ORGANOVO HOLDINGS, INC. - Quarter Report: 2019 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

For the quarterly period ended December 31, 2019

OR

For the transition period from                      to                     

Commission File Number 001-35996

Organovo Holdings, Inc.

(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Act:

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 for 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,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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 Exchange Act). Yes ☐  No ☒

As of February 1, 2020, a total of 130,497,563 shares of the registrant’s Common Stock, $0.001 par value, were outstanding.

ORGANOVO HOLDINGS, INC.

INDEX

PART I. FINANCIAL INFORMATION

2

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Organovo Holdings, Inc.

Condensed Consolidated Balance Sheets

(in thousands except for share and per share data)

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

3

Organovo Holdings, Inc.

Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Loss

(in thousands except share and per share data)

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

4

Organovo Holdings, Inc.

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

(in thousands)

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

5

Organovo Holdings, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

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

6

Organovo Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Description of Business

Nature of operations

Organovo Holdings, Inc. (“Organovo Holdings,” “we,” “us,” “our,” “the Company” and “our Company”) is a biotechnology company that has focused on pioneering the development of bioprinted human tissues that emulate human biology and disease. In August 2019, after a rigorous assessment of the Company’s lead liver therapeutic tissue program following completion of various preclinical studies, the Company’s Board of Directors (the “Board”) concluded that the variability of biological performance and related duration of potential benefits presented development challenges and lengthy redevelopment timelines that no longer supported an attractive opportunity for the Company and its stockholders. Furthermore, the Board deemed the stage of development of the Company’s other therapeutic pipeline assets, including stem cell based tissue programs, to be too premature to potentially reach IND filing status within an acceptable investment horizon and with the Company’s available resources. As a result, the Company suspended all development of its lead program and all other related pipeline development activity and engaged a financial advisory firm to explore its strategic alternatives, including evaluating a range of ways to generate value from the Company’s technology platform and intellectual property, its commercial and development capabilities, its listing on the Nasdaq Capital Market, and its remaining financial assets.

On December 13, 2019, the Company and Tarveda Therapeutics, Inc. (“Tarveda”), a privately owned biopharmaceutical company, entered into an Agreement and Plan of Merger and Reorganization, as amended by the First Amendment to Merger Agreement, dated January 26, 2020, and as may be amended from time to time (the “Merger Agreement”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Opal Merger Sub, Inc. (“Opal”), a new wholly-owned subsidiary of the Company, will merge with and into Tarveda, with Tarveda as the surviving corporation, becoming a wholly-owned subsidiary of the Company (the “Merger”). As a result of the Merger, each outstanding share of Tarveda capital stock will be converted into the right to receive shares of the Company’s common stock. Under the terms of the Merger Agreement, the Company will issue, and Tarveda securityholders will be entitled to receive, in a tax-free exchange, shares of its common stock such that Tarveda securityholders will own approximately 75% of the combined company on a fully diluted basis (as defined in the Merger Agreement) and the Company’s securityholders will own approximately 25% of the combined company on a fully diluted basis (as defined in the Merger Agreement). The Merger Agreement provides that the exchange ratio for Tarveda’s capital stock are subject to upward and downward adjustment based on the Company’s net cash balance at the closing of the Merger. If the Company’s net cash balance at the closing of the Merger is below $22 million, the Merger Agreement provides for adjusting the exchange ratio to increase the number of shares of its common stock issued to former Tarveda securityholders. As a result, Tarveda’s securityholders may receive additional shares of the Company’s common stock as Merger consideration, and consequently the Company’s securityholders may be further diluted as a result of the Merger. If the Company’s net cash balance at the closing of the Merger is above $22 million, the Merger Agreement provides for adjusting the conversion ratio to decrease the number of shares of its common stock issued to former Tarveda securityholders. Additionally, the Merger Agreement provides for certain adjustments for debt of each of the parties. These percentages are calculated based on other assumptions as well, and, to the extent these assumptions prove to be inaccurate, Tarveda’s securityholders may receive a larger or smaller percentage of the combined company’s pro forma fully diluted capitalization. If Tarveda’s net cash balance at the closing of the Merger is below $15 million, the Company may elect to not consummate the Merger.

The Merger is subject to customary closing conditions, including approval by the Company’s stockholders of the issuance of its common stock in the Merger, as well as a reverse stock split of its common shares. The Company anticipates the Merger will be completed in the fiscal fourth quarter of 2020. The Merger Agreement contains certain termination rights for both the Company and Tarveda, and further provides that, upon termination of the Merger Agreement under specified circumstances, either party may be required to pay the other party a termination fee ranging between $1.0 million (plus reimbursement of $0.3 million of expenses) and $2.0 million (plus reimbursement of $0.5 million of expenses), depending on the cause of the termination.

Prior to execution of the Merger Agreement, the Company solicited bids from potential purchasers for its operating assets, which the Company had sought to sell or otherwise dispose of in one or more strategic transactions. In connection with that process, the Company entered into an agreement with LifeNet Health (“LifeNet”) on November 7, 2019 to sell certain equipment and inventory of our Samsara Sciences, for $1.5 million in cash. In addition, on January 26, 2020, the Company and Tarveda agreed to amend the Merger Agreement to provide that the Company would be credited with $1.5 million for purposes of calculating the number of shares to be issued to Tarveda stockholders in connection with the Merger if the Company does not sell or transfer its intellectual property and remaining assets prior to the closing of the Merger. The Company’s remaining assets following these actions will consist primarily of its cash, cash equivalents, interest receivables, restricted cash and other working capital items related to its corporate administrative function, its intellectual property portfolio, its license and collaboration agreements, its remaining assets, its listing on the Nasdaq Capital Market and the Merger Agreement with Tarveda. In addition, the majority of the Company’s employees have been terminated, except for six general and administrative personnel.

