Notes to Consolidated Financial Statements
Note 1. Organization and Summary of Significant Accounting Policies
Organization
Dextera Surgical Inc. (the “Company”) was incorporated in the state of Delaware on October 15, 1997, as Vascular Innovations, Inc. On November 26, 2001, the Company changed its name to Cardica, Inc., and on June 19, 2016, changed its name to Dextera Surgical Inc. The Company is commercializing and developing the MicroCutter 5/80™ stapler based on its proprietary “staple-on-a-strip” technology intended for use by thoracic, pediatric, bariatric, colorectal and general surgeons. The Company rebranded the latest version of its MicroCutter XCHANGE® 30 combo device as Dextera MicroCutter 5/80™ stapler, which is currently commercially available, is a cartridge-based MicroCutter device with a 5 millimeter shaft diameter, 80 degrees of articulation, and a 30 millimeter staple line approved for use specified indications for use in the United States and in the European Union, or EU, for a broader range of specified indications of use. The Company previously had additional products in development, including the MicroCutter XCHANGE® 45, a cartridge-based MicroCutter device with an 8 millimeter shaft and a 45 millimeter staple line, and the MicroCutter FLEXCHANGE™ 30, a cartridge-based MicroCutter device with a flexible shaft to facilitate endoscopic procedures requiring cutting and stapling; however, the Company suspended development of these additional potential products to focus solely on development of the first MicroCutter XCHANGE 30, and now the MicroCutter 5/80.
In March 2012, the Company completed the design verification for and applied Conformité Européenne, or the CE Mark, to the MicroCutter XCHANGE 30 (where the Company uses the term “MicroCutter XCHANGE 30” herein, the Company refers to earlier versions of the MicroCutter XCHANGE 30, not the latest version that the Company rebranded as the MicroCutter 5/80) and, in December 2012, began a controlled commercial launch of the MicroCutter XCHANGE 30 in Europe. The Company received from the United States Food and Drug Administration, or FDA, 510(k) clearances for the MicroCutter XCHANGE 30 and blue reload in January 2014, and for the white reload in February 2014, for use in multiple open or minimally-invasive surgical procedures for the transection, resection and/or creation of anastomoses in small and large intestine, as well as the transection of the appendix. The blue reload is a cartridge inserted in the MicroCutter XCHANGE 30 to deploy staples for use in medium thickness tissue, and the white reload is a cartridge inserted in the MicroCutter XCHANGE 30 to deploy staples for use in thin tissue. In March 2014, the Company made its first sale of the MicroCutter XCHANGE 30 in the United States, and subsequently temporarily suspended its controlled commercial launch in November 2014, as the Company shifted its focus to improved performance based on surgeons’ feedback. In April 2015, the Company resumed its controlled commercial launch primarily in Europe, of the MicroCutter XCHANGE 30 for thinner tissue usually requiring deployment of white reloads. In November 2015, the Company issued a voluntary withdrawal of the MicroCutter XCHANGE 30 blue cartridges from the market, and continued to sell the MicroCutter XCHANGE 30 device solely for use with the white cartridge. While the Company continues this controlled commercial launch, the Company’s goal was to complete product improvements on the MicroCutter 5/80 which accommodates thicker tissue by enabling deployment of both white and blue reloads. The Company has since ceased the production of the MicroCutter XCHANGE 30 and although it will continue to sell the MicroCutter XCHANGE 30 until the Company has depleted the remaining finished goods inventory, it is focusing on producing and selling the MicroCutter 5/80. To further expand the use of the MicroCutter 5/80, the Company submitted 510(k) Premarket Notifications to the FDA to expand the indications for use to include vascular structures, and in January 2016, received FDA 510(k) clearance to use the MicroCutter 5/80 with a white reload and in July 2016, received FDA 510(k) clearance to use the MicroCutter 5/80 with a blue reload, both for the transection and resection in open or minimally invasive urologic, thoracic, and pediatric surgical procedures. These clearances complement the existing indications for use of the MicroCutter 5/80 in surgical procedures in the small and large intestine and in the appendix. Following the 510(k) clearances, the Company is currently conducting its evaluation of the MicroCutter 5/80, that deploys both blue and white cartridges, with selected centers of key opinion leaders throughout the U.S. and Europe through initial market preference testing to validate the clinical benefits prior to broadening its commercial launch. The Company also initiated the MATCH registry, a post-market surveillance registry, the MicroCutter-Assisted Thoracic Surgery Hemostasis (“MATCH”) registry to evaluate the hemostasis (stopping of blood flow) and ease-of-use for the MicroCutter 5/80.
Historically, the Company generated product revenues primarily from the sale of automated anastomotic systems; however, the Company started generating revenues from the commercial sales of the MicroCutter products since its introduction in Europe in December 2012, and in the United States in March 2014, and through June 30, 2017, the Company generated $2.9 million of net product revenues from the commercial sales of the MicroCutter products.
For the years ended June 30, 2017, 2016 and 2015, the Company generated $1.2 million, $0.4 million and $0.7 million, respectively, of net product revenues from the commercial sales of the MicroCutter products.
Going Concern
The Company has incurred cumulative net losses of $222.9 million through June 30, 2017, and negative cash flows from operating activities and expects to incur losses for the next several years. As of June 30, 2017, the Company had approximately $6.0 million of cash and cash equivalents and $4.0 million of debt principal outstanding.
The Company believes that the existing cash and cash equivalents will be sufficient to meet its anticipated cash needs to enable it to conduct its business substantially as currently conducted at least through the end of December 2017.
The Company may be able to extend this time period to the extent that it decreases planned expenditures, or raises additional capital.
To satisfy its short-term and longer-term liquidity requirements, the Company may seek to sell additional equity or debt securities, obtain a credit facility, enter into product development, license or distribution agreements with third parties or divest one or more of its commercialized products or products in development. The sale of additional equity or convertible debt securities could result in significant dilution to its stockholders, particularly in light of the prices at which its common stock has been recently trading. In addition, if the Company raises additional funds through the sale of equity securities, new investors could have rights superior to its existing stockholders. If additional funds are raised through the issuance of debt securities, these securities could have rights senior to those associated with its common stock and could contain covenants that would restrict its operations. Any product development, licensing, distribution or sale agreements that the Company enters into may require it to relinquish valuable rights, including with respect to commercialized products or products in development that the Company would otherwise seek to commercialize or develop it selves. The Company may not be able to obtain sufficient additional financing or enter into a strategic transaction in a timely manner. Its need to raise capital may require it to accept terms that may harm its business or be disadvantageous to its current stockholders.
The Company’s consolidated financial statements have been prepared assuming that it will continue as a going concern. This assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Its continuations as a going concern is contingent upon its ability to raise financing. However, there can be no assurance that the Company will be able to raise such funds if and when they are required. Failure to obtain future funding when needed or on acceptable terms would adversely affect its ability to fund operations and continues as a going concern. These matters raise substantial doubt about the ability of the Company to continue in existence as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Basis of Presentation and Principles of Consolidation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) and include the accounts of Dextera Surgical Inc., and its wholly-owned subsidiary in Germany. All significant intercompany balances and transactions have been eliminated in consolidation.
Reverse Stock Split
On February 16, 2016, the Company filed an amendment to its Amended and Restated Certificate of Incorporation to effect a one-for-ten reverse split of its outstanding common stock (the “Reverse Split”) which had the effect of reducing the number of outstanding shares of common stock from 89,344,777 to 8,934,452, effective February 17, 2016. Any fractional shares of common stock resulting from the Reverse Split were settled in cash equal to the fraction of a share to which the holder was entitled. As a result of the Reverse Split, the Company reclassified its consolidated balance sheets total par value of approximately $80,000 from common stock to additional paid-in capital for the reporting periods.
All shares of common stock, stock options, warrants to purchase common stock, the conversion rate of preferred stock and per share information presented in the consolidated financial statements have been adjusted to reflect the Reverse Split on a retroactive basis for all periods presented and all share information is rounded down to the nearest whole share after reflecting the Reverse Split.
Foreign Currency Translation
The Company’s foreign operations are subject to exchange rate fluctuations and foreign currency costs. The functional currency of the German subsidiary is the United States dollar. Transactions and balances denominated in dollars are presented at their original amounts. Monetary assets and liabilities denominated in currencies other than the dollar are re-measured at the current exchange rate prevailing at the balance sheet date. All transaction gains or losses from the re-measurement of monetary assets and liabilities are included in the consolidated statements of operations within other income (expense).
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) generally requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could materially differ from these estimates.
Cash and Cash Equivalents
The Company’s cash and cash equivalents are maintained in checking, money market, commercial paper and corporate debt securities investment accounts. The Company considers all highly liquid investments with maturities remaining on the date of purchase of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable consists of trade receivables and other receivables. Accounts receivable are recorded at net realizable value, which approximates fair value. The Company evaluates the collectability of accounts receivable on a case-by-case basis and makes adjustments to the bad debt reserve for expected losses. The Company considers factors such as ability to pay, bankruptcy, credit ratings, payment history and past-due status of the accounts. If circumstances related to customers change, estimates of recoverability would be further adjusted
Available-for-Sale Securities
Available-for-sale securities consist primarily of corporate debt securities, commercial paper, and certificates of deposit, and, by the Company's investment policy, restrict exposure to any single corporate issuer by imposing concentration limits. Although maturities may extend beyond one year, it is management's intent that these securities are available for use in current operations.
The Company did not hold investments in marketable securities as of June 30, 2017. At June 30, 2016, t
he Company held investments in marketable securities having maturity dates of less than one year for short-term and greater than one year for long-term. The Company records its marketable securities at fair value and classifies them as available-for-sale. The cost of securities sold is based on the specific-identification method. Interest on securities classified as available-for-sale is included in interest income. Unrealized gains or losses on available-for-sale securities are classified as other comprehensive income or loss and reported as a separate component of stockholders’ equity (deficit) until realized.
