Capital Resources and Liquidity
We are using the net proceeds from the sales of our common stock for product development to commercialize our technology, research and development, the development of our patent strategy and expansion of our patent portfolio, as well as for working capital and other general corporate purposes. Our costs include employee salaries and benefits, compensation paid to consultants, capital costs for research and other equipment, costs associated with development activities including travel and administration, legal expenses, sales and marketing costs, general and administrative expenses, and other costs associated with a late-stage development, publicly-traded technology company. However, this is highly dependent on the nature of our development efforts and our success in commercialization. We continue to add employees for research and development, as well as general and administrative functions, to support our efforts. Additionally, we continue to incur consulting expenses related to technology development and other efforts as well as legal and related expenses to protect our intellectual property.
The amounts that we actually spend for any specific purpose may vary significantly and will depend on a number of factors including, but not limited to, our expected cash resources, the pace of progress of our commercialization and development efforts, actual needs with respect to product testing, research and development, market conditions, and changes in or revisions to our marketing strategies. In addition, we may invest in complementary products, technologies or businesses.
We have earned minimal revenues since inception, and our operations have been funded with initial capital contributions and proceeds from the sale of equity securities and debt. At December 31, 2016 and
December 31, 2017
, we had incurred accumulated losses totaling
$46.2 million
and
$67.8 million
, respectively. The losses are primarily the result of research and development costs associated with commercializing our technology, combined with start-up, financing and public company costs. We expect to continue to incur substantial costs for commercialization of our technology on a continuous basis because our business model involves developing and licensing custom filter designs.
Our consolidated financial statements account for the continuation of our business as a going concern. We are subject to the risks and uncertainties associated with a new business. Our principal source of liquidity as of
December 31, 2017
consists of existing cash and cash equivalents of
$19.5 million
. During the year ended December 31, 2017, we used
$15.6 million
of cash and investments for operating activities, the purchase of property and equipment, and expenditures for patents. Due to these conditions, along with planned growth, substantial doubt exists as to our ability to continue as a going concern. After evaluation of these conditions, we believe our current resources will provide sufficient funding for planned operations into the second half of 2018. If necessary, we will seek to raise additional capital from the sale of equity securities or the incurrence of indebtedness to allow us to continue operations. There can be no assurance that additional financing will be available to us on acceptable terms, or at all. Additionally, if we issue additional equity securities to raise funds, whether to existing investors or others, the ownership percentage of our existing stockholders would be reduced. New investors may demand rights, preferences or privileges senior to those of existing holders of common stock. Additionally, we may be limited as to the amount of funds we can raise pursuant to SEC rules and the continued listing requirements of NASDAQ. If we cannot raise needed funds, we might be forced to make substantial reductions in our operating expenses, which could adversely affect our ability to implement our business plan and ultimately our viability as a company. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from this uncertainty.
We have a Form S-3 universal shelf registration statement on file with the SEC. The universal shelf registration statement on Form S-3 permits us to sell, in one or more public offerings, shares of our common stock, shares of preferred stock or debt securities, or any combination of such securities and warrants to purchase securities, for proceeds in an aggregate amount of up to
$35.0
million, subject to limitations on the amount of securities we may sell in any twelve-month period. As of December 31, 2017, we have raised a total of
$11.5
million of gross proceeds from the sale of
2,715,000
shares of our common stock, leaving approximately
$23.5
million of securities available for issuance pursuant to the Form S-3. The Form S-3 will expire in May 2019.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Use of Estimates
—The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. In the opinion of management, all adjustments (consisting of normal accruals) considered for a fair presentation have been included. Significant estimates made in preparing these financial statements include (a) assumptions to calculate the fair values of financial instruments, warrants and equity instruments and other liabilities and the deferred tax asset valuation allowance and (b) the useful lives for depreciable and amortizable assets. Actual results could differ from those estimates. In the opinion of management, all adjustments, including normal recurring accruals considered necessary for a fair presentation, have been included.
Consolidation -
The accompanying financial statements include the accounts of the Company and its wholly-owned subsidiary, GVR Trade, S.A. All significant intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents
—We consider all liquid instruments purchased with a maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
—We maintain checking accounts at
one
U.S. financial institution. The U.S. bank accounts are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per account owner. GVR Trade S.A., our wholly owned Swiss-based subsidiary maintains checking accounts at one major national financial institution. Additionally, we maintain a checking account with a very minimal balance at one bank in South Korea, which is used to fund payroll and rent in South Korea. Management believes we are not exposed to significant credit risk due to the financial position of the depository institutions in which our deposits are held.
Restricted Cash
—Restricted cash at December 31, 2016 and December 31, 2017 represents cash held within a certificate of deposit with a financial institution, which serves as collateral for our corporate credit cards. The restriction on the cash will lapse in conjunction with the expiration of the use of the corporate credit cards.
Investments
—Securities held-to-maturity: Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Investment/debt securities are classified as held-to-maturity when we have the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity computed under the effective interest method. Such amortization is included in investment income. Interest on securities classified as held-to-maturity is included in investment income.
When the fair value of an investment instrument classified as held-to-maturity is less than its amortized cost, management assesses whether or not: (i) we have the intent to sell the instrument or (ii) it is more likely than not that we will be required to sell the instrument before its anticipated recovery. If either of these conditions is met, we must recognize an other-than-temporary impairment for the difference between the instrument’s amortized cost basis and its fair value, and include such amounts in net securities gains (losses).
For investment instruments that do not meet the above criteria and are not expected to be recovered at the amortized cost basis, the instrument is considered other-than-temporarily impaired. For these instruments, we separate the total impairment into the credit loss component and the amount of the loss related to other factors. In order to determine the amount of the credit loss, we calculate the recovery value by performing a discounted cash flow analysis based on the current cash flows and future cash flows management expects to recover. The discount rate is the effective interest rate implicit in the underlying instrument. The amount of the total other-than-temporary impairment related to credit loss is recognized in earnings and is included in net securities gains (losses). The amount of the total other-than-temporary impairment related to other factors is recognized in other comprehensive income. For investment instruments that have other-than-temporary impairment recognized through earnings, if through subsequent evaluation there is a significant increase in the cash flow expected, the difference between the amortized cost basis and the cash flows expected to be collected is accreted as interest income.
During 2016, we invested in corporate paper and federally insured certificates of deposit that we have classified as held-to-maturity. As of December 31, 2016, the amortized cost value was
$4.7 million
with an unrealized loss of
$2,000
and a fair value of
$4.7 million
. The investments consisted of
$4.0 million
of corporate paper, of which
$3.0 million
matured in January of 2017 and
$1.0 million
matured in February of 2017, and
$747,000
of certificates of deposit which matured in increments of
$249,000
between January and March of 2017. We did not recognize an other-than-temporary impairment gain or loss or a comprehensive gain or loss as of December 31, 2016.
During 2017, we invested in commercial papers and certificates of deposit that were classified as investments held-to-maturity. Additionally, we maintained money market fund balances that were classified as cash and cash equivalents. As of December 31, 2017, all of our investments held-to-maturity have matured and we have no investments classified as held-to-maturity.
We recorded investment income of
$22,000
and
$67,000
for the years ended December 31, 2016 and 2017, respectively, associated with our cash and investment accounts.
Fair Value of Financial Instruments
—We measure certain financial assets and liabilities at fair value based on the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The carrying amounts of our financial
instruments, including cash equivalents, restricted cash, investments held-to-maturity, accounts payable, and accrued liabilities, approximate fair value due to their short maturities.
Accounts Receivable
—Trade accounts receivable are stated net of allowances for doubtful accounts. Management estimates the allowance for doubtful accounts based on review and analysis of specific customer balances that may not be collectible, customer payment history and any other customer-specific information that may impact collectability of the receivable. Accounts are considered for write-off when they become past due and when it is determined that the probability of collection is remote. The was no allowance for doubtful accounts at December 31, 2016 and December 31, 2017.
Property and Equipment
—Property and equipment consists of leasehold improvements associated with our corporate offices, software purchased during the normal course of business, equipment and office furniture and fixtures, all of which are recorded at cost. During 2016, other property and equipment were acquired as part of the purchase of GVR and were initially recorded at their fair value. Depreciation and amortization is recorded using the straight-line method over the respective useful lives of the assets ranging from
three
to
five years
. Leasehold improvements are amortized over the shorter of lease term or useful life. Long-lived assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of these assets may not be recoverable.
Intangible Assets, net
—Intangible assets are recorded at cost and amortized over the useful life. In the case of business combinations, intangible assets are recorded at fair value. At
December 31, 2016
and
December 31, 2017
, intangible assets, net, includes patents, domain name and other intangibles purchased from GVR, including customer relationships, technology and trademark. Intangible assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of these assets may not be recoverable.
Goodwill—
At
December 31, 2017
, goodwill represents the difference between the price paid to acquire GVR Trade and the fair value of the assets acquired, net of assumed liabilities. We review goodwill for impairment annually and whenever events or circumstances indicate that the carrying amount of these assets may not be recoverable.
Revenue Recognition
—Revenue consists primarily of fees received in connection with filter design projects with customers. Contracts may involve upfront non-refundable fees, intended to support our initial engineering product development efforts, as well as milestone payments based upon the successful completion of certain deliverables. In relation to the upfront non-refundable fees, we recognize revenue in accordance with the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 605,
Revenue Recognition.
We recognize revenue as the services are performed over the initial engineering filter design development period and when all of the following criteria have been met: persuasive evidence of an arrangement exists, services have been rendered, collection of the revenue is reasonably assured, and the fees are fixed or determinable. We record the expenses related to these projects in the periods incurred and they are generally included in research and development expense.
