The accompanying notes are an integral part
of these condensed consolidated financial statements.
The accompanying notes are an integral part
of these condensed consolidated financial statements.
The accompanying notes are an integral part
of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
|
1.
|
Description of Business
and Basis of Presentation
|
Alliqua BioMedical, Inc. (the “Company”)
manufactures high water content, electron beam cross-linked, aqueous polymer hydrogels, or gels, used for wound care, medical diagnostics,
transdermal drug delivery and cosmetics. The Company believes that it is one of the leading manufacturers of high performance gels
in the United States. The Company specializes in custom gels by capitalizing on proprietary manufacturing technologies. The Company
has, historically, served as a contract manufacturer, supplying its gels to third parties who incorporate them into their own products.
Recent Developments
On May 7, 2018, the Company completed its
previously announced Asset Sale Transaction (the “AST”) with Celularity, Inc. (“Celularity”), pursuant
to which the Company sold substantially all of its assets to Celularity, including certain assets comprising its MIST, Biovance
and Interfyl Product Lines (the “Purchased Assets”). As consideration for the Purchased Assets, Celularity paid $29.0
million to the Company in cash. No debt or significant liabilities were assumed by Celularity in the AST. Under the terms
of the Asset Purchase Agreement (the “APA”), the Company retained certain specified assets, including, among other
things, cash, accounts receivable, and its hydrogel contract manufacturing business, including its SilverSeal and Hydress product
lines. Approximately $14.8 million of the consideration received from Celularity was used to pay down in full all outstanding debt
and related costs owed to Perceptive Credit Holdings LP (“Perceptive”).
The transactions contemplated by the APA
were approved by the affirmative vote of a majority of the voting power of issued and outstanding shares of the Company’s common
stock on April 27, 2018.
The Company’s operations sold under
the APA have been reclassified to discontinued operations in the second quarter of 2018, when the shareholders of the Company approved
the sale. The AST was completed on May 7, 2018.
Basis of Presentation
The condensed consolidated financial statements
contained in this report are unaudited. In the opinion of management, the condensed consolidated financial statements include all
adjustments, which are of a normal recurring nature, necessary to present fairly the Company’s financial position as of June
30, 2018 and results of operations and cash flows for the three and six months ended June 30, 2018 and 2017. While management believes
that the disclosures presented are adequate to make the information not misleading, these unaudited condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the Company’s
latest year-end financial statements, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31,
2017 (the “2017 Annual Report”). The results of the Company’s operations for any interim period are
not necessarily indicative of the results of operations for any other interim period or for the full year.
Principles of Consolidation
The accompanying condensed consolidated
financial statements include the financial statements of the Company and its wholly-owned subsidiary, AquaMed Technologies, Inc.
All significant inter-company transactions and accounts have been eliminated in consolidation.
Reclassifications
Certain amounts in prior periods have been reclassified to conform
to the current year presentation. Such reclassifications did not have a material effect on the Company’s financial condition
or results of operations as previously reported.
Discontinued Operations
In addition to the aforementioned AST with
Celularity, effective August 31, 2017 the Company entered into an Asset Purchase Agreement (“the Argentum Purchase Agreement”)
with Argentum Medical, LLC. (“Argentum”) whereby the Company agreed to sell to Argentum all of the Company’s
rights, including (i) all distribution rights, exclusivity rights, intellectual property rights and marketing rights to the TheraBond
product line and (ii) the unsold inventory of TheraBond products and work in process previously purchased by the Company in existence
as of the closing, which occurred upon execution and delivery of the Argentum Purchase Agreement. In consideration for the sale
of the TheraBond product line and the unsold TheraBond inventory to Argentum by the Company, Argentum agreed to pay (i) $3.6 million
for the TheraBond product line and certain other agreements between the parties and (ii) up to $0.1 million for the unsold TheraBond
inventory upon the Company’s completion of its obligations to deliver all remaining and qualifying unsold TheraBond inventory,
as specified in the Argentum Purchase Agreement. Of the $3.6 million of consideration, $0.3 million was initially deposited in
an indemnity escrow account under standard terms and conditions. This amount is classified under current assets of discontinued
operations on the Company’s balance sheet as of December 31, 2017. As of June 30, 2018, $0.1 million was paid from the escrow,
and $0.2 million remains in the indemnity escrow account under standard terms and conditions; classified under current assets of
discontinued operations on the Company’s balance sheet.