When the resulting fair value is significantly below cost basis and/or the significant decline has lasted for an extended period of time, the Company performs an evaluation to determine whether the marketable equity security is other than temporarily impaired. The evaluation that the Company uses to determine whether a marketable equity security is other than temporarily impaired is based on the specific facts and circumstances present at the time of assessment, which include significant quantitative and qualitative assessments and estimates regarding credit ratings, collateralized support, the length of time and significance of a security’s loss position and intent and ability to hold a security to maturity or forecasted recovery.
The Company did not hold investments in marketable securities as of June 30, 2017.
Investments held as of June 30, 2016 are summarized as follows (in thousands):
|
|
As of June 30, 2016
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper – Short-term
|
|
$
|
999
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
999
|
|
Corporate debt securities – Short-term
|
|
|
8,095
|
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
8,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,094
|
|
|
$
|
—
|
|
|
$
|
(4
|
)
|
|
$
|
9,090
|
|
The following table summarizes the gross unrealized losses and fair values of investments in an unrealized loss position as of June 30, 2016, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):
|
|
June 30, 2016
|
|
|
|
Less than 12 months
|
|
|
12 months or greater
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Gross
Unrealized
Losses
|
|
Corporate debt securities
|
|
$
|
8,091
|
|
|
$
|
(4
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,091
|
|
|
$
|
(4
|
)
|
Total
|
|
$
|
8,091
|
|
|
$
|
(4
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,091
|
|
|
$
|
(4
|
)
|
The Company reviews investments for other-than-temporary impairment. It was determined that unrealized losses at June 30, 2016 were temporary in nature, because the changes in market value for these securities resulted from the fluctuating interest rates, rather than a deterioration of the credit worthiness of the issuers. The Company was unlikely to experience losses if these securities were held to maturity. In the event that the Company disposed of these securities before maturity, it expected that any losses would have been immaterial.
The following tables summarizes contractual underlying maturities of the Company’s available-for-sale investments at June 30, 2016 (in thousands):
|
|
June 30, 2016
|
|
|
|
Due one year or less
|
|
Marketable Securities:
|
|
Cost
|
|
|
Fair Value
|
|
Commercial paper
|
|
$
|
999
|
|
|
$
|
999
|
|
Corporate debt securities
|
|
|
8,095
|
|
|
|
8,091
|
|
Total
|
|
$
|
9,094
|
|
|
$
|
9,090
|
|
Restricted Cash
Under an operating lease for its facility in Redwood City, California, the Company is required to maintain a letter of credit with a restricted cash balance at the Company’s bank. A certificate of deposit of $0.1 million at June 30, 2017 and 2016, has been recorded as restricted cash in the accompanying balance sheets, related to the letter of credit (see Note 5).
Concentrations of Credit Risk and Certain Other Risks
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, short-term investments, long-term investments and accounts receivable. The Company places its cash, cash equivalents, short-term and long-term investments with high-credit quality financial institutions. The Company is exposed to credit risk in the event of default by the institutions holding the cash, cash equivalents, short-term and long-term investments to the extent of the amounts recorded on the balance sheet. The Company sells its products to hospitals in the U.S. and Europe and to distributors in Europe, Japan and Saudi Arabia that resell the products to hospitals. The Company does not require collateral to support credit sales. The Company has had insignificant credit losses to date.
The following table illustrates total net revenue from the geographic location in which the Company’s customers are located and sales revenue by product line.
Net revenue by geographic location:
|
|
Fiscal Year Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
United States
|
|
|
31
|
%
|
|
|
37
|
%
|
|
|
50
|
%
|
Japan
|
|
|
24
|
%
|
|
|
34
|
%
|
|
|
28
|
%
|
Germany
|
|
|
21
|
%
|
|
|
21
|
%
|
|
|
14
|
%
|
Rest of world
|
|
|
24
|
%
|
|
|
8
|
%
|
|
|
8
|
%
|
Sales revenue by product line (in thousands):
|
|
Fiscal Year Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
MicroCutter
|
|
$
|
1,209
|
|
|
$
|
351
|
|
|
$
|
684
|
|
Cardiac (automated anastomotic systems)
|
|
|
1,842
|
|
|
|
2,178
|
|
|
|
2,238
|
|
Total
|
|
$
|
3,051
|
|
|
$
|
2,529
|
|
|
$
|
2,922
|
|
The following table illustrates concentrations of credit risk for the periods presented.
|
|
Percent of Total Net
Revenue for
Fiscal Year Ended June 30,
|
|
|
Percent of Total
Accounts Receivable
as of June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2017
|
|
|
2016
|
|
Century Medical
|
|
|
21
|
%
|
|
|
21
|
%
|
|
|
28
|
%
|
|
|
28
|
%
|
|
|
33
|
%
|
Herz-Und Diabeteszentrum
|
|
|
8
|
%
|
|
|
8
|
%
|
|
|
10
|
%
|
|
|
—
|
|
|
|
—
|
|
B. Braun
|
|
|
9
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
19
|
%
|
|
|
—
|
|
Iona Surgical
|
|
|
3
|
%
|
|
|
1
|
%
|
|
|
1
|
|
|
|
7
|
%
|
|
|
20
|
%
|
As of June 30, 2017, 2016 and 2015, and for the years then ended, no other customer accounted for equal to or greater than 10% of net revenue or account receivable balances. The Company does not believe that accounts receivable from Century Medical, Herz-Und Diabeteszentrum, B. Braun and Iona Surgical represent a significant credit risk based on past collection experiences and the general creditworthiness of these customers.
The Company depends upon a number of key suppliers, including single source suppliers, the loss of which would materially harm the Company’s business. Single source suppliers are relied upon for certain components and services used in manufacturing the Company’s products. The Company does not have long-term contracts with any of the suppliers; rather, purchase orders are submitted for each order. Because long-term contracts do not exist, none of the suppliers are required to provide the Company any guaranteed minimum quantities.
Inventories
Inventories are recorded at the lower of cost or market on a first-in, first-out basis. The Company periodically assesses the recoverability of all inventories, including materials, work-in-process and finished goods, to determine whether adjustments for impairment are required. Inventory that is obsolete or in excess of forecasted usage is written down to its estimated net realizable value based on assumptions about future demand and market conditions. Further reduced demand may result in the need for additional inventory write-downs in the near term. Inventory write-downs are charged to cost of product sales and establish a lower cost basis for the inventory.
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives of the related assets, which are generally three to five years. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful life of the related assets. Upon sale or retirement of assets, the costs and related accumulated depreciation and amortization are removed from the balance sheet and the resulting gain or loss is reflected in the statement of operations.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, including property and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Impairment, if any, is assessed using discounted cash flows. All long-lived assets are in the United States, and through June 30, 2017, there have been no indications of impairment; therefore, the Company has recorded no such losses.
Revenue Recognition
The Company recognizes revenue when four basic criteria are met: (1) persuasive evidence of an arrangement exists; (2) title has transferred; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. The Company uses contracts and customer purchase orders to determine the existence of an arrangement. The Company uses shipping documents and third-party proof of delivery to verify that title has transferred. The Company assesses whether the fee is fixed or determinable based upon the terms of the agreement associated with the transaction. To determine whether collection is probable, the Company assesses a number of factors, including past transaction history with the customer and the creditworthiness of the customer. If the Company determines that collection is not reasonably assured, then the recognition of revenue is deferred until collection becomes reasonably assured, which is generally upon receipt of payment.
The Company records product sales net of estimated product returns and discounts from the list prices for its products. The amounts of product returns and the discount amounts have not been material to date. The Company’s sales to distributors do not include price protection.
Payments that are contingent upon the achievement of a substantive milestone are recognized in their entirety in the period in which the milestone is achieved subject to satisfaction of all revenue recognition criteria at that time. Revenue generated from license fees and performing development services are recognized when they are earned and non-refundable upon receipt, over the period of performance, or upon incurrence of the related development expenses in accordance with contractual terms, based on the actual costs incurred to date plus overhead costs for certain project activities. Amounts paid but not yet earned on a project are recorded as deferred revenue until such time as performance is rendered or the related development expenses, plus overhead costs for certain project activities, are incurred.
Research and Development
Research and development expenses consist of costs incurred for internally sponsored research and development, direct expenses, research-related overhead expenses, and costs incurred on development contracts. Research and development costs are charged to research and development expenses as incurred.
Clinical Trials
The Company accrues and expenses costs for clinical trial activities performed by third parties based upon estimates of the percentage of work completed over the life of the individual study in accordance with agreements established with contract research organizations and clinical trial sites. The Company determines the estimates through discussion with internal clinical personnel and outside service providers as to progress or stage of completion of trials or services and the agreed upon fee to be paid for such services. Costs of setting up clinical trial sites for participation in the trials are expensed immediately as research and development expenses. Clinical trial site costs related to patient enrollment are accrued as patients are entered into the trial.
Deferred Rent
Rent expense is recognized on a straight-line basis over the non-cancelable term of the Company’s facility operating lease. The difference between the actual amounts paid and amounts recorded as rent expense is recorded to deferred rent. The current portion of deferred rent is recorded as other accrued liabilities, while the non-current portion is recorded in non-current accrued liabilities.
Income Taxes
The Company utilizes the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax reporting bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.
The Company would classify interest and penalties related to uncertain tax positions in income tax expense, if applicable. There was no interest expense or penalties related to unrecognized tax benefits recorded through June 30, 2017.
Segments
The Company operates in a single reporting segment. Management uses one measurement of profitability and does not segregate its business for internal reporting purposes. All of the Company’s long-lived assets are maintained in the United States.
