted average period of 1.48 years, assuming no change of control.

The total unrecognized compensation cost related to unvested performance-based restricted stock units as of June 30, 2020 was approximately $1,038,000, which will be recognized over a weighted average period of 1.19 years, assuming no change of control.

As of June 30, 2020, there are no participants enrolled into the employee stock purchase plan for the current purchase period, beginning March 1, 2020.

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 assumed dividend yield is 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 weighted average expected life of options was estimated using the average of the contractual term and the weighted average vesting term of the options. The measurement and classification of share-based payments to non-employees is consistent with the measurement and classification of share-based payments to employees. There were no options granted in the three months ended June 30, 2020 and 2019.

 

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, 2020*

 

 

June 30, 2019

 

Dividend yield

 

 

 

 

 

 

Volatility

 

 

0.00

%

 

 

43.69

%

Risk-free interest rate

 

 

0.00

%

 

2.52

 

Expected term

 

0 months

 

 

6 months

 

Grant date fair value

 

$

-

 

 

$

0.29

 

 

*There are no participants in the ESPP for the current purchase period (beginning March 1, 2020).

 

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.

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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). On December 26, 2019, the Company obtained an additional compliance period of 180 calendar days by electing to transfer to The Nasdaq Capital Market. On March 26, 2020, the Company obtained shareholder approval to effect a reverse stock split in a range from 20:1 to 40:1, which remains subject to the approval of the Company’s board of directors, in order to meet the minimum closing bid price per share requirement under the Nasdaq Listing Rules. On April 17, 2020 the Company received an additional notice letter from Nasdaq indicating that based on extraordinary market conditions, Nasdaq has determined to toll the compliance periods for bid price and market value of publicly held shares requirements (collectively, the “Price-based Requirements”) through June 30, 2020. Accordingly, since the Company had 66 calendar days remaining in its compliance period as of April 16, 2020, the Company will, upon reinstatement of the Price-based Requirements, still have 66 calendar days from July 1, 2020, or until September 4, 2020, to regain compliance. The Company can regain compliance, either during the suspension or during the compliance period resuming after the suspension, by evidencing compliance with the Price-based Requirements for a minimum of 10 consecutive trading days. The Company intends to comply with the Price-based Requirements by effecting the Reverse Stock Split. 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. 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 to maintain the listing of its common stock on The Nasdaq Capital Market. The Company’s failure to regain compliance during this second compliance period could result in delisting.

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, 2020 and 2019, the Company issued 0 and 6,087,382 shares of common stock, respectively, for net proceeds of $0 and $5.0 million in at-the-market offerings under the 2018 Sales Agreement.  

As of June 30, 2020, 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.

Restricted stock units

The following table summarizes the Company’s restricted stock units (not including performance-based restricted stock units) activity from March 31, 2020 through June 30, 2020:

 

 

 

Number of

Shares

 

 

Weighted

Average Price

 

Unvested at March 31, 2020

 

 

480,256

 

 

$

1.95

 

Granted

 

 

 

 

$

 

Vested

 

 

(61,626

)

 

$

2.57

 

Cancelled / forfeited

 

 

 

 

$

 

Unvested at June 30, 2020

 

 

418,630

 

 

$

1.85

 

 

14


 

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), 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. 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 percent 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, 2020, no tranches are expected to vest unless there is a change in control.

Based on the amended PBRSU vesting terms, 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.

On July 2, 2019, the Company issued Performance-Based Restricted Stock Unit Awards (the “PBRSU Retention Awards”) for an aggregate of 6,027,899 shares of common stock to its management team. The PBRSUs were issued pursuant to the 2012 Plan. The PBRSU Retention Awards will vest in full upon the earlier of the Company’s engagement in a pre-IND meeting with the FDA, twenty-four months from the grant date, or a change in control. As of June 30, 2020, all PBRSUs are expected to vest twenty-four months from the grant date.

The following table summarizes the Company’s performance-based restricted stock unit activity from March 31, 2020 through June 30, 2020:

 

 

 

Number of

Shares

 

 

Weighted

Average Price

 

Unvested at March 31, 2020

 

 

3,952,927

 

 

$

0.51

 

Granted

 

 

 

 

$

 

Vested

 

 

 

 

$

 

Cancelled / forfeited

 

 

 

 

$

 

Unvested at June 30, 2020

 

 

3,952,927

 

 

$

0.51

 

 

Stock options

The following table summarizes the Company’s stock option activity from March 31, 2020 to June 30, 2020:

 

 

 

Options

Outstanding

 

 

Weighted

Average

Exercise Price

 

 

Aggregate

Intrinsic

Value

 

Outstanding at March 31, 2020

 

 

7,638,076

 

 

$

2.08

 

 

$

37,440

 

Options granted

 

 

 

 

$

 

 

$

 

Options cancelled / forfeited

 

 

 

 

$

 

 

$

 

Options exercised

 

 

 

 

$

 

 

$

 

Outstanding at June 30, 2020

 

 

7,638,076

 

 

$

2.08

 

 

$

79,237

 

Vested and Exercisable at June 30, 2020

 

 

4,593,119

 

 

$

2.48

 

 

$

3,396

 

 

The weighted average remaining contractual term of options exercisable and outstanding at June 30, 2020 was approximately 7.13 years.

15


 

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, 2020, there were 1,188,718 shares available for purchase under the ESPP. 