Summarized operating results of discontinued
operations for the three and six months ended June 30, 2018 and 2017 are presented in the following table (in thousands):
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue, net of returns, allowances and discounts
|
|
$
|
1,844
|
|
|
$
|
4,905
|
|
|
$
|
6,681
|
|
|
$
|
9,261
|
|
Cost of revenues
|
|
|
504
|
|
|
|
1,337
|
|
|
|
1,791
|
|
|
|
2,575
|
|
Gross profit
|
|
|
1,340
|
|
|
|
3,568
|
|
|
|
4,890
|
|
|
|
6,686
|
|
Selling, general and administrative
|
|
|
5,140
|
|
|
|
6,088
|
|
|
|
11,485
|
|
|
|
13,031
|
|
Interest expense
|
|
|
64
|
|
|
|
596
|
|
|
|
612
|
|
|
|
1,169
|
|
Warrant modification expense
|
|
|
-
|
|
|
|
33
|
|
|
|
-
|
|
|
|
803
|
|
Loss from discontinued operations, net of tax
|
|
|
(3,864
|
)
|
|
|
(3,149
|
)
|
|
|
(7,207
|
)
|
|
|
(8,317
|
)
|
Note: The discontinued operations
were sold on May 7, 2018.
Non-cash amortization expense of $0.4 million
and $1.2 million is included in selling, general and administrative expense for the three months ended June 30, 2018 and 2017,
respectively. Non-cash amortization expense of $1.4 million and $2.3 million is included in selling, general and administrative
expense for the six months ended June 30, 2018 and 2017, respectively.
During the three and six months ended June
30, 2018, the Company recorded a net gain of approximately $5.5 million (net of state income tax of $0.5 million) on the sale of
the assets related to the purchase agreement with Celularity, as shown in the following table (in thousands):
Proceeds from sale
|
|
|
|
|
|
|
|
|
Total Consideration
|
|
|
|
|
|
|
29,000
|
|
Less: Net book value of assets sold to Celularity
|
|
|
|
|
|
|
|
|
Inventory, net
|
|
|
(1,578
|
)
|
|
|
|
|
Intangibles, net
|
|
|
(20,557
|
)
|
|
|
|
|
Goodwill
|
|
|
(1,659
|
)
|
|
|
|
|
Fixed Assets, net
|
|
|
(904
|
)
|
|
|
|
|
Other current assets
|
|
|
15
|
|
|
|
|
|
Total net book value of assets
|
|
|
|
|
|
|
(24,683
|
)
|
Add: Net book value of liabilities extinguished due to sale
|
|
|
|
|
|
|
|
|
Milestone payment
|
|
|
1,000
|
|
|
|
|
|
Other liabilities
|
|
|
717
|
|
|
|
|
|
Total net book value of liabilities
|
|
|
|
|
|
|
1,717
|
|
Less: State tax expense
|
|
|
|
|
|
|
(513
|
)
|
Net gain on sale of assets
|
|
|
|
|
|
$
|
5,521
|
|
Summarized assets and liabilities of discontinued operations
are presented in the following table (in thousands):
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Accounts receivable, net
|
|
$
|
1,024
|
|
|
$
|
3,161
|
|
Inventory, net
|
|
|
-
|
|
|
|
1,458
|
|
Prepaid expenses and other current assets
|
|
|
200
|
|
|
|
443
|
|
Total current assets
|
|
|
1,224
|
|
|
|
5,062
|
|
Fixed assets, net
|
|
|
-
|
|
|
|
1,041
|
|
Intangible assets, net
|
|
|
-
|
|
|
|
22,069
|
|
Goodwill, net
|
|
|
-
|
|
|
|
1,659
|
|
Total assets of discontinued operations
|
|
|
1,224
|
|
|
|
29,831
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
2,169
|
|
|
|
957
|
|
Accrued expenses and other current liabilities
|
|
|
131
|
|
|
|
3,557
|
|
Senior secured term loan, net
|
|
|
-
|
|
|
|
10,929
|
|
Total current liabilities
|
|
$
|
2,300
|
|
|
$
|
15,443
|
|
Other long-term liabilities
|
|
|
-
|
|
|
|
245
|
|
Total liabilities of discontinued
operations
|
|
$
|
2,300
|
|
|
$
|
15,688
|
|
Significant Accounting Policies and
Estimates
The Company’s significant accounting
policies are disclosed in Note 2 —
Summary of Significant Accounting Policies
in the 2017 Annual Report. Since the
date of the 2017 Annual Report, there have been no material changes to the Company’s significant accounting policies. The
preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the amounts reported in the condensed
consolidated financial statements and accompanying notes. These estimates and assumptions include valuing equity securities
and derivative financial instruments issued in financing transactions, allowance for doubtful accounts, inventory reserves, deferred
taxes and related valuation allowances. Actual results could differ from the estimates.