Net Loss per Share
Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding for the period without consideration of potential shares of common stock. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock and dilutive potential common share equivalents outstanding for the period less the dilutive potential shares of common stock for the period determined using the treasury-stock method. Dilutive potential common share equivalents are excluded from the computation of net loss per share in the loss periods as their effect would be antidilutive. For purposes of this calculation, options, warrants and underlying convertible preferred shares to purchase stock and unvested restricted stock awards are considered to be potential shares of common stock and are only included in the calculation of diluted net loss per share when their effect is dilutive.
In the years the Preferred Stock was outstanding, the two-class method was used to calculate basic and diluted earnings (loss) per common share since it is a participating security under ASC 260
Earnings per Share
. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Under the two-class method, basic earnings (loss) per common share is computed by dividing net earnings (loss) attributable to common share after allocation of earnings to participating securities by the weighted-average number of shares of common stock outstanding during the year. Diluted earnings (loss) per common share is computed using the more dilutive of the two-class method or the if-converted method. In periods of net loss, no effect is given to participating securities since they do not contractually participate in the losses of the Company.
The following table sets forth the computation of the basic and diluted net loss per share (in thousands, except per share data):
|
|
Fiscal Year Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(17,226
|
)
|
|
$
|
(15,987
|
)
|
|
$
|
(19,182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend attributable to convertible preferred stock
|
|
|
(8,704
|
)
|
|
|
—
|
|
|
|
—
|
|
Net loss allocable to common stockholders
|
|
$
|
(25,930
|
)
|
|
$
|
(15,987
|
)
|
|
$
|
(19,182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding allocable to common stockholders
|
|
|
11,144
|
|
|
|
8,910
|
|
|
|
8,895
|
|
Denominator for basic and diluted net loss per share allocable to common stockholders
|
|
|
11,144
|
|
|
|
8,910
|
|
|
|
8,895
|
|
Basic and diluted net loss per share allocable to common stockholders
|
|
$
|
(2.33
|
)
|
|
$
|
(1.79
|
)
|
|
$
|
(2.16
|
)
|
The following table sets forth the outstanding securities not included in the diluted net loss per common share calculation for the fiscal years ended June 30, 2017, 2016 and 2015, because their effect would be antidilutive (in thousands):
|
|
As of June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Options to purchase common stock
|
|
|
1,537
|
|
|
|
1,516
|
|
|
|
456
|
|
Non-vested restricted stock units and awards
|
|
|
174
|
|
|
|
27
|
|
|
|
19
|
|
Shares reserved for issuance upon conversion of convertible preferred
stock Series B
|
|
|
1,011
|
|
|
|
1,915
|
|
|
|
1,915
|
|
Warrants
|
|
|
43,542
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
46,264
|
|
|
|
3,458
|
|
|
|
2,390
|
|
Stock-Based Compensation
Stock-based compensation expense related to employee and director share-based compensation plans, including stock options and restricted stock units, is measured on the grant date, based on the fair value-based measurement of the award and is recognized as an expense over the requisite service period which generally equals the vesting period of each grant. The Company recognizes compensation expense using the accelerated method and the Company accounts for the non-employee share-based grants pursuant to ASC 505-50, Equity Based Payments to Non-Employees.
In September 2016, the Company’s board of directors approved the adoption of the 2016 Employee Stock Purchase Plan (the “2016 ESPP”), which was subsequently approved by the Company’s shareholders in November 2016. Under the 2016 ESPP, the Company has reserved a total of 300,000 shares of common stock for issuance to employees. The first offering period under the 2016 ESPP began on March 16, 2017 and will end on February 15, 2018. After the commencement of the first offering period, the 2016 ESPP provides for subsequent offering periods to begin on August 15
th
and February 15
th
of each year. Each subsequent offering period under the 2016 ESPP will be one-year long and contain two six-month purchase windows. Shares subject to purchase rights granted under the Company’s 2016 ESPP that terminate without having been exercised in full will not reduce the number of shares available for issuance under the Company’s 2016 ESPP. The 2016 ESPP is intended to qualify as an “employee stock purchase plan,” under Section 423 of the Internal Revenue Code of 1986 with the purpose of providing employees with an opportunity to purchase the Company’s common stock through accumulated payroll deductions. Employees are able to purchase shares of common stock at 85% of the lower of the fair market value of the Company’s common stock on the first day of the offering period or on the last day of the six-month purchase window. No shares were issued under the 2016 ESPP as of June 30, 2017. For the fiscal year ended June 30, 2017, the Company recorded stock-based compensation expense of $22,000 related to the 2016 ESPP.
The Company selected the Black-Scholes option pricing model for determining the estimated fair value-based measurements of share-based awards. The use of the Black-Scholes model requires the use of assumptions including expected term, expected volatility, risk-free interest rate and expected dividends. The Company used the following assumptions in its fair value-based measurements:
Stock Option Plan:
|
|
Fiscal Year Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Risk-free interest rate
|
|
|
1.1%
|
–
|
2.0%
|
|
|
|
0.5%
|
–
|
1.5%
|
|
|
|
0.2%
|
–
|
1.7%
|
|
Dividend yield
|
|
|
|
—
|
|
|
|
|
|
—
|
|
|
|
|
|
—
|
|
|
Weighted-average expected life (in years)
|
|
|
|
4.8
|
|
|
|
|
4.2
|
–
|
5.0
|
|
|
|
4.3
|
–
|
4.9
|
|
Volatility
|
|
|
75%
|
–
|
92%
|
|
|
|
65%
|
–
|
75%
|
|
|
|
65%
|
–
|
72%
|
|
Employee Stock Purchase Plan:
|
|
Fiscal Year Ended
June 30, 2017
|
|
Risk-free interest rate
|
|
|
0.9%
|
-
|
1.0%
|
|
Dividend yield
|
|
|
|
—
|
|
|
Weighted-average expected term (in years)
|
|
|
0.4
|
-
|
0.9
|
|
Expected volatility
|
|
|
127%
|
-
|
99%
|
|
The Company estimates the expected life of options granted based on historical exercise and post-vest cancellation patterns, which the Company believes are representative of future behavior. The risk-free interest rate for the expected term of each option is based on a risk-free zero-coupon spot interest rate at the time of grant. The Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the foreseeable future. The expected volatility is based on the Company’s historical stock price. The Company estimates forfeitures in calculating the expense related to stock-based compensation. The Company recorded stock-based compensation expenses for awards granted to employees under ASC 718 of $1.1 million, or $0.10 per share, $1.2 million, or $0.13 per share, and $1.1 million, or $0.13 per share, for fiscal years ended June 30, 2017, 2016 and 2015, respectively. The Company recorded stock-based compensation expenses for awards granted to non-employees under ASC 505-50 of $9,103, or $0 per share, for fiscal year ended June 30, 2016 and did not record any for fiscal years ended June 30, 2017 and 2015. In December 2014, the Company cancelled certain options granted to employees in excess of the stock plan limits, which resulted in the recognition of $0.2 million of unamortized expense recorded as stock-based compensation expenses.
Total compensation expense related to unvested awards not yet recognized is approximately $0.5 million at June 30, 2017, and is expected to be recognized over a weighted average period of 3.5 years.
Included in the statement of operations is the following non-cash stock-based compensation expense for the periods reported, including non-employee stock based compensation expense and the amortization of deferred compensation (in thousands):
|
|
Fiscal Year Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Cost of product sales
|
|
$
|
116
|
|
|
$
|
106
|
|
|
$
|
63
|
|
Research and development
|
|
|
297
|
|
|
|
203
|
|
|
|
183
|
|
Selling, general and administrative
|
|
|
706
|
|
|
|
867
|
|
|
|
903
|
|
Total
|
|
$
|
1,119
|
|
|
$
|
1,176
|
|
|
$
|
1,149
|
|
Warrant Liabilities
Warrants classified as liabilities are carried at fair value until they are exercised or expire, with changes in fair value at each reporting date included in other income (expense), net.
The Company used the Black-Scholes option pricing model for determining the estimated fair value of warrant liabilities issued in May 2017 (see Note 8), as these warrants are indexed to the Company’s common stock. The use of the Black-Scholes model requires the use of assumptions including expected term, expected volatility, risk-free interest rate and expected dividends. The Company used the following assumptions in its fair value-based measurements:
|
|
June 30,
2017
|
|
|
Issuance
(May 2017)
|
|
Risk-free interest rate
|
|
|
1.2%
|
–
|
1.9%
|
|
|
|
1.1%
|
–
|
1.9%
|
|
Dividend yield
|
|
|
|
—
|
|
|
|
|
|
—
|
|
|
Remaining contractual term (in years)
|
|
|
0.9
|
–
|
4.9
|
|
|
|
1
|
–
|
5
|
|
Volatility
|
|
|
94%
|
–
|
141%
|
|
|
|
84%
|
–
|
106%
|
|
The remaining contractual term of the warrants is used as the expected life of the warrants. The risk-free interest rate is based on a risk-free zero-coupon spot interest rate at the time of grant for a period commensurate with the remaining contractual term. The Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the foreseeable future. The expected volatility is based on the Company’s historical stock price and is determined based on the remaining contractual term of the warrants.
See also Note 2.
Recent Accounting Pronouncements
In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-09,
Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting
, which provides the FASB’s guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. ASU 2017-09 will be effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017, which will be the Company’s fiscal year 2019 (beginning July 1, 2018). Early adoption is permitted including adoption in an interim period. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.
In August 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
, which provides the FASB's guidance on certain cash flow statements items. ASU 2016-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, which will be the Company’s fiscal year 2019 (beginning July 1, 2018). Early adoption is permitted including adoption in an interim period. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
, which amends the current guidance by replacing the incurred loss model with a forward-looking expected loss model. The standard is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, which will be the Company’s fiscal year 2021 (beginning July 1, 2020). Early adoption is permitted. The Company will be evaluating the impact of the adoption of this guidance on its consolidated financial statements and related disclosures.