Common stock reserved for future issuance

Common stock reserved for future issuance consisted of the following at June 30, 2020:

 

Common stock options outstanding and reserved under the 2012 Plan

 

 

5,549,864

 

Common stock reserved under the 2012 Plan

 

 

14,158,654

 

Common stock reserved under the 2016 Employee Stock Purchase Plan

 

 

1,188,718

 

Restricted stock units outstanding under the 2012 Plan

 

 

418,630

 

Performance-based restricted stock units outstanding under the 2012 Plan

 

 

3,794,221

 

Common stock options outstanding and reserved under the Incentive

   Award Agreement

 

 

2,088,212

 

Performance-based restricted stock units outstanding under the Incentive Award

   Agreement

 

 

158,706

 

Total at June 30, 2020

 

 

27,357,005

 

 

 

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 $0 and $10,000 was recorded under this agreement for the three months ended June 30, 2020 and 2019, respectively. The Company completed its obligations under this agreement and does not anticipate recording any further revenue.

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.

On January 30, 2020, the Company received a demand letter (the “Letter”) from a purported stockholder alleging that the disclosures in the Form S-4 filed with the SEC on December 23, 2019 violated federal securities laws by failing to disclose certain allegedly material information. The Letter demands, among other things, that the Company make corrective disclosures and reserves the right to pursue legal action. The Company believes the assertions in the Letter are without merit and now moot.

On March 4, 2020, the Company received a letter from the SEC regarding an inquiry into certain of the Company’s prior disclosures and related operations. The Company is cooperating with the SEC in response to a subpoena.

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.

16


 

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 any 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.

Note 6. Leases

Operating Leases

In October 2019, the Company entered into an agreement to rent office space at 440 Stevens Avenue, Suite 200, Solana Beach, California 92075. This agreement is a month-to-month contract and can be terminated at-will by either party at any time. As such, the Company has concluded that this agreement does not contain a lease and will be expensed as incurred. Monthly rental payments are approximately $4,000 per month.

 

The Company recorded operating lease expense for its former facilities on 6275 Nancy Ridge Drive, San Diego, California 92121 and its copy machines on a straight-line basis over the life of the leases, which were terminated in the third quarter of fiscal 2019. For the three months ended June 30, 2020 and 2019, the Company recorded operating lease expense of approximately $0 and $262,000, respectively. In addition, the Company recorded rent expense for the office space of approximately $12,000 and $0 for the three months ended June 30, 2020 and 2019, respectively. 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 expensed as incurred. Variable lease expense was approximately $0 and $107,000 for the three months ended June 30, 2020 and 2019, respectively. Short-term lease cost for the three months ended June 30, 2020 and 2019 was approximately $0 and $15,000, respectively. The short-term lease was terminated in the second quarter of fiscal 2020.

 

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 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 was 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, 2020.

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.

During fiscal 2020, the Company provided services to Viscient Biosciences (“Viscient”), an entity for which Keith Murphy, the Company’s director, as of July 15, 2020, and former Chief Executive Officer and President, serves as the Chief Executive Officer and President. In addition to the services provided by Organovo, Viscient has purchased primary human cell-based products from its former subsidiary, Samsara. There was approximately $84,000 of accounts receivable outstanding as of June 30, 2020 and $60,000 of accounts receivable outstanding as of June 30, 2019. The Company and Viscient have agreed on a payment plan under which Viscient has made a payment of approximately $28,000 on or before June 17, 2020 and will make a payment of approximately $28,000 on or before July 24, 2020; $19,000 on or before August 23, 2020; $19,000 on or before September 22, 2020, and $19,000 on or before October 22, 2020. Through the date of filing, Viscient has made payments in aggregate of $84,000. Further, in July 2020, we entered into a Cooperation Agreement with Mr. Murphy. See “Note 1. Description of Business” and “Note 10. Subsequent Events” for more information.

17


 

Note 9. Restructuring

In August 2019, after a rigorous assessment of the Company’s lead liver therapeutic tissue program following completion of various preclinical studies, the Company’s Board of Directors (the “Board”) concluded that the variability of biological performance and related duration of potential benefits presented development challenges and lengthy redevelopment timelines that no longer supported an attractive opportunity for the Company and its stockholders. Furthermore, the Board deemed the stage of development of the Company’s other therapeutic pipeline assets, including stem cell based tissue programs, to be too premature to potentially reach IND filing status within an acceptable investment horizon and with the Company’s available resources. As a result, the Company suspended all development of its lead program and all other related pipeline development activity and engaged a financial advisory firm to explore its strategic alternatives, including evaluating a range of ways to generate value from the Company’s technology platform and intellectual property, its commercial and development capabilities, its listing on the Nasdaq Stock Market, and its remaining financial assets. Under the restructuring plan, the Company terminated the employment of 52 employees, or 90 percent of its workforce and recorded a restructuring charge during the year ended March 31, 2020 of approximately $2.7 million, related to employee severance and benefits costs, of which approximately $1.7 million was paid out during the fiscal second quarter, approximately $0.9 million was paid out during the fiscal third quarter, approximately $0.1 million was paid out during the fiscal fourth quarter, and less than $0.1 million was paid out during the first quarter of fiscal 2021.

No restructuring charges were recorded during the three months ended June 30, 2020 and 2019.

