rva-10q_20180930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to

Commission file number: 000-54192

 

REVA MEDICAL, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

33-0810505

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

5751 Copley Drive, Suite B

San Diego, CA 92111

 

(858) 966-3000

(Address of principal executive offices,

 

(Registrant’s telephone number

including zip code)

 

including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes       No  

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes      No  

As of November 1, 2018, 41,479,877 shares of the registrant’s common stock, $0.0001 par value per share, were outstanding.

 

 

 

 

 


 

REVA MEDICAL, INC.

FORM 10-Q –– QUARTERLY REPORT

For the Quarter Ended September 30, 2018

Table of Contents

 

 

 

Page

 

 

 

PART I.  FINANCIAL INFORMATION

 

1

 

Item 1. Financial Statements

 

1

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

18

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

28

 

Item 4. Controls and Procedures

 

28

 

 

 

PART II.  OTHER INFORMATION

 

28

 

Item 1. Legal Proceedings

 

28

 

Item 1A. Risk Factors

 

28

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

31

 

Item 3. Defaults upon Senior Securities

 

31

 

Item 4. Mine Safety Disclosures

 

31

 

Item 5. Other Information

 

31

 

Item 6. Exhibits

 

32

 

 

 

SIGNATURES

 

33

 


 

- i -


 

REFERENCES

Corporate Information

Our principal executive offices are located at 5751 Copley Drive, Suite B, San Diego, CA 92111, U.S.A., and our telephone number is (858) 966-3000. Our website address is www.revamedical.com. The information on, or accessible through, our website is not part of this report. Unless the context implies otherwise, references in this report and in the information incorporated herein by reference to “REVA Medical,” “REVA,” the “Company,” “we,” “us,” and “our” refer to REVA Medical, Inc. and its consolidated subsidiary.

Currency

Unless indicated otherwise in this report, all references to “$” or “dollars” refer to United States dollars, the lawful currency of the United States of America. References to “A$” refer to Australian dollars, the lawful currency of the Commonwealth of Australia.

Trademarks

Our product name Fantom® is a registered trademark in the United States, Australia and the European Union.  We have pending applications to register the mark in Brazil, China and Japan.  The names Fantom Encore, Tyrocore™ and MOTIV™ are also our trademarks. We have pending applications to register Tyrocore and MOTIV in the United States.  All other trademarks, trade names, and service marks appearing in this report are the property of their respective owners. Use or display by us of other parties’ trademarks, trade dress, or service marks is not intended to and does not imply a relationship with, or endorsement or sponsorship of, us by the owner thereof.

- ii -


 

PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements

 

REVA Medical, Inc.

Consolidated Balance Sheets

(Unaudited)

(in thousands, except share and per share amounts)

 

 

 

September 30,

 

 

December 31,

 

 

2018

 

 

2017

 

Assets

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

7,094

 

 

$

18,544

 

Investment securities

 

 

 

 

1,470

 

Accounts receivable, net

 

115

 

 

 

63

 

Inventory

 

831

 

 

 

627

 

Prepaid expenses and other current assets

 

685

 

 

 

438

 

Total current assets

 

8,725

 

 

 

21,142

 

Property and equipment, net

 

1,878

 

 

 

1,492

 

Other non-current assets

 

23

 

 

 

27

 

Total assets

$

10,626

 

 

$

22,661

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Deficit

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

1,010

 

 

$

756

 

Accrued expenses and other current liabilities

 

1,544

 

 

 

1,737

 

Deferred revenue

 

383

 

 

 

158

 

Total current liabilities

 

2,937

 

 

 

2,651

 

Convertible notes

 

66,211

 

 

 

99,368

 

Accrued interest on convertible notes

 

13,465

 

 

 

8,779

 

Common stock warrant liability

 

470

 

 

 

4,176

 

Other long-term liabilities

 

813

 

 

 

500

 

Total liabilities

 

83,896

 

 

 

115,474

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' deficit:

 

 

 

 

 

 

 

Common stock ― $0.0001 par value; 100,000,000 shares authorized; 41,479,877 and  41,245,820 shares issued and outstanding, respectively, at September 30, 2018 and December 31, 2017

 

4

 

 

 

4

 

Additional paid-in capital

 

292,651

 

 

 

289,342

 

Accumulated other comprehensive loss

 

(2

)

 

 

(2

)

Accumulated deficit

 

(365,923

)

 

 

(382,157

)

Total stockholders' deficit

 

(73,270

)

 

 

(92,813

)

Total liabilities and stockholders' deficit

$

10,626

 

 

$

22,661

 

 

 

The accompanying notes are an integral part of these financial statements.

-1-

 


 

REVA Medical, Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(Unaudited)

(in thousands, except share and per share amounts)

 

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

September 30,

 

 

 

2018

 

 

 

2017

 

 

 

2018

 

 

 

2017

 

Revenue, net

$

 

93

 

 

$

 

17

 

 

$

 

237

 

 

$

 

17

 

Cost of revenue

 

 

141

 

 

 

 

7

 

 

 

 

318

 

 

 

 

7

 

Gross margin

 

 

(48

)

 

 

 

10

 

 

 

 

(81

)

 

 

 

10

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

1,729

 

 

 

 

3,092

 

 

 

 

6,669

 

 

 

 

10,139

 

Selling, general, and administrative

 

 

2,821

 

 

 

 

1,687

 

 

 

 

9,250

 

 

 

 

5,766

 

Total operating expenses

 

 

4,550

 

 

 

 

4,779

 

 

 

 

15,919

 

 

 

 

15,905

 

Loss from operations

 

 

(4,598

)

 

 

 

(4,769

)

 

 

 

(16,000

)

 

 

 

(15,895

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

19

 

 

 

 

34

 

 

 

 

64

 

 

 

 

36

 

Interest expense

 

 

(1,617

)

 

 

 

(1,499

)

 

 

 

(4,686

)

 

 

 

(5,169

)

Loss on issuance of convertible notes payable and warrants to purchase common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(520

)

(Loss) gain on change in fair value of convertible notes and warrant liability

 

 

(2,853

)

 

 

 

12,304

 

 

 

 

36,863

 

 

 

 

28,620

 

Other income (expense)

 

 

13

 

 

 

 

(17

)

 

 

 

(7

)

 

 

 

(98

)

Total other income (expense)

 

 

(4,438

)

 

 

 

10,822

 

 

 

 

32,234

 

 

 

 

22,869

 

Net income (loss)

$

 

(9,036

)

 

$

 

6,053

 

 

$

 

16,234

 

 