Recent Accounting Principles
In June 2018, the FASB issued ASU 2018-07,
“Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting”. The
amendments in this update is to maintain or improve the usefulness of the information provided to the users of financial statements
while reducing cost and complexity in financial reporting. The areas for simplification in this Update involve several aspects
of the accounting for nonemployee share-based payment transactions resulting from expanding the scope of Topic 718, to include
share-based payment transactions for acquiring goods and services from nonemployees. Some of the areas for simplification apply
only to nonpublic entities. The amendments in this update are effective for all entities for fiscal years beginning after December
15, 2018, and interim periods within those fiscal years. The Company does not expect that this guidance will have a material impact
on its consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02,
“Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated
Other Comprehensive Income”. The amendments in this Update allow a reclassification from accumulated other comprehensive
income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate
the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial
statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts
and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from
continuing operations is not affected. The amendments in this Update also require certain disclosures about stranded tax effects.
The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods
within those fiscal years. The Company does not expect that this guidance will have a material impact on its consolidated financial
statements.
The Company’s financial statements
are prepared using accounting principles generally accepted in the United States of America applicable to a going concern that
contemplates the realization of assets and liquidation of liabilities in the normal course of business.
The Company has experienced recurring losses
since its inception. For the six months ended June 30, 2018, the Company incurred a net loss of $6.4 million, utilized $7.5 million
in cash from operations and had an accumulated deficit of $156.4 million. These factors raised substantial doubt as to the Company’s
ability to continue as a going concern.
Upon closing the APA, the Company received
gross proceeds of $29.0 million and part of the proceeds, $14.8 million, were utilized to satisfy its obligations under the Credit
Agreement and Guaranty (the “CAG”) with Perceptive. As of June 30, 2018, the Company had a cash balance of approximately
$11.0 million.
Given the Company’s current cash
position and reduced cash burn, the Company believes substantial doubt has been mitigated and it has sufficient resources to support
its planned operations for a year from the date these financial statements are issued.
On January 1,
2018, the Company adopted Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with
Customers” (“ASC 606”). The core principle of ASC 606 requires that an entity recognize revenue to depict
the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects
to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle and,
in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under
existing accounting principles generally accepted in the United States of America (“U.S. GAAP”) including identifying
performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and
allocating the transaction price to each separate performance obligation.
The Company adopted ASC
606 for all applicable contracts using the modified retrospective method, which would have required a cumulative-effect adjustment,
if any, as of the date of adoption. The adoption of ASC 606 did not have a material impact on the Company’s condensed
consolidated financial statements as of the date of adoption. As a result, a cumulative-effect adjustment was not required.
The Company recognizes
revenue predominately from one type of revenue, contract manufacturing and recognizes an immaterial amount from the sale of products.
Revenue from both contract manufacturing and products is recognized at the point where the customer obtains control of the goods
and the Company satisfies its performance obligation, which generally is at the time it ships the product to the customer. To achieve
this core principle, the Company applies the following five steps:
Step 1 – Identify the Contract with
the Customer – A contract exists when (a) the parties to the contract have approved the contract and are committed to perform
their respective obligations, (b) the entity can identify each party’s rights regarding the goods or services to be transferred,
(c) the entity can identify the payment terms for the goods or services to be transferred, (d) the contract has commercial substance
and it is probable that the entity will collect substantially all of the consideration to which it will be entitled in exchange
for the goods or services that will be transferred to the customer.
Step 2 – Identify Performance Obligations
in the Contract – Upon execution of a contract, the Company identifies as performance obligations each promise to transfer
to the customer either (a) goods or services that are distinct or (b) a series of distinct goods or services that are substantially
the same and have the same pattern of transfer to the customer. To the extent a contract includes multiple promised goods or services,
the Company must apply judgement to determine whether the goods or services are capable of being distinct within the context of
the contract. If these criteria are not met, the goods or services are accounted for as a combined performance obligation.