 

The following table summarizes the activity and balances of the restructuring reserve (in thousands):

 

 

 

Severance for Involuntary

Employee Terminations

 

Balance at March 31, 2020

 

$

21

 

Reserve established

 

 

 

Increase to reserve

 

 

 

Utilization of reserve:

 

 

 

 

Payments

 

 

(21

)

Balance at June 30, 2020

 

$

 

 

Note 10. Subsequent Events

On July 14, 2020, we entered into a Cooperation Agreement with Mr. Murphy. Pursuant to the Cooperation Agreement, the Board appointed Messrs. Murphy and Stern to the six member Board as Class III directors, with terms expiring at the Company’s 2020 Annual Meeting and two of the Company’s existing directors, Richard Maroun and David Shapiro, resigned from the Board and from each Board committee on which they serve, effective immediately. The Board also agreed to nominate, recommend, support and solicit proxies for the re-election of Messrs. Murphy and Stern at the 2020 Annual Meeting. The Board also agreed to nominate, recommend, support and solicit proxies for an advisory stockholder vote (the “Advisory Nominees Proposal”) at the 2020 Annual Meeting to appoint three individuals, Douglas Jay Cohen, David Gobel and Alison Tjosvold Milhous (collectively, the “Advisory Nominees”), to the Board. If the final vote tabulation for the Advisory Nominees Proposal receives more votes cast “FOR” than “AGAINST” its approval, our Board has approved the appointment of the Advisory Nominees, to be automatically effective immediately following the final adjournment of the 2020 Annual Meeting. In addition, immediately following the appointment of the Advisory Nominees, each of our existing directors (other than Messrs. Murphy and Stern) will resign from the Board, which will result in Messrs. Murphy and Stern and the Advisory Nominees constituting the full membership of the Board (collectively, the “New Director Slate”) and will trigger a “Change of Control” under Organovo’s severance plan, as well as its Directors and Officers (“D&O”) liability insurance policies, requiring the following cash outlays: i) approximately $3.0 million for severance obligations and ii) approximately $2.0 million (or $1.7 million net of returned premium) for a six year D&O tail insurance policy. Please see “Note 1. Business Description” for a discussion of the new business plan the New Director Slate intends for the Company to pursue if they are appointed to the Board following the final adjournment of the 2020 Annual Meeting.

18


 

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, 2020. 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, 2020, filed with the Securities and Exchange Commission on May 28, 2020, 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 unaudited 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 unaudited 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, 2020, filed with the SEC on Form 10-K on May 28, 2020 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 an early-stage biotechnology company that has focused on pioneering the development of bioprinted 3D human tissues that emulate key aspects of human biology and disease.

 

Historical Operations and Strategic Alternatives Process

Prior to August 2019, we have focused our efforts on 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. We also explored the development of other potential pipeline in vivo tissue constructs in-house and through collaborations with academic and government researchers. In the past, we also explored the development of in vitro tissues, including proof of concept models of diseased tissues, for use in drug discovery and development.

In August 2019, after a rigorous assessment of our in vitro liver therapeutic tissue program, we concluded that the variability of biological performance and related duration of potential benefits no longer supported an attractive opportunity due to redevelopment challenges and lengthening timelines to compile sufficient data to support an IND filing. As a result, we suspended development of our lead program and all other related in-house pipeline development activities.

Our Board also 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, our listing on the Nasdaq Capital Market, and our remaining financial assets. These strategic alternatives included possible mergers and business combinations, sales of part or all of our assets, and licensing and partnering arrangements. We implemented various restructuring steps to manage our resources and extend our cash runway, including reducing commercial activities related to our liver tissues, except for sales of primary human cells out of inventory, negotiating an exit from our long-term facility lease, selling various assets, and reducing our workforce. Additionally, in November 2019, we sold certain inventory and equipment and related proprietary information held by our wholly-owned subsidiary, Samsara Sciences, Inc. (“Samsara”), and as a result of such sale, Samsara ceased its operations.

After conducting a diligent and extensive process of evaluating strategic alternatives and identifying and reviewing potential candidates for a strategic acquisition or other transaction, which included the receipt of more than 27 non-binding indications of interest from interested parties and careful evaluation and consideration of those proposals, and following extensive negotiation with

19


 

Tarveda, on December 13, 2019, we entered into a merger agreement with Tarveda (the “Merger Agreement”). Pursuant to the Merger Agreement, and subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, our wholly-owned merger subsidiary would merge (the “Merger”) into Tarveda, with Tarveda surviving the Merger. The Merger Agreement included various conditions to the consummation of the Merger, including approval by our stockholders at a Special Meeting of Stockholders scheduled for April 7, 2020 (the “Special Meeting”).

At the Special Meeting, the Merger was not approved by our stockholders. As a result, we terminated the Merger Agreement with Tarveda. Pursuant to the terms of the Merger Agreement, we were obligated to reimburse certain of Tarveda’s merger-related expenses not to exceed $300,000, which was offset by Tarveda’s portion of shared expenses incurred by Organovo in fiscal 2020.

The Cooperation Agreement and Advisory Nominees Proposal

Following the Special Meeting and the termination of the Merger Agreement, our Board continued to solicit stockholder feedback regarding the Company’s strategic alternatives and how to maximize stockholder value. In response to feedback from our largest stockholder regarding its desire for the Board to consider opportunities in the 3D bioprinting field and suggestion that the Board should speak with Keith Murphy, the Company’s founder, stockholder and former Chief Executive Officer and Chairman, for potential business ideas, our Board initiated discussions with Mr. Murphy. Based on these discussions, we entered into a Cooperation Agreement with Mr. Murphy on July 14, 2020 (the “Cooperation Agreement”). Under the terms of the Cooperation Agreement, the Board appointed Mr. Murphy and Adam K. Stern to the Board as Class III directors, and two of the Company’s existing directors, Richard Maroun and David Shapiro, resigned from the Board and the committees thereof. The Board also agreed to nominate, recommend, support and solicit proxies for the re-election of Messrs. Murphy and Stern at the Company’s 2020 Annual Meeting of Stockholders (the “2020 Annual Meeting”). The Board also agreed to nominate, recommend, support and solicit proxies for an advisory stockholder vote (the “Advisory Nominees Proposal”) at the 2020 Annual Meeting to appoint three individuals, Douglas Jay Cohen, David Gobel and Alison Tjosvold Milhous (collectively, the “Advisory Nominees”), to the Board. Mr. Murphy identified each of the Advisory Nominees. If the final vote tabulation for the Advisory Nominees Proposal receives more votes cast “FOR” than “AGAINST” its approval, the Board has approved the appointment of the Advisory Nominees, to be automatically effective immediately following the final adjournment of the 2020 Annual Meeting. In addition, immediately following the appointment of the Advisory Nominees, each of our existing directors (other than Messrs. Murphy and Stern) will resign from the Board, which will result in Messrs. Murphy and Stern and the Advisory Nominees constituting the full membership of the Board (collectively, the “New Director Slate”).