$

 

6,974

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share - basic

$

 

(0.22

)

 

$

 

0.15

 

 

$

 

0.39

 

 

$

 

0.17

 

Weighted average shares outstanding - basic

 

 

41,456,349

 

 

 

 

41,197,348

 

 

 

 

41,326,441

 

 

 

 

42,001,898

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share - diluted

$

 

(0.22

)

 

$

 

(0.08

)

 

$

 

(0.31

)

 

$

 

(0.33

)

Weighted average shares outstanding - diluted

 

 

41,456,349

 

 

 

 

58,525,654

 

 

 

 

52,832,597

 

 

 

 

56,547,761

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

 

(9,036

)

 

$

 

6,053

 

 

$

 

16,234

 

 

$

 

6,974

 

Other comprehensive income (loss)

 

                0

 

 

 

0

 

 

 

                 0

 

 

 

0

 

Comprehensive income (loss)

$

 

(9,036

)

 

$

 

6,053

 

 

$

 

16,234

 

 

$

 

6,974

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

-2-

 


 

REVA Medical, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

 

 

Nine Months Ended

 

 

September 30,

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

$

16,234

 

 

$

6,974

 

Non-cash adjustments to reconcile net income to net cash used for

 

 

 

 

 

 

 

operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

448

 

 

 

806

 

Loss on sale of property and equipment

 

 

 

 

45

 

Stock-based compensation

 

3,309

 

 

 

1,003

 

Provision for inventory reserve

 

60

 

 

 

 

Interest expense on convertible notes

 

4,686

 

 

 

5,169

 

Loss on issuance of convertible notes payable and warrants to purchase common stock

 

 

 

 

520

 

Gain on change in fair value of convertible notes and warrant liability

 

(36,863

)

 

 

(28,620

)

Deferred rent

 

14

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(52

)

 

 

(65

)

Inventory

 

(264

)

 

 

(370

)

Prepaid expenses and other current assets

 

(297

)

 

 

104

 

Other non-current assets

 

 

 

 

30

 

Accounts payable

 

251

 

 

 

(420

)

Accrued expenses and other current liabilities

 

(207

)

 

 

(338

)

Deferred revenue

 

225

 

 

 

88

 

Other long-term liabilities

 

306

 

 

 

234

 

Net cash used for operating activities

 

(12,150

)

 

 

(14,840

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

(820

)

 

 

(335

)

Purchases of investment securities

 

 

 

 

(1,470

)

Proceeds from sale of property and equipment

 

50

 

 

 

 

Maturities of investment securities

 

1,470

 

 

 

 

Net cash provided by/(used for) investing activities

 

700

 

 

 

(1,805

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from issuances of common stock

 

 

 

 

92

 

Repurchase of common stock

 

 

 

 

(12,493

)

Proceeds from issuances of convertible notes payable and warrants, net

 

 

 

 

44,985

 

Net cash provided by financing activities

 

 

 

 

32,584

 

Net increase (decrease) in cash and cash equivalents

 

(11,450

)

 

 

15,939

 

Cash and cash equivalents at beginning of period

 

18,544

 

 

 

6,674

 

Cash and cash equivalents at end of period

$

7,094

 

 

$

22,613

 

 

 

 

 

 

 

 

 

Supplemental non-cash information:

 

 

 

 

 

 

 

Property and equipment in accounts payable at end of period

$

14

 

 

$

23

 

Adjustment to beginning accumulated deficit upon adoption of ASU 2016-09

$

 

 

$

53

 

Leasehold improvement allowance - lessor paid improvements

$

787

 

 

$

 

 

 

The accompanying notes are an integral part of these financial statements.

 

-3-

 


REVA Medical, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

1.

Background and Basis of Presentation

Background:  REVA Medical, Inc. was incorporated in California in 1998 under the name MD3, Inc. In March 2002, we changed our name to REVA Medical, Inc. In October 2010, we reincorporated in Delaware. We established a non-operating wholly owned subsidiary, REVA Germany GmbH, in 2007.

We are a medical device company focused on the development and commercialization of polymer-based bioresorbable products for vascular applications. Coronary artery disease (“CAD”) has been our first area of focus.  Annually, more than 5.6 million metallic stents are used to treat CAD and worldwide sales are estimated at $4.0 billion1.  Fantom, our sirolimus-eluting bioresorbable scaffold is marketed in select European and Middle Eastern countries as an alternative to metallic stents in the treatment of CAD.  On November 1, 2018, we launched Fantom Encore, our third generation coronary scaffold, in these markets. Fantom Encore has the thinnest struts of any commercially available bioresorbable scaffold in Europe.  

We expanded our product portfolio into the treatment of below-the-knee (“BTK”) peripheral artery disease (“PAD”) with receipt of CE Mark for the MOTIV sirolimus-eluting bioresorbable scaffold in July 2018.  PAD in the lower extremities is a large and growing medical issue.  According to the Center for Disease Control, more than 8.5 million Americans suffer from PAD.  We estimate that the worldwide market for drug-eluting bioresorbable scaffolds in BTK PAD could reach $1.5 billion2.  We plan to release MOTIV in select centers to assess product performance, inform product development activities and determine commercial strategy.

In December 2010, we completed an initial public offering (the “IPO”) of our common stock in Australia and registered with the U.S. Securities and Exchange Commission (“SEC”) and, consequently, became an SEC reporting company. Our common stock is traded in the form of CHESS Depositary Interests (“CDIs”) on the Australian Securities Exchange (“ASX”); each share of our common stock is equivalent to ten CDIs. Our trading symbol is “RVA.AX.” We may pursue a listing of our common stock on a U.S. stock exchange, at which time we would become dual-listed, if we maintain our listing on the ASX.

Basis of Presentation:  We have prepared the accompanying consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) and SEC rules and regulations for reporting of interim financial information and, therefore, certain information and footnote disclosures normally included in annual financial statements are omitted. Accordingly, these interim financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this report and with the audited financial statements and accompanying footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Form 10-K”).

The accompanying consolidated financial statements include the accounts of REVA and its wholly owned subsidiary. All intercompany transactions and balances, if any, have been eliminated in consolidation. The accompanying consolidated financial statements are unaudited; the consolidated balance sheet as of December 31, 2017 was derived from our audited financial statements included in the 2017 Form 10-K. The accompanying consolidated financial statements have been prepared on the same basis as our annual financial statements and, in our opinion, all adjustments, consisting only of normal recurring accruals, considered necessary for a fair statement of the results of these interim periods have been included.