Step 3 – Determine the Transaction
Price – The transaction price is determined based on the consideration to which the Company will be entitled in exchange
for transferring products or services to the customer. Generally, all contracts include fixed consideration. If a contract did
include variable consideration, the Company would determine the amount of variable consideration that should be included in the
transaction price based on expected value method. Variable consideration would be included in the transaction price, if in the
Company’s judgement, it is probable that a significant future reversal of cumulative revenue under the contract would not
occur.
Step 4 – Allocate the Transaction
Price – After the transaction price has been determined, the next step is to allocate the transaction price to each performance
obligation in the contract. If the contract only has one performance obligation, the entire transaction price will be applied to
that obligation. If the contract has multiple performance obligations, the transaction price is allocated to the performance obligations
based on the relative standalone selling price (SSP) at contract inception.
Step 5 –
Satisfaction of the Performance Obligations (and Recognize Revenue) – When an asset is transferred, and the customer obtains
control of the asset (or the services are rendered), the Company recognizes revenue. At contract inception, the Company determines
if each performance obligation is satisfied at a point in time or over time. Revenue from both product sales and contract manufacturing
is recognized at the point where the customer obtains control of the goods and the Company satisfies its performance obligation,
which generally is at the time it ships the product to the customer.
Disaggregation
of Revenue
The Company recognizes
revenue predominately from contract manufacturing and recognizes an immaterial amount from products. Revenue from both products
and contract manufacturing is recognized at the point where the customer obtains control of the goods and the Company satisfies
its performance obligation, which generally is at the time it ships the product to the customer.
As of June 30,
2018, or December 31, 2017, the Company did not have any contract assets or contract liabilities from contracts with customers.
During the three and six months ended June 30, 2018 and 2017, there was no revenue recognized from performance obligations satisfied
(or partially satisfied) in previous periods. As of June 30, 2018, there were no remaining performance obligations that the Company
had not satisfied.
|
4.
|
Net Loss Per Common Share
|
Basic loss per share data for each period
presented is computed using the weighted-average number of shares of common stock outstanding during each such period. Diluted
loss per share data is computed using the weighted-average number of common and dilutive common-equivalent shares outstanding during
each period. Dilutive common-equivalent shares consist of: (a) shares that would be issued upon the exercise of stock options and
warrants, computed using the treasury stock method; and (b) shares of non-vested restricted stock.
The following securities are excluded from the calculation of
weighted average dilutive common shares because their inclusion would have been anti-dilutive:
|
|
As of June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Stock options
|
|
|
706,666
|
|
|
|
921,050
|
|
Warrants
|
|
|
400,307
|
|
|
|
517,167
|
|
Non-vested restricted stock
|
|
|
20,000
|
|
|
|
261,603
|
|
Total
|
|
|
1,126,973
|
|
|
|
1,699,820
|
|
Inventory consists of the following (in
thousands):
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
129
|
|
|
$
|
98
|
|
Work in process
|
|
|
8
|
|
|
|
-
|
|
Finished goods
|
|
|
2
|
|
|
|
-
|
|
Less: Inventory reserve for excess and slow moving inventory
|
|
|
-
|
|
|
|
(5
|
)
|
Total
|
|
$
|
139
|
|
|
$
|
93
|
|
|
6.
|
Accrued Expenses and Other
Current Liabilities
|
Accrued expenses and other current liabilities
consist of the following (in thousands):
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Salaries, benefits and incentive compensation
|
|
$
|
71
|
|
|
$
|
509
|
|
Professional fees
|
|
|
129
|
|
|
|
176
|
|
Other
|
|
|
49
|
|
|
|
27
|
|
Total accrued expenses and other current liabilities
|
|
$
|
249
|
|
|
$
|
712
|
|
Senior Secured Term Loan Facility
On May 29, 2015, the Company entered into
the CAG with Perceptive Credit Opportunities Fund, L.P. The CAG provided a senior secured term loan in a single borrowing to the
Company in the principal amount of $15.5 million.
On March 13, 2018, the Company, AquaMed
Technologies, Inc., a wholly owned subsidiary of the Company, and Perceptive entered into an Amendment Agreement, pursuant to which
the parties agreed to certain amendments and modifications to the terms of the CAG. The Amendment Agreement provided for, an additional
bridge term loan to the Company in the aggregate principal amount of $2.0 million pursuant to a Bridge Loan Note (“BLN”).