Proposed Drug Discovery Business

The New Director Slate has advised us that if the Advisory Nominees Proposal is approved at the 2020 Annual Meeting, the New Director Slate intends to recommence operations and focus our future efforts on developing highly customized human tissues as living, dynamic models of human biology and disease for use in drug discovery and development. The New Director Slate has advised us that it believes our proprietary technology can be used to build functional 3D human tissues that mimic key aspects of native human tissue composition, architecture, and function. The New Director Slate also believes we can utilize our proprietary technology to develop highly customized and dynamic models of human disease, including cell type-specific compartments, prevalent intercellular tight junctions, and microvascular structures. They believe these features can facilitate the development of complex, multicellular disease models for use in the development of targeted therapeutics for various diseases including, among others, intestine, kidney, skin and breast diseases. Market opportunities may include externally-partnered or internally-directed drug discovery and the clinical development of new molecular entities or repurposed drugs in-licensed from other pharmaceutical companies. The goal of the New Director Slate is to establish a pipeline of drug candidates in high-value disease areas, aiming to commence human clinical testing for at least one drug candidate within a three to four year timeframe.

The New Director Slate advised us that it believes we have a significant opportunity to change the classic model of drug discovery using 3D bioprinted human tissues and other 3D models (sometimes known as “organoids” or “organs on a chip”). They have advised that the Company’s new paradigm will involve augmenting available animal disease models, or replacing animal disease models altogether, in the discovery process with more relevant disease models utilizing 3D bioprinted human tissues developed by the Company. They believe our 3D bioprinted human tissues may enable us to study the treatment of human disease by replicating key aspects of human biology in areas where this is currently a challenge with existing models. Rather than offering contract research services (as we have done in the past), they believe we should focus on identifying and developing our own drug candidates, including from unique compounds or repurposed drugs in-licensed from other pharmaceutical companies. After identifying a drug candidate, they may have us out-license the drug candidate or they may elect to have us develop the drug candidate internally. In addition to drug discovery, they believe we should continue to evaluate opportunities to monetize our intellectual property and technologies along the way as a means to generate funds to support our primary business. They also believe that we should continue to identify and work with partners and collaborators, including leading academic research sites, to develop new enabling applications which can support its discovery and development mission.

20


 

If the Advisory Nominees Proposal is approved, the New Director Slate intends to restart our research and development operations by hiring a team of R&D professionals with the experience required to develop bioprinted and other 3D tissues for use in drug discovery, to leverage 3D models of disease to discover new drug candidates, and to develop new drug candidates for the initiation of clinical studies.

The New Director Slate has advised us that they expect our research and development staff to grow to seven to ten employees. They also expect to maintain or grow a general and administrative staff of three to five employees to support our operations and reporting requirements as a public company.

If the Advisory Nominees Proposal is approved, the New Director Slate has advised us that they expect to lease sufficient office and laboratory space to support our requirements. They expect that we will need space in the short term in the 3,000-7,000 sq. ft. range, with mixed office and laboratory space. They expect to lease a new facility in San Diego at prevailing market terms.

In the event the Advisory Nominees Proposal is not approved by our stockholders, we may pursue one of the following courses of action, which include but are not limited to the following actions:

 

Pursue another strategic transaction similar to the Merger. We may resume our process of evaluating other candidate companies interested in pursuing a strategic transaction and, if a candidate is identified, focus our attention on negotiating and completing such strategic transaction with such candidate.

 

Continue to operate and expand our business. We could elect to continue to operate and expand our business and pursue licensing or partnering transactions or utilize our intellectual property and platform technology to pursue the redevelopment of our liver tissues or the development of therapeutic tissues currently being studied by our collaborators. Due to the early development stage of our, and our collaborators’, potential therapeutic tissues, any such redevelopment or development efforts would require a significant amount of time and financial resources, and would be subject to all the risk and uncertainties involved in the development of novel, early stage therapeutic products, research tools, and drug screening technologies. There is no assurance that we could raise sufficient capital to support these efforts, that our development efforts would be successful commercially in the case of research applications or that we could successfully obtain any required regulatory approvals required to market any therapeutic product we pursued. We would also need to increase qualified scientific, sales and marketing, and administrative staffing, lease a suitable facility and make other expenditures necessary to support these efforts.

 

Dissolve and liquidate our assets. Our Board may determine that it is in the best interests of the Company and our stockholders to dissolve and liquidate our assets, subject to approval by our stockholders. In that event, we would be required to pay all of our debts and contractual obligations and to set aside certain reserves for potential future claims. If we dissolve and liquidate our assets, there can be no assurance as to the amount or timing of available cash that will remain for distribution to our stockholders after paying our debts and other obligations and setting aside funds for our contingent liabilities.

COVID-19

In December 2019 a respiratory illness caused by a novel strain of coronavirus, SARS-CoV-2, causing the Coronavirus Disease 2019, also known as COVID-19 or coronavirus emerged. While initially the outbreak was largely concentrated in China it has spread globally. Global health concerns relating to the COVID-19 pandemic have been weighing on the macroeconomic environment, and the pandemic has significantly increased economic volatility and uncertainty. The pandemic has resulted in government authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place or stay-at-home orders, and business shutdowns.