In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-09,
Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting,
which relates to the accounting for employee share-based payments. This standard addresses several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. This standard will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, which will be the Company’s fiscal year 2018 (beginning July 1, 2017). The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02,
Leases,
requiring lessees to recognize assets and liabilities for leases with lease terms of more than 12 months in the balance sheet. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, which will be the Company’s fiscal year 2019 (beginning July 1, 2018). A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the preliminary phases of assessing the effect of this guidance. While this assessment continues, the Company has not selected a transition date nor has it determined the impact of this guidance on the Company’s consolidated financial statements and related disclosures.
In January 2016, the FASB issued ASU 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
, which addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, which will be the Company’s fiscal year 2019 (beginning July 1, 2018). The Company will be evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements and related disclosures.
In July 2015, the FASB issued ASU 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory,
an accounting standard update which requires an entity measuring inventory other than last-in, first-out (LIFO) or the retail inventory method to measure inventory at the lower of cost and net realizable value. When evidence exists that the net realizable value of inventory is lower than its costs, the difference will be recognized as a loss in the statement of operations. The standard is effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The adoption of this guidance is not expected to have a material impact the Company’s consolidated financial statements and related disclosures.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606): Revenue from Contracts with Customers, which guidance in this update will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance when it becomes effective. ASU No. 2014-09 affects any entity that enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principle of ASU No. 2014-09 is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. Additionally, this new guidance would require significantly expanded disclosures about revenue recognition. ASU No. 2014-09 is effective for annual reporting periods, and interim periods within those annual reporting periods, beginning after December 15, 2016, which will be the Company’s fiscal year 2018 (beginning July 1, 2017), and entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. However, in July 2015, the FASB approved the deferral of the new standard's effective date by one year. The new standard will now be effective for annual reporting periods, and interim periods within those annual reporting periods, beginning after December 15, 2017, which will be the Company’s fiscal year 2019 (beginning July 1, 2018). The FASB will permit companies to adopt the new standard early, but not before the original effective date of December 15, 2016. The Company is in the initial stages of evaluating the effect of the standard on the Company’s consolidated financial statements and continues to evaluate the available transition methods.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, adding clarification, while retaining the core principles in the revenue guidance. For identifying performance obligations, the ASU clarifies when a promised good or service is separately identifiable (i.e., distinct within the context of the contract) and allow entities to disregard items that are immaterial in the context of a contract. For licensing, the ASU clarifies how an entity should evaluate the nature of its promise in granting a license of IP, which will determine whether it recognizes revenue over time (“symbolic IP”) or at a point in time (“functional IP”). The effective date and transition requirements for these amendments are the same as those of the new revenue standard (ASU 2014-09, as amended by ASU 2015-14). The Company will be evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements and related disclosures.
In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, amending guidance in the new revenue standard on transition, collectability, noncash consideration and the presentation of sales taxes and other similar taxes. The amendments clarify that for a contract to be considered completed at transition, substantially all of the revenue must have been recognized under the existing GAAP. The amendments also clarified the collectability assessment and expanded circumstances under which nonrefundable consideration may receive revenue recognition when collectability of the remainder is not probable. It clarified that the fair value of noncash consideration should be measured at contract inception for determining the transaction price. The amendments permit an entity to make a policy election to exclude from the transaction price sales taxes and similar taxes. The effective date and transition requirements for these amendments are the same as those of the new revenue standard (ASU 2014-09, as amended by ASU 2015-14). The Company will be evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements and related disclosures.
Note 2. Fair Value Measurements
FASB Accounting Standards Codification (“ASC”) 820, “
Fair Value Measurements and Disclosures
,”
defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
All assets that are measured at fair value on a recurring basis have been segregated into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date.
The Company’s warrant liabilities are classified as Level 3. The fair values of the outstanding common stock warrants are measured using the Black-Scholes option-pricing model. Inputs used to determine estimated fair value include the estimated fair value of the underlying common stock at the valuation measurement date, the remaining contractual term of the warrants, risk-free interest rates, expected dividends and estimated volatility (see Note 1).
Assets and liabilities measured at fair value are summarized below (in thousands):
|
|
As of June 30, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
280
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
280
|
|
Total assets at fair value
|
|
$
|
280
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,638
|
|
|
$
|
8,638
|
|
Total liabilities at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,638
|
|
|
$
|
8,638
|
|
|
|
As of June 30, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
3,029
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,029
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
—
|
|
|
|
999
|
|
|
|
—
|
|
|
|
999
|
|
Corporate debt securities
|
|
|
—
|
|
|
|
8,091
|
|
|
|
—
|
|
|
|
8,091
|
|
Total assets at fair value
|
|
$
|
3,029
|
|
|
$
|
9,090
|
|
|
$
|
—
|
|
|
$
|
12,119
|
|
Funds held in money market instruments, are included in Level 1 as their fair values are based on market prices/quotes for identical assets in active markets.
Level 3 liabilities include common stock warrant liabilities (see Note 8). The following table sets forth a summary of the changes in the estimated fair value of common stock warrant liabilities which were measured at fair value on a recurring basis (in thousands):
Balances as of June 30, 2014, 2015 and 2016
|
|
$
|
—
|
|
Warrants issued
|
|
|
12,572
|
|
Gain from remeasurement
|
|
|
(3,796
|
)
|
Exercises into common stock
|
|
|
(138
|
)
|
Balance as of June 30, 2017
|
|
$
|
8,638
|
|
Gain from remeasurement was included in other income (expense), net. During the year and the quarter ended June 30, 2017, warrants to purchase 905,561 shares of common stock were exercised for total cash proceeds of $0.2 million.
Corporate debt securities and commercial papers are valued primarily using market prices comparable securities, bid/ask quotes, interest rate yields, and prepayment spreads and are included in Level 2.
Cash balances of $5.7 million and $0.6 million at June 30, 2017 and 2016, respectively, are not included in the fair value hierarchy disclosure. As of June 30, 2017, the Company’s material financial assets and liabilities were reported at their current carrying values which approximate fair value given the short-term nature of less than a year, except for its note payable. As of June 30, 2017, the Company’s note payable was reported at its current carrying value which approximates fair value based on Level 3 unobservable inputs involving discounted cash flows and the estimated market rate of borrowing that could be obtained by companies with credit risk similar to the Company’s credit risk.
Note 3. Inventories
Inventories consisted of the following (in thousands):
|
|
June 30,
201
7
|
|
|
June 30,
2016
|
|
Raw materials
|
|
$
|
757
|
|
|
$
|
698
|
|
Work in progress
|
|
|
171
|
|
|
|
133
|
|
Finished goods
|
|
|
383
|
|
|
|
232
|
|
Total
|
|
$
|
1,311
|
|
|
$
|
1,063
|
|
Note 4. Property and Equipment
Property and equipment consisted of the following (in thousands):
|
|
June 30,
|
|
|
|
201
7
|
|
|
201
6
|
|
Computer hardware and software
|
|
$
|
117
|
|
|
$
|
106
|
|
Office furniture and equipment
|
|
|
27
|
|
|
|
27
|
|
Machinery and equipment
|
|
|
6,230
|
|
|
|
6,523
|
|
Leasehold improvements
|
|
|
183
|
|
|
|
183
|
|
|
|
|
6,557
|
|
|
|
6,839
|
|
Less: accumulated depreciation and amortization
|
|
|
(5,879
|
)
|
|
|
(5,661
|
)
|
Total
|
|
$
|
678
|
|
|
$
|
1,178
|
|
Note 5. Commitments and Contingencies
On November 11, 2010, the Company entered into an amendment to its facility lease (the “Lease Amendment”). Pursuant to the Lease Amendment, the term of the lease was extended by four years, through August 31, 2015, and the Company was granted an improvement allowance of $148,070 to be used in connection with the construction of alterations and refurbishment of improvements in the premises, which was used and reimbursed in the fiscal year ended June 30, 2012. The leasehold improvement allowance will be recorded as a reduction of rent expense on a straight-line basis over the term of the lease. On November 24, 2014, the Company entered into another amendment to its facility lease (the “Second Lease Amendment”), extended its lease by three years, from September 1, 2015, through August 31, 2018 (the “Second Extended Term”). In addition, under the Second Lease Amendment, the Company was granted an option to further extend the lease for a period of three years beyond August 31, 2018 (the “Option Term”), with the annual rent payable by the Company during the Option Term to be equal to the annual rent for comparable buildings, as described in the Second Lease Amendment. Under the operating lease, the Company is required to maintain a letter of credit with a restricted cash balance at the Company’s bank. A certificate of deposit of $0.1 million was recorded as restricted cash in the condensed balance sheets as of June 30, 2017 and 2016, related to the letter of credit.
Future minimum lease payments under the non-cancelable operating leases having initial terms of a year or more as of June 30, 2017, including the Lease Amendment, are as follows (in thousands):
|
|
Operating
|
|
Fiscal year ending June 30,
|
|
Leases
|
|
2018
|
|
$
|
1,032
|
|
2019
|
|
|
173
|
|
Total
|
|
$
|
1,205
|
|
Rent expense for fiscal years 2017, 2016 and 2015 was $0.9 million, $0.9 million and $0.8 million, respectively.
Note 6. Distribution, License, Development and Commercialization Agreements
Century
On September 2, 2011, the Company signed a distribution agreement (the “Distribution Agreement”) with Century with respect to distribution of the Company’s planned MicroCutter products in Japan. Under the terms of a secured note purchase agreement, Century agreed to loan the Company an aggregate of up to $4.0 million, with principal due in September 30, 2016, subject to certain conditions, which principal due date was extended by two years effective July 1, 2014. Under this facility, the Company received $2.0 million on September 30, 2011, and the remaining $2.0 million on December 27, 2011. The note bears 5% annual interest which is payable quarterly in arrears. (see Note 7).