In addition to the upfront non-refundable payments, the filter design projects include certain milestone payments upon successful filter design or a design stage completion. These filter design projects are associated with complex technology development, and as such we do not have certainty about our ability to achieve the program milestones. Achievement of the milestone is generally dependent on the filter design specifications and the milestone typically needs to be accepted by the customer. The payment associated with achieving the milestone is generally commensurate with our effort or the value of the deliverable and is generally non-refundable. We record revenue associated with the milestone payments in accordance with ASC Topic 605-28,
Milestone Method,
whereby we record revenue upon successful completion of the related milestone and when collection of the revenue is reasonably assured. We record the expenses related to these projects, generally included in research and development expense, in the periods incurred.
During the years ended December 31, 2016 and 2017, we recorded revenue of
$302,000
and
$653,000
, respectively, primarily related to filter design projects. As of
December 31, 2017
, we have recorded
$143,000
in deferred revenue related primarily to our filter design development projects.
Research and Development
—Costs and expenses that can be clearly identified as research and development are charged to expense as incurred in accordance with ASC Topic 730-10,
Research and Development
.
Operating Leases
—We lease office space and research facilities under operating leases. Certain lease agreements contain free or escalating rent payment provisions. We recognize rent expense under such leases on a straight-line basis over the term of the lease. Lease renewal periods are considered on a lease-by-lease basis in determining the lease term.
Stock-Based Compensation
—We account for employee stock options in accordance with ASC Topic 718,
Compensation-Stock Compensation
. For stock options issued to employees and directors we use the Black-Scholes option valuation model for estimating fair value at the date of grant. For stock options issued for services rendered by non-employees,
we recognize compensation expense in accordance with the requirements of ASC Topic 505-50
, Equity
, or ASC 505-50, as amended. Non-employee option grants that do not vest immediately upon grant are recorded as an expense over the vesting period. At the end of each financial reporting period prior to performance, the value of these options, as calculated using the Black-Scholes option valuation model, is determined, and compensation expense recognized or recovered during the period is adjusted accordingly. Since the fair market value of options granted to non-employees is subject to change in the future, the amount of the future compensation expense is subject to adjustment until the common stock options or warrants are fully vested.
We account for restricted stock units issued to employees at fair value, based on the market price of our stock on the date of grant, net of estimated forfeitures. Compensation expense is recognized for the portion of the award that is ultimately expected to vest over the period during which the recipient renders the required services to the Company generally using the straight-line single option method. The fair value of non-employee restricted stock units awarded are remeasured as the awards vest, and the resulting increase or decrease in fair value, if any, is recognized as an increase or decrease to compensation expense in the period the related services are rendered.
In the case of award modifications, we account for the modification by recognizing the effect of the modification in the period the award was modified.
Stock-based compensation expense is included in research and development expenses and general and administrative expenses.
Earnings Per Share, or EPS
—EPS is computed in accordance with ASC Topic 260,
Earnings per Share
, and is calculated using the weighted average number of common shares outstanding during each period. Diluted EPS assumes the conversion, exercise or issuance of all potential common stock equivalents unless the effect is to reduce a loss or increase the income per share. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options (using the treasury stock method), the exercise of warrants (using the if-converted method) and the vesting of restricted stock unit awards.
The following table presents the number of shares excluded from the calculation of diluted net loss per share attributable to common stockholders for the periods below:
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
Year Ended December 31, 2017
|
Common stock warrants
|
2,915,559
|
|
|
3,730,255
|
|
Common stock options
|
801,690
|
|
|
1,082,490
|
|
Non-vested restricted stock unit awards
|
1,455,558
|
|
|
1,476,858
|
|
Total shares excluded from net loss per share attributable to common stockholders
|
5,172,807
|
|
|
6,289,603
|
|
Income Taxes
—We account for income taxes in accordance with ASC Topic 740,
Income Taxes
, or ASC 740, which requires the recognition of deferred tax assets and liabilities for the future consequences of events that have been recognized in our condensed consolidated financial statements or tax returns. The measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and the tax bases of our assets and liabilities result in a deferred tax asset, ASC 740 requires an evaluation of the probability of being able to realize the future benefits indicated by such asset. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or the entire deferred tax asset will not be realized. As part of the process of preparing our consolidated financial statements, we are required to estimate our income tax expense in each of the jurisdictions in which we operate. We also assess temporary differences resulting from differing treatment of items for tax and accounting differences. We record a valuation allowance to reduce the deferred tax assets to the amount of future tax benefit that is more likely than not to be realized. For the period when we were organized as a limited liability company, we were treated as a partnership for federal and state income tax purposes under the entity classification domestic default rules. As of
December 31, 2016
and
December 31, 2017
,
no
liability for unrecognized tax benefits was required to be reported. We recognize interest and penalties related to income tax matters in income taxes, and there were
none
for the years ended
December 31, 2016
and
December 31, 2017
, respectively.
We have filed, or are in the process of filing, tax returns that are subject to audit by the respective tax authorities. Although the ultimate outcome would be unknown, we believe that any adjustments that may result from tax return audits are not likely to have a material, adverse effect on our consolidated results of operations, financial position or cash flows.
Reclassifications
—Certain amounts in the consolidated statement of operations for the year ended December 31, 2016 have been reclassified to conform to the current year presentation.
Business Combinations—
We record business combinations using the acquisition method of accounting and, accordingly, allocate the fair value of purchase consideration to the assets acquired and liabilities assumed based on their fair values at the acquisition date. The excess of the fair value of the purchase consideration over the fair value of the assets acquired and liabilities assumed is recorded as goodwill. The results of operations of the business acquired are included in our consolidated results of operations beginning on the date of acquisition.
Foreign Currency Translation
—The Swiss Franc has been determined to be the functional currency for the net assets of our Swiss-based subsidiary. We translate the assets and liabilities to U.S. dollars at each reporting period using exchange rates in effect at the balance sheet date and record the effects of the foreign currency translation in accumulated other comprehensive income (loss) in shareholders' equity. We translate the income and expenses to U.S. dollars at each reporting period using the average exchange rate in effect for the period and record the effects of the foreign currency translation as other comprehensive income (loss) in the consolidated statements of comprehensive loss. Gains and losses resulting from foreign currency transactions are included in net loss in the consolidated statements of comprehensive loss.
Recent Accounting Pronouncements
Revenue from Contracts with Customers—
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
, which defers the effective date of ASU No. 2014-09 for all entities by one year to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. This ASU shall be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Early adoption is permitted but not before the annual periods beginning after December 15, 2016, including interim periods within that reporting period. In March 2016, the FASB issued ASU No. 2016-08,
Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
. This ASU provides further guidance surrounding the recognition of revenue as well as guidance involving principal versus agent considerations. The effective date of this ASU is the same as ASU 2014-09. In April 2016, the FASB issued ASU No. 2016-10,
Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing
. This amendment provides clarification surrounding the identification of performance obligations and offers licensing implementation guidance. The effective date of this ASU is the same as ASU 2014-09. In May 2016, the FASB issued ASU No. 2016-12,
Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients,
which provides further guidance surrounding certain aspects of ASU 2014-09. The effective date of this ASU is the same as ASU 2014-09. The new standards became effective for us on January 1, 2018 and we adopted at that time using the modified retrospective approach with a cumulative adjustment to reflect the initial impact recognized at the date of adoption. We believe the impact is not significant due to the relatively small number of contracts and nature of our contracts, which are primarily related to design development projects where the revenue is recognized over time under both the prior guidance and the new revenue recognition standard.
We believe the adoption of the new standard will result in an increase to contract assets and a corresponding increase to retained earnings. The impact of the adoption is primarily related to the recognition of income from milestones within our contracts. Up until January 1, 2018, we recognized income related to milestones at the time when the milestone was achieved. Under the new guidance we are required to estimate the likelihood of such achievement, and recognize the income over the period of achievement.
Leases—
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
, a comprehensive new leases standard that amends various aspects of existing accounting guidance for leases. It will require recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The main difference between previous U.S. GAAP and the amended standard is the recognition of lease assets and lease liabilities by lessees on the balance sheet for those leases classified as operating leases under previous U.S. GAAP. The accounting applied by a lessor is largely unchanged from that applied under previous U.S. GAAP. As a result, we will have to recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing our right to use the underlying asset for the lease term on the balance sheet. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are currently reviewing the two leases we have and are evaluating the effects of the new guidance on our consolidated financial statements. We do not expect it to have a material impact on our consolidated financial statements.
Intangibles-Goodwill and Other—
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
, which simplifies the accounting for goodwill impairments by eliminating step 2 from the goodwill impairment test. The amended guidance will become effective for us commencing in the first quarter of fiscal 2019. We are currently evaluating the impact of this new standard.
Compensation-Stock Compensation—
In May 2017, the FASB issued ASU No. 2017-09,
Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting
, which provides clarity over the accounting for a change to the terms or conditions of a share-based payment award. The amendments in the update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The amendments in this update should be applied prospectively to an award modification on or after the adoption date. This guidance became effective for us on January 1, 2018 and will be applied to all future share-based award modifications.
NOTE 3—INTANGIBLE ASSETS AND GOODWILL
Intangible assets include patents, domain name and other intangibles purchased from GVR, including customer relationships, technology and a trademark. Certain patents were acquired from STI as a result of an asset contribution and were recorded at their carryover basis. The fair value of the patents remained substantially the same as their carrying value at the exchange date. In addition, we acquired other patents and the domain name www.resonant.com through the normal course of business. Intangibles acquired as part of the purchase of GVR were initially recorded at their fair value. Issued patents are amortized over their approximate useful life of
17
years, or
20
years in the case of new patents, once they are approved by their respective regulatory agency. For the patents acquired from STI, we are amortizing them over the remaining useful life of
1
to
12
years as of
December 31, 2017
. The domain name is amortized over the approximate useful life of
10
years. The other intangibles acquired from GVR are amortized over their useful life of
three
to
five
years. Intangible assets consisted of the following at
December 31, 2016
and
2017
:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2017
|
Patents
|
$
|
1,132,000
|
|
|
$
|
1,349,000
|
|
Domain Name
|
22,000
|
|
|
22,000
|
|
Client Base (1)
|
137,000
|
|
|
143,000
|
|
Trademark (1)
|
17,000
|
|
|
17,000
|
|
Backlog (1)
|
12,000
|
|
|
13,000
|
|
Technology
|
84,000
|
|
|
77,000
|
|
|
1,404,000
|
|
|
1,621,000
|
|
Less: accumulated amortization
|
(151,000
|
)
|
|
(268,000
|
)
|
Net intangible assets
|
$
|
1,253,000
|
|
|
$
|
1,353,000
|
|
(1) Includes the impact of foreign currency translation. The total impact at December 31, 2016 was
$5,000
and the total impact at
December 31, 2017
was
$2,000
.