The extent to which the coronavirus impacts our operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak and travel bans and restrictions, quarantines, shelter-in-place or stay-at-home orders, and business shutdowns. In particular, the continued COVID-19 pandemic could adversely impact our operations, including among others, the timing and ability to pursue strategic alternatives, given the impact it may have on the manufacturing and supply chain, sales and marketing and clinical trial operations of potential strategic partners and the ability, if we elect to do so, to advance our research and development activities and pursue development of any of our pipeline products each of which could have an adverse impact on our business and our financial results. However, our employees and consultants have been working remotely prior to the COVID-19 pandemic and we currently believe our operations have not otherwise been negatively impacted by the pandemic.

21


 

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 stock-based compensation expense, the valuation of impairment of long-lived assets, and the valuation allowance on deferred tax assets. Though the impact of the COVID-19 pandemic to our business and operating results presents additional uncertainty, we continue to use the best information available to inform our critical accounting estimates. 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, 2020. For a description of critical accounting policies that affect our significant judgments and estimates used in the preparation of our unaudited condensed 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, 2020, filed with the SEC on May 28, 2020.

Results of Operations

Comparison of the three months ended June 30, 2020 and 2019

The following table summarizes our results of operations for the three months ended June 30, 2020 and 2019 (in thousands, except %):

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

Increase (decrease)

 

 

 

2020

 

 

2019

 

 

$

 

 

%

 

Revenues

 

$

-

 

 

$

668

 

 

$

(668

)

 

 

(100

%)

Cost of revenues

 

$

-

 

 

$

51

 

 

$

(51

)

 

 

(100

%)

Research and development

 

$

-

 

 

$

3,823

 

 

$

(3,823

)

 

 

(100

%)

Selling, general and administrative

 

$

2,786

 

 

$

3,315

 

 

$

(529

)

 

 

(16

%)

Other income

 

$

19

 

 

$

198

 

 

$

(179

)

 

 

(90

%)

 

Revenues

We had no revenue for the three months ended June 30, 2020 compared to $0.7 million of revenue for the three months ended June 30, 2019, due to a cessation of revenue generating activities following our decision to restructure operations to preserve capital as we pursue various strategic alternatives.  

Costs and Expenses

Cost of Revenues

Cost of product and service revenues, which reflects expenses related to manufacturing our products and delivering services was zero for the three months ended June 30, 2020, compared to approximately $0.1 million for the three months ended June 30, 2019. The decrease was due to the cessation of revenue generating activities following our decision to restructure operations to preserve capital as we pursue various strategic alternatives.

22


 

Research and Development Expenses

The following table summarizes our research and development expenses for the three months ended June 30, 2020 and 2019 (in thousands, except %):

 

 

 

Three months ended

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

Increase (decrease)

 

 

 

June 30, 2020

 

 

% of total

 

 

June 30, 2019

 

 

% of total

 

 

$

 

 

%

 

Research and development

 

$

-

 

 

 

0

%

 

$

3,528

 

 

 

92

%

 

$

(3,528

)

 

 

(100

%)

Non-cash stock-based compensation

 

 

-

 

 

 

0

%

 

 

164

 

 

 

4

%

 

 

(164

)

 

 

(100

%)

Depreciation and amortization

 

 

-

 

 

 

0

%

 

 

131

 

 

 

4

%

 

 

(131

)

 

 

(100

%)

Total research and development

   expenses

 

$

-

 

 

 

0

%

 

$

3,823

 

 

 

100

%

 

$

(3,823

)

 

 

(100

%)

 

Research and development expenses were zero, a decrease of $3.8 million, or 100%, from the prior year period as we eliminated all research and development activities following our decision to pursue our strategic alternatives during the second quarter of fiscal 2020. This action caused a $1.7 million reduction of personnel related costs, a $0.8 million reduction in lab supply costs, a $0.8 million reduction in facilities costs, and a $0.5 million reduction in all other costs. The Company’s average full-time research and development staff decreased from an average of forty-one full-time employees for the three months ended June 30, 2019 to an average of zero full-time employees for the three months ended June 30, 2020. Going forward, based on the outcome of the Advisory Proposal vote and strategic decisions that the Board may make, the Company may elect to pursue renewed research and development activities with an associated increase in expenses.

 

Selling, General and Administrative Expenses

The following table summarizes our selling, general and administrative expenses for the three months ended June 30, 2020 and 2019 (in thousands, except %):

 

 

 

Three months ended

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

Increase (decrease)

 

 

 

June 30, 2020

 

 

% of total

 

 

June 30, 2019

 

 

% of total

 

 

$

 

 

%

 

Selling, general and administrative

 

$

1,857

 

 

 

67

%

 

$

2,185

 

 

 

66

%

 

$

(328

)

 

 

(15

%)

Non-cash stock-based compensation

 

 

925

 

 

 

33

%

 

 

1,056

 

 

 

32

%

 

 

(131

)

 

 

(12

%)

Depreciation and amortization

 

 

4

 

 

 

0

%

 

 

74

 

 

 

2

%

 

 

(70

)

 

 

(95

%)

Total selling, general and

   administrative expenses

 

$

2,786

 

 

 

100

%

 

$

3,315

 

 

 

100

%

 

$

(529

)

 

 

(16

%)

 

For the three months ended June 30, 2020, selling, general and administrative expenses were approximately $2.8 million, a decrease of $0.5 million, or 16%, over the prior year period as we restructured our operations to preserve capital as we explore strategic alternatives. These actions caused a $0.9 million decrease in personnel costs and a $0.1 million decrease in all other costs, which were offset by a $0.3 million increase in corporate costs and a $0.2 million increase in allocated facilities costs.  Our average selling, general and administrative headcount was six full-time employees for the three months ended June 30, 2020 compared to twenty-one full-time employees in the prior year period.