In return for the loan commitment, the Company granted Century distribution rights to the Company’s planned MicroCutter product line in Japan, and a right of first negotiation for distribution rights in Japan to future products. Century is responsible for securing regulatory approval from the Ministry of Health in Japan for the MicroCutter product line. In August 2013, Century filed for regulatory approval of the MicroCutter XCHANGE 30 blue and white reloads with the Pharmaceuticals and Medical Devices Agency, or PMDA, and in April 2014, filed for the MicroCutter XCHANGE 30 stapler with TUV Rheinland Japan Ltd, a registered third-party agency in Japan and received approvals in late 2014 for both reloads and stapler, to market in Japan. Also, in January 2015, Century submitted an application to PMDA, relating to a change in the material of the reload insert component within the reloads, changing the distal tip of the reload insert material from a LCP to an IXEF, and received approval in August 2015, to market in Japan. Though approvals of the MicroCutter XCHANGE 30 stapler and reloads for marketing in Japan have been obtained, Century intends to wait until the Company releases the MicroCutter 5/80 to Century and Century will need to file additional regulatory approvals with the Ministry of Health to market the MicroCutter 5/80 in Japan. After approval for marketing in Japan, the Company would sell MicroCutter units to Century, who would then sell the MicroCutter devices to their customers in Japan.
Proceeds from the note and granting the distribution rights were allocated to the note based on its aggregate fair value of $2.4 million at the dates of receipt. This fair value was determined by discounting cash flows using a discount rate of 18%, which the Company estimated a market rate of borrowing that could be obtained by companies with credit risk similar to the Company’s. The remainder of the proceeds of $1.6 million was recognized as debt issuance discount and was allocated to the value of the distribution rights granted to Century under the Distribution Agreement and is included in deferred revenue. The deferred revenue will be recognized over the term of the Distribution Agreement, beginning upon the first sale by Century of the MicroCutter products in Japan which had not occurred as of June 30, 2017.
The Company’s distribution agreement with Century pertaining to the PAS-Port system, originally dated June 16, 2003, as amended, was due to expire on July 31, 2014. Concurrently and in return for the amendment of the note, as discussed above, to extend the maturity date to September 30, 2018, the Company amended its distribution agreement with Century for the PAS-Port system, effective July 1, 2014, to, among other things, renew the contract for another five years, extending the expiration date to July 31, 2019. The note amendment was accounted for as the modification of the 2011 note agreement, as the value of the consideration provided by the Company in the form of additional distribution rights was estimated to be approximately equal to the reduction in the fair value of the note. Accordingly, the Company reduced the carrying value of the note of $3.1 million to its post-modification fair value of $2.6 million, and recorded the resulting incremental discount of $0.5 million as deferred revenue. The Company determined the fair value of the amended note using the discount rate of 18%, which the Company estimated as the market rate of borrowing as of the modification date that could be obtained by companies with credit risk similar to the Company’s. The incremental discount of $0.5 million will be amortized over the remaining term of the note using the effective interest rate method. The deferred revenue will be recognized over the term of the distribution agreement beginning upon the first sale by Century of the MicroCutter products in Japan.
Cook Incorporated
In June 2007, the Company entered into, and in September 2007 and in June 2009 amended, a license, development and commercialization agreement with Cook, to develop and commercialize a specialized device, referred to as the PFO device, designed to close holes in the heart from genetic heart defects known as patent foramen ovales (“PFOs”). Under the agreement, Cook funded certain development activities and the Company and Cook jointly developed the device. The Company’s significant deliverables under the arrangement were the license rights and the associated development activities. These deliverables were determined to represent one unit of accounting as there was no standalone value to the license rights. If developed, Cook would receive an exclusive, worldwide, royalty-bearing license, with the right to grant sublicenses, to make, have made, use, sell, offer for sale and import the PFO device. Under this agreement, the Company received no payments in the fiscal years ended June 30, 2017, 2016 and 2015. Amounts paid but not yet earned on the project are recorded as deferred revenue until such time as the related development expenses for certain project activities are incurred. A total of $0.4 million under this agreement has been recorded as deferred development revenue on the balance sheet as of June 30, 2017 and 2016. On January 6, 2010, the Company and Cook mutually agreed to suspend work on the PFO project and, accordingly, the Company does not anticipate receiving any additional payments or recording any additional revenue related to this agreement in the foreseeable future.
Intuitive Surgical
On August 16, 2010, the Company entered into a license agreement with Intuitive Surgical Operations, Inc., or Intuitive Surgical, (the “License Agreement”) pursuant to which the Company granted to Intuitive Surgical a worldwide, sublicenseable, exclusive license to use the Company’s intellectual property in the robotics field in diagnostic or therapeutic medical procedures, but excluding vascular anastomosis applications, for an upfront license fee of $9.0 million. The Company is also eligible to receive a contingent payment related to achieving a certain sales volume. Each party has the right to terminate the License Agreement in the event of the other party’s uncured material breach or bankruptcy. Following any termination of the License Agreement, the licenses granted to Intuitive Surgical will continue, and except in the case of termination for the Company’s uncured material breach or insolvency, Intuitive Surgical’s payment obligations will continue as well. Under the License Agreement, Intuitive Surgical has rights to improvements in the Company’s technology and intellectual property over a specified period of time.
The Company determined that there were two substantive deliverables under the License Agreement representing separate units of accounting: license rights to technology that existed as of August 16, 2010, and license rights to technology that may be developed over the following three years. The $9.0 million upfront license payment and $1.0 million premium on the stock purchase by Intuitive Surgical (see Note 8) were aggregated and allocated to the two units of accounting based upon the relative estimated selling prices of the deliverables. The relative estimated selling prices of the deliverables were determined using a probability weighted expected return model with significant inputs relating to the nature of potential future outcomes and the probability of occurrence of future outcomes. Based upon the relative estimated selling prices of the deliverables, $9.0 million of the total consideration of $10.0 million was allocated to the license rights to technology that existed as of August 16, 2010, that has been recognized as revenue in the fiscal year ended June 30, 2011, and $1.0 million was allocated to technology that may be developed over the following three years that was recognized as revenue ratably over that three-year period, which ended in the fiscal year ended June 30, 2014.
On December 31, 2015, the Company and Intuitive Surgical amended the license agreement, which was initially signed in August 2010, to include, among other things, an agreement providing for a feasibility evaluation and potential development of a surgical stapling cartridge for use with Intuitive Surgical’s
da Vinci
Surgical Systems Under the terms of the amendment, Intuitive Surgical paid a one-time, non-refundable and non-creditable payment of $2.0 million to extend its rights to improvements in the Company’s stapling technology and certain patents until August 16, 2018, and to provide for a feasibility evaluation period from December 31, 2015, to June 30, 2016. In addition, the amendment provides that each of the parties releases the other party from any claims they have or may have against the other party
The feasibility evaluation allowed Intuitive Surgical to test and evaluate the Company’s MicroCutter technology. The six-month feasibility evaluation of the Company’s MicroCutter technology was completed successfully and Intuitive Surgical exercised its option to initiate a joint development program for an 8-millimeters-in-diameter surgical stapling cartridge for use with the
da Vinci
Surgical System, and the Company and Intuitive Surgical entered into a joint development program in which Intuitive Surgical will be responsible for the development work on the stapler and the Company will be responsible for the development work on the stapler cartridge. Pursuant to the agreement, the Company will receive further funding for development of the cartridge and tooling as well as a unit-based royalty on commercial sales.
The Company determined that there were two substantive deliverables under the amended license agreement representing separate units of accounting: license rights to technology that existed as of December 30, 2015; and license rights to technology that may be developed over the following two years. The $2.0 million payment from the amended license agreement was aggregated and allocated to the two units of accounting based upon the relative estimated selling prices of the deliverables. The relative estimated selling prices of the deliverables were determined using a probability weighted expected return model with significant inputs relating to the nature of potential future outcomes and the probability of occurrence of future outcomes, which approximates fair value based on Level 3 unobservable inputs. Based upon the relative estimated selling prices of the deliverables, $1.4 million of the total consideration of $2.0 million was allocated to the license rights to technology that existed as of December 30, 2015 that was recognized as revenue in the three months ended March 31, 2016, and $0.6 million was allocated to technology that may be developed over the following two years that was being recognized as revenue ratably over that two-year period. The Company recognized license and development revenue of $0.1 million and $1.5 million during the fiscal years ended June 30, 2017 and 2016, respectively, and as of June 30, 2017 and 2016, had deferred revenue of $0.4 million and $0.5 million, respectively, related to this amended license agreement.
Note 7. Notes Payable
In connection with the Distribution Agreement with Century (see Note 6), the Company entered into a secured note purchase agreement and a related security agreement pursuant to which Century agreed to loan to the Company up to an aggregate of $4.0 million, which amount was received in the fiscal year ended June 30, 2012, and the secured note purchase agreement was amended effective July 1, 2014, to extend the principal due date by two years. Under this facility, the Company received $2.0 million on September 30, 2011, and the remaining $2.0 million on December 27, 2011. This note bears 5% annual interest which is payable quarterly in arrears and was due in full on September 30, 2018. The debt issuance discount of approximately $2.1 million is reflected as a reduction in long-term debt and is being amortized as interest expense over the term of the note using the effective interest method. The note is secured by substantially all of the Company's assets, including the Company’s intellectual property related to the PAS-Port® Proximal Anastomosis System, but excluding all other intellectual property, until the note is repaid. There are no covenants associated with this debt.