The results of operations for the three and nine month periods ended September 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 or for any other interim period.

Use of Estimates:  The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from our estimates.

 

 

 

-4-

 


REVA Medical, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

1 JP Morgan Equity Research Interventional Cardiology Market Model Dec. 2016.

2 BTK: Nehler M, et al. Epidemiology of peripheral arterial disease and critical limb ischemia in an insured national population. JVS 2014; Population data from United Nations online database.

Liquidity, Capital Resources and Ability to Continue as a Going Concern:  The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  We have incurred significant operating losses since inception and have relied on our ability to fund our operations primarily through equity and debt financings.  At September 30, 2018, we had an accumulated deficit of $365.9 million and cash of $7.1 million. Our current planned operating activities call for expenditures over the next 12 months that exceed our current cash.  We currently believe that our current cash will be sufficient to fund our operations only through the first quarter of 2019, assuming that we achieve certain minimum levels of sales of our Fantom and Fantom Encore scaffolds between now and the first quarter of 2019 and that we implement cost reductions in November 2018.  If we do not achieve the minimum level of sales, or implement such cost reductions, we currently believe that our current cash will be sufficient to fund our operations only through the middle of the first quarter of 2019 unless we further reduce operating and capital expenditures or sell certain assets.  

Although we initiated commercial sales of Fantom in the third quarter of 2017, we are still very early in the commercialization stage.  We are focused on educating physicians regarding the unique features of Tyrocore, Fantom and Fantom Encore, continuing to publish results from our pivotal clinical trial (FANTOM II) and conducting and initiating additional clinical studies, including the commencement of our 1,500 patient post-market trial in May 2018, to build additional clinical evidence to support market adoption.  Until we generate revenue at a level to support our cost structure, we expect to continue to incur substantial operating losses and net cash outflows. We may never become profitable and even if we attain profitability, we may not sustain profitability or positive cash flows on a recurring basis. Unless we are able to significantly accelerate our sales, we do not anticipate generating positive cash flows in 2018 or 2019, and therefore, will need to raise further capital to support our operations and our ongoing costs, and, if we determine to do so, to conduct additional clinical trials. We plan to address our capital needs by pursuing business development and strategic opportunities and pursuing equity or debt financing options.  In addition, the convertible notes we issued in 2014 mature in November 2019 and each holder of the convertible notes we issued in 2017 has a redemption right that it may exercise in November 2019.  If the holders of the 2017 convertible notes collectively, or individually, exercise their redemption right, or if the 2014 convertible notes are not converted into shares of our common stock or their maturity date is not extended, we most likely will not have the cash to repay the notes.  As of September 30, 2018, the aggregate face value of all such convertible notes plus accrued interest was $85.6 million.  See Note 7 Convertible Notes and Warrants to Purchase Common Stock for additional information.  If we do not successfully execute strategic opportunities that provide us with capital or raise capital through equity or debt financings, we will need to consider significant additional delays, reductions or cessation of our research and development programs and of our commercialization efforts, and we could be forced into bankruptcy or liquidation.  There can be no assurance that our efforts will result in the resolution of our liquidity needs. The factors discussed above raise substantial doubt about our ability to continue as a going concern.  If we are not able to continue as a going concern, holders of our common stock and our convertible notes could lose their investment.  The accompanying consolidated financial statements do not include any adjustments that might result should we be unable to continue as a going concern.  

2.

Summary of Significant Accounting Policies

Cash Equivalents:  We consider all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents.  Cash equivalents are carried at cost, which we believe approximates fair value due to the short-term maturities of these investments.  

Inventory:  We received CE Mark approval of our Fantom scaffold on April 3, 2017, at which time we began capitalizing raw material purchases and commercial scaffold production costs to inventory.  Inventory is stated at the lower of cost or net realizable value based on the first-in, first-out cost method (“FIFO”).  Our policy is to record an estimated allowance against inventory for unsalable, obsolete, or impaired inventory, with a corresponding increase to cost of revenue.  We record the cost of products to be used in research and development or clinical trials as research and development expense when inventory is requisitioned for such use.

Convertible Notes:  Convertible notes are analyzed at issue date to determine balance sheet classification, issue discounts or premiums, and embedded or derivative features. Embedded or derivative features are evaluated in accordance with accounting guidance for derivative securities and, if the features give rise to separate accounting, we

-5-

 


REVA Medical, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

make an election to account for the notes at cost or at fair value. If fair value accounting is elected on the issue date, we record the difference between the issue price of the notes and their fair value as a gain or loss in our consolidated statement of operations. We remeasure the fair value at each reporting date and record a gain (upon a decrease in fair value) or loss (upon an increase in fair value), as a component of other income (expense) in our consolidated statement of operations. Inputs to the models include the market value of the underlying stock, a life equal to the contractual life of the notes, incremental borrowing rates that correspond to debt with similar credit worthiness, and estimated volatility based on the historical prices of our trading securities. For each periodic valuation, we also make assumptions as to our abilities to test and commercialize our product, to obtain future financings when and if needed, and to comply with the terms and conditions of any outstanding convertible notes.

Following an analysis of their embedded and derivative features, we elected to utilize fair value accounting for all issues of convertible notes as management believes the convertible notes will be converted into common stock, rather than repaid, and the fair value method of accounting provides a more appropriate value of these liabilities than would be provided under the cost method.

Common Stock Warrants:  The fair value of warrants issued for the purchase of common stock is recorded as a liability whenever warrants call for issuance of registered shares upon exercise, a condition we may not satisfy at the time of exercise, and which, if not so satisfied, will result in a net settlement of warrants. Until the time warrants are exercised or expire, the fair value is assessed at each reporting date. Any change in value is recorded as a gain or loss as a component of other income (expense) in our consolidated statement of operations. Inputs to the valuation models are of the same nature as those used to value our convertible notes.

Revenue:  Revenue is generated primarily from the sale of our products, Fantom and Fantom Encore. We recognize revenue following a five-step model: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligations.

We began selling our products in July 2017.  We sell our products primarily through direct sales to end-users, though in April 2018, we also began selling them through distributors. Our products are sold only in countries that accept CE Mark. Terms of sale are generally consistent for both end-users and distributors with payment terms generally net 30 to 90 days. No installation, calibration or testing of products is performed subsequent to shipment in order to render products operational. Revenue is categorized based on sales channel: direct sales and distributors.

We recognize revenue in an amount that reflects the amount we expect to be entitled to in exchange for our products when control of promised products is transferred to customers upon delivery to the customer’s location.  As shipping and handling is performed before control of the product transfers to the customer, it is accounted for as a fulfillment cost included in cost of sales and it is not considered a performance obligation.