Other Income (Expense)

Other income was less than $0.1 million for the three months ended June 30, 2020 as compared to $0.2 million for the three months ended June 30, 2019, due to a decrease in interest income caused by lower average yields and investment balances.

Financial Condition, Liquidity and Capital Resources

Until our recent decision to explore strategic alternatives, we had primarily devoted our efforts to developing and commercializing a platform technology to produce and study living tissues that emulate key aspects of human biology and disease, raising capital and building infrastructure. Following the decision to explore strategic alternatives, we have taken steps to manage our resources and extend our cash runway, including reducing all commercial and research and development laboratory activities, except for sales of primary human cells out of inventory, negotiating an exit from our long-term facility lease, selling lab equipment and inventory, and reducing our workforce to the minimum level necessary to explore and support these strategic alternatives and maintain our core intellectual property, licenses and collaborations with research institutions and universities.

23


 

As of June 30, 2020, we had cash and cash equivalents of approximately $24.8 million and an accumulated deficit of $282.2 million. We also had negative cash flow from operations of $2.6 million during the three months ended June 30, 2020. At March 31, 2020, we had cash and cash equivalents of approximately $27.4 million and an accumulated deficit of $279.5 million.

At June 30, 2020, we had total current assets of approximately $25.5 million and current liabilities of approximately $0.8 million, resulting in working capital of $24.7 million. At March 31, 2020, we had total current assets of approximately $28.3 million and current liabilities of approximately $1.8 million, resulting in working capital of $26.5 million.

The following table summarizes the primary sources and uses of cash for the three months ended June 30, 2020 and 2019 (in thousands):

 

 

Three months ended

 

 

June 30,

 

 

2020

 

2019

 

Net cash (used in) provided by:

 

 

 

 

 

 

Operating activities

$

(2,570

)

$

(5,935

)

Investing activities

 

2

 

 

1

 

Financing activities

 

(1

)

 

4,944

 

Net decrease in cash, cash equivalents, and restricted cash

$

(2,569

)

$

(990

)

 

Operating activities

Net cash used in operating activities for the three months ended June 30, 2020 was approximately $2.6 million as compared to $5.9 million used in operating activities for the three months ended June 30, 2019. This $3.4 million decrease in operating cash usage can be attributed primarily to a $3.1 million improvement in the net loss less depreciation and amortization and stock-based compensation, resulting from the Company’s restructuring and reduction of headcount and a $0.3 million reduction in the change in working capital between the two periods.

Investing activities

Net cash provided by investing activities was less than $0.1 million for the three months ended June 30, 2020 and 2019.

Financing activities

Net cash used by financing activities was less than $0.1 million during the three months ended June 30, 2020 compared to net cash provided by financing activities of approximately $4.9 million during the three months ended June 30, 2019. Financing in the prior year period was driven by the sale of common stock through at-the-market (“ATM”) offerings.

Operations funding requirements

Through June 30, 2020, we have financed our operations primarily through the sale of common stock in public offerings, the private placement of equity securities, from revenue derived from products and research-based services, grants, and collaborative research agreements, and from the sale of convertible notes.

Throughout the strategic alternatives assessment process, the Company has taken steps to manage its resources and extend its cash runway including selling various assets and reducing its workforce to the minimum level necessary to explore and support these strategic alternatives as well as to support the remainder of the Company’s on-going business activities and assets, including its intellectual property platform and collaborations with research institutions and universities.

The Company believes its cash and cash equivalents on hand will be sufficient to meet its financial obligations for at least the next 12 months of operations  If the Advisory Proposal is approved, and the New Director Slate recommences the Company’s operations and focuses its efforts on drug discovery and development, the Company will need to raise additional capital to implement this new business plan.  The Company cannot predict with certainty the exact amount or timing for any future capital raises.

24


 

Based on our use of the 2018 Shelf through June 30, 2020, we cannot raise more than $81.3 million in future offerings under the 2018 Shelf, including through our at-the-market program.

Having insufficient funds may require us to relinquish rights to our technology on less favorable terms than we would otherwise choose. Failure to obtain adequate financing could eventually adversely affect our ability to operate as a going concern. If we raise additional funds from the issuance of equity securities, substantial dilution to our existing stockholders would likely result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business. We cannot be sure that additional financing will be available if and when needed, or that, if available, it can obtain financing on terms favorable to its stockholders.  Any failure to obtain financing when required will have a material adverse effect on the Company’s business, operating results, financial condition and ability to continue as a going concern.

On June 25, 2019, we received a notice letter from the Listing Qualifications Staff of Nasdaq indicating that, based upon the closing bid price of our common stock for the last 30 consecutive business days, we no longer meet the requirement to maintain a minimum closing bid price of $1 per share, as set forth in Nasdaq Listing Rule 5450(a)(1). On December 26, 2019, we obtained an additional compliance period of 180 calendar days by electing to transfer to The Nasdaq Capital Market to take advantage of the additional compliance period offered on that market. On April 17, 2020 we received an additional notice letter from Nasdaq indicating that based on extraordinary market conditions, Nasdaq has determined to toll the compliance periods for bid price and market value of publicly held shares requirements (collectively, the “Price-based Requirements”) through June 30, 2020. Accordingly, since we had 66 calendar days remaining in the compliance period as of April 16, 2020, we will, upon reinstatement of the Price-based Requirements, still have 66 calendar days from July 1, 2020, or until September 4, 2020, to regain compliance. We can regain compliance, either during the suspension or during the compliance period resuming after the suspension, by evidencing compliance with the Price-based Requirements for a minimum of 10 consecutive trading days. To qualify, we 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. We intend to comply with the Price-based Requirements by effecting a Reverse Stock Split.