The Company made interest payments of $0.2 million for each of the fiscal years ended June 30, 2017, 2016 and 2015. The interest payable at June 30, 2017 and 2016, was $50,000 and $50,000, respectively, and is included in other accrued liabilities in the accompanying balance sheets.
In August 2016, Century asserted that the Company had an obligation to prepay Century’s loan in the amount of $4.0 million within ten days of receiving net proceeds from financing of over $44.0 million in April 2014, notwithstanding that the Company entered into an agreement with Century in July 2014 to extend the due date to September 30, 2018. Century further has asserted that the Company owes Century penalty interest at the incremental rate of 7% per annum, but has offered to waive it if the Company immediately repays the loan.
The Company did not agree with Century’s assertions as the Company believes it had notified Century of the financing that occurred in April 2014 and the extension of the due date of the note agreement effectively waived the prepayment provisions of the loan. Accordingly, the Company has not changed the classification of the note as a noncurrent liability as of June 30, 2017. Penalty interest has not been reflected in the financial statements as its payment was not considered probable. Additionally, the Company has not accelerated amortization of the remaining note discount ($0.5 million at June 30, 2017).
Subsequent to June 30, 2017, Century and the Company signed an amendment to the note (see Note 14).
Note 8. Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
As of June 30, 2017 and June 30, 2016, the total number of shares that the Company is authorized to issue is 130,000,000 shares, consisting of 125,000,000 shares of common stock and 5,000,000 shares of preferred stock.
Common Stock
Holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders of the Company. Subject to the preferences that may be applicable to any outstanding shares of preferred stock, the holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors. No dividends have been declared to date.
Preferred Stock Financing Arrangements
The Company has 5,000,000 shares of authorized preferred stock issuable in one or more series. The Company can determine the number of shares constituting any series and the designation of such series and the rights, preferences, privileges and restrictions thereof. These rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences and sinking fund terms, any or all of which may be greater than the rights of common stock. The issuance of the preferred stock could adversely affect the voting power of holders of common stock and the likelihood that such holders will receive dividend payments and payments upon liquidation. In addition, the issuance of preferred stock could have the effect of delaying, deferring or preventing a change in control of the Company or other corporate action.
The Company designated 250,000 shares of its preferred stock as convertible preferred stock Series A. The convertible preferred stock Series A shares were non-voting and non-redeemable under any circumstances, and were convertible into shares of the Company’s common stock at a conversion rate of 10 shares of common stock for each share of convertible preferred stock Series A, subject to certain ownership limitations. In aggregate, 191,474 shares of convertible preferred stock Series A were issued in April 2014. In fiscal year 2017, all 191,474 shares of convertible preferred stock series A
were
converted into shares of common stock, resulting in the issuance of 1,914,740 common shares. Upon conversion, the Company recognized as a deemed dividend to convertible preferred stock Series A stockholders the associated original issuance costs ($1.0 million), based on the Company’s interpretation of the provisions of ASC 470-20-40-1. Shares of convertible preferred stock Series A, outstanding prior to conversion to shares of common stock, is included in stockholders’ equity (deficit) in the Company’s consolidated balance sheets because as it was not redeemable.
In May 2017, the Company designated 8,000 shares of its preferred stock as convertible preferred stock Series B. On May 16, 2017, the Company issued 8,000 convertible preferred stock Series B shares together with warrants to purchase common stock at a price to the public of $1,000 per share of convertible preferred stock Series B, raising gross proceeds of $8 million, prior to deducting underwriting discounts and commissions and offering expenses of $1.3 million paid by the Company.
Each share of convertible preferred stock Series B is convertible at a conversion price of $0.27 into 3,704 shares of the Company’s common stock at any time at the option of the holder, subject to certain ownership limitations. In aggregate, convertible preferred stock Series B is convertible into 29,632,000 shares of common stock. The conversion price will be reset to 75% of the common stock volume weighted average price upon Company repayment or amendment of its note payable to Century (see Note 7) if such repayment or amendment relates to amounts exceeding $500,000. In the event the Company issues common stock at a lower price, the conversion price will reset to such lower value. In the event of the Company’s liquidation, dissolution, or winding up, holders of the Company’s convertible preferred stock Series B will share ratably with the holders of the Company’s common stock on an as-if-converted basis. In the event of a change in control, convertible preferred stock Series B shares can be redeemed for a price per share equal to the higher of the amount received by common stock holders (on an as-converted basis) or 130% of the original amount invested, paid using the same type of consideration as common stock holders are paid. Shares of convertible preferred stock Series B have no voting rights and are not entitled to receive dividends, unless a cash dividend is declared by the Company’s board of directors to be paid to the holders of common stock, in which case the holders of convertible preferred stock Series B will be entitled to receive a cash dividend equal to the amount of dividends declared on the common stock on an as-if-converted basis.
Each share of convertible preferred stock Series B was sold with a warrant to purchase up to 3,704 shares of common stock (‘‘Series 1 warrants’’) and a warrant to purchase up to 1,852 shares of common stock (‘‘Series 2 warrants’’). In aggregate, Series 1 warrants to purchase 29,632,000 shares of common stock and Series 2 warrants to purchase 14,816,000 shares of common stock were issued. Subject to certain ownership limitations, the warrants are immediately exercisable into shares of the Company’s common stock at an initial exercise price of $0.27 and expire (a) with respect to Series 1 warrants, on the fifth anniversary of the date of issuance, and (b) with respect to the Series 2 warrants, on the first anniversary of the date of issuance. Warrants must be exercised on a gross basis, unless there is no effective registration statement for the underlying shares, in which case net exercise is allowed. In the event of a change in control whereby the warrant becomes exercisable into shares that are not publicly traded, warrants can be redeemed for a price equal to their value determined using the Black-Scholes model as of the transaction date. Such redemption will be paid in cash only if the change in control was in the Company’s control, and otherwise will be paid using the same form of consideration as is paid to common stockholders Warrant holders are not entitled to receive dividends until and unless the warrant is exercised.
The Company concluded that both the convertible preferred stock Series B and the Series 1 and 2 warrants are freestanding financial instruments as the warrants are separable, legally detachable, and transferable from each other and from the preferred stock. Series 1 and 2 warrants have been classified as liabilities in accordance with
ASC 815-40, Contracts in Entity’s Own Equity
.
Based on this guidance, the Company interpreted the terms of the warrants to potentially allow for settlement in cash outside the control of the Company in certain circumstances.
The proceeds from issuance were allocated between convertible preferred stock Series B and the warrants. The issuance date fair value of the warrants of $12.6 million exceeded total proceeds raised of $8.0 million; accordingly, the excess of $4.6 million was recognized as loss from issuance of preferred stock and warrants and included in other income (expense), net. Because no proceeds remained to be allocated to convertible preferred stock Series B, this condition gives rise to a beneficial conversion feature, a conversion price that is in the money on the issuance date. However, the value of the beneficial conversion feature is limited to the amount allocated to the preferred stock, which was $0.
Issuance costs of $1.3 million were allocated to warrants consistent with the allocation of the proceeds from the financing, and are included in loss from issuance of preferred stock and warrants.
During the year and the quarter ended June 30, 2017, a total of 7,727 shares of convertible preferred stock Series B were converted into 28,618,487 shares of the Company’s common stock, leaving 273 shares of convertible preferred stock Series B issued and outstanding at June 30, 2017. Upon conversion, the Company recognized as a deemed dividend to convertible preferred stock Series B stockholders of $7.7 million, the proportionate amount of the discount from the allocation of the proceeds to warrants, based on our interpretation of the provisions of ASC 470-20-40-1. Additionally, warrants to purchase 905,561 shares of common stock were exercised for total cash proceeds of $0.2 million.
Because convertible preferred stock Series B can be redeemed by holders upon a change in control that could occur outside the Company’s control, it is classified in the Company’s consolidated balance sheets as a separate line item outside permanent stockholders’ equity (deficit) (“mezzanine”). Accretion of preferred stock to its redemption value is not recorded unless redemption becomes probable. As of June 30, 2017, the redemption was not probable as there has not been a change in control of the Company.
Shares Reserved
Shares of common stock reserved for future issuance are as follows:
|
|
June 30,
|
|
|
|
2017
|
|
Stock options and RSUs outstanding
|
|
|
1,711,005
|
|
Shares available for grant under stock option plans
|
|
|
367,640
|
|
Shares reserved for issuance upon conversion of convertible preferred stock Series B
|
|
|
1,011,110
|
|
Warrants for common stock
|
|
|
43,542,439
|
|
Total
|
|
|
46,632,194
|
|
Stock Options
In 1997, the Company adopted the 1997 Equity Incentive Plan (the “1997 Plan”). The 1997 Plan provides for the granting of options to purchase common stock and the issuance of shares of common stock, subject to Company repurchase rights, to directors, employees and consultants. Certain options are immediately exercisable, at the discretion of the Board of Directors. Shares issued pursuant to the exercise of an unvested option are subject to the Company’s right of repurchase which lapses over periods specified by the board of directors, generally four years from the date of grant. In February 2006, the Company terminated all remaining unissued shares under the 1997 Plan. Although the 1997 Plan terminated, all outstanding options thereunder will continue to be governed by their existing terms.
In October 2005, the Company’s Board of Directors adopted, and in December 2005 the stockholders approved, the 2005 Equity Incentive Plan, as amended (the “2005 Plan”). Pursuant to a series of amendments, a total of 1,140,000 shares of common stock have been reserved for issuance under the 2005 Plan as of the termination date. In October 2015, the Company terminated all remaining unissued shares under the 2005 Plan. Although the 2005 Plan terminated, all outstanding options thereunder will continue to be governed by their existing terms.