Fantom and Fantom Encore have had limited shelf lives. We currently maintain a product exchange program under which we accept product exchanges for units that expire prior to utilization, which we consider a right of return.  Due to a lack of historical experience and the risk of significant revenue reversal, we currently defer the recognition of revenue until we believe the right of return has expired based upon estimated usage. Actual amounts may ultimately differ from our estimates. If actual results vary and we adjust these estimates, there could be an effect on earnings in the period of adjustment.  We recently received approval for 12-month shelf life for Fantom and Fantom Encore and we will begin phasing out our product exchange program in the fourth quarter of 2018.

Revenue recognized from contracts with customers during the three and nine months ended September 30, 2018 was $93,000 and $237,000, respectively.  Total product shipments for these periods was $185,000 and $462,000, respectively. The difference between product shipments and revenue recognized represents our provision for returns

-6-

 


REVA Medical, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

under our product exchange program and was recorded as deferred revenue.   There were no open contracts as of September 30, 2018.

An analysis of the change in deferred revenue in our consolidated balance sheet is summarized as follows:

 

Balance as of December 31, 2017

$

158

 

  Current provisions relating to sales in current year

 

462

 

  Right of refund expired/sales in current year

 

(66

)

  Right of refund expired/sales in prior year

 

(171

)

Balance as of September 30, 2018

$

383

 

Contract acquisition costs

Contract acquisition costs associated with product sales include sales bonuses and royalties. Because our product sales are performance obligations in contracts that are satisfied at a point in time, sales bonuses associated with and royalties based on our product sales are incurred at the point in time that is generally the same time the contract is executed. Sales bonuses are recorded as selling expense and royalties are recorded as cost of revenue in our consolidated statements of operations and comprehensive income (loss).

Accounts Receivable:  Our accounts receivable arise from product sales and represent amounts due from hospitals. We provide reserves against trade receivables for estimated losses that may result from a customer’s inability to pay. Amounts determined to be uncollectible are charged or written-off against the reserve. As of September 30, 2018 and December 31, 2017, our reserves against such trade receivables was $0.

Cost of Revenues:  Cost of revenues consists of direct product costs, royalties and provisions for excess and/or obsolete products. Our product costs consist primarily of direct labor, overhead, raw materials and components. We incur royalties related to the technology that we license from a third party (Note 9).  We assess our reserves for excess and/or obsolete products on a quarterly basis and any changes are recognized in cost of revenues.

Research and Development Costs:  Research and development costs are expensed as incurred. These costs include salaries, employee benefits, laboratory supplies, consulting services, manufacturing products and services, preclinical and clinical costs, technology license fees, laboratory equipment depreciation, facility costs, and certain indirect costs.

Stock-Based Compensation: Stock-based compensation expense is recorded in connection with stock options, restricted stock awards, and restricted stock unit awards (“RSUs”) to employees, directors, and consultants. We have granted stock options, restricted stock, and RSUs that vest based on the passage of time (time-based vesting awards) as well as stock options and RSUs that vest based on achievement of performance milestones (performance-based vesting awards).

For time-based vesting stock options granted to employees and directors, we determine compensation expense based on estimated grant date fair values utilizing the Black-Scholes option valuation model. The Black-Scholes model requires the input of assumptions, including, among others, volatility, the expected term, and the fair value of the underlying common stock on the date of grant. For time-based vesting restricted stock awards and RSUs, the grant date fair value is equal to the closing market price of our common stock on the date of award. We use the straight-line method to allocate compensation expense to reporting periods over each recipient’s requisite service period, which is generally from one to four years. All stock-based compensation expense is recorded as either research and development or selling, general and administrative expense based on a recipient’s work classification.

For performance-based vesting stock options and RSUs, we record compensation expense for only the performance milestones that are probable of being achieved, with such expense recorded on a straight-line basis over the expected vesting period. We reassess our performance-based estimates each reporting period and, if the estimated service period changes, we recognize all remaining compensation expense over the remaining service period and, if the probability of achievement changes to or from “probable,” we recognize the cumulative effect. Whenever an award recipient terminates service prior to achievement of a performance milestone, the recipient’s unvested awards are cancelled and the related compensation expense previously recorded is reversed.

-7-

 


REVA Medical, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

For stock options granted to consultants, all of which are time-based vesting, we estimate fair values at the date of grant and at each subsequent reporting period and record compensation expense during the consultant’s service period. We estimate the fair value utilizing the Black-Scholes option valuation model with the same approach to inputs and assumptions as we use to estimate the fair value of employee options, except we use the remaining term as the expected life of the option.

Recently Adopted Accounting Pronouncements: We adopted Accounting Standards Update (“ASU”) 2016-09, Stock Compensation: Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), effective January 1, 2017. ASU 2016-09 simplifies certain aspects of accounting for stock-based compensation, including the accounting for income taxes, the option to recognize forfeiture credits as they occur rather than as an estimate of future activity, and classifications in the statement of cash flows. Upon the adoption, we recorded a cumulative effect adjustment to increase our accumulated deficit by approximately $53,000, with a corresponding increase to additional paid-in capital, to reverse our forfeiture estimate for unvested awards. All forfeitures occurring after adoption are being recognized in the consolidated statement of operations in the reporting period in which they occur. We had $1.8 million of forfeitures during the year ended December 31, 2017 related to a reduction in force that occurred in July 2017.  

 

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU 2014-09 Revenue from Contracts with Customers, which introduced Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”), ASU 2014-09 which introduced ASC 606, an updated standard on revenue recognition.  The standard outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. Revenue recognized under ASC 606 represents the consideration an entity expects to be entitled to in exchange for the transfer of goods or services to a customer; it also requires additional disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. The standard permits two methods of adoption:  retrospectively to each prior reporting period (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method).  We adopted ASC 606 effective January 1, 2018 and utilized the modified retrospective method for adoption. The adoption of the new revenue standards did not change our revenue recognition as our revenues continued to be recognized when the customer takes control of our product.  No adjustment to retained earnings was required upon adoption because we did not identify any accounting changes that impacted the amount of previously reported revenues. 

 

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). The amendments in this update require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments in this update eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public entities. For public business entities, the amendments in ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Except for the early application guidance discussed in ASU 2016-01, early adoption of the amendments in this update is not permitted. We adopted ASU 2016-01 effective January 1, 2018.  For the nine months ended September 30, 2018, there were no changes in the value of our convertible notes or common stock warrant liability related to credit risk.  Therefore, this guidance had no impact on our consolidated financial statements for the three or nine months ended September 30, 2018.  We will continue to evaluate this guidance quarterly.  