During the year ended December 31, 2016 and 2017, we wrote-off
$19,000
and
$8,000
, respectively, of patents we are no longer pursuing. The write-offs are included in research and development expense.
Amortization of intangible assets was
$89,000
and
$126,000
for the years ended
December 31, 2016
and
2017
, respectively. The following table summarizes the estimated amortization expense relating to the intangible assets as of
December 31, 2017
:
|
|
|
|
|
Years ending December 31,
|
|
2018
|
$
|
130,000
|
|
2019
|
103,000
|
|
2020
|
76,000
|
|
2021
|
66,000
|
|
2022
|
56,000
|
|
2023 and thereafter
|
418,000
|
|
Total amortization expense
|
$
|
849,000
|
|
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired from GVR Trade (see Note 5). Goodwill is not amortized, but is subject to impairment tests on at least an annual basis and whenever circumstances suggest that goodwill may be impaired.
|
|
|
|
|
|
Goodwill
|
Balance at January 1, 2016
|
$
|
—
|
|
Acquisition of GVR
|
824,000
|
|
Effect of currency translation
|
(35,000
|
)
|
Balance at December 31, 2016
|
$
|
789,000
|
|
Effect of currency translation
|
$
|
35,000
|
|
Balance at December 31, 2017
|
$
|
824,000
|
|
NOTE 4—PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2017
|
Cost:
|
|
|
|
|
Computers, peripheral and scientific equipment
|
$
|
618,000
|
|
|
$
|
1,016,000
|
|
Software
|
967,000
|
|
|
1,367,000
|
|
Leasehold Improvements
|
470,000
|
|
|
502,000
|
|
Office furniture and equipment
|
214,000
|
|
|
327,000
|
|
|
2,269,000
|
|
|
3,212,000
|
|
Less accumulated depreciation and amortization
|
(1,275,000
|
)
|
|
(1,858,000
|
)
|
Property and equipment, net
|
$
|
994,000
|
|
|
$
|
1,354,000
|
|
Depreciation expense for the years ended
December 31, 2016
and
December 31, 2017
was
$604,000
and
$594,000
, respectively. Disposals of property were
$1,000
and
$21,000
for the years ended
December 31, 2016
and
December 31, 2017
, respectively.
NOTE 5—ACQUISITION OF GVR TRADE S.A.
On
July 6, 2016
, we acquired all of the issued and outstanding capital stock of GVR Trade S.A. The purchase price, consisting of
$661,000
in cash and
125,000
shares of our common stock with a fair value of
$545,000
, based on a per share price of
$4.36
as of the date of acquisition, was approximately
$1.2 million
. At the time of acquisition, we incurred approximately
$92,000
of acquisition related expenses, which were included in general and administrative expenses for the year ended December 31, 2016. GVR is a wholly owned direct subsidiary of Resonant.
As of the acquisition date, we recorded goodwill of approximately
$824,000
, which represented the excess of the purchase price over the fair value of the assets acquired. The fair value for the assets acquired and liabilities assumed were based upon independent calculations and valuations. We review goodwill for impairment annually and whenever events or circumstances indicate that the carrying amount of the assets may not be recoverable.
The purchase price was allocated based on the fair values of assets and liabilities as follows:
|
|
|
|
|
Assets acquired
|
|
Cash and cash equivalents
|
$
|
148,000
|
|
Other current assets
|
52,000
|
|
Property and equipment
|
23,000
|
|
Intangible assets
|
|
Customer relationships
|
143,000
|
|
Developed technology
|
88,000
|
|
Trademarks and other
|
31,000
|
|
Total assets acquired
|
485,000
|
|
|
|
Liabilities assumed
|
|
Current liabilities
|
(35,000
|
)
|
Deferred tax liability
|
(41,000
|
)
|
Deferred revenue, current
|
(27,000
|
)
|
Total liabilities assumed
|
(103,000
|
)
|
Net value of assets acquired and liabilities assumed
|
382,000
|
|
|
|
Total purchase price
|
1,206,000
|
|
Excess of purchase price over fair value of assets acquired and liabilities assumed - recorded as Goodwill
|
$
|
824,000
|
|
The acquisition was not material to our consolidated financial statements and we have included the financial results of the business acquisition in our consolidated financial statements from the date of acquisition. Our consolidated statements of comprehensive loss include
$127,000
and
$58,000
of net loss of GVR for the year ended
December 31, 2016
and
2017
, respectively.
NOTE 6—WARRANTS
From time to time, we have issued warrants to purchase shares of common stock. These warrants have been issued in connection with financing transactions and for consulting services. Our warrants are subject to standard anti-dilution provisions applicable to shares of our common stock.
Bridge Warrants
In connection with and as an inducement to make the bridge loans in
January and March 2013
, Resonant LLC issued to each of our
three
founders
5
-year warrants to purchase Class B units of Resonant LLC at an exercise price of
$0.40
per unit, which we refer to as the Bridge Warrants. The Bridge Warrants were issued in
two
tranches, at the same time the bridge loan was funded, with each founder receiving warrants for
20,833
Class B units on each of
January 31, 2013
(for a total of
62,499
Class B units) and
March 19, 2013
(for a total of
62,499
Class B units). The founders paid an aggregate of
$1,000
in cash for the Bridge Warrants.
On
June 17, 2013
, in connection with our acquisition of all of the outstanding membership interests of Resonant LLC in an exchange transaction, the founders exchanged their Bridge Warrants to purchase an aggregate of
124,998
Class B units of Resonant LLC for Bridge Warrants to purchase an aggregate of
249,999
shares of our common stock at an exercise price of
$0.20
per share. All other terms of the Bridge Warrants remained the same.
Consulting Warrant, Financing Warrant and Underwriting Warrant
Upon consummation of our Senior Convertible Note financing, for business consulting services provided by MDB Capital Group, LLC, or MDB, we issued to MDB a
7
-year warrant to purchase
222,222
shares of our common stock at an exercise price of
$0.01
per share, which we refer to as the Consulting Warrant. The Consulting Warrant is exercisable six months after the completion of our initial public offering, or IPO, in
2014
and prior to
June 15, 2020
.
In addition, for placement agent services provided by MDB in connection with our Senior Convertible Note financing, we issued to MDB a
7
-year warrant to purchase shares of our common stock, which we refer to as the Financing Warrant. The Financing Warrant is exercisable
six months
after the completion of our IPO and prior to
June 15, 2020
. The Financing Warrant is exercisable for a number of shares of our common stock equal to
$700,000
divided by the Financing Warrant’s exercise price.
In connection with the closing of our IPO, we also issued a third warrant to MDB related to their role as the sole underwriter for our IPO, which we refer to as the Underwriting Warrant. We issued them a
5
-year warrant to purchase
310,500
shares of common stock at an exercise price of
$7.50
per share. The warrant was not exercisable until
November 24, 2014
(
180
-days from the date of the underwriting agreement) and expires
May 28, 2019
.
Investor Relations Warrants
In
August 2014
and
October 2014
, we entered into agreements with our investor relations firm, or IR Firm, and an IR consultant to provide us with investor relations services. Pursuant to the IR Firm agreement, in addition to monthly cash compensation, we issued to the IR Firm a
3
-year consulting warrant, or IR Consulting Warrant, for the purchase of
42,000
shares of common stock that became fully vested on
July 21, 2015
. The IR Consulting Warrant had an exercise price of
$8.31
and expired, unexercised, on
July 17, 2017
.
Pursuant to our agreement with the IR consultant, in addition to monthly cash compensation, we issued to the IR consultant a
4
-year consulting warrant, or IR Warrant, for the purchase of
6,000
shares of common stock that became fully vested on September of 2015. The IR Warrant has an exercise price of
$6.50
and expires on
September 30, 2018
.
There was no expense recorded for the years ended
December 31, 2016
or
2017
related to the investor relations warrants as they had been fully expensed as of
December 31, 2015
.
Private Placement Warrants - 2016
In
April 2016
, we issued warrants to purchase
1,996,880
shares of our common stock at an exercise price of
$2.86
in connection with our private placement sale of
1,996,880
shares of common stock. The warrants are exercisable for a period
commencing
6 months
and ending
36 months
after the closing of the financing on
April 25, 2016
. We also issued to the placement agents in the financing, warrants to purchase an aggregate of
99,844
shares of our common stock at an exercise price of
$2.86
for a period commencing
6 months
and ending
36 months
after the closing. We refer to these warrants as Private Placement Warrants -
2016
. We estimated the fair value of the Private Placement Warrants - 2016 at
$2,500,000
using the Black-Scholes option valuation model with the following assumptions: market prices of the stock of
$2.90
per share, time to maturity of
3 years
, volatility of
60%
,
zero
expected dividend rate and risk free rate of
0.97%
. The allocation of the fair value of these warrants was included in additional paid-in capital on the consolidated balance sheet.