On May 20, 2015, the Board of Directors of the Company adopted the Dextera Surgical Inc., Inducement Plan pursuant to which the Company reserved 40,000 shares for issuance under the Inducement Plan. The only persons eligible to receive grants of Stock Awards under Inducement Plan are individuals who satisfy the standards for inducement grants under NASDAQ Marketplace Rule 5635(c)(4) and the related guidance under NASDAQ IM 5635-1 – that is, generally, a person not previously an employee or director of the Company, or following a bona fide period of non-employment, as an inducement material to the individual's entering into employment with the Company. A “Stock Award” is any right to receive the Company common stock granted under the Plan, including a nonstatutory stock option, a restricted stock award, a restricted stock unit award, a stock appreciation right, or any other stock award. At June 30, 2016, the Company reserved 529,116 shares for issuance under the Inducement Plan.
On May 20, 2015, the Company’s new vice president of operations, was granted a stock option to purchase 40,000 shares of the Company common stock pursuant to the Inducement Plan.
On October 15, 2015, the Company’s new president and chief executive officer, was granted a stock option to purchase 489,116 shares of the Company common stock pursuant to the Inducement Plan.
In November 2015, the Company’s Board of Directors adopted, and in January 2016 the stockholders approved, the 2016 Equity Incentive Plan, as amended (the “2016 Plan”). In August 2016, the Company’s Board of Directors adopted, and in November 2016 the stockholders approved, to increase the share reserve under the 2016 Plan by 500,000 shares. A total of 1,363,580 shares of common stock have been reserved for issuance under the 2016 Plan as of June 30, 2017.
Stock awards granted under the 2016 Plan may either be incentive stock options, nonstatutory stock options, stock appreciation rights or rights to acquire restricted or performance stock. Incentive stock options may be granted to employees with exercise prices of no less than the fair value of the common stock on the date of grant, as determined by the Board of Directors, and nonstatutory options may be granted to employees, directors or consultants at exercise prices of no less than the fair value. If, at the time the Company grants an option, the awardee directly or by attribution owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, the option price shall be at least 110% of the fair value and shall not be exercisable more than five years after the date of grant. Options may be granted with vesting terms as determined by the Board of Directors. Options expire no more than 10 years after the date of grant, or earlier if employment is terminated.
Award activity under all Plans is as follows:
|
|
|
|
|
|
Outstanding Options
|
|
|
|
Shares
Available for
Grant
|
|
|
Number of
Shares
|
|
|
Weighted-
Average
Exercise
Price Per
Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2014
|
|
|
71,691
|
|
|
|
560,152
|
|
|
$
|
19.39
|
|
Shares reserved
|
|
|
540,000
|
|
|
|
—
|
|
|
|
—
|
|
Restricted stock awards granted
|
|
|
(29,000
|
)
|
|
|
—
|
|
|
|
—
|
|
Options granted
|
|
|
(250,961
|
)
|
|
|
250,961
|
|
|
|
6.90
|
|
Options forfeited
|
|
|
355,534
|
|
|
|
(355,534
|
)
|
|
|
14.46
|
|
Balance at June 30, 2015
|
|
|
687,264
|
|
|
|
455,579
|
|
|
|
16.48
|
|
Shares reserved
|
|
|
409,132
|
|
|
|
—
|
|
|
|
—
|
|
Options granted
|
|
|
(1,249,956
|
)
|
|
|
1,249956
|
|
|
|
2.84
|
|
Options forfeited
|
|
|
189,212
|
|
|
|
(189,212
|
)
|
|
|
24.32
|
|
Balance at June 30, 2016
|
|
|
35,652
|
|
|
|
1,516,323
|
|
|
|
4.33
|
|
Shares reserved
|
|
|
500,000
|
|
|
|
—
|
|
|
|
—
|
|
Restricted stock awards granted
|
|
|
(147,600
|
)
|
|
|
—
|
|
|
|
—
|
|
Options granted
|
|
|
(172,000
|
)
|
|
|
172,000
|
|
|
|
1.32
|
|
Options forfeited
|
|
|
151,588
|
|
|
|
(151,588
|
)
|
|
|
7.61
|
|
Balance at June 30, 2017
|
|
|
367,640
|
|
|
|
1,536,735
|
|
|
$
|
3.67
|
|
The following table summarizes information about options outstanding, vested and exercisable at June 30, 2017:
Options Outstanding
|
|
|
Options exercisable
|
|
Exercise Prices
|
|
Number of
Shares
|
|
|
Weighted-
Average
Remaining
Contractual
Life (years)
|
|
|
Weighted
Average
Exercise
Price per
Share
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price per
Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
0.20
|
–
|
$
2.79
|
|
|
238,841
|
|
|
|
6.30
|
|
|
$
|
1.73
|
|
|
|
66,564
|
|
|
$
|
1.81
|
|
2.80
|
–
|
2.80
|
|
|
1,025,280
|
|
|
|
6.96
|
|
|
|
2.80
|
|
|
|
462,149
|
|
|
|
2.80
|
|
3.50
|
–
|
38.20
|
|
|
272,614
|
|
|
|
3.90
|
|
|
|
8.66
|
|
|
|
218,330
|
|
|
|
9.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total outstanding
|
|
|
1,536,735
|
|
|
|
6.31
|
|
|
$
|
3.67
|
|
|
|
746,814
|
|
|
$
|
4.66
|
|
Options vested and expected to vest
|
|
|
1,453,918
|
|
|
|
6.29
|
|
|
$
|
3.73
|
|
|
|
|
|
|
|
|
|
The weighted average remaining contractual life for all currently exercisable options as of June 30, 2017, was 5.84 years. The aggregate intrinsic value as of June 30, 2017, of all outstanding options was $1,236, options vested and expected to vest was $1,032 and options exercisable was $0. The aggregate intrinsic value as of June 30, 2016, of all outstanding options was $0, options vested and expected to vest was $0 and options exercisable was $0.
The weighted-average estimated grant date fair value of options granted to employees and directors during fiscal years 2017, 2016 and 2015 was $1.32, $2.93 and $3.67 per share, respectively. There were no options exercised during fiscal years 2017, 2016 and 2015. The grant date fair value of all stock options actually vesting in fiscal years 2017, 2016 and 2015 $927,000, $0 and $568,000, respectively.
Restricted Stock Units and Awards
The following table summarizes information about restricted stock activity.
|
|
Shares
|
|
Non-vested restricted stock at June 30, 2014
|
|
|
1,600
|
|
Awarded
|
|
|
29,000
|
|
Vested
|
|
|
(1,600
|
)
|
Forfeited
|
|
|
(10,000
|
|
Non-vested restricted stock at June 30, 2015
|
|
|
19,000
|
|
Awarded
|
|
|
40,000
|
|
Vested
|
|
|
(32,330
|
)
|
Forfeited
|
|
|
—
|
|
Non-vested restricted stock at June 30, 2016
|
|
|
26,670
|
|
Awarded
|
|
|
147,600
|
|
Vested
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
Non-vested restricted stock at June 30, 2017
|
|
|
174,270
|
|
The aggregate intrinsic value as of June 30, 2017, of all non-vested restricted stock awards was $52,000, and awards expected to vest was $36,000.
The grant date fair value of awards granted during fiscal years 2017, 2016 and 2015 was $1.42, $4.75 and $11.40 per share, respectively. The grant date fair value of all awards granted during fiscal years 2017, 2016 and 2015 was $210,000, $190,000 and $330,00, respectively. The grant date fair value of all stock awards actually vesting in fiscal years 2017, 2016 and 2015 was $0, $88,000 and $19,000, respectively.
The fair value of each restricted stock award is estimated based upon the closing price of the Company’s common stock on the grant date. Share-based compensation expense related to restricted stock units and awards is recognized over the requisite service period as adjusted for estimated forfeitures.
Employee Stock Purchase Plan
In September 2016, the Company’s board of directors approved the adoption of the 2016 Employee Stock Purchase Plan (the “2016 ESPP”), which was subsequently approved by the Company’s shareholders in November 2016. Under the 2016 ESPP, the Company has reserved a total of 300,000 shares of common stock for issuance to employees. The first offering period under the 2016 ESPP began on March 16, 2017 and will end on February 15, 2018. After the commencement of the first offering period, the 2016 ESPP provides for subsequent offering periods to begin on August 15
th
and February 15
th
of each year. Each subsequent offering period under the 2016 ESPP will be one-year long and contain two six-month purchase windows. Shares subject to purchase rights granted under the Company’s 2016 ESPP that terminate without having been exercised in full will not reduce the number of shares available for issuance under the Company’s 2016 ESPP. The 2016 ESPP is intended to qualify as an “employee stock purchase plan,” under Section 423 of the Internal Revenue Code of 1986 with the purpose of providing employees with an opportunity to purchase the Company’s common stock through accumulated payroll deductions. Employees are able to purchase shares of common stock at 85% of the lower of the fair market value of the Company’s common stock on the first day of the offering period or on the last day of the six-month purchase window. No shares were issued under the 2016 ESPP as of June 30, 2017. For the fiscal year ended June 30, 2017, the Company recorded stock-based compensation expense of $22,000 related to the 2016 ESPP.
Note 9. Reductions in Force
During the fiscal year 2015, the Company reduced its workforce by 24 positions to conserve cash and to match its use of cash with its stage of development. The Company’s decision to engage in the corporate restructurings and layoffs resulted from the necessary improvements required for the MicroCutter 5/80. As a result, the Company recorded a restructuring charge of $0.3 million for severance and other benefits which was fully paid during the fiscal year 2015. The charges were included in all departmental expenses.