-8-

 


REVA Medical, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

Recently Issued Accounting Pronouncements: In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), in July 2018 issued ASU 2018-10 Codification Improvements to Topic 842, Leases and in August 2018 issued ASU 2018-11 Leases (Topic 842) – Targeted Improvements. These updates require a lessee to recognize on the balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term for all leases with terms greater than twelve months. For leases less than twelve months, an entity is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. These updates are effective for fiscal years beginning with fiscal year 2019, including interim periods within those years, with early adoption permitted. Although we are currently evaluating the impact of this guidance on our consolidated financial statements, we expect that most of our operating lease commitments will be recognized as right-of-use assets and liabilities upon adoption of the new guidance and will significantly increase both the assets and liabilities recognized and reported on our balance sheet.   The Company currently expects to complete its assessment of the full financial impact of the new lease accounting guidance during the next three to six months.

 

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal Use Software - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which amends the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract to align with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We are in the process of evaluating the impact on our consolidated financial statements and the timing of adoption of this update.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This new guidance removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. The new disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This new guidance is effective for the Company beginning on January 1, 2020, with early adoption permitted. Certain disclosures in the new guidance will need to be applied on a retrospective basis and others on a prospective basis. While the Company is currently assessing the impact of the new guidance, it is not expected to have a material impact on our  consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718), which simplifies the accounting for non-employee share-based payment transactions. The new standard expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018 (including interim periods within that fiscal year), with early adoption permitted. We do not believe that the application of the new standard will have a material impact on our consolidated financial statements.

In July 2017, ASU 2017-11, Earnings Per Share, Distinguishing Liabilities from Equity, Derivatives and Hedging, was issued.  ASU 2017-11 changes the accounting treatment and the earnings per share calculation for certain instruments with down round features. The amendments in this update should be applied using a cumulative-effect adjustment as of the beginning of the fiscal year of adoption or retrospective adjustment to each period presented. This update is effective for annual periods beginning after December 15, 2018, and interim periods within those periods. We are determining the impact the adoption will have on our consolidated financial statements and whether to early adopt the new guidance.

3.    Investment Securities

Investment securities are marketable equity or debt securities. As of September 30, 2018, we had no investment securities.  Prior to this quarter, all of our investment securities were “available-for-sale” securities and carried at fair value. Fair value for securities with short maturities and infrequent secondary market trades typically is determined by using a curve-based evaluation model that utilizes quoted prices for similar securities. The evaluation model takes into consideration the days to maturity, coupon rate and settlement date convention. Net unrealized gains or losses on these securities are included in accumulated other comprehensive loss, which is a separate component of stockholders’

-9-

 


REVA Medical, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

deficit. Realized gains and realized losses are included in other income (expense) while amortization of premiums and accretion of discounts are included in interest income. Interest and dividends on available-for-sale securities are included in interest income. We periodically evaluate our investment securities for impairment. If we determine that a decline in fair value of any investment security is other than temporary, then the cost basis would be written down to fair value and the decline in value would be charged to other expense at that time.

Historically, when we had investment securities, they were under the custodianship of a major financial institution, consisted of certificates of deposit insured by the Federal Deposit Insurance Corporation, and were classified as current assets on our consolidated balance sheets because we considered them to be highly liquid and available for use, if needed, in current operations.

 

4.

Inventory

The Company began capitalizing inventory upon obtaining CE Mark approval during the second quarter of 2017.  Inventory at September 30, 2018 and December 31, 2017 was as follows (in thousands):

 

September 30,

 

 

December 31,

 

 

2018

 

 

2017

 

Raw materials

$

653

 

 

$

255

 

Work in process

 

159

 

 

 

61

 

Finished goods

 

97

 

 

 

329

 

Excess and obsolete reserve

 

(78

)

 

 

(18

)

 

$

831

 

 

$

627

 

5.

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation.  Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets, which is generally three to five years.  Leasehold improvements are amortized over the economic life of the asset or the lease term, whichever is shorter.  Upon disposition or retirement of an asset, its cost and related accumulated depreciation are written off and any gain or loss is recognized in the consolidated statement of operations.

 

Property and equipment at September 30, 2018 and December 31, 2017 were as follows (in thousands):

 

 

September 30,

 

 

December 31,

 

 

2018

 

 

2017

 

Furniture, office equipment, and software

$

580

 

 

$

601

 

Laboratory equipment

 

5,728

 

 

 

5,705

 

Leasehold improvements

 

3,208

 

 

 

2,422

 

Construction in progress

 

12

 

 

 

 

 

 

9,528

 

 

 

8,728

 

Accumulated depreciation and amortization

 

(7,650

)

 

 

(7,236

)

 

$

1,878

 

 

$

1,492

 

 

6.

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities at September 30, 2018 and December 31, 2017 were as follows (in thousands):

 

September 30,

 

 

December 31,

 

 

2018

 

 

2017

 

Accrued salaries and other employee costs

$

985

 

 

$

1,296

 

Accrued clinical and preclinical expenses

 

234

 

 

 

220

 

Accrued operating expenses

 

303

 

 

 

184

 

Accrued use taxes and other

 

22

 

 

 

37

 

 

$

1,544

 

 

$

1,737

 

 

-10-

 


REVA Medical, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

7.

Convertible Notes Payable and Warrants to Purchase Common Stock

In May 2017, we issued 338 convertible notes and in June 2017 we issued 133 convertible notes (collectively, the “2017 Notes”), each with a face value of $100,000, for total gross cash proceeds of $47.1 million.  We used a portion of these proceeds to repurchase 1,732,260 shares of our common stock from one of the purchasers in the 2017 Notes at $7.212 per share, for a total repurchase price of $12.5 million, and incurred transaction costs of $2.1 million, resulting in net proceeds of $32.6 million. The 2017 Notes are convertible at any time at the holders’ election; the conversion rate as of September 30, 2018 was $8.655 per share, which, if converted at that conversion rate, would result in issuing 5,441,941 shares of common stock upon conversion. The conversion rate may decrease depending on the price at which we issue securities in a future financings, if any, to a minimum of $7.212 per share. The 2017 Notes mature five years from issue date, if not converted or redeemed earlier. Interest accrues at the rate of 8.0 percent per annum, compounded annually, and is payable upon redemption or maturity; accrued interest is not payable or convertible upon conversion of the notes. Upon at least 30 days’ written notice, each holder of the 2017 Notes has a right to request that we redeem the notes (face value plus accrued interest) on November 4, 2019, if they have not been previously converted or redeemed.