As of June 30, 2020, we had 130,618,203 total issued and outstanding shares of common stock.

In addition, our 2008 Equity Incentive Plan provided for the issuance of up to 1,521,584 shares of common stock upon the exercise of outstanding stock options, of which 896,256 shares were issued. The 2008 Equity Incentive Plan terminated on July 1, 2018. The 2012 Equity Incentive Plan, as amended, provides for the issuance of up to 28,553,986 shares of our common stock, of which 14,158,654 shares remain available for issuance as of June 30, 2020, to executive officers, directors, advisory board members, employees and consultants. Additionally, 1,500,000 shares of common stock have been reserved for issuance under the 2016 ESPP, of which 1,188,718 shares remain available for future issuance as of June 30, 2020. Lastly, 2,246,918 shares of common stock have been reserved for issuances under Inducement Award Agreements. In aggregate, issued and outstanding common stock, shares underlying outstanding warrants, and shares issuable under outstanding equity awards or reserved for future issuance under the 2008 and 2012 Equity Incentive Plans, the Inducement Award Agreements, and the 2016 ESPP total 157,975,208 shares of common stock as of June 30, 2020.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements, including unrecorded derivative instruments that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. We have certain warrants and options outstanding but we do not expect to receive sufficient proceeds from the exercise of these instruments unless and until the underlying securities are registered, and/or all restrictions on trading, if any, are removed, and in either case the trading price of our common stock is significantly greater than the applicable exercise prices of the options and warrants. 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required for smaller reporting companies under Item 305(e).

 

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ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial and accounting officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the quarterly period covered by this report were designed and operating effectively.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the fiscal quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and our Chief Financial Officer, do not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

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PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 5 of the Notes to the Unaudited Condensed Consolidated Financial Statements within this Form 10-Q for a discussion of our legal proceedings and contingencies.

ITEM 1A. RISK FACTORS

Investment in our common stock involves a substantial degree of risk and should be regarded as speculative. As a result, the purchase of our common stock should be considered only by persons who can reasonably afford to lose their entire investment. Before you elect to purchase our common stock, you should carefully consider the risk and uncertainties described below in addition to the other information incorporated herein by reference. Additional risks and uncertainties of which we are unaware or which we currently believe are immaterial could also materially adversely affect our business, financial condition or results of operations. If any of the risks or uncertainties discussed in this Annual Report occur, our business, prospects, liquidity, financial condition and results of operations could be materially and adversely affected, in which case the trading price of our common stock could decline, and you could lose all or part of your investment.

Risks Related to COVID-19

We face risks related to health epidemics, including the recent COVID-19 pandemic, which could have a material adverse effect on our business and results of operations.

In December 2019 a respiratory illness caused by a novel strain of coronavirus, SARS-CoV-2, causing the Coronavirus Disease 2019, also known as COVID-19 or coronavirus emerged. While initially the outbreak was largely concentrated in China it has spread globally. Global health concerns relating to the COVID-19 pandemic have been weighing on the macroeconomic environment, and the pandemic has significantly increased economic volatility and uncertainty. The pandemic has resulted in government authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place or stay-at-home orders, and business shutdowns. The extent to which the coronavirus impacts our operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak and travel bans and restrictions, quarantines, shelter-in-place or stay-at-home orders, and business shutdowns. The continued COVID-19 pandemic could adversely impact our operations, including among others, the timing and ability to pursue strategic alternatives, given the impact it may have on the manufacturing and supply chain, sales and marketing and clinical trial operations of potential strategic partners, and the ability, if we elect to do so, to advance our research and development activities and pursue development of any of our pipeline products, each of which could have an adverse impact on our business and our financial results.

In addition, the stock market has been unusually volatile during the COVID-19 pandemic and such volatility may continue. Our stock price has also experienced volatility during this time, including occasional significant increases and decreases, and such increases and decreases may repeat or continue for the foreseeable future.

There are no comparable recent events which may provide guidance as to the effect of the COVID-19 pandemic, and, as a result, the ultimate impact of the pandemic, or any similar health epidemic that may occur in the future, is highly uncertain and subject to change. We do not yet know the full extent of COVID-19’s impact on our business, our operations, or the global economy as a whole. However, the effects may have a material adverse impact on our future results of operations.

Risks Related to the Proposed Go Forward Business

If the Advisory Nominees Proposal is approved at the 2020 Annual Meeting, the New Director Slate has advised us that it intends for the Company to recommence operations and focus our efforts on utilizing our 3D bioprinting technology to develop human tissues and disease models for drug discovery and development. In this case, the Company will be recommencing its operations as an early-stage company with an unproven business strategy, and may never achieve profitability.

If the Advisory Nominees Proposal is approved at the Annual Meeting, the New Director Slate has advised us that it intends for the Company to recommence operations and focus its efforts on utilizing its 3D bioprinting technology to develop human tissues and disease models for drug discovery and development. In this case, the Company will be recommencing its operations as an early-stage company with an unproven business strategy, and may never achieve profitability. Our success will depend upon the viability of our platform technology and any disease models we develop, as well as on our ability to determine which drug candidates we should pursue. Our success will also depend on our ability to select an appropriate development strategy for any drug candidates we identify, including internal development or partnering or licensing arrangements with pharmaceutical companies. We may never achieve profitability, or even if we achieve profitability, we may not be able to maintain or increase our profitability.

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The New Director Slate has advised us that they expect that the Company will incur substantial additional operating losses over the next several years as our research and development activities increase.

