CHF SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 – Nature of Business and Basis of Presentation
Nature of Business: CHF Solutions, Inc. (the “Company”) is a medical device company focused on developing, manufacturing and commercializing the Aquadex FlexFlow®
and Aquadex SmartFlow™ systems (herein referred to as the “Aquadex System”) for ultrafiltration therapy. The Aquadex SmartFlow system is indicated for temporary (up to eight hours) or extended (longer than 8 hours
in patients who require hospitalization) use in adult and pediatric patients weighing 20kg or more whose fluid overload is unresponsive to medical management, including diuretics. CHF Solutions, Inc. is a Delaware corporation headquartered
in Minneapolis with wholly owned subsidiaries in Australia, Ireland and Delaware. The Company has been listed on Nasdaq since February 2012.
In August 2016, the Company acquired the business associated with the Aquadex FlexFlow system (herein referred to as the “Aquadex Business”) from a subsidiary of Baxter International, Inc. (“Baxter”), and refocused its strategy to fully devote its
resources to the Aquadex Business.
On October 6, 2020, the Company’s stockholders approved a reverse split of its outstanding common stock at a ratio in the range of 1-for-5 to 1-for-30 and, on October 9, 2020, the board of directors approved a 1-for-30 reverse split of the
Company’s outstanding common stock that became effective after trading on October 16, 2020. This reverse stock split does not change the par value of the Company’s common stock or the number of common or preferred shares authorized by the Company’s
Fourth Amended and Restated Certificate of Incorporation. All share and per-share amounts have been retroactively adjusted to reflect the reverse stock splits for all periods presented. After implementing the
reverse stock split described above, we received confirmation from Nasdaq on November 2, 2020, that we had regained compliance with the minimum bid price rule and the listing matter was closed.
Principles of Consolidation: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of
America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Certain information and note disclosures normally included in the audited annual consolidated financial statements have
been condensed or omitted pursuant to those rules and regulations. Accordingly, they do not include all of the information necessary for a fair presentation of results of operations, comprehensive loss, financial condition, and cash flows in
conformity with U.S. GAAP. In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of the Company
for the periods presented. Operating results for interim periods are not necessarily indicative of results that may be expected for the entire fiscal year. The preparation of the financial statements in conformity with U.S. GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ
from these estimates.
For further information, refer to the consolidated financial statements and notes thereto included in the Company’s
Annual Report on Form 10-K
for the year ended December 31, 2019.
Going Concern: The Company’s financial statements have been prepared and presented on a basis assuming it continues as a going concern. During the
years ended December 31, 2019 and 2018 and through September 30, 2020, the Company incurred losses from operations and net cash outflows from operating activities as disclosed in the consolidated statements of operations and cash flows, respectively.
As of September 30, 2020, the Company had an accumulated deficit of $230.3 million and it expects to incur losses for the immediate future. To date, the Company has been funded by debt and equity financings, and although the Company believes that it
will be able to successfully fund its operations, there can be no assurance that it will be able to do so or that it will ever operate profitably. These factors raise substantial doubt about the Company’s ability to continue as a going concern
through the next twelve months.
The Company became a revenue generating company after acquiring the Aquadex Business in August 2016. The Company expects to incur additional losses in the near-term as it grows the Aquadex Business, including investments in expanding its sales
and marketing capabilities, purchasing inventory, manufacturing components, and complying with the requirements related to being a U.S. public company. To become and remain profitable, the Company must succeed in expanding the adoption and market
acceptance of the Aquadex System. This will require the Company to succeed in training personnel at hospitals and in effectively manufacturing, marketing and distributing the Aquadex System and related components. There can be no assurance that the
Company will succeed in these activities, and it may never generate revenues sufficient to achieve profitability.
During 2018, 2019 and through August 21, 2020, the Company closed on underwritten public and other equity offerings for aggregate net proceeds of approximately $43.2 million after deducting the underwriting discounts and commissions or placement
agents fees and offering expenses, as applicable, and other costs associated with the offerings. In addition, during 2020, the Company received $4.1 million in proceeds from the exercise of investor warrants. See Note 3 –Shareholder’s Equity. The
Company will require additional funding to grow its business, which may not be available on terms favorable to the Company, or at all. The Company may receive those funds from the proceeds from future warrant exercises, issuances of equity
securities, or other financing transactions. Should warrant exercises not materialize or future capital raising be unsuccessful, the Company may not be able to continue as a going concern. No adjustments have been made relating to the recoverability
and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company not continue as a going concern.