In
December 2017
, we entered into Warrant Exercise Agreements with certain holders of Private Placement Warrants - 2016 to induce the exercise of
836,780
warrants in full. Pursuant to the agreements, the warrant holders exercised in full the warrants and purchased an aggregate of
836,780
shares of our common stock at an exercise price of
$2.86
per share, for an aggregate exercise price of approximately
$2.4 million
and we paid the warrant holders aggregated inducement fees of approximately
$239,000
, which resulted in net proceeds to us of
$2.2 million
. The inducement offer included in the Warrant Exercise Agreements was considered a modification to the warrants upon acceptance by the warrant holders. Upon modification of the warrants we were required to remeasure the warrants. We estimated the fair value of the Private Placement Warrants - 2016 immediately prior to modification at
$3.8 million
using the Black-Scholes option valuation model with the following assumptions: market prices of the stock of
$6.96
to
$7.42
per share, time to maturity of
1.42
years, volatility of
60%
,
zero
expected dividend rate and risk free rates of
1.70%
to
1.74%
. We estimated the fair value of the Private Placement Warrants - 2016 upon modification at
$3.9 million
using the Black-Scholes option valuation model with the following
assumptions: market prices of the stock of
$6.96
to
$7.42
per share, time to maturity of
1 day
, volatility of
10%
,
zero
expected dividend rate and risk free rates of
1.14%
to
1.21%
. The change in fair value was
$166,000
, and when combined with the cash inducement of
$239,000
, resulted in
$73,000
of expense, which was recorded as warrant inducement expense.
Underwriting Warrants - Public Offering 2016
In
September 2016
, we issued warrants to purchase
135,750
shares of our common stock at an exercise price of
$4.25
to the underwriter of our public offering of
2,715,000
shares of common stock. The warrants are exercisable for a
2
year period commencing
September 9, 2017
. We refer to these warrants as Underwriting Warrants - Public Offering 2016. We estimated the fair value of the Underwriting Warrants -Public Offering
2016
at
$475,000
using the Black-Scholes option valuation model with the following assumptions: market prices of the stock of
$6.54
per share, time to maturity of
3 years
, volatility of
60%
,
zero
expected dividend rate and risk free rate of
0.90%
. The allocation of the fair value of these warrants was included in additional paid-in capital on the consolidated balance sheet.
Private Placement Warrants - February 2017
In
February 2017
, we issued warrants to purchase
1,626,898
shares of our common stock at an exercise price of
$8.25
in connection with our private placement sale of
1,626,898
shares of common stock. The warrants were exercisable for a period commencing
6 months
and ending
30 months
after the closing of the financing. We refer to these warrants as Private Placement Warrants -
February 2017
. We estimated the fair value of the Private Placement Warrants - February 2017 at
$2,084,000
using the Black-Scholes option valuation model with the following assumptions: market prices of the stock of
$4.91
per share, time to maturity of
3 years
, volatility of
60%
,
zero
expected dividend rate and risk free rate of
1.50%
. The allocation of the fair value of these warrants was included in additional paid-in capital on the consolidated balance sheet.
On December 19, 2017, we entered into a Warrant Exercise Agreement with the holder of Private Placement Warrants - February 2017 to induce the exercise of the
1,626,898
warrants in full. Pursuant to the agreement, the warrant holder exercised in full the warrant and purchased
1,626,898
shares of our common stock at an exercise price of
$8.25
per share, for an aggregate exercise price of approximately
$13.4 million
and we paid the warrant holder an inducement fee of approximately
$6.7 million
, which resulted in net proceeds to us of
$6.7 million
. The inducement offer included in the Warrant Exercise Agreement was considered a modification to the warrant upon acceptance by the warrant holder. Upon modification of the warrant we were required to remeasure the warrant. We estimated the fair value of the Private Placement Warrants - February 2017 immediately prior to modification at
$4.1 million
using the Black-Scholes option valuation model with the following assumptions: market prices of the stock of
$8.18
per share, time to maturity of
1.67 years
, volatility of
60%
,
zero
expected dividend rate and risk free rate of
1.78%
. We estimated the fair value of the Private Placement Warrants - February 2017 upon modification at
$6.7 million
using the Black-Scholes option valuation model with the following assumptions: market prices of the stock of
$8.18
per share, time to maturity of
1 day
, volatility of
10%
,
zero
expected dividend rate and risk free rate of
1.25%
. The change in fair value was
$4.1 million
, and when combined with the cash inducement of
$6.7 million
, resulted in
$2.6 million
of expense, which was recorded as warrant inducement expense.
Private Placement Warrants - September 2017
In September and October 2017, we issued warrants to purchase an aggregate of
1,976,919
shares of our common stock at an exercise price of
$4.85
in connection with our private placement sale of
1,976,919
shares of common stock. The sale was completed in two tranches with the first tranche, which closed on
September 28, 2017
, including
1,745,581
warrants, and the second tranche, which closed on
October 2, 2017
, including
231,338
warrants. The warrants are exercisable for a period commencing
6 months
and ending
36 months
after the closing of the financing. Collectively, we refer to these warrants as Private Placement Warrants - September 2017. We estimated the total fair value of the Private Placement Warrants - September 2017 at
$3.6 million
using the Black-Scholes option valuation model with the following assumptions: market prices of the stock of
$4.49
for the first tranche and
$4.69
per share for the second tranche, time to maturity of
3 years
, volatility of
60%
,
zero
expected dividend rate and risk free rates of
1.59%
for the first tranche and
1.63%
for the second tranche. The allocation of the fair value of these warrants was included in additional paid-in capital on the consolidated balance sheet.
Placement Agent Warrants - 2017
In addition to the Private Placement Warrants - September 2017 issued in connection with our private placement sale of
1,976,919
shares of our common stock, we also issued to the placement agent, warrants to purchase a total of
98,846
shares of our common stock at an exercise price of
$4.85
per share. Upon closing of the first tranche on September 28, 2017, we issued
87,279
warrants, and upon closing the second tranche, we issued
11,567
warrants. The warrants are exercisable for a
period commencing
6 months
and ending
36 months
after the closing of the financing. Collectively, we refer to these warrants as Placement Agent Warrants - 2017. We estimated the fair value of the Placement Agent Warrants - 2017 at
$174,000
using the Black-Scholes option valuation model with the following assumptions: market prices of the stock of
$4.49
per share for the first tranche and
$4.69
per share for the second tranche, time to maturity of
3 years
, volatility of
60%
,
zero
expected dividend rate and risk free rates of
1.59%
for the first tranche and
1.63%
for the second tranche. The allocation of the fair value of these warrants was included in additional paid-in capital on the consolidated balance sheet.
A roll-forward of warrant activity from
January 1, 2016
to
December 31, 2016
is shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued and
Outstanding
Warrants as of
January 1, 2016
|
|
Warrants
Issued
|
|
Warrants
Exercised/
Expired
|
|
Issued and
Outstanding
Warrants as of
December 31, 2016
|
Bridge Warrants
|
249,999
|
|
|
—
|
|
|
—
|
|
|
249,999
|
|
Consulting Warrant
|
117,778
|
|
|
—
|
|
|
(19,778
|
)
|
(1)
|
98,000
|
|
Financing Warrants
|
78,186
|
|
|
—
|
|
|
—
|
|
|
78,186
|
|
Underwriting Warrant
|
310,500
|
|
|
—
|
|
|
—
|
|
|
310,500
|
|
IR Consulting Warrants
|
48,000
|
|
|
—
|
|
|
—
|
|
|
48,000
|
|
Private Placement Warrants - 2016
|
—
|
|
|
2,096,724
|
|
|
(101,600
|
)
|
(2)
|
1,995,124
|
|
Underwriting Warrants - Public Offering 2016
|
—
|
|
|
135,750
|
|
|
—
|
|
|
135,750
|
|
|
804,463
|
|
|
2,232,474
|
|
|
(121,378
|
)
|
|
2,915,559
|
|
|
|
(1)
|
During the year ended December 31, 2016, there were
19,778
common stock warrants that were exercised through a cashless exercise which netted
19,693
shares being issued.
|
|
|
(2)
|
During the year ended December 31, 2016, there were
3,600
common stock warrants that were exercised through a cashless exercise which netted
1,375
shares being issued. Additionally, there were
98,000
warrants exercised for cash.
|
A roll-forward of warrant activity from January 1, 2017 to
December 31, 2017
is shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued and
Outstanding
Warrants as of
January 1, 2017
|
|
Warrants
Issued
|
|
Warrants
Exercised/
Expired
|
|
Issued and
Outstanding
Warrants as of
December 31, 2017
|
Bridge Warrants
|
249,999
|
|
|
—
|
|
|
—
|
|
|
249,999
|
|
Consulting Warrant
|
98,000
|
|
|
—
|
|
|
(85,777
|
)
|
(1
|
)
|
12,223
|
|
Financing Warrants
|
78,186
|
|
|
—
|
|
|
(15,656
|
)
|
(2
|
)
|
62,530
|
|
Underwriting Warrant
|
310,500
|
|
|
—
|
|
|
—
|
|
|
310,500
|
|
IR Consulting Warrants
|
48,000
|
|
|
—
|
|
|
(42,000
|
)
|
(3
|
)
|
6,000
|
|
Private Placement Warrants - 2016
|
1,995,124
|
|
|
—
|
|
|
(1,104,061
|
)
|
(4
|
)
|
891,063
|
|
Underwriting Warrants - Public Offering 2016
|
135,750
|
|
|
—
|
|
|
(13,575
|
)
|
(5
|
)
|
122,175
|
|
Private Placement Warrants - February 2017
|
—
|
|
|
1,626,898
|
|
|
(1,626,898
|
)
|
(6
|
)
|
—
|
|
Private Placement Warrants - September 2017
|
—
|
|
|
1,976,919
|
|
|
—
|
|
|
1,976,919
|
|
Placement Agent Warrants - 2017
|
—
|
|
|
98,846
|
|
|
—
|
|
|
98,846
|
|
|
2,915,559
|
|
|
3,702,663
|
|
|
(2,887,967
|
)
|
|
3,730,255
|
|
|
|
(1)
|
During the year ended December 31, 2017, there were
85,777
common stock warrants that were exercised through cashless exercises which netted
85,620
shares being issued.
|
|
|
(2)
|
During the year ended December 31, 2017, there were
15,656
common stock warrants that were exercised through a cashless exercise which netted
6,842
shares being issued.
|
|
|
(3)
|
During the year ended December 31, 2017,
42,000
warrants expired.
|
|
|
(4)
|
During the year ended December 31, 2017, there were
122,281
common stock warrants that were exercised through cashless exercises which netted
49,063
shares being issued. Additionally, there were
981,780
warrants that were exercised for cash, which included
836,780
warrants exercised subject to inducement, which offered the warrant holder an inducement fee of
$0.29
/share to exercise the warrant in full for cash immediately.
|
|
|
(5)
|
During the year ended December 31, 2017, there were
13,575
common stock warrants that were exercised through a cashless exercise which netted
6,322
shares being issued.
|
|
|
(6)
|
During the year ended December 31, 2017, there were
1,626,898
common stock warrants that were exercised for cash. The warrants were exercised subject to inducement, which offered the warrant holder an inducement fee of
$4.13
/share to exercise the warrant in full for cash immediately.
|
NOTE 7—STOCKHOLDERS’ EQUITY
Common Stock
Pursuant to our amended and restated certificate of incorporation, we are authorized to issue
47,000,000
shares of common stock. Holders of our common stock are entitled to dividends as and when declared by the board of directors, subject to rights and holders of all classes of stock outstanding having priority rights to dividends. There have been no dividends declared to date. Each share of common stock is entitled to one vote.