The New Director Slate has advised us that they expect that the Company will incur substantial additional operating losses over the next several years as our research and development activities increase. The amount of future losses and when, if ever, we will achieve profitability are uncertain. Our ability to generate revenue and achieve profitability will depend on, among other things:

 

successfully developing human tissues and disease models for drug discovery and development that enable us to identify drug candidates;

 

successfully outsource certain portions of our development efforts;

 

entering into partnering or licensing arrangements with pharmaceutical companies to further develop and conduct clinical trials for any drug candidates we identify;

 

obtaining any necessary regulatory approval for any drug candidates we identify; and

 

raising sufficient funds to finance our activities and long-term business plan.

 

We might not succeed at any of these undertakings. If we are unsuccessful at one or more of these undertakings, our business, prospects, and results of operations will be materially adversely affected.  

 

Using our platform technology to develop human tissues and disease models for drug discovery and development is new and unproven.

Utilizing our 3D bioprinting platform technology to develop human tissues and disease models for drug discovery and development will involve new and unproven technologies, disease models and approaches, each of which is subject to the risk associated with new and evolving technologies. To date, we have not identified or developed any drug candidates utilizing the business model recommended by the New Director Slate. Our future success will depend on our ability to utilize our 3D bioprinting platform to develop human tissues and disease models that will enable us to identify and develop viable drug candidates. We may experience unforeseen technical complications, unrecognized defects and limitations in our technology or our ability to develop disease models or identify viable drug candidates. These complications could materially delay or substantially increase the anticipated costs and time to identify and develop viable drug candidates, which would have a material adverse effect on our business and financial condition and our ability to continue operations.

We will face intense competition in our drug discovery efforts.

The biotechnology industry is subject to intense competition and rapid and significant technological change. There are many potential competitors for the disease indications we may pursue, including major drug companies, specialized biotechnology firms, academic institutions, government agencies and private and public research institutions. Many of these competitors have significantly greater financial and technical resources, experience and expertise in the following areas than we have, including:

 

 

research and technology development;

 

development of or access to disease models;

 

identification and development of drug candidates;

 

regulatory processes and approvals; and

 

identifying and entering into agreements with potential collaborators.

 

Principal competitive factors in our industry include: the quality, scientific and technical support, management and the execution of drug development and regulatory approval strategies; skill and experience of employees, including the ability to recruit and retain skilled, experienced employees; intellectual property portfolio; range of capabilities, including drug identification, development and regulatory approval; and the availability of substantial capital resources to fund these activities.

In order to effectively compete, we may need to make substantial investments in our research and technology development, drug candidate identification and development, testing and regulatory approval and licensing and business development activities. There is no assurance that we will be successful in discovering effective drug candidates using our 3D bioprinted tissues or disease models. Our technologies and drug development plans also may be rendered obsolete or noncompetitive as a result of technologies, products and services introduced by competitors. Any of these risks may prevent us from building a successful drug discovery business or entering into a strategic partnership or collaboration related to, any drug candidates we identify on favorable terms, or at all.

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If we purse drug development through 3D bioprinted tissues and disease models, we will require access to a constant, steady, reliable supply of human cells to support our development activities.

If we pursue drug development through 3D bioprinted tissues and disease models, we will require access to a constant, steady, reliable supply of human cells to support our development activities. We typically purchased certain qualified human cells from selected third-party suppliers based on quality assurance, cost effectiveness, and regulatory requirements. We formed our wholly-owned subsidiary, Samsara, to eventually serve as a key source of the primary human cells we utilized in our business and we recently dissolved Samsara in connection with pursuing the proposed Merger with Tarveda, which was not successful. If we recommence our development operation, we will need to identify one or more sources of qualified human cells and there can be no guarantee that we would be able to access the quantity and quality of raw materials needed at a cost-effective price. In this event, any failure to obtain a reliable supply of sufficient human cells or a supply at cost effective prices would harm our business and our results of operations and could cause us to be unable to obtain a sufficient supply of human cells to support our drug development efforts.

The business plan proposed by the New Director Slate will be adversely impacted if we are unable to successfully attract, hire and integrate key additional employees or contractors.

Our future success depends in part on our ability to successfully attract and then retain key additional executive officers and other key employees and contractors to support our proposed drug discovery plans. Recruiting and retaining qualified scientific and clinical personnel is critical to our success. Competition to hire qualified personnel in our industry is intense, and we may be unable to hire, train, retain or motivate these key personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. If we are unable to attract and retain high quality personnel, our ability to pursue our drug discovery business will be limited, and our business, prospects, financial condition and results of operations may be adversely affected.

The business plan proposed by the New Director Slate will be adversely impacted if we are unable to secure adequate laboratory facilities and equipment.

In connection with our strategic alternatives process and restructuring beginning in August 2019, we exited our lease agreement for our prior company headquarters (which included laboratory space) and sold most of our lab equipment (with the exception of our bioprinters). In order to proceed with our proposed business plan, we will need to secure adequate lab space and equipment. If we are unable to secure such space and equipment at all, or on commercially reasonable terms, our business opportunity would be adversely impacted.

We may require substantial additional funding to pursue the business plan proposed by the New Director Slate. Raising additional capital would cause dilution to our existing stockholders and may restrict our operations or require us to relinquish rights to our technologies or to a drug candidate.

We currently do not have any committed external source of funds and do not expect to generate any meaningful revenue in the foreseeable future. The New Director Slate has advised us that they believe that our existing cash, cash equivalents and marketable securities and interest thereon will be sufficient to fund our projected operating requirements under the proposed business plan for at least 12 months. They have based these estimates on assumptions that may prove to be wrong, and the Company may use its available capital resources sooner than it currently expects if the operating plans change. If the New Director Slate elects to change the proposed business plan and decide that the Company should pursue further research and development activities, the Company will require substantial additional funding to operate its prop