Revenue Recognition: The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”), Topic 606, Revenue from Contracts with Customers,
which the Company adopted effective January 1, 2018. Accordingly, the Company recognizes revenue when its customers obtain control of its products or services, in an amount that reflects the consideration that the Company expects to receive in
exchange for those goods and services. See Note 2 – Revenue Recognition, for disclosures. For the three months and nine months ended September 30, 2020, there were no customers that represented in excess of 10% of net sales. For the three months
ended September 30, 2019, three customers represented 11%, 12% and 12% of net sales. For the nine months ended September 30, 2019, one customer represented 10% of net sales.
Accounts Receivable: Accounts receivable are unsecured, are recorded at net realizable value, and do not bear interest. The Company makes judgments as to its ability to collect outstanding receivables
based upon significant patterns of collectability, historical experience, and managements’ evaluation of specific accounts and will provide an allowance for credit losses when collection becomes doubtful. The Company performs credit evaluations of
its customers’ financial condition on an as-needed basis. Payment is generally due 30 days from the invoice date and accounts past 30 days are individually analyzed for collectability. When all collection efforts have been exhausted, the account is
written off against the related allowance. To date the Company has not experienced any write-offs or significant deterioration of the aging of its accounts receivable, and therefore, no allowance for doubtful accounts was considered necessary as of
September 30, 2020 or December 31, 2019. As of September 30, 2020, one customer represented 13% of the accounts receivable balance. As of December 31, 2019, two customers represented 13% and 12% of the accounts receivable balance.
Inventories: Inventories are recorded as the lower of cost or net realizable value using the first-in-first out method. Overhead is allocated to manufactured finished goods inventory based on the normal
capacity of the Company’s production facilities. Abnormal amounts of overhead, if any, are expensed as incurred. Inventories consisted of the following:
(in thousands)
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Finished Goods
|
|
$
|
1,072
|
|
|
$
|
750
|
|
Work in Process
|
|
|
455
|
|
|
|
79
|
|
Raw Materials
|
|
|
1,394
|
|
|
|
968
|
|
Total
|
|
$
|
2,921
|
|
|
$
|
1,797
|
|
Loss per share: Basic loss per share is computed based on the net loss for each period divided by the weighted average number of common shares outstanding. The net loss allocable to common stockholders for
the nine months ended September 30, 2020, reflects a $1.8 million increase for the net deemed dividend to preferred stockholders provided in connection with the close of the public offering of Series H Convertible Preferred Stock on January 28, 2020.
This net deemed dividend includes $0.2 million that resulted from the subsequent reduction in the exercise of price of the warrants as a result of the March 2020 offering. The net loss allocable to common stockholders for the nine months ended
September 30, 2019, reflects a $4.5 million increase for the net deemed dividend to preferred stockholders provided in connection with the close of the public offering of Series G Convertible Preferred Stock on March 12, 2019. The deemed dividends
represent the intrinsic value of the preferred shares at the time of issuance. See Note 3 – Shareholders’ Equity for additional disclosures.
Diluted earnings per share is computed based on the net loss allocable to common stockholders for each period divided by the weighted average number of common shares outstanding, increased by the number of additional shares that would have been
outstanding had the potentially dilutive common shares been issued, and reduced by the number of shares the Company could have repurchased from the proceeds from issuance of the potentially dilutive shares. Potentially dilutive shares of common stock
include shares underlying outstanding convertible preferred stock, warrants, stock options and other stock-based awards granted under stock-based compensation plans.