On their issue dates, we evaluated the 2017 Notes and, following an analysis of the embedded and derivative features, irrevocably elected to account for the notes at fair value. Their fair value as of September 30, 2018 and December 31, 2017 was estimated to be $39.7 million and $38.4 million, respectively.  Their fair value as of September 30, 2018 was $7.4 million below their $47.1 million face value.

In November 2014, we issued 250 convertible notes (the “2014 Notes”), each with a face value of $100,000, for total gross cash proceeds of $25.0 million. The 2014 Notes are convertible at any time at the holders’ election into a total of 11,506,156 shares of common stock, which represents a conversion rate of $2.17275 per share. The 2014 Notes mature on November 14, 2019, if not converted or redeemed earlier. Interest accrues at the rate of 7.54 percent per annum, compounded annually, and is payable upon redemption or maturity; accrued interest is not payable or convertible upon conversion of the 2014 Notes. Effective June 1, 2017, the terms of the 2014 Notes that provided the holders with a one-time option to require us to redeem the notes on June 30, 2017 and that provided for an automatic conversion of the 2014 Notes were eliminated, and the 2014 Notes were modified to be subordinate to the 2017 Notes. Our stockholders approved the foregoing modifications to the terms of the 2014 Notes.

On their issue date, we evaluated the 2014 Notes and, following an analysis of the embedded and derivative features, we irrevocably elected to account for the notes at fair value. Following the modifications to the notes that were effective on June 1, 2017, we continued to account for the 2014 Notes under the fair value method. Their fair value as of September 30, 2018 and December 31, 2017 was estimated to be $26.5 million and $61.0 million, respectively. Their fair value as of September 30, 2018 was $1.5 million higher than the $25.0 million face value.

Changes in the fair value of the 2014 Notes and 2017 Notes (collectively, the “convertible notes”) are recorded as gains or losses in the other income (expense) portion of our consolidated statement of operations. During the three months and nine months ended September 30, 2018, we accrued $1.6 million and $4.7 million in interest expense on the convertible notes, respectively. During the three and nine months ended September 30, 2017, we accrued $1.5 million and $3.1 million in interest expense on the convertible notes, respectively, as well as $2.1 million in transaction costs related to issuance of the 2017 Notes.

In connection with issuing the 2017 Notes, in May 2017 and June 2017, we issued warrants to purchase up to 2,119,500 shares of common stock to the purchasers of the 2017 Notes. The warrants are immediately exercisable and expire five years from issue date. The exercise price of each warrant is $5.00 per share, which may increase depending on the price at which we issue securities in future financings, if any, to a maximum of $7.212 per share. The fair value of the warrants on September 30, 2018 and December 31, 2017 was estimated to be $0.5 million and $4.2 million, respectively. Changes in the fair value of the warrants are recorded as gains or losses in the other income (expense) portion of our consolidated statement of operations.

The aggregate fair value of the 2017 Notes and warrants on their issue dates was estimated to be $47.6 million, which was $0.5 million higher than the $47.1 million issue price; we recorded this difference as a loss on issuance in the consolidated statement of operations.

As previously discussed, the 2014 Notes mature in November 2019 and each holder of the 2017 Notes has a redemption right that it may exercise in November 2019.  As of September 30, 2018, the aggregate face value of all the convertible notes plus accrued interest was $85.6 million. If the holders of the 2017 Notes collectively, or

-11-

 


REVA Medical, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

individually, exercise their redemption right, or if the 2014 Notes are not converted into shares of our common stock or their maturity date is not extended, we most likely will not have the cash to repay the notes (see Note 1 – Liquidity, Capital Resources and Ability to Continue as a Going Concern).

 

 

8.

Fair Value Measurements

Our convertible notes and common stock warrant liability are carried at fair value.  Our cash equivalents and investment securities, when we had them, were also carried at fair value.  The fair value of financial assets and liabilities is measured under a framework that establishes “levels” which are defined as follows: (i)  Level 1 fair value is determined from observable, quoted prices for identical assets or liabilities; (ii) Level 2 fair value is determined from quoted prices for similar items in active markets or quoted prices for identical or similar items in markets that are not active, and (iii) Level 3 fair value is determined using the entity’s own assumptions about the inputs that market participants would use in pricing an asset or liability.  

The fair values of our cash equivalents, investment securities, convertible notes and common stock warrant liability are summarized in the following tables (in thousands):

 

 

September 30, 2018

 

 

Total

 

 

Fair Value Determined Under:

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible notes

$

66,211

 

 

$

 

 

$

 

 

$

66,211

 

Common stock warrant liability

$

470

 

 

$

 

 

$

 

 

$

470

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

Total

 

 

Fair Value Determined Under:

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

$

4,388

 

 

$

4,388

 

 

$

 

 

$

 

Investment securities

$

1,470

 

 

$

 

 

$

1,470

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible notes

$

99,368

 

 

$

 

 

$

 

 

$

99,368

 

Common stock warrant liability

$

4,176

 

 

$

 

 

$

 

 

$

4,176

 

 

2017 Notes and Warrants:  The fair value of the 2017 Notes as of September 30, 2018 was determined using a Least Squares Monte Carlo simulation model; the fair value of our warrants to purchase common stock was determined using the same model with an embedded Black-Scholes valuation model to evaluate the early exercise features. These models require use of unobservable inputs that are determined by management, with the assistance of independent experts. These inputs represent our best estimates, but involve certain inherent uncertainties. We use the market value of the underlying stock, a life equal to the contractual life of the financial instrument, an estimate of the credit spread based on the implied spread as of the commencement date of the 2017 Notes, an estimate of volatility based on the historical prices of our trading securities, and we make assumptions as to our abilities to test and commercialize our product(s), to obtain future financings when and if needed, to comply with the terms and conditions of our convertible notes, and the probability of a change in control event.

 

The following is a summary of the assumptions used to value the 2017 Notes:

 

 

September 30,

 

 

December 31,

 

 

2018

 

 

2017

 

Price per share of common stock

$

2.13

 

 

$

5.31

 

Risk-free interest rate

 

2.9

%

 

 

2.1

%

Expected volatility of common stock

 

45.0

%

 

 

45.0

%

Expected life (in years)

 

3.63

 

 

4.37

 

Bond yield of equivalent securities

 

26.5

%

 

 

26.5

%

 

A significant change in the market price per share, expected volatility, or bond yield of equivalent securities, in isolation, would result in significantly higher or lower fair value measurements. In combination, changes in these inputs

-12-

 


REVA Medical, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

could result in a significantly higher or lower fair value measurement if the input changes were to be aligned, or could result in a minimally higher or lower fair value measurement if the input changes were of a compensating nature.