Under the Amendment Agreement, the Company agreed to pay an upfront fee of $0.25 million and all fees, costs and expenses payable
pursuant to the CAG (including reasonable attorney’s fees of Perceptive). The BLN bore interest at a rate per annum equal
to the sum of (i) the greater of (x) LIBOR and (y) 1%, plus (ii) an applicable margin of 9.75%. The BLN matured on the earlier
of (i) May 7, 2018 and (ii) the closing date in connection with the APA.
On May 7, 2018, the Company paid approximately
$14.8 million in full satisfaction of all debt obligations due Perceptive.
|
8.
|
Commitments and Contingencies
|
License Agreement with Noble Fiber
Technologies, LLC
On July 15, 2011, the Company entered into
a license agreement with Noble Fiber Technologies, LLC, whereby the Company has the exclusive right and license to manufacture
and distribute “SilverSeal Hydrogel Wound Dressings” and “SilverSeal Hydrocolloid Wound Dressings”. The
license is granted for ten years with an option to be extended for consecutive renewal periods of two years after the initial term.
Royalties are to be paid equal to 9.75% of net sales of licensed products. Total royalties, for the three and six months ended
June 30, 2018 and 2017 were nominal.
Litigation, Claims and Assessments
From time to time, the Company may become
involved in lawsuits, investigations and claims that arise in the ordinary course of business. The Company believes it has meritorious
defenses against all pending claims and intends to vigorously pursue them. While it is not possible to predict or determine the
outcomes of any pending actions, the Company believes the amount of liability, if any, with respect to such actions, would not
materially affect its financial position, results of operations or cash flows.
On February 22, 2018, a putative stockholder
class action complaint was filed in the United States District Court for the District of Delaware against the Company and each
member of the Board, captioned Ronald Cresta, Individually and on Behalf of All Others Similarly Situated v. Alliqua BioMedical
Inc., David Johnson, Joseph M. Leone, Gary Restani, Jeffrey Sklar and Mark Wagner. The complaint alleges, among other things, that
the Company and the Board violated federal securities laws and regulations by soliciting stockholder votes in connection with the
AST through a proxy statement that omits material facts necessary to make the statements therein not false or misleading. The complaint
seeks, among other things, to enjoin the Company and the Board from conducting the stockholder vote on the AST unless and until
the allegedly omitted material information is disclosed to the Company’s stockholders, damages allegedly suffered by the
plaintiffs as a result of the asserted omissions, as well as related attorneys’ fees and expenses.
On April 4, 2018, the court approved the
parties’ stipulation and proposed order to withdraw the motion for preliminary injunction and dismiss the action and the
case was closed. The court retained jurisdiction of the action solely for determining any potential fee application if the parties
are unable to reach agreement and a fee application becomes necessary.
Stock-Based Compensation
On May 7, 2018, in connection with the
closing of the sale under the APA of substantially all of the Company’s assets to Cellularity, which triggered certain change
in control provisions of the Company’s equity plans, all unvested and outstanding options and restricted stock awards under
the 2011 Plan and 2014 Plan became vested and exercisable.