The following table sets forth the potential shares of common stock that are not included in the calculation of diluted net loss per share because to do so would be anti-dilutive as of the end of each period presented:
|
|
September 30
|
|
|
|
2020
|
|
|
2019
|
|
Warrants to purchase common stock
|
|
|
1,631,948
|
|
|
|
181,038
|
|
Series F convertible preferred stock
|
|
|
14,224
|
|
|
|
3,745
|
|
Stock options
|
|
|
15,741
|
|
|
|
11,036
|
|
Total
|
|
|
1,661,913
|
|
|
|
195,819
|
|
The following table reconciles reported net loss with reported net loss per share for each of the nine months ended September 30:
(in thousands, except per share amounts)
|
|
2020
|
|
|
2019
|
|
Net loss
|
|
$
|
(12,750
|
)
|
|
$
|
(13,666
|
)
|
Deemed dividend to preferred shareholders (see Note 3)
|
|
|
(1,757
|
)
|
|
|
(4,509
|
)
|
Net loss after deemed dividend
|
|
|
(14,507
|
)
|
|
|
(18,175
|
)
|
Weighted average shares outstanding
|
|
|
1,287
|
|
|
|
64
|
|
Basic and diluted loss per share
|
|
$
|
(11.27
|
)
|
|
$
|
(284.70
|
)
|
Subsequent Events: The Company evaluates events through the date the consolidated financial statements are filed for events requiring adjustment to or disclosure in the consolidated financial statements.
Note 2 – Revenue Recognition
Net Sales
The Company sells its products in the United States primarily through a direct sales force. Customers who purchase the Company’s products include hospitals and clinics throughout the United States. In countries outside the United States, the
Company sells its products through a limited number of specialty healthcare distributors in the United Kingdom, Italy, Spain, Germany, Austria, Switzerland, Southeast Asia, Brazil, India, Greece, the United Arab Emirates, Israel and Palestine. These
distributors resell the Company’s products to hospitals and clinics in their respective geographies.
Revenue from product sales are recognized when the customer or distributor obtains control of the product, which occurs at a point in time, most frequently upon shipment of the product or receipt of the product, depending on shipment terms. The
Company’s standard shipping terms are FOB shipping point, unless the customer requests that control and title to the inventory transfer upon delivery.
Revenue is measured as the amount of consideration we expect to receive, adjusted for any applicable estimates of variable consideration and other factors affecting the transaction price, which is based on the invoiced price, in exchange for
transferring products. All revenue is recognized when the Company satisfies its performance obligations under the contract. The majority of the Company’s contracts have a single performance obligation and are short term in nature. The Company has
entered into extended service plans with customers which are recognized over time. This revenue represents less than 1% of net sales for the three and nine months ended September 30, 2020 and 2019. The unfulfilled performance obligations related to
these extended service plans is included in deferred revenue, which is included in other current liabilities on the consolidated balance sheets. The majority of the deferred revenue is expected to be recognized within one year.
Sales taxes and value added taxes in foreign jurisdictions that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales. Revenue includes shipment and
handling fees charged to customers. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold.
Product Returns: The Company offers customers a limited right of return for its product in case of non-conformity or performance issues. The Company estimates the amount of its product sales that may be returned by its customers and records this
estimate as a reduction of revenue in the period the related product revenue is recognized. The Company currently estimates product return liabilities using available industry data and its own historical sales and returns information. The Company
has not received any returns to date and believes that future returns of its products will be minimal. Therefore, revenue recognized is not currently impacted by variable consideration related to product returns.
Note 3 – Stockholders’ Equity
Series F Convertible Preferred Stock: On November 27, 2017, the Company closed on an underwritten public offering of Series F Convertible Preferred Stock and warrants to purchase shares of common stock for
gross proceeds of $18.0 million. Net proceeds totaled approximately $16.2 million after deducting the underwriting discounts and commissions and other costs associated with the offering.
The offering was comprised of Series F convertible preferred stock, convertible into shares of the Company’s common stock at an initial conversion price of $1,890.00 per share. Each share of Series F convertible preferred stock was accompanied by
a Series 1 warrant, which was to expire on the first anniversary of its issuance, to purchase 16 shares of the Company’s common stock at an exercise price of $1,890.00 per share, and a Series 2 warrant, which expires on the seventh anniversary of its
issuance, to purchase 16 shares of the Company’s common stock at an exercise price of $1,890.00 per share. The Series F convertible preferred stock has full ratchet price based anti-dilution protection, subject to customary carve outs, in the event
of a down-round financing at a price per share below the conversion price of the Series F convertible preferred stock (which protection will expire if, during any 20 of 30 consecutive trading days, the volume weighted average price of the Company’s
common stock exceeds 300% of the then-effective conversion price of the Series F convertible preferred stock and the daily dollar trading volume for each trading day during such period exceeds $200,000). The exercise price of the warrants is fixed
and does not contain any variable pricing features, nor any price based anti-dilutive features, apart from customary adjustments for stock splits, combinations, reclassifications, stock dividends or fundamental transactions. A total of 18,000 shares
of Series F convertible preferred stock initially convertible into 9,557 shares of common stock and warrants to purchase 19,122 shares of common stock were issued in the offering.