Note 10. Income Taxes
Deferred income taxes reflect the net tax effects of net operating loss and tax credit carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts unused for income tax purposes. Significant components of the Company’s net deferred tax assets are as follows (in thousands):
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry-forwards
|
|
$
|
74,330
|
|
|
$
|
68,914
|
|
Research credits
|
|
|
4,168
|
|
|
|
3,891
|
|
Fixed asset depreciation
|
|
|
—
|
|
|
|
48
|
|
Stock compensation
|
|
|
570
|
|
|
|
393
|
|
Deferred revenue
|
|
|
296
|
|
|
|
151
|
|
Other
|
|
|
1,144
|
|
|
|
1,123
|
|
Total deferred tax assets
|
|
|
80,508
|
|
|
|
74,520
|
|
Valuation
A
llowance
|
|
|
(80,481
|
)
|
|
|
(74,520
|
)
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
Fixed asset depreciation
|
|
|
(27
|
)
|
|
|
—
|
|
Net Deferred Tax Assets
|
|
$
|
—
|
|
|
$
|
—
|
|
Realization of the deferred tax assets is dependent upon future income, if any, the amount and timing of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The net valuation allowance increased by approximately $6.0 million, $6.9 million and $6.9 million during fiscal years ended June 30, 2017, 2016 and 2015, respectively.
As of June 30, 2017, the Company has net operating loss carry-forwards for federal income tax purposes of approximately $203.5 million, which begin to expire in fiscal year 2018. The Company also has state net operating loss carry-forwards of approximately $122.4 million, which begin to expire in fiscal year 2018. The Company has federal research and development tax credits $3.8 million, which begin to expire in fiscal year 2021. The Company also has state research and development tax credits of $4.4 million, of which California tax credits have an unlimited carry-forward period and Arizona tax credits begin to expire in fiscal year 2024.
Included in the valuation allowance balance as of June 30, 2017, is $0.2 million related to the exercise of stock options which are not reflected as an expense for financial reporting purposes. Accordingly, any future reduction in the valuation allowance relating to this amount will be credited directly to equity and not reflected as an income tax benefit in the Statement of Operations.
The reconciliation of income tax benefits attributable to the net loss computed at the U.S. federal statutory rates to the income tax benefit recorded (in thousands):
|
|
Fiscal Year Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Tax benefit at U.S. statutory rate
|
|
$
|
(5,855
|
)
|
|
$
|
(5,449
|
)
|
|
$
|
(6,520
|
)
|
Loss for which no tax benefit is currently recognizable
|
|
|
5,052
|
|
|
|
5,292
|
|
|
|
6,341
|
|
Loss on issuance of convertible preferred stock Series B and
related warrants, and remeasurement of common stock
warrant liability
|
|
|
712
|
|
|
|
—
|
|
|
|
—
|
|
Refundable research credits
|
|
|
(160
|
)
|
|
|
—
|
|
|
|
—
|
|
Stock-based compensation
|
|
|
141
|
|
|
|
140
|
|
|
|
160
|
|
Prior year adjustments
|
|
|
98
|
|
|
|
—
|
|
|
|
—
|
|
Other, net
|
|
|
12
|
|
|
|
17
|
|
|
|
19
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Utilization of the net operating loss carry-forwards and credit carry-forwards may be subject to a substantial annual limitation due to the limitations set forth in Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (“Internal Revenue Code”), and similar state provisions. In the fiscal year ended June 30, 2010, the Company completed a detailed analysis to determine whether an ownership change under Section 382 of the Internal Revenue Code had occurred. The effect of an ownership change would be the imposition of an annual limitation on the use of the net operating loss carry-forwards and credit carry-forwards attributable to periods before the change. Any subsequent ownership changes could further limit the use of net operating losses and credits. The Company concluded that approximately $4.9 million of federal net operating loss carry-forwards, $1.5 million of federal credit carry-forwards and approximately $19.5 million of California state net operating loss carry-forwards are significantly limited to offset future income, if any. However, the Company issued additional shares in fiscal years 2011 through 2017, that may have triggered another ownership change. A Section 382 study to determine the impact of these issuances has not been performed. If a change in ownership was triggered, the net operating loss carry-forwards and credit carry-forwards included in the Deferred Tax Assets could be further limited. The reductions are reflected in the carry-forward amounts included above.
At June 30, 2017, the Company had unrecognized tax benefits of $1.3 million, all of which would not currently affect the Company’s effective tax rate if recognized due to the Company’s deferred tax assets being fully offset by a valuation allowance. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
|
Amount
|
|
Balance at June 30, 2014
|
|
$
|
1,013
|
|
Additions based on tax positions related to prior years
|
|
|
26
|
|
Additions based on tax positions related to current year
|
|
|
82
|
|
Balance at June 30, 2015
|
|
|
1,121
|
|
Additions based on tax positions related to prior year
|
|
|
56
|
|
Additions based on tax positions related to current year
|
|
|
79
|
|
Balance at June 30, 2016
|
|
|
1,256
|
|
Additions based on tax positions related to prior years
|
|
|
—
|
|
Additions based on tax positions related to current year
|
|
|
84
|
|
Balance at June 30, 2017
|
|
$
|
1,340
|
|
The Company would classify interest and penalties related to uncertain tax positions in income tax expense, if applicable. There was no interest expense or penalties related to unrecognized tax benefits recorded through June 30, 2017. The tax years 1998 through 2017 remain open to examination by one or more major taxing jurisdictions to which the Company is subject.
Note 11. Employee Benefit Plan
In January 2001, the Company adopted a 401(k) Profit Sharing Plan that allows voluntary contributions by eligible employees. Employees may elect to contribute up to the maximum allowed under the Internal Revenue Service regulations. The Company may make discretionary contributions as determined by the Board of Directors. No amount was contributed by the Company to the plan during fiscal years ended June 30, 2017, 2016 or 2015.
Note 12. Indemnification
From time to time, the Company enters into contracts that require the Company, upon the occurrence of certain contingencies, to indemnify parties against third-party claims. These contingent obligations primarily relate to (i) claims against the Company’s customers for violation of third-party intellectual property rights caused by the Company’s products; (ii) claims resulting from personal injury or property damage resulting from the Company’s activities or products; (iii) claims by the Company’s office lessor arising out of the Company’s use of the premises; and (iv) agreements with the Company’s officers and directors under which the Company may be required to indemnify such persons for liabilities arising out of their activities on behalf of the Company. Because the obligated amounts for these types of agreements usually are not explicitly stated, the overall maximum potential amount of these obligations cannot be reasonably estimated. No liabilities have been recorded for these obligations on the Company’s consolidated balance sheets as of June 30, 2017 or 2016, as there are no amounts currently estimable and probable of payment.
Note 13. Consolidated Financial Information by Quarter
Consolidated Financial Information by Quarter (unaudited)
Fiscal Year 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(In thousands, except per share data)
|
|
Total net revenue
|
|
$
|
467
|
|
|
$
|
799
|
|
|
$
|
1,107
|
|
|
$
|
1,050
|
|
Gross profit (loss) on product sales
(1)
|
|
|
(88
|
)
|
|
|
(245
|
)
|
|
|
(332
|
)
|
|
|
(82
|
)
|
Net loss allocable to common stockholders
|
|
|
(3,955
|
)
|
|
|
(3,637
|
)
|
|
|
(4,483
|
)
|
|
|
(13,855
|
)
|
Basic and diluted net loss per share allocable to common stockholders
|
|
|
(0.44
|
)
|
|
|
(0.41
|
)
|
|
|
(0.50
|
)
|
|
|
(0.78
|
)
|
Shares used in computing basic and diluted net loss per share
allocable to common stockholders
|
|
|
8,928
|
|
|
|
8,928
|
|
|
|
8,928
|
|
|
|
17,794
|
|
Fiscal Year 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(In thousands, except per share data)
|
|
Total net revenue
|
|
$
|
755
|
|
|
$
|
700
|
|
|
$
|
1,886
|
|
|
$
|
714
|
|
Gross profit (loss) on product sales
(1)
|
|
|
(286
|
)
|
|
|
(206
|
)
|
|
|
(453
|
)
|
|
|
(423
|
)
|
Net loss allocable to common stockholders
|
|
|
(4,642
|
)
|
|
|
(4,087
|
)
|
|
|
(3,027
|
)
|
|
|
(4,231
|
)
|
Basic and diluted net loss per share allocable to common stockholders
|
|
|
(0.52
|
)
|
|
|
(0.46
|
)
|
|
|
(0.34
|
)
|
|
|
(0.47
|
)
|
Shares used in computing basic and diluted net loss per share allocable to
common stockholders
|
|
|
8,896
|
|
|
|
8,901
|
|
|
|
8,916
|
|
|
|
8,928
|
|
(1) Gross profit is computed as total net product sales less cost of product sales.
Note 14. Subsequent Event
On September 21, 2017, the Company and Century entered into an amendment to the secured note purchase agreement (see Note 7). In August 2016, Century asserted that Dextera had an obligation to repay the loan within ten days of receiving net proceeds from a financing in April 2014, notwithstanding that Dextera entered into the amendment to the agreement with Century in July 2014 to extend the due date to September 30, 2018. Century further asserted that Dextera owed Century penalty interest at the incremental rate of 7% per annum. The Company did not agree with Century’s assertions as the Company believes that it had notified Century of the financing that occurred in April 2014 and the extension of the due date of the note agreement effectively waived the prepayment provisions of the loan.
The parties settled the dispute by entering into the note amendment, pursuant to which: (1) the Company agreed to make partial principal payments on the note in the amount of $125,000 on each of September 30, 2017, December 31, 2017, March 31, 2018, and June 30, 2018; (2) the parties waived any and all claims based on, or relating to, Century’s allegation that the earlier payment was due, and (3) the parties agreed that no penalty interest was due.
The remainder of the principal balance of $3.5 million is due on September 30, 2018.
The agreement to make partial principal payments in fiscal year 2018 was an event that occurred after June 30, 2017; accordingly, they are classified as long-term as of June 30, 2017.