2014 Notes:  The fair value of the 2014 Notes as of September 30, 2018 was determined using a Least Squares Monte Carlo simulation model.  This model requires use of unobservable inputs that are determined by management, with the assistance of independent experts. These inputs represent our best estimates, but involve certain inherent uncertainties. We use the market value of the underlying stock, a life equal to the contractual life of the financial instrument, estimates of the forward AUD/USD exchange rate, an estimate of the credit spread calculated by adding a subordination spread based on an analysis of comparable bonds to our implied spread from the valuation of the 2017 Notes and warrants, and an estimate of volatility based on the historical prices of our trading securities.

The primary assumptions used to value the 2014 Notes as of September 30, 2018 were:  expected life of 1.1 years, AUD stock price of $2.94 (US equivalent of $2.13), expected volatility of common stock of 45%, forward exchange rate volatility of 10%, credit spread of 26.5% and risk-free interest rate of 2.0% to 2.5%.  

The fair value of the 2014 Notes as of December 31, 2017 was determined using an “as-converted” method. This involved multiplying the number of shares into which the 2014 Notes convert (11,506,156 shares) by the Company’s stock price as of December 31, 2017 (the last trading day of the quarter).  We performed an evaluation as to whether the “as-converted” method would yield a materially different result from the Least Squares Monte Carlo simulation model used in previous quarters and determined that it would not. We use the “as-converted” method for calculating fair value when the 2014 Notes are significantly in the money as they no longer have complex features which would require a more complicated valuation model.  

Reconciliation: A reconciliation of the convertible notes and common stock warrant liability that are measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows (in thousands):

 

 

 

 

Common Stock

 

 

Convertible Notes

 

 

Warrant Liability

 

Balance at December 31, 2016

$

91,655

 

 

$

 

Net issuances

 

40,954

 

 

 

6,666

 

Total unrealized gains on change in fair value

 

(33,241

)

 

 

(2,490

)

Balance at December 31, 2017

$

99,368

 

 

$

4,176

 

Total unrealized gains on change in fair value

 

(33,157

)

 

 

(3,706

)

Balance at September 30, 2018

$

66,211

 

 

$

470

 

 

9.

Commitments and Contingencies

We license certain patents and other intellectual property rights related to the composition and coating of our bioresorbable scaffolds and our other biomaterial products from Rutgers University. We entered into an amendment to this license in July 2018.  Previously, the license required minimum annual royalties upon sales of products utilizing the licensed technology.  The amendment eliminated all minimum annual royalties, which prior to the amendment could have eventually exceeded $2 million per year.  Under the amendment, the current royalty rate is less than five percent.  Upon a change in control of the Company, the royalty rate will reduce if and when certain revenue goals are attained.   Additionally, under the terms of the amended license, future milestone payments, payments due upon a sublicense of our technology and extension fees applicable to other indications have all been eliminated.  The accrual of $500,000 for extension fees as of June 30, 2018 was eliminated in the third quarter of 2018.  The amended license increased the amount of payment we owe upon a change in control of the Company to $7.85 million plus 1% of the amount by which the purchase price to be paid at closing, net of debt repayment to creditors, exceeds $500 million, subject to a $10.0 million cap on the amount of the change in control payment.

We lease approximately 37,000 square feet of office and lab space for our corporate headquarters in San Diego, California.  In October 2017, we amended this lease to extend the expiration date by 88 months from January 2018 to May 2025.  Effective February 1, 2018, our monthly rent became $66,000 and it will increase every February by three percent.  The amended lease also contains a leasehold improvement allowance of $787,000 and rent abatements of $274,000. We utilized the leasehold improvement allowance to upgrade our facilities and all construction was completed in the third quarter of 2018.

-13-

 


REVA Medical, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

We record rent expense on a straight-line basis over the life of the lease; the difference between average rent expense and cash payments for rent is recorded as a deferred rent liability. As of September 30, 2018, our deferred rent liability was $809,000, all of which, except for $14,000, was classified as a long-term liability.

10.

Capital Stock

Our certificate of incorporation, as amended, authorizes us to issue 100,000,000 shares of common stock, par value $0.0001 per share, 25,000,000 shares of Class B common stock, par value $0.0001 per share and 5,000,000 shares of undesignated preferred stock, par value $0.0001 per share.  As of September 30, 2018 and December 31, 2017, 41,479,877 and 41,245,820  shares of common stock were outstanding, respectively, and no shares of Class B common stock or preferred stock were outstanding.

Certain stockholders, as well as the holders of our convertible notes, if such convertible notes are converted into common stock, have the right to cause us to file a registration statement that would register the resale of such shares on their behalf and to include their shares in registration statements that we may file on behalf of other stockholders.

11.

Stock-Based Compensation

The PlanOur 2010 Equity Incentive Plan, as amended (the “Plan”), provides for grants of incentive and non-qualified stock options to purchase our common stock at a price per share equal to the closing market price on the date of grant and of RSU and restricted stock awards, for which there is no consideration payable by the recipient. An RSU entitles the recipient to one share of our common stock upon vesting.  All stock issuances under the Plan are made with new shares from our authorized but unissued common stock. The number of shares reserved for issuance under the Plan may be increased annually by up to three percent of our outstanding stock. On January 1, 2018, an additional 1,237,374 shares were added to the Plan.  As of September 30, 2018, there were 3,574,479 shares reserved for issuance under the Plan.  

Employees, non-employee directors, and consultants are eligible to participate in the Plan. For purposes of determining stock-based compensation expense, we include non-employee directors with employees; we account for consultant compensation expense separately.

The term of awards granted under the Plan may not exceed ten years.  Vesting periods of awards are determined by our board of directors.

Stock option activity under the Plan was as follows:

 

Options

 

 

Weighted Average

 

 

Outstanding

 

 

Exercise Price

 

Balance at December 31, 2016

 

6,128,192

 

 

$

6.65

 

Granted

 

897,100

 

 

 

6.80

 

Cancelled

 

(783,123

)

 

 

7.42

 

Exercised

 

(121,678

)

 

 

2.81

 

Balance at December 31, 2017

 

6,120,491

 

 

$

6.65

 

Granted

 

901,469

 

 

 

2.87

 

Cancelled

 

(1,053,323

)

 

 

6.87

 

Exercised

 

(83,425

)

 

 

1.40

 

Balance at September 30, 2018

 

5,885,212

 

 

$

6.10

 

 

A majority of the vesting periods of outstanding stock options is four years, with 25 percent vesting on the one-year anniversary of the vesting commencement date and 75 percent vesting in equal monthly installments thereafter. A majority of those options are exercisable at any time but, if exercised prior to vesting, are subject to a lapsing right of repurchase by us at the exercise price until fully vested. As of September 30, 2018, no unvested options had been exercised and, therefore, no shares were subject to repurchase.