Effective July 3, 2018, the conversion price of the Series F convertible preferred stock was reduced from $1,890.00 to $890.40, the per share price in the July 2018 Offering described below. Effective March 12, 2019, the conversion price of the
Series F convertible preferred stock was reduced from $890.40 to $157.50, the per share price to the public of the Series G convertible preferred stock which closed in an underwritten public offering on March 12, 2019, described below. Effective
October 25, 2019, the conversion price of the Series F convertible preferred stock was reduced from $157.50 to $42.30, and on November 6, 2019 from $42.30 to $29.83, the per share price to the public in the October and November 2019 transactions,
respectively, described below. Effective January 28, 2020, the conversion price of the Series F convertible preferred stock was reduced from $29.83 to $16.50, the per share price to the public of the Series H convertible preferred stock which closed
in an underwritten public offering on January 28, 2020, described below. Effective March 23, 2020, the conversion price of the Series F convertible preferred stock was reduced from $16.50 to $9.00, the per share price to the public in the March 2020
transaction, described below. As of September 30, 2020, and December 31, 2019, 127 and 535 shares of the Series F convertible preferred stock remained outstanding, respectively.
July 2018 Offering: On July 3, 2018, the Company closed on an underwritten public offering of 6,065 shares of its common stock at a public offering price of
$890.40 per share, for gross proceeds of $5.4 million, including the full exercise of the underwriters’ over-allotment option to purchase additional shares of the Company’s common stock (the “July 2018 Offering”). Net proceeds totaled
approximately $4.6 million after deducting underwriting discounts and commissions and offering expenses.
In connection with the July 2018 Offering, and to induce certain institutional investors who hold warrants issued by the Company in November 2017 (“November 2017 Warrants”) to participate in the July 2018 Offering, the
Company entered into letter agreements with such institutional investors. Pursuant to the terms of these agreements, the Company agreed, effective July 3, 2018, to reduce the per share exercise price of the November 2017 Warrants held by such
institutional investors to $890.40 and to extend the expiration date of the warrants that were to expire on November 27, 2018 to November 27, 2019. The number of common shares underlying the warrants that were repriced did not change. The repriced
warrants were exercisable for 18,488 shares of common stock in the aggregate, of which, following such amendment, half expired on November 27, 2019 and half will expire on November 27, 2024. The repricing of the warrants was accounted as an equity
financing cost, with no impact to net proceeds from the offering.
Series G Convertible Preferred Stock and March 2019 Offering: On March 12, 2019, the Company closed on an underwritten public offering of common stock, Series G convertible preferred stock and warrants to
purchase shares of common stock for gross proceeds of $12.4 million, which included the full exercise of the underwriter’s over-allotment option to purchase additional shares and warrants (“March 2019 Offering”). Net proceeds totaled approximately
$11.0 million after deducting the underwriting discounts and commissions and other costs associated with the offering. The Series G convertible preferred stock included a beneficial conversion amount of $4.5 million, representing the intrinsic value
of the shares at the time of issuance. This amount is reflected as an increase to the loss per share allocable to common stockholders in the nine months ended September 30, 2019.