As a result, a summary of the Company’s
outstanding and exercisable options as of June 30, 2018 was as follows (in thousands, except per share data):
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
Range of
Exercise Price
|
|
Weighted
Average
Exercise
Price
|
|
|
Outstanding
Number of
Options
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Life in Years
|
|
|
Exercisable
Number of
Options
|
|
$2.00 - $4.00
|
|
$
|
3.51
|
|
|
|
215
|
|
|
|
3.51
|
|
|
|
2.3
|
|
|
|
215
|
|
$4.10 - $9.90
|
|
|
8.53
|
|
|
|
28
|
|
|
|
8.53
|
|
|
|
6.3
|
|
|
|
28
|
|
$10.00 - $19.90
|
|
|
10.57
|
|
|
|
76
|
|
|
|
10.57
|
|
|
|
1.2
|
|
|
|
76
|
|
$20.00 - $29.90
|
|
|
23.80
|
|
|
|
1
|
|
|
|
23.80
|
|
|
|
0.1
|
|
|
|
1
|
|
$30.00 - $39.90
|
|
|
33.63
|
|
|
|
46
|
|
|
|
33.63
|
|
|
|
4.3
|
|
|
|
46
|
|
$40.00 - $49.90
|
|
|
46.34
|
|
|
|
69
|
|
|
|
46.34
|
|
|
|
1.7
|
|
|
|
69
|
|
$50.00 - $59.90
|
|
|
52.92
|
|
|
|
43
|
|
|
|
52.92
|
|
|
|
1.1
|
|
|
|
43
|
|
$60.00 - $69.90
|
|
|
66.09
|
|
|
|
176
|
|
|
|
66.09
|
|
|
|
3.4
|
|
|
|
176
|
|
$70.00 - $79.90
|
|
|
77.54
|
|
|
|
3
|
|
|
|
77.54
|
|
|
|
1.2
|
|
|
|
3
|
|
$80.00 - $89.90
|
|
|
87.18
|
|
|
|
23
|
|
|
|
87.18
|
|
|
|
1.7
|
|
|
|
23
|
|
$90.00 - $99.90
|
|
|
90.04
|
|
|
|
21
|
|
|
|
90.04
|
|
|
|
1.8
|
|
|
|
21
|
|
$100.00 - $266.90
|
|
|
109.49
|
|
|
|
6
|
|
|
|
109.49
|
|
|
|
1.8
|
|
|
|
6
|
|
|
|
|
|
|
|
|
707
|
|
|
|
|
|
|
|
2.6
|
|
|
|
707
|
|
For the three months ended June 30, 2018
and 2017, the Company recognized $1.0 million and $0.4 million of stock-based compensation expense, of which, $0.009 million and
$0.015 million is included in cost of revenues and $1.0 million and $0.4 million is included in selling, general and administrative
expenses in the condensed consolidated statements of operations, respectively. For the six months ended June 30, 2018 and 2017,
the Company recognized $0.9 million and $0.9 million of stock-based compensation expense, of which, $0.02 million and $0.026 million
is included in cost of revenues and $0.9 million and $0.9 million is included in selling, general and administrative expenses in
the condensed consolidated statements of operations, respectively. As of June 30, 2018, there was $0.02 million of unrecognized
stock-based compensation expense which will be amortized over a weighted average period of 0.3 years.
Reverse Stock Split
The Company effected a 1-for-10 reverse
stock split of its outstanding common stock on October 5, 2017. The accompanying consolidated financial statements and accompanying
notes to the consolidated financial statements give retroactive effect to the reverse stock split for all periods presented. The
shares of common stock retained a par value of $0.001 per share.
In November 2015, the Company entered into
a manufacturing supply agreement with a company where a Company director was then a member of the Board of Directors. During the
three months ended June 30, 2018 and 2017, the Company incurred costs of approximately $0.07 million and $0.1 million, respectively,
from this vendor. During the six months ended June 30, 2018 and 2017, the Company incurred costs of approximately $0.26 million
and $0.26 million, respectively. Approximately $0 and $0.1 million is included in accounts payable related to this related party
as of June 30, 2018 and December 31, 2017, respectively.
|
11.
|
Fair Value Measurement
|
Fair value is defined as the price that
would be received upon selling an asset or the price paid to transfer a liability on the measurement date. It focuses on the exit
price in the principal or most advantageous market for the asset or liability in an orderly transaction between willing market
participants. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used
in the valuation methodologies in measuring fair value. This hierarchy requires entities to maximize the use of observable inputs
and minimize the use of unobservable inputs. The three levels of inputs used to measure fair values are as follows:
Level 1:
|
Observable prices in active markets for identical assets and liabilities.
|
|
|
Level 2:
|
Observable inputs other than quoted prices in active markets for identical assets and liabilities.
|
|
|
Level 3:
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities.
|
Warrant Liabilities
On June 30, 2018, the Company recomputed
the fair value of its warrant liability of outstanding warrants to purchase an aggregate of 210,000 shares of common stock as $164,000
using the Binomial option pricing model (Level 3 inputs) using the following assumptions: expected volatility of 79.54% risk-free
rate of 2.68%, expected term of 3.58 years, and expected dividends of 0.00%. The Company recorded a loss on the change in fair
value of these warrant liabilities of $15,000 and $34,000 during the three and six months ended June 30, 2018, respectively.