During March 2015, we granted 316,000 options that vest based on achievement of certain performance milestones. We estimated the vesting term for each performance milestone on the date of grant, and on each reporting

-14-

 


REVA Medical, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

date thereafter, based on our internal timelines and operating projections. Our estimates of vesting ranged from approximately nine to 30 months at the grant date in March 2015; we estimated the weighted average remaining vesting term to be 12 months and 15 months as of December 31, 2017 and September 30, 2018, respectively. A total of 65 percent of these options had vested as of September 30, 2018.  During the year ended December 31, 2017, 63,000 unvested options were cancelled.  None of these options were cancelled during the nine months ended September 30, 2018.

During 2013, we awarded 87,500 shares of restricted stock; 25 percent of each award vested on each annual anniversary date of the award.  As of September 30, 2018, all of these awards had vested and none had been cancelled.

RSU activity under the Plan was as follows:

 

RSUs

 

 

Performance

 

 

Time

 

 

Outstanding

 

 

Based

 

 

Based

 

Balance at December 31, 2016

 

754,000

 

 

 

706,200

 

 

 

47,800

 

Granted

 

397,300

 

 

 

162,500

 

 

 

234,800

 

Cancelled

 

(526,000

)

 

 

(479,200

)

 

 

(46,800

)

Vested

 

(47,800

)

 

 

 

 

 

(47,800

)

Balance at December 31, 2017

 

577,500

 

 

 

389,500

 

 

 

188,000

 

Granted

 

228,000

 

 

 

 

 

 

228,000

 

Cancelled

 

 

 

 

 

 

 

 

Vested

 

(209,083

)

 

 

(162,500

)

 

 

(46,583

)

Balance at September 30, 2018

 

596,417

 

 

 

227,000

 

 

 

369,417

 

We estimated the vesting term for each performance-based RSU on the award date, and on each reporting date thereafter, based on our internal timelines and operating projections. As of September 30, 2018, we estimated the remaining weighted average vesting term for performance-based RSUs to be 13.1 months for those granted during 2015.  The performance-based RSUs granted in 2017 vested on June 30, 2018.  

Time-based RSUs generally vest over one year for non-employee directors and ratably over three years for employees.

No tax benefits arising from stock-based compensation have been recognized in the consolidated statements of operations and comprehensive loss through September 30, 2018.

Grants and Awards to Employees:  We account for option grants, restricted stock awards, and RSUs to employees based on their estimated fair values on the date of grant or award, with the resulting stock-based compensation recorded over the requisite service period on a straight-line basis. The fair value of restricted stock and RSUs is equal to the closing market price of our common stock on the date of award.  The fair value of option grants was estimated on the date of grant using the following weighted-average assumptions:

 

 

Nine Months Ended

 

 

September 30,

 

 

2018

 

 

2017

 

Risk-free interest rate

2.8%

 

 

2.2%

 

Expected volatility of common stock

66.6%

 

 

65.4%

 

Expected life in years

6.25

 

 

6.21

 

Dividend yield

0%

 

 

0%

 

 

 

The assumed risk-free interest rate was based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term equal to the expected life of the option. The assumed volatility was calculated based on the historical market prices of a selected group of publicly traded companies considered our peers; we used peer group data because we had limited historical trading data for our common stock, but adjusted the 2016 volatility upward by approximately ten percent to allow us to move toward using the historical trading data for our common stock, which is more volatile than our peer group. In 2017, we began using the historical trading data for our common stock; our stock began trading on December 23, 2010, the date of our IPO, which provides approximately 7.75 years’ history as of September 30, 2018. For options that have time-based vesting, the expected option life was calculated using the simplified method under the accounting standard for stock compensation and a ten-year option expiration; we use the simplified method because we do not yet have adequate history as a public company traded on a U.S. stock exchange to establish a

-15-

 


REVA Medical, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

reasonable expected life. For options that have performance-based vesting, the expected life was calculated based on our internal timelines and operating projections. The expected dividend yield of zero reflects that we have not paid cash dividends since inception and do not intend to pay cash dividends in the foreseeable future.

The options granted to employees during the nine months ended September 30, 2018 had a weighted average grant date fair value of $1.80.

The aggregate intrinsic value of options exercised during the nine months ended September 30, 2018 and 2017, was $54,000 and $362,000, respectively.

Stock-based compensation arising from employee options and awards under the Plan was as follows for the periods indicated (in thousands):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Research and development expense

 

156

 

 

 

(548

)

 

 

501

 

 

 

(202

)

Selling, general, and administrative expense

 

732

 

 

 

(338

)

 

 

2,808

 

 

 

1,205

 

 

$

888

 

 

$

(886

)

 

$

3,309

 

 

$

1,003

 

As of September 30, 2018, we had approximately $6.3 million of unrecognized compensation costs related to unvested employee equity awards that are expected to be recognized over a weighted-average period of 1.7 years.

12.

Net Income (Loss) Per Common Share

Basic net income (loss) per common share is calculated by dividing the net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of common share equivalents outstanding for the period determined using the treasury-stock method and the if-converted method, as applicable. For this calculation, common stock options and restricted stock subject to forfeiture are considered common stock equivalents; common stock equivalents are used in the calculation of diluted net loss per share only when their effect is dilutive.

Basic net income per share reconciles to fully diluted net loss per share as follows (dollars in thousands):

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Diluted Net Loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) used for basic net income (loss) per share

$

(9,036

)

 

$

6,053

 

 

$

16,234

 

 

$

6,974

 

Interest expense on convertible notes

 

 

 

 

1,499

 

 

 

1,754

 

 

 

3,054

 

Gain on change in fair value of convertible notes and warrants

 

 

 

 

(12,304

)

 

 

(34,509

)

 

 

(28,620

)

 

$

(9,036

)

 

$

(4,752

)

 

$

(16,521

)

 

$

(18,592

)

Weighted Average Shares Used to Compute Diluted Net Loss per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used for basic net income (loss) per share

 

41,456,349