The March 2019 Offering was comprised of 15,173 shares of common stock priced at $157.50 per share and 1,910,536 shares of Series G convertible preferred stock, convertible into common stock at $157.50 per
share. Each share of Series G convertible preferred stock and each share of common stock was accompanied by a Series 1 warrant and a Series 2 warrant. The Series 1 warrants are exercisable into 78,863 shares of common stock and the Series 2
warrants are exercisable into 78,863 shares of common stock. Series 1 warrants expire on the fifth anniversary of the date of issuance and are exercisable at $157.50 to purchase one share of common stock. Series 2 warrants expire on the earlier of:
(i) the eighteen-month anniversary of the date of issuance and (ii) the 30th trading day following the public announcement of the receipt from the U.S. Food and Drug Administration (FDA) of clearance or approval of a modification to the product
label for the Aquadex System to include pediatric patients. Series 2 warrants are exercisable at $157.50 per share of common stock. The Company announced it had received FDA clearance for use of its Aquadex System in pediatric patients on February
26, 2020, effectively setting the date of expiration of these warrants for April 8, 2020. The conversion price of the Series G convertible preferred stock as well as the exercise price of the warrants are fixed and do not contain any
variable pricing features, nor any price based anti-dilutive features apart from customary adjustments for splits and reverse splits of common stock. The Series G convertible preferred stock included a beneficial ownership limitation of 4.99% but
had no dividend preference (except to extent dividends are also paid on the common stock), liquidation preference or other preferences over common stock. The securities comprising the units were immediately separable and were issued separately.
As of September 30, 2020, and December 31, 2019, all 63,685 shares of the Series G convertible preferred stock had been converted into common stock and none remained outstanding.
October and November 2019 Offerings: On October 25, 2019, the Company closed on a registered direct offering of 19,195 shares of common stock at a price of $34.50 per
share, for gross proceeds of approximately $660,000, prior to deducting commissions and expenses related to the transaction. In a concurrent private placement, the Company agreed to issue to the investors in the registered direct offering
unregistered warrants to purchase up to 19,196 shares of its common stock at an exercise price of $42.30 per share, which became exercisable six months from the date of issuance, and will expire five years from the initial exercise date. On
November 6, 2019, the Company closed on a registered direct offering of 40,637 shares of common stock, or common equivalents, at a price of $33.60 per share, for gross proceeds of approximately $1.36 million prior to deduction of commissions and
offering expenses related to the transaction. In a concurrent private placement, the Company agreed to issue to the investors in the registered direct offering warrants to purchase up to 40,638 shares of our common stock at an exercise price of
$29.83 per share, which were exercisable upon the date of issuance, and will expire five years from the initial exercise date.
Series H Convertible Preferred Stock and January 2020 Offering: On January 28, 2020, the Company closed on an underwritten public offering of common stock, Series H convertible preferred stock and warrants
to purchase shares of common stock for gross proceeds of $9.7 million, which included the full exercise of the underwriter’s over-allotment option to purchase additional shares and warrants (“January 2020 Offering”). Net proceeds totaled
approximately $8.6 million after deducting the underwriting discounts and commissions and other costs associated with the offering. The Series H convertible preferred stock included a beneficial conversion amount of $1.6 million, representing the
intrinsic value of the shares at the time of issuance, and $0.2 million of down-round protection in connection with the re-pricing of the warrants following the March 2020 offering described below. This amount is reflected as an increase to the loss
per share allocable to common stockholders in the nine months ended September 30, 2020.
The January 2020 Offering was comprised of 201,546 shares of common stock priced at $16.50 per share and 11,517,269 shares of Series H convertible preferred stock, convertible into common stock at $16.50 per
share, including the full exercise of the over-allotment option. Each share of Series H convertible preferred stock and each share of common stock was accompanied by a warrant to purchase common stock.
The warrants are exercisable into 585,460 shares of common stock. The conversion price of the preferred stock issued in the transaction is fixed and does not contain any variable pricing feature or any price based anti-dilutive feature. The
preferred stock issued in this transaction includes a beneficial ownership blocker but has no dividend rights (except to the extent that dividends are also paid on the common stock) or liquidation preference, and, subject to limited exceptions, has
no voting rights. The securities comprising the units are immediately separable and were issued separately. The warrants were exercisable beginning on the closing date and expire on the fifth anniversary of the closing date and had an initial
exercise price per share equal to $16.50 per share, subject to appropriate adjustment in the event of subsequent equity sales of common stock or securities convertible into common stock for an exercise price per share less than the exercise price per
share of the warrants then in effect (but in no event lower than 10% of the applicable Unit offering price), or in the event of recapitalization events, stock dividends, stock splits, stock combinations, reclassifications, reorganizations or similar
events affecting our common stock. Effective March 23, 2020, the exercise price of these warrants was reduced from $16.50 to $9.00, the per share price to the public in the March 2020 offering, described below.