Warrants that contain exercise reset provisions
and contingent consideration liabilities are Level 3 derivative liabilities measured at fair value on a recurring basis using pricing
models for which at least one significant assumption is unobservable as defined in ASC 820. The fair value of contingent consideration
liabilities that are classified as Level 3 were estimated using a discounted cash flow technique with significant inputs that are
not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC 820. The significant inputs
in the Level 3 measurement not supported by market activity include the probability assessments of expected future cash flows related
to the acquisitions, appropriately discounted considering the uncertainties associated with the obligation, and as calculated in
accordance with the terms of the acquisition agreements. The development and determination of the unobservable inputs for Level
3 fair value measurements and the fair value calculations are the responsibility of the Company’s Chief Financial Officer
and are approved by the Chief Executive Officer.
The following table sets forth a summary
of the changes in the fair value of Level 3 warrant liabilities that are measured at fair value on a recurring basis (in thousands):
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Warrant Liabilities
|
|
|
|
|
|
|
|
|
Beginning balance as of January 1,
|
|
$
|
130
|
|
|
$
|
20
|
|
Change in fair value of warrant liability
|
|
|
34
|
|
|
|
(369
|
)
|
Warrant modification expense
|
|
|
-
|
|
|
|
803
|
|
Ending balance as of March 31,
|
|
$
|
164
|
|
|
$
|
454
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Contingent Consideration
|
|
|
|
|
|
|
|
|
Beginning balance as of January 1,
|
|
$
|
-
|
|
|
$
|
1,816
|
|
Payments of contingent consideration
|
|
|
-
|
|
|
|
(1,851
|
)
|
Change in fair value of contingent consideration
|
|
|
-
|
|
|
|
35
|
|
Ending balance as of March 31,
|
|
$
|
-
|
|
|
$
|
-
|
|
Assets and liabilities measured at fair value on a recurring
basis are as follows (in thousands):
|
|
June 30, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
164
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
164
|
|
|
|
December 31, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
130
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
130
|
|
In accordance with ASC 740-270,
Income
Taxes – Interim Reporting
, the Company is required at the end of each interim period to determine the best estimate of
its annual effective tax rate and apply that rate to year-to-date ordinary income or loss. The resulting tax expense (or benefit)
is adjusted for the tax effect of specific events, if any, required to be discretely recognized in the interim period as they occur.
For the six months ended June 30, 2018 and 2017, the Company recorded $0.5 million and immaterial tax expense (or benefit), respectively.
The gain on sale of assets to Celularity, in the period ended June 30, 2018, resulted in current state tax expense, primarily due
to limitations on the use of net operating loss carryforwards in certain state jurisdictions. The Company has not recorded net
deferred tax assets as of June 30, 2018 or December 31, 2017 because it maintained a full valuation allowance against all material
deferred tax assets, and management has determined that it is more likely than not that the Company will be unable to realize those
future benefits. The Company’s effective tax rate differs from the statutory rates of 21% and 34% as of June 30, 2018 and
2017, respectively, due to losses for which no future benefit is expected. As of June 30, 2018, and December 31, 2017, the Company
had no uncertain tax positions recorded in its consolidate balance sheets.
The United States enacted the Tax Cuts
and Jobs Act (“Act”) on December 22, 2017, most provisions of which took effect in years beginning after December 31,
2017. The Act made substantial changes to U.S. taxation of corporations, including a reduction in the U.S. federal corporate income
tax rate from 34% to 21% and changes to limitations on the deductibility of executive compensation. The effect on deferred tax
assets and liabilities of a change in law or tax rates is recognized in income in the period that includes the enactment date.
After the enactment of the Act, the SEC
issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant
does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete
the accounting for certain income tax effects of the Act. In our financial statements for the period ended December 31, 2017, we
calculated an estimate of the impact of the Act related to the remeasurement of our net U.S. deferred tax asset due to the change
in U.S. federal corporate income tax rate. The provisional amount recorded was deferred tax expense of $14.6 million,
but which was fully and equally offset by a deferred tax benefit related to a corresponding reduction in our valuation allowance.
In addition, due to changes in executive compensation rules pursuant to the Act, the Company determined that approximately $1.3
million of deferred tax asset for stock compensation may not be realizable. The Company had previously recorded a valuation allowance
against the deferred tax asset so this adjustment had no impact on the financial statements for the period ended December 31, 2017.
The Company has not adjusted the provisional amounts in these financial statements for the period ended June 30, 2018, but we expect
to complete this analysis within the one-year measurement period provided by SAB 118.