On
April 25, 2016
, we completed the private placement sale of
1,996,880
units at a price of
$2.985
per unit to institutional and individual investors, which included existing investors, executives and board members. Each unit consists of
one
share of our common stock and
one
warrant to purchase
one
share of our common stock at an exercise price of
$2.86
for a period commencing
6 months
and ending
36 months
after the closing of the financing. We also issued to the placement agents in the financing, warrants to purchase an aggregate of
99,844
shares of our common stock at an exercise price of
$2.86
for a period commencing
6 months
and ending
36 months
after the closing. Gross proceeds were
$6.0 million
with net proceeds of
$5.2 million
after deducting placement agent fees and offering expenses. We registered for resale by the investors the shares of common stock, and the shares of common stock issuable upon exercise of the warrants, purchased by the investors in the financing pursuant to a registration statement that was declared effective by the SEC in
May 2016
.
On
September 14, 2016
, we completed the sale of
2,715,000
shares of common stock at a price of
$4.25
per share in an underwritten public offering. We also issued to the underwriter warrants to purchase
135,750
shares of our common stock at an exercise price of
$4.25
exercisable for a
2
year period commencing
September 9, 2017
. Gross proceeds were
$11.5 million
with net proceeds of
$10.6 million
after deducting underwriter fees and offering expenses. The shares were issued pursuant to a shelf registration statement that we filed with the SEC, which became effective in
May 2016
.
On
February 22, 2017
, we completed the private placement sale of
1,626,898
units at a price of
$4.61
per unit to one investor. Each unit consists of
one
share of our common stock and
one
warrant to purchase
one
share of our common stock at an exercise price of
$8.25
for a period commencing
6 months
and ending
30 months
after the closing of the financing. Gross proceeds were
$7.5 million
. We incurred
$29,000
of legal expenses in connection with the financing. We registered for resale by the investor the shares of common stock, and the shares of common stock issuable upon exercise of the warrants, purchased by the investor in the financing pursuant to a registration statement that was declared effective by the SEC in
April 2017
.
On
October 2, 2017
, we completed the private placement sale of
1,976,919
units. Each unit consisted of
one
share of our common stock and
one
warrant to purchase
one
share of our common stock at an exercise price of
$4.85
per share for a period commencing
6 months
and ending
36 months
from
September 28, 2017
, the date of the
first
closing of the offering. The sale closed in
two
rounds with the
first
closing on
September 28, 2017
which included the private placement sale of
1,745,581
units at a price of
$4.70
per unit to institutional and individual investors. Gross proceeds in the
first
closing were
$8.2 million
with net proceeds of
$7.5 million
after deducting placement agent fees and offering expenses. The
second
closing, completed on
October 2, 2017
, was for
231,338
units and gross proceeds of
$1.1 million
with net proceeds of
$1.0 million
after deducting placement agent fees and offering expenses. We also issued to the placement agent, warrants to purchase an aggregate of
98,846
shares of our common stock at an exercise price of
$4.85
per share for a period commencing
6 months
and ending
36 months
from
September 28, 2017
.
We have a Form S-3 universal shelf registration statement on file with the SEC. The universal shelf registration statement on Form S-3 permits us to sell, in one or more public offerings, shares of our common stock, shares of preferred stock or debt securities, or any combination of such securities and warrants to purchase securities, for proceeds in an aggregate amount of up to
$35.0 million
. As of December 31, 2017, we have raised a total of
$11.5 million
of gross proceeds from the sale of
2,715,000
shares of our common stock, leaving approximately
$23.5 million
of securities available for issuance pursuant to the Form S-3. The Form S-3 will expire in
May 2019
.
Preferred Stock
Pursuant to our amended and restated certificate of incorporation, we are authorized to issue
3,000,000
shares of preferred stock. The board of directors has the authority, without action by our stockholders, to designate and issue shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. To-date, no preferred shares have been issued.
NOTE 8— STOCK-BASED COMPENSATION
2014 Omnibus Incentive Plan
In January 2014, our board of directors approved the 2014 Omnibus Incentive Plan and amended and restated the plan in March 2014. Our stockholders approved the Amended and Restated 2014 Omnibus Incentive Plan, or the 2014 Plan, in March 2014. Our 2014 Plan initially permitted the issuance of equity based instruments covering up to a total of
1,400,000
shares of common stock. In June 2016, our board of directors and stockholders approved an increase of
1,300,000
shares and in June 2017 approved an additional increase of
3,250,000
shares of common stock bringing the total shares allowed under the plan to
5,950,000
.
Option Valuation
We have computed the fair value of options granted to employees and non-employees using the Black-Scholes option valuation model. The compensation costs of non-employee arrangements are subject to re-measurement at each reporting period over the vesting terms as earned. Option forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. This estimate will be adjusted periodically based on the extent to which actual option forfeitures differ, or are expected to differ, from the previous estimate, when it is material. The expected term used for options issued to non-employees is the contractual life and the expected term used for options issued to employees is the estimated period of time that options granted are expected to be outstanding. We have estimated the expected life of our employee stock options using the “simplified” method, whereby, the expected life equals the arithmetic average of the vesting term and the original contractual term of the option due to our lack of sufficient historical data. For consultants we use an estimated expected life of the remaining term of the stock option grant, which is initially
ten years
. Since our stock has not been publicly traded for a sufficiently long period of time, we are utilizing an expected volatility figure based on a review of the historical volatilities, over a period of time, equivalent to the expected life of the instrument being valued, of similarly positioned public companies within our industry. The risk-free interest rate was determined from the U.S. Treasury's Daily Treasury Yield Curve Rate with a term that best approximates the expected term of the instrument being valued.
Stock Options to Employees and Non-Employees
During the years ended
December 31, 2016
and
2017
, we granted incentive stock options for the purchase of
346,500
and
488,300
shares, respectively, of our common stock to our employees and consultants. The options granted in 2016 have an exercise price range of
$1.93
per share to
$5.50
per share with a term of
ten
years. The options granted in 2017 have an exercise price range of
$4.36
per share to
$7.80
per share with a term of
ten
years. The options vest over various periods, generally quarterly over
sixteen
quarters. The options granted in 2016 had an aggregate grant date fair value of
$627,000
and the options granted in 2017 had an aggregate grant date fair value of
$1.4 million
utilizing the Black-Scholes option valuation model.
We estimated the fair value of stock options awarded during the years ended December 31,
2016
and
2017
using the Black-Scholes option valuation model. The fair values of stock options granted for the years were estimated using the following assumptions:
|
|
|
|
|
|
Option Grants Awarded During the Year Ended December 31, 2016
|
|
Option Grants Awarded During the Year Ended December 31, 2017
|
Stock Price
|
$1.93 - $5.50
|
|
$4.36 - $7.80
|
Dividend Yield
|
0%
|
|
0%
|
Expected Volatility
|
60.0%
|
|
60.0%
|
Risk-free interest rate
|
1.30% - 2.06%
|
|
1.95% - 2.37%
|
Expected Term
|
7 years
|
|
7 to 10years
|
Stock-based compensation expense related to stock options for employees was
$529,000
and
$435,000
for the years ended December 31,
2016
and 2017, respectively. We estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from our estimates. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. To the extent that actual forfeitures differ from our estimates, the difference is recorded as a cumulative adjustment in the period the estimates were revised. For the period from January 1, 2016 to June 30, 2016 we applied a forfeiture rate of
zero
as there had been minimal forfeitures to date. Beginning July 1, 2016, we applied a forfeiture rate of
six
percent, which is reflected in our stock-based compensation expense related to stock options for the year ended December 31, 2016 and 2017.
In August 2016, we modified certain stock options previously granted to a former executive. The modification was made in connection with the executive’s termination. The modification included accelerated vesting of stock options to purchase
26,876
shares of common stock as well as an extension of the exercise period for all vested shares, including stock options to purchase
43,438
shares of common stock. As a result of the modification, additional stock compensation expense of
$48,000
was recognized for the year December 31, 2016.
In January 2017, we modified certain stock options previously granted to a former executive. The modification was made in connection with the executive’s termination. The modification included accelerated vesting of stock options to purchase
8,752
shares of common stock as well as an extension of the exercise period for all vested shares, including stock options to purchase
17,504
shares of common stock. As a result of the modification, additional stock compensation expense of
$19,000
was recognized for the year ended December 31, 2017.
For stock options paid in consideration of services rendered by non-employees, we recognize compensation expense in accordance with the requirements of ASC 505-50. Non-employee stock option grants that do not vest immediately upon grant are recorded as an expense over the vesting period. At the end of each financial reporting period prior to performance, the value of these stock options, as calculated using the Black-Scholes option valuation model, is determined, and compensation expense recognized or recovered during the period is adjusted accordingly. Since the fair market value of stock options granted to non-employees is subject to change in the future, the amount of the future compensation expense is subject to adjustment until the common stock options are fully vested. Stock-based compensation expense related to stock options for consultants was
$27,000
and
$9,000
for the years ended December 31,
2016
and
2017
, respectively.