As of September 30, 2020, all 11,517,269 shares of the Series H convertible preferred stock had been converted into common stock and none remained outstanding. As of September 30, 2020, warrants to purchase 455,162 shares of common stock had been
exercised for total cash proceeds of $4.1 million.
March 2020 Offering: On March 23, 2020, the Company closed on a registered direct offering of 138,715 shares of its common stock at a price to the public of $9.00 per share, for gross proceeds of
approximately $1.2 million, or $1.0 million net after deducting commissions and offering expenses payable by CHF Solutions. In a concurrent private placement, the Company agreed to issue to the investors in the registered direct offering warrants to
purchase up to 138,715 shares of the Company’s common stock. The warrants to purchase up to 138,715 shares of common stock have an exercise price of $11.18 per share, were exercisable six months from the date of issuance, and will expire five and a
half years from the date of issuance.
April 2020 Offering: On April 1, 2020 the Company closed on a registered direct offering of 171,008 shares of its common stock at a price to the public of $13.02 per share, for gross proceeds of
approximately $2.2 million, prior to deduction of commissions and offering expenses related to the transaction. In a concurrent private placement, the Company agreed to issue to the investors in the registered direct offering warrants to purchase up
to 85,506 shares of the Company’s common stock. The warrants have an exercise price of $11.15 per share, were exercisable immediately, and will expire five and a half years from the date of issuance.
May 2020 Offering: On May 5, 2020 the Company closed on a registered direct offering of 119,930 shares of its common stock at a price to the public of $14.18 per share, for gross proceeds of approximately
$1.7 million, prior to deduction of commissions and offering expenses related to the transaction. In a concurrent private placement, the Company agreed to issue to the investors in the registered direct offering warrants to purchase up to 59,966
shares of the Company’s common stock. The warrants have an exercise price of $12.30 per share, were exercisable immediately, and will expire five and a half years from the date of issuance.
August 2020 Offering: On August 21, 2020, the Company closed on an underwritten public offering of common stock and warrants to purchase shares of common stock for gross proceeds of approximately $14.4
million, which included the full exercise of the underwriter’s over-allotment option to purchase additional shares and warrants (“August 2020 Offering”). Net proceeds totaled approximately $13.0 million after deducting the underwriting discounts and
commissions and other costs associated with the offering. The August 2020 Offering was comprised of 1,064,678 shares of common stock priced at $13.50 per share. Each share of common stock was accompanied by a
warrant to purchase common stock. The warrants are exercisable into 1,064,678 shares of common stock. The securities comprising the units are immediately separable and were issued separately. The warrants were exercisable beginning on the
effective date of our stockholders’ approval of a reverse stock split in an amount sufficient to permit the exercise in full of the warrants, which occurred on October 6, 2020, and will expire on the five year anniversary of the closing date.
Placement Agent Fees: In connection with the offerings described above, the Company paid the placement agents an aggregate cash placement fee equal to 8% of the aggregate gross proceeds raised in each of
the offerings.
Market-Based Warrants: On May 30, 2019, the Company granted a market-based warrant to a consultant in exchange for investor relations services. The warrant represents the right to acquire up to 3,334
shares of the Company’s common stock at an exercise price of $95.40 per share, the closing stock price of the Company’s common shares on May 30, 2019. The warrant is subject to a vesting schedule based on the Company achieving certain market stock
prices within a specified period of time. The warrant expires on May 30, 2024. The warrant was valued at $57.90 per share using the Monte Carlo valuation methodology and was expensed over the term of the consulting engagement which was twelve
months. Significant inputs used for the Monte Carlo valuation were the expected stock price volatility of 136.21%, and management’s expectations regarding the timing of regulatory clearance for an expanded label in pediatrics. None of these
warrants had vested as of September 30, 2020.
Note 4 - Stock-Based Compensation
Under the fair value recognition provisions of U.S. GAAP for accounting for stock-based compensation, the Company measures stock-based compensation expense at the grant date based on the fair value of the award and
recognizes the compensation expense over the requisite service period, which is generally the vesting period.