Stock Option Award Activity
The following is a summary of our stock option activity during the year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Weighted
Average
Remaining
Life In
Years
|
Outstanding, January 1, 2016
|
565,050
|
|
|
$
|
6.57
|
|
|
$
|
4.25
|
|
|
7.84
|
|
Granted
|
346,500
|
|
|
3.03
|
|
|
1.81
|
|
|
8.51
|
|
Exercised
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Canceled/Forfeited
|
(109,860
|
)
|
|
5.08
|
|
|
3.32
|
|
|
—
|
|
Outstanding, December 31, 2016
|
801,690
|
|
|
$
|
5.25
|
|
|
$
|
3.32
|
|
|
7.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Weighted
Average
Remaining
Life In
Years
|
Exercisable, January 1, 2016
|
302,415
|
|
|
$
|
6.25
|
|
|
$
|
4.11
|
|
|
7.07
|
|
Vested
|
173,010
|
|
|
5.37
|
|
|
3.43
|
|
|
5.95
|
|
Exercised
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Canceled/Forfeited
|
(56,251
|
)
|
|
5.87
|
|
|
3.87
|
|
|
—
|
|
Exercisable, December 31, 2016
|
419,174
|
|
|
$
|
5.94
|
|
|
$
|
3.86
|
|
|
6.00
|
|
The following is a summary of our stock option activity during the year ended
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Weighted
Average
Remaining
Life In
Years
|
Outstanding, January 1, 2017
|
801,690
|
|
|
$
|
5.25
|
|
|
$
|
3.32
|
|
|
7.40
|
|
Granted
|
488,300
|
|
|
4.62
|
|
|
2.79
|
|
|
9.51
|
|
Exercised
|
(32,928
|
)
|
|
2.37
|
|
|
1.41
|
|
|
—
|
|
Canceled/Forfeited
|
(174,572
|
)
|
|
6.4
|
|
|
4.18
|
|
|
—
|
|
Outstanding, December 31, 2017
|
1,082,490
|
|
|
$
|
4.87
|
|
|
$
|
3.00
|
|
|
8.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Weighted
Average
Remaining
Life In
Years
|
Exercisable, January 1, 2017
|
419,174
|
|
|
5.94
|
|
|
3.86
|
|
|
6.00
|
|
Vested
|
457,338
|
|
|
4.57
|
|
|
2.77
|
|
|
8.65
|
|
Exercised
|
(32,928
|
)
|
|
2.37
|
|
|
1.41
|
|
|
—
|
|
Canceled/Forfeited
|
(139,281
|
)
|
|
6.65
|
|
|
4.38
|
|
|
—
|
|
Exercisable, December 31, 2017
|
704,303
|
|
|
5.08
|
|
|
3.17
|
|
|
8.15
|
|
The following table presents information related to stock options outstanding and exercisable at
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Exercise
Price
|
|
Outstanding
Number of
Options
|
|
Weighted
Average
Remaining
Life In
Years
|
|
Exercisable
Number
of Options
|
$1.93 - $2.00
|
|
149,000
|
|
|
8.10
|
|
65,198
|
|
$3.83 - $4.70
|
|
523,190
|
|
|
9.38
|
|
343,198
|
|
$5.06 - $6.00
|
|
250,000
|
|
|
6.67
|
|
197,199
|
|
$6.18 – $7.20
|
|
70,000
|
|
|
6.67
|
|
40,945
|
|
$7.54 – $7.80
|
|
67,800
|
|
|
6.96
|
|
41,817
|
|
$8.06 - $12.98
|
|
22,500
|
|
|
7.04
|
|
15,946
|
|
|
|
1,082,490
|
|
|
8.15
|
|
704,303
|
|
As of
December 31, 2017
, there was
$925,000
of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted average vesting period of approximately
2.8
years. The aggregate
intrinsic value of outstanding options and options vested as of December 31, 2016 were
$647,000
and
$146,000
, respectively, representing options whose exercise price was less than the closing fair market value of our common stock of
$5.05
per share. The aggregate intrinsic value of outstanding options and options vested as of December 31, 2017 were
$2.9 million
and
$1.7 million
, respectively, representing options whose exercise price was less than the closing fair market value of our common stock of
$7.47
per share. There were no excess tax benefits realized for tax deductions from stock options exercised during the year ended December 31,
2016
as no options were exercised. There were no excess tax benefits realized for tax deductions from stock options exercised during the year ended December 31, 2017 as we have recorded a full valuation allowance against our deferred income taxes.
Restricted Stock Units Activity
We account for restricted stock units issued to employees at fair value, based on the market price of our stock on the date of grant, net of estimated forfeitures. The fair value of non-employee restricted stock units awarded are re-measured as the awards vest, and the resulting increase in fair value, if any, is recognized as expense in the period the related services are rendered. During the years ended December 31, 2016 and
2017
we recorded
$1.7 million
and
$2.6 million
, respectively, of stock-based compensation related to the restricted stock unit shares that have been issued to-date.
A summary of restricted stock unit activity for the year ended
December 31, 2016
is as follows:
|
|
|
|
|
|
|
|
|
Number of
Restricted Share
Units
|
|
Weighted-Average
Grant-Date Fair
Value Per Share
|
Outstanding at January 1, 2016
|
375,629
|
|
|
$
|
6.16
|
|
Granted
|
1,383,159
|
|
|
3.22
|
|
Vested
|
(262,201
|
)
|
|
4.54
|
|
Forfeited
|
(41,029
|
)
|
|
5.64
|
|
Outstanding at December 31, 2016
|
1,455,558
|
|
|
$
|
3.64
|
|
A summary of restricted stock unit activity for the year ended
December 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
Number of
Restricted Share
Units
|
|
Weighted-Average
Grant-Date Fair
Value Per Share
|
Outstanding at January 1, 2017
|
1,455,558
|
|
|
$
|
3.64
|
|
Granted
|
722,400
|
|
|
5.37
|
|
Vested
|
(649,359
|
)
|
|
4.26
|
|
Forfeited
|
(51,741
|
)
|
|
5.40
|
|
Outstanding at December 31, 2017
|
1,476,858
|
|
|
$
|
4.96
|
|
As of
December 31, 2017
, there was
$5.0 million
of unrecognized compensation expense related to unvested restricted stock unit agreements which is expected to be recognized over a weighted-average period of approximately
2.4 years
. For restricted stock unit awards subject to graded vesting, we recognize compensation cost on a straight-line basis over the service period for the entire award.
Market-based Awards
In August 2016, we granted
250,000
market-based restricted stock units to an executive. The restricted stock units are subject to market-based vesting requirements, measured quarterly, based on the average of (a) the average high daily trading price of our common stock for each trading day during the last month of the applicable calendar quarter and (b) the average low daily trading price of our common stock for each trading day during the last month of the applicable calendar quarter, each as reported by The Nasdaq Stock Market, LLC. The restricted stock units are eligible to be earned on a quarterly basis based on a linear interpolation of the applicable share price, or in the case of a liquidation event, on the day of (or in connection with) such liquidation event based on the applicable transaction price. Once earned, the restricted stock units vest
50%
on the date such restricted stock units become earned and
50%
on
September 30, 2019
. We recognize compensation expense for restricted stock units with market-based conditions using a graded vesting model, based on the probability of the performance condition being met, net of estimated pre-vesting forfeitures. The share price on the date of issuance was $5.06 per share. To determine the fair
value of the award we used a Monte Carlo simulation which simulates future stock prices for the Company and, hence, shares vested, pursuant to the award. A key input into the model is the expected volatility for our stock. This estimate considered the historical volatility of our stock as well as the stock price volatility of guideline public companies. The fair value was determined to be
$74,000
. For the years ended December 31, 2016 and 2017, we recognized
$8,000
and
$24,000
, respectively, of stock compensation expense in connection with this award, which is included in general and administrative expenses. The unamortized expense related to this award is
$41,000
and is expected to be recognized over
1.8
years.
Incentive Bonus Awards
We provide eligible employees, including executives, the opportunity to earn bonus awards upon achievement of predetermined performance goals and objectives. The purpose is to reward attainment of company goals and/or individual performance objectives, with award opportunities expressed as a percentage of base salary. Bonuses can be measured and paid quarterly and/or annually, and are paid in cash, equity or a combination of cash and equity, in the discretion of our compensation committee.
2015 Incentive Bonus Program
During 2015, our employees and executives participated in the 2015 Incentive Bonus Program. The awards under this program contained a combination of service conditions and performance conditions based on the achievement of specified performance thresholds approved by the board. The performance bonus amounts were based on each individual’s salary paid during the year multiplied by a defined bonus multiplier percentage, plus an additional
10%
bonus for non-executive employees. In
February 2016
, upon board approval, we granted
90,265
restricted stock unit awards, of which
45,140
shares vested on the issuance date and the remaining shares vested on
January 1, 2017
. For the year ended December 31, 2015, we recognized stock compensation expense of
$121,000
in connection with the program, which was included in accrued salaries and payroll related expenses as of year-end. The accrual was released upon issuance of the equity awards in 2016. For the year ended December 31, 2016 we recognized additional stock compensation expense of
$44,000
, which is included in the restricted stock unit expense discussed under "Restricted Stock Units Activity" above. There was
no
expense recorded during the year ended December 31, 2017 in connection with this program.
2016 Incentive Bonus Program
During 2016, our employees and executives participated in the 2016 Incentive Bonus Program. The program provided for the award of annual bonuses if certain performance goals, based on revenue and certain other non-monetary targets, were attained in our 2016 fiscal year. The bonus was payable in cash, restricted stock units or a combination of cash and restricted stock units, as determined by our compensation committee, with the number of restricted stock units to be determined by dividing the dollar value to be paid in restricted stock units by the average closing price of our common stock for the
ten
trading days ending on the last trading day of 2016. The restricted stock units would have vested in full on the tenth business day following grant. Although the specific performance objectives were not achieved, it was determined that a discretionary bonus would be awarded under the program based on the significant achievements made toward the objectives during the year. The payment method and terms remained the same as the original bonus program. The discretionary awards were granted in February of
2017
, and consisted of cash awards totaling
$688,000
and equity awards in the form of restricted stock units and stock options to vest in full
10
days following grant. The equity awards consisted of
27,390
restricted stock units with a grant date fair value of
$119,000
based on the grant date share price of
$4.36
and
125,880
stock options with a grant date fair value of
$332,000
using the Black-Scholes option valuation model using the following assumptions: stock price of
$4.36
; dividend yield of
0%
; expected volatility of
60%
; risk-free rate of
2.15%
and expected life of
7 years
. For the year ended December 31, 2016, we recorded stock compensation expense of
$451,000
in connection with these equity awards and salary expenses of
$688,000
related to the cash portion of awards under this program. The total expense for these awards,
$1.1 million
, was recorded in the fourth quarter of 2016 and was included in accrued salaries and payroll-related expenses as of December 31, 2016. For the year ended December 31, 2016,
$679,000
and
$460,000
are included in research and development expenses and general and administrative expenses, respectively. There was no expense recorded for the year ended December 31, 2017 in connection with this program.
2017 Incentive Bonus Program
During 2017, our employees and executives are participating in the 2017 Incentive Bonus Program. The program provides for the award of quarterly and annual bonuses to our employees and executive officers if certain performance goals, based on company-wide billings, expenses and certain other individual non-monetary targets, are attained in quarterly and annual performance periods during our 2017 fiscal year. The awards contain a combination of service conditions and performance conditions based on the achievement of specified performance thresholds. The awards are based on each individual’s annual salary multiplied by a bonus multiplier percentage which has been determined by our compensation committee. The plan also allows for additional discretionary awards to non-executive employees up to
10%
of the total base salaries of non-executive employees. Additionally, the annual bonus, as it relates to executive employees, is subject to the achievement of certain stock price thresholds for the
10
trading days ending on the last trading day of 2017. The bonuses may be paid in the form of cash, stock options, restricted stock, or a combination thereof. The number of shares underlying equity awards granted to each employee will be determined based on the performance bonus amount to be paid in equity, based in part by utilizing the stock price on the grant date. We recognize compensation expense for the total amount of the bonuses earned during the period earned. For the year ended December 31, 2017, we recorded a total of
$1.5 million
of expense related to the 2017 incentive bonus plan as the performance conditions were achieved. Included in the expense for 2017 is
$670,000
related to quarterly awards which were paid in the form of stock options and restricted stock units and has been recorded as stock compensation expense. Of the total expense recorded for the year ended December 31, 2017,
$916,000
is included in research and development expenses and
$625,000
is included in general and administrative expenses. As of December 31, 2017 there was
$695,000
included in accrued salaries and payroll related expenses for this program.
2017 Non-executive Bonus Program
Effective
July 1, 2017
, our non-executive employees participated in the 2017 Non-executive Bonus Program. The program provided for the award of up to
300,000
restricted stock units to be awarded to non-executive employees and consultants based upon the achievement of certain performance conditions before the end of the year. Vesting of the restricted stock units are subject to continued service over the vesting period. Based on the achievement of performance conditions,
180,528
restricted stock units were granted on
January 25, 2018
. The awards will vest in four tranches with
25%
of the shares vesting on each April 1, 2018, 2019, 2020 and 2021. We recorded
$414,000
of stock compensation expense related to the 2017 Non-executive Bonus Program for the year ended December 31, 2017 of which
$338,000
and
$76,000
is included in research and development expenses and general and administrative expenses, respectively.
Common Stock Issued to Non-Employees
In February 2016, we issued
3,000
shares of our common stock to a consultant in exchange for employment recruiting services. In April 2016, we issued
5,549
shares of common stock to a previous employee in connection with a separation agreement. We recorded
$6,000
in stock compensation expense related to the stock issuances for the year ended December 31, 2016. The amount of compensation expense related to the consultant shares issued represents the fair value of the stock on the dates of issuance. There was no expense recorded during the year ended December 31, 2016 related to the shares issued to our previous employee as the value of those shares had been accrued at the time of separation in 2015.
Total equity-based compensation costs recorded in the consolidated statements of comprehensive loss is allocated as follows:
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2016
|
Year Ended
December 31, 2017
|
Research and development
|
|
|
|
Employees
|
$
|
944,000
|
|
$
|
1,937,000
|
|
Non-employees
|
36,000
|
|
181,000
|
|
Total research and development
|
980,000
|
|
2,118,000
|
|
|
|
|
General and administrative
|
|
|
Employees and directors
|
1,372,000
|
|
1,824,000
|
|
Non-employees
|
307,000
|
|
179,000
|
|
Total general and administrative
|
1,679,000
|
|
2,003,000
|
|
|
|
|
Total equity-based compensation
|
2,659,000
|
|
4,121,000
|
|
NOTE 9—COMMITMENT AND CONTINGENCIES
In October 2013, we signed a lease for office space for our corporate headquarters and moved into the new location in the first quarter of 2014. The lease had a term of
38 months
and a rental cost of approximately
$5,412
per month, increasing
3%
annually after the first
fourteen months
. In addition, our share of building operating costs were estimated to be
$2,101
per month. In April 2014, we amended the lease to add additional space which increased our rent to
$8,286
per month beginning August 1, 2014 plus estimated monthly operating costs of
$3,154
and extended the lease term through July, 2017. We had a renewal option for an additional
3
year term. The original lease included a tenant improvement allowance of
$72,160
and the amended lease included an additional tenant improvement allowance of
$38,320
. The allowances were used to construct our office build-out and have been capitalized as leasehold improvements as of
December 31, 2016
and
2017
. The capitalized costs are being amortized over the amended lease term through July 2017. Effective April 2017, we amended the lease to add additional space and to extend our lease term through July 2018, with an option to extend through July, 2019. With the amendment, the total leased space is now
9,024
feet with monthly rent of
$14,479
through July 31, 2017 and
$13,987
from August 1, 2017 through the end of the lease, plus estimated monthly operating costs of approximately
$7,000
.
In November 2013, we signed a lease for our satellite development office in Burlingame, CA. The lease had a
two
-year term, and rental costs of approximately
$4,000
per month. In May 2015, we renewed the lease for a
one
year period expiring
November 30, 2016
with rental costs of
$5,000
per month. Effective December 16, 2016, we signed a new lease of
5,248
square feet of office space within the same building in Burlingame, California commencing February 2017. The lease has a
five
-year term, and rental costs of approximately
$17,000
per month.
Rent expense related to our facilities was
$220,000
and
$477,000
, respectively, for the years ended
December 31, 2016
and
2017
.
Future minimum rent payments are as follows:
|
|
|
|
|
Years ending December 31,
|
|
2018
|
$
|
430,000
|
|
2019
|
$
|
212,000
|
|
2020
|
$
|
218,000
|
|
2021
|
$
|
224,000
|
|
2022
|
$
|
19,000
|
|
Total minimum rent payments
|
$
|
1,103,000
|
|
Legal Proceedings
—
W
e are occasionally involved in legal proceedings and other matters arising from the normal course of business.
Beginning on March 17, 2015,
three
putative class action lawsuits were filed in the United States District Court for the Central District of California, naming us, Terry Lingren and John Philpott as defendants. The three lawsuits were consolidated into a single putative class action, In re Resonant Inc. Securities Litigation, Case No. 15-cv-01970 SJO (MRWx). On February 23, 2016, the plaintiffs filed a consolidated second amended complaint, purporting to assert claims under the federal securities laws against us, Terry Lingren, John Philpott, and the underwriter of our May 29, 2014 IPO. In the consolidated second amended complaint, the plaintiffs purported to be acting on behalf of a class consisting of purchasers or acquirers of our common stock between November 6, 2014 and April 2, 2015, as well as a class of persons or entities who purchased or acquired our shares in (or traceable to) our IPO. The plaintiffs alleged that, as a result of the defendants’ allegedly false and/or misleading statements and/or omissions concerning our business, operations, prospects and performance, our common stock traded at artificially inflated prices between November 6, 2014 and April 2, 2015. On July 11, 2016, the court entered an order granting in part and denying in part our motion to dismiss the consolidated second amended complaint. The court granted the motion to dismiss with respect to plaintiffs’ claims under Section 11 of the Securities Act of 1933 and Section 20(a) of the Securities Exchange Act of 1934. The court also granted the motion to dismiss plaintiffs’ claims under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder to the extent those claims were premised on alleged misstatements made on February 26, 2015. The court denied the motion to dismiss with respect to plaintiffs’ claims under Section 15 of the Securities Act of 1933, and with respect to plaintiffs’ claims under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder to the extent those claims were premised on alleged misstatements made in November and December of 2014 and January of 2015. On October 26, 2016, the court issued an order clarifying its July 11, 2016 order on the motion to dismiss, making clear that the court's actual intent was to grant the motion to dismiss with respect to the claims under Section
15 of the Securities Act of 1933, while denying the motion to dismiss with respect to the claims under Section 20(a) of the Securities Exchange Act of 1934.
On November 22, 2017, the court granted final approval of a settlement which fully resolved plaintiffs’ claims and provided for a release of all claims asserted in the class action litigation, bringing the litigation to a close. The settlement amount was paid by our insurance carrier.
On September 24, 2015, a purported shareholder derivative action was filed in the United States District Court for the Central District of California, and is pending before the same federal district court judge to whom the putative class action was assigned. In the derivative action, the plaintiff alleges that certain of our officers and directors breached their fiduciary duties to us, including by allegedly violating the federal securities laws and exposing us to possible financial liability.
The parties to the shareholder derivative action have reached a settlement that, if approved by the court, will fully resolve plaintiff’s claims and provide for the release of all claims asserted in the litigation. On February 1, 2018, the court entered an order granting preliminary approval of the settlement. The court has scheduled a final approval hearing to take place on April 2, 2018. We can make no assurances that the court will grant final approval of the settlement.