The following table presents the classification of stock-based compensation expense recognized for the periods below:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
(in thousands)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Selling, general and administrative expense
|
|
$
|
288
|
|
|
$
|
383
|
|
|
$
|
963
|
|
|
$
|
1,018
|
|
Research and development expense
|
|
|
21
|
|
|
|
29
|
|
|
|
73
|
|
|
|
95
|
|
Total stock-based compensation expense
|
|
$
|
309
|
|
|
$
|
412
|
|
|
$
|
1,036
|
|
|
$
|
1,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5 - Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents and warrants.
The Company’s financial assets and liabilities are measured at fair value on a recurring basis and are classified and disclosed in one of the following three categories:
•
|
Level 1 - Financial instruments with unadjusted quoted prices listed on active market exchanges.
|
•
|
Level 2 - Financial instruments lacking unadjusted, quoted prices from active market exchanges, including over the counter traded financial instruments. The prices for the financial instruments are
determined using prices for recently traded financial instruments with similar underlying terms as well as directly or indirectly observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals.
|
•
|
Level 3 - Financial instruments that are not actively traded on a market exchange. This category includes situations where there is little, if any, market activity for the financial instrument. The
prices are determined using significant unobservable inputs or valuation techniques.
|
The fair value of the market-based warrants described in Note 3 was calculated using a Monte Carlo valuation model and was classified as Level 3 in the fair value hierarchy. These warrants were classified as permanent equity and as a result, were
measured at the grant date and are not required to be remeasured to fair value at each reporting period end.
All cash equivalents are considered Level 1 measurements for all periods presented. The Company does not have any financial instruments classified as Level 2 or Level 3 and there were no movements between these categories as of September
30, 2020 and December 31, 2019. The Company believes that the carrying amounts of all remaining financial instruments approximate their fair value due to their relatively short maturities.
Note 6 – Income Taxes
The Company provides for a valuation allowance when it is more likely than not that it will not realize a portion of the deferred tax assets. The Company has established a full valuation allowance for U.S. and foreign deferred tax assets due to
the uncertainty that enough taxable income will be generated in those taxing jurisdictions to utilize the assets. Therefore, the Company has not reflected any benefit of such deferred tax assets in the accompanying condensed consolidated financial
statements.
As of September 30, 2020, there were no material changes to what the Company disclosed regarding tax uncertainties or penalties in its
Annual Report
on Form 10-K for the year ended December 31, 2019.
Note 7—Finance Lease Liability
In June 2020, the Company entered into a lease agreement to finance equipment valued at $67,000. The equipment consisted of computer hardware and is included in Property, Plant and Equipment in the accompanying condensed consolidated financial
statements. The principal amount under the lease agreement was $64,000 at the date the lease commenced, the implied interest rate is 7.5%, and the term of the lease is 39 months.
In July 2020, the Company entered into a lease agreement to finance equipment valued at $30,000. The equipment consisted of audio-visual equipment and is included in Property, Plant and Equipment in the accompanying condensed consolidated
financial statements. The principal amount under the lease agreement was $29,000 at the date the lease commenced, the implied interest rate is 7.5%, and the term of the lease is 39 months.
Note 8—Commitments and Contingencies
Paycheck Protection Program: On April 21, 2020, the Company announced it had received of $1.66 million under the Paycheck Protection Program (PPP) under the federal Coronavirus Aid, Relief, and Economic
Security (CARES) Act. Subsequent to the Company applying and receiving the funds under the PPP, the United States Treasury Department and the U.S. Small Business Administration issued new guidance regarding eligibility
for these loans. As a result, on May 12, 2020, the Company announced it had elected to return all funds it had received under the PPP, so that these funds could be used to help another small business in greater need during the COVID-19 pandemic.
Employee Retirement Plan: The Company has a 401(k)-profit sharing plan that provides retirement benefit to substantially all full-time U.S. employees. Eligible employees may contribute a percentage of
their annual compensation, subject to Internal Revenue Service (“IRS”) limitations, with the Company matching a portion of the employee’s contributions at the discretion of the Company.