We intend to continue to defend ourselves vigorously in these actions.
We are not party to any other legal proceedings. We may, from time to time, be party to litigation and subject to claims incident to the ordinary course of business. As our growth continues, we may become party to an increasing number of litigation matters and claims. The outcome of litigation and claims cannot be predicted with certainty, and the resolution of any future matters could materially affect our future financial position, results of operations or cash flows.
We have directors’ and officers’ liability insurance, which will be utilized in the defense of these matters. The liability insurance may not cover all of the future liabilities we may incur in connection with the foregoing matters. As of
December 31, 2017
, we have incurred legal expenses of approximately
$750,000
.
Legal fees and other costs associated with such actions are expensed as incurred. We assess, in conjunction with our legal counsel, the need to record a liability for litigation and contingencies. Litigation accruals are recorded when and if it is determined that a loss related matter is both probable and reasonably estimable. Material loss contingencies that are reasonably possible of occurrence, if any, are subject to disclosure. Based on the very early stage of litigation for the cases referred to above, it is not possible to estimate the amount or range of possible loss that might result from an adverse judgment or a settlement of these matters. We will evaluate developments in legal proceedings and other matters on a quarterly basis. As of
December 31, 2016
and
2017
, there was
no
litigation or contingency with at least a reasonable possibility of a material loss.
No
losses have been recorded during the years ended
December 31, 2016
and
2017
, respectively, with respect to litigation or loss contingencies.
NOTE 10—INCOME TAXES
The benefit from income taxes by jurisdiction consist of the following for the years ended
December 31, 2016
and
2017
:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
Year Ended December 31, 2017
|
U.S. federal
|
|
|
|
Current
|
$
|
—
|
|
|
$
|
—
|
|
Deferred
|
—
|
|
|
—
|
|
Total U.S. federal
|
—
|
|
|
—
|
|
U.S. state and local
|
|
|
|
|
Current
|
1,000
|
|
|
1,000
|
|
Deferred
|
—
|
|
|
—
|
|
Total U.S. state and local
|
1,000
|
|
|
1,000
|
|
Foreign
|
|
|
|
|
Current
|
—
|
|
|
—
|
|
Deferred
|
(23,000
|
)
|
|
(15,000
|
)
|
Total foreign
|
(23,000
|
)
|
|
(15,000
|
)
|
Benefit from income taxes
|
$
|
(22,000
|
)
|
|
$
|
(14,000
|
)
|
Income taxes differ from the amounts computed by applying the U.S. federal income tax rate to pretax income (loss) before income taxes as a result of the following for the years ended
December 31, 2016
and
2017
:
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016
|
|
Year ended December 31, 2017
|
Expected income tax benefit
|
$
|
(5,191,000
|
)
|
|
$
|
(7,357,000
|
)
|
State income tax (benefit), net of federal benefit
|
(1,022,000
|
)
|
|
(1,176,000
|
)
|
Valuation allowance
|
6,219,000
|
|
|
7,398,000
|
|
Permanent differences:
|
|
|
|
|
|
Stock options
|
173,000
|
|
|
95,000
|
|
Warrants
|
—
|
|
|
914,000
|
|
Transaction costs
|
31,000
|
|
|
—
|
|
Research & development credit
|
(267,000
|
)
|
|
(263,000
|
)
|
Adjustment to deferred taxes
|
(12,000
|
)
|
|
267,000
|
|
Foreign rate differential
|
28,000
|
|
|
19,000
|
|
Other
|
19,000
|
|
|
89,000
|
|
Provision for (benefit from) for income taxes
|
$
|
(22,000
|
)
|
|
$
|
(14,000
|
)
|
For year ended
December 31, 2016
and 2017, we recorded a net income tax benefit of
$22,000
and
$14,000
, respectively, which included
$1,000
and
$1,000
of income tax expense offset by
$23,000
and
$15,000
, respectively, for the change in deferred foreign taxes. Deferred income tax reflects the tax effects of temporary differences that gave rise to significant portions of our deferred tax assets and liabilities.
Deferred income taxes consisted of the following as of
December 31, 2016
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016
|
|
Year ended December 31, 2017
|
U.S. federal and state deferred tax assets—long term:
|
|
|
|
|
Accrued payroll
|
|
$
|
525,000
|
|
|
$
|
376,000
|
|
Accrued expenses
|
|
—
|
|
|
21,000
|
|
Fixed assets
|
|
80,000
|
|
|
111,000
|
|
Intangibles
|
|
702,000
|
|
|
457,000
|
|
Research & development credit
|
|
1,257,000
|
|
|
1,464,000
|
|
Net operating loss
|
|
11,515,000
|
|
|
13,204,000
|
|
Stock compensation
|
|
772,000
|
|
|
539,000
|
|
New jobs credit
|
|
7,000
|
|
|
8,000
|
|
Total long-term assets
|
|
14,858,000
|
|
|
16,180,000
|
|
Total deferred tax assets
|
|
14,858,000
|
|
|
16,180,000
|
|
U.S. federal and state deferred tax liabilities—long term:
|
|
|
|
|
Fixed assets
|
|
—
|
|
|
—
|
|
Total deferred tax liabilities
|
|
—
|
|
|
—
|
|
Net deferred tax assets - long term
|
|
14,858,000
|
|
|
16,180,000
|
|
Less: Valuation allowance
|
|
(14,858,000
|
)
|
|
(16,180,000
|
)
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
Foreign deferred tax assets—long term:
|
|
|
|
|
Net operating loss
|
|
$
|
16,000
|
|
|
$
|
12,000
|
|
Total foreign deferred tax assets
|
|
16,000
|
|
|
12,000
|
|
Foreign deferred tax liabilities—long term:
|
|
|
|
|
|
Intangibles
|
|
(32,000
|
)
|
|
(13,000
|
)
|
Total foreign deferred tax liabilities
|
|
(32,000
|
)
|
|
(13,000
|
)
|
Net foreign deferred tax liabilities
|
|
$
|
(16,000
|
)
|
|
$
|
(1,000
|
)
|
In December 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted. The 2017 Tax Act represents major tax reform legislation that, among other provisions, reduced the U.S. corporate tax rate. The reduction in the tax rate reduced our federal and state net deferred tax assets by
$6.1 million
, primarily related to our net operating loss carryforwards. Due to the full valuation allowance recorded against our federal and state net deferred tax assets, there was no impact to our income tax expense for the year ended
December 31, 2017
.
We recorded a full valuation allowance against our U.S. federal and state net deferred tax assets at
December 31, 2016
and
December 31, 2017
. In determining the need for a valuation allowance, we reviewed all available evidence pursuant to the requirements of FASB ASC 740. Based upon our assessment of all available evidence, we have concluded that it is more likely than not that the net deferred tax assets will not be realized. For the year ended
December 31, 2016
, the valuation allowance increased by
$6.2 million
. For the year ended
December 31, 2017
, the valuation allowance increased by
$1.3 million
.
As of
December 31, 2017
, we had federal net operating loss carryforwards of approximately
$47.0 million
, state net operating loss carryforwards of approximately
$46.9 million
and foreign net operating loss carryforwards of
$75,000
in Switzerland. The federal net operating loss carryforwards will begin to expire in 2033, and the state net operating loss carryforwards will begin to expire in 2033. Our ability to utilize net operating loss carryforwards may be limited in the event that a change in ownership, as defined in Section 382 of the Internal Revenue Code, occurs in the future. In the event a change of ownership occurs, it will limit the annual usage of the carryforwards in future years. Management believes that certain changes in control have occurred which resulted in limitations on our net operating loss carryforwards; however, management has determined that these limitations will not impact the ultimate utilization of the net operating loss carryforwards.
We recognize interest and penalties related to income tax matters in income taxes, and there were
none
during the years ended
December 31, 2016
and
2017
.
The adoption of ASC 740 guidance required us to identify, evaluate and measure all uncertain tax positions taken or to be taken on tax returns and to record liabilities for the amount of these positions that may not be sustained, or may only partially be sustained, upon examination by the relevant taxing authorities. Although we believe that our estimates and judgments were reasonable, actual results may differ from these estimates. Some or all of these judgments are subject to review by the taxing authorities. We have
no
significant uncertain tax positions for the years ended
December 31, 2016
and
2017
.
Our annual income taxes and the determination of the resulting deferred tax assets and liabilities involve a significant amount of judgment. Our judgments, assumptions and estimates relative to current income taxes take into account current tax laws, their interpretation of current tax laws and possible outcomes of future audits conducted by domestic tax authorities. We operate within federal and state taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues which may require an extended period of time to resolve. We are currently not being examined by any tax authorities. We are subject to taxation in the United States, California, Massachusetts and Switzerland. As of
December 31, 2017
, our tax years remain open to examination by the taxing authorities for all years since our incorporation in 2013.
NOTE 11—RELATED PARTY TRANSACTIONS
In August 2016, we entered into a consulting agreement with a member of our board of directors. Under the agreement, the board member would provide engineering design and fabrication advisory services for an hourly rate, with total payments not to exceed
$120,000
during any twelve-month period. During the years ended December 31, 2016 and 2017, we incurred expenses of
$42,000
and
$26,000
, respectively, in connection with the consulting agreement. As of December 31, 2016, we owed
$16,000
to the board member in connection with this agreement and it was paid in 2017. The agreement was terminated effective April 1, 2017.
NOTE 12—EMPLOYEE BENEFIT PLAN
We have a 401(k) Savings Retirement Plan that covers substantially all domestic employees who meet the plan’s eligibility requirements and provides for an employee elective contribution and employer matching contributions.
We recorded matching contributions to the retirement plan of
$204,000
and
$284,000
for the years ended
December 31, 2016
and
2017
, respectively.
NOTE 13—SUBSEQUENT EVENTS
We evaluated subsequent events through
February 27, 2018
, the date of issuance of the consolidated financial statements for the year ended
December 31, 2017
.