7

As a result of the sale transaction with LifeNet, aside from the maintenance of the Company’s intellectual property portfolio, license and collaboration agreements, its remaining assets, and its listing on the Nasdaq Capital Market, all of the Company’s business immediately following the Merger will be the business conducted by Tarveda immediately prior to the Merger, if the Merger closes. Accordingly, because of the pending Merger with Tarveda and the action described above, the Company believes its historical operating results are not indicative of future results. The Company cannot assure you that it will close the pending Merger with Tarveda on favorable terms, in a timely manner, or at all.

Except where specifically noted or the context otherwise requires, references to “Organovo Holdings,” “the Company,” “we,” “our,” and “us” in these notes to the unaudited condensed consolidated financial statements refers to Organovo Holdings, Inc. and its wholly owned subsidiaries, Organovo, Inc., Samsara Sciences, Inc, and Opal Merger Sub, Inc.

Note 2. Summary of Significant Accounting Policies

Basis of presentation and principles of consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not necessarily include all information and notes required by GAAP for complete financial statements. The condensed consolidated balance sheet at March 31, 2019 is derived from the Company’s audited consolidated balance sheet at that date.

The unaudited condensed consolidated financial statements include the accounts of Organovo Holdings and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments, which are only normal and recurring, necessary for a fair statement of the Company’s financial position, results of operations, stockholders’ equity and cash flows. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2019, as filed with the Securities and Exchange Commission (“SEC”). Operating results for interim periods are not necessarily indicative of operating results for the Company’s fiscal year ending March 31, 2020 (see “Note 1. Description of Business”).

Liquidity

As of December 31, 2019, the Company had cash and cash equivalents of approximately $30.5 million and restricted cash of approximately $0.1 million. The restricted cash was pledged as collateral for a letter of credit that the Company is required to maintain as a security deposit under the terms of the lease of its facilities. The Company had an accumulated deficit of approximately $276.7 million at December 31, 2019. The Company also had negative cash flows from operations of approximately $11.7 million during the nine months ended December 31, 2019.

Through December 31, 2019, the Company has financed its operations primarily through the sale of convertible notes, warrants, the private placement of equity securities, the sale of common stock through public and at-the-market (“ATM”) offerings, and through revenue derived from product and research service-based agreements, collaborative agreements, licenses, and grants. During the three and nine months ended December 31, 2019, the Company issued 0 and 6,087,382 shares of its common stock through its ATM facility and received net proceeds of approximately $0 and $5.0 million, respectively.

Throughout the strategic alternatives assessment process, the Company has taken steps to manage its resources and extend its cash runway including reducing commercial activities related to its liver tissues, except for sales of primary human cells out of inventory, negotiating an exit from its long-term facility lease, selling various assets, and reducing its workforce to the minimum level necessary to explore and support these strategic alternatives as well as to support the remainder of the Company’s on-going business activities and assets, including its intellectual property platform and collaborations with research institutions and universities. As a result, the Company terminated the employment of 52 employees, or 90% of its workforce and recorded a restructuring charge during the nine months ended December 31, 2019 of approximately $2.8 million, primarily related to employee severance and benefits costs, of which $1.7 million was paid out during the fiscal second quarter, $0.9 million was paid out during the fiscal third quarter, and the remainder is anticipated to be paid out during the fiscal fourth quarter.

The Company currently expects further restructuring actions tied to the completion of the Merger with Tarveda, which could lead to an additional $3.5 million of severance and benefits costs that would be incurred and paid upon the closing of the Merger. As a result of the sale of certain non-intellectual property related assets and remaining assets, its future cash requirements will consist primarily of fees associated with the Merger including fees payable to financial advisors, consulting fees, intellectual property, legal and accounting support costs, key employee retention, severance and change of control benefits and ongoing compensation obligations for the six general and administrative personnel that remain with us as of the date the sale transaction is completed. The Company currently anticipates requiring approximately $4.2 million in transaction related costs, to complete the Merger. Absent any further impact from asset sales, additional legal costs, Merger related costs or severance and benefit costs, the Company expects its cash balance to be approximately $29.0 million at the end of its fiscal fourth quarter.

8

The Company’s expenses may exceed its current plans and expectations, and, if the Merger with Tarveda is not completed, it could cause the Company to complete another transaction or wind-down its operations sooner than anticipated. If the Company is unable to successfully complete the Merger with Tarveda or another strategic transaction or secure additional capital on a timely basis and on terms that are acceptable to its stockholders, the Company may elect to cease its operations altogether, in which event the value realized by its stockholders might be significantly less than the $29.0 million of stockholders’ equity recorded on the Company’s consolidated financial statements as of December 31, 2019.

While the Company believes that it can maintain its current operations for at least the next 12 months, based on its current plans and available resources, the assessment by the Company discussed above with respect to the Merger with Tarveda and other alternatives raises substantial doubt over the Company’s ability to successfully finance itself on a long-term basis. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Use of estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Significant estimates used in preparing the condensed consolidated financial statements include those assumed in revenue recognition, the measurement of operating lease right-of-use assets and lease liabilities, the valuation of stock-based compensation expense, the valuation of impairment of long-lived assets, and the valuation allowance on deferred tax assets. On an ongoing basis, management reviews these estimates and assumptions.

Impairment of long-lived assets

In accordance with ASC 360-10, the Company records an impairment loss on long-lived assets used in operations when events and circumstances indicate that long-lived assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets (i.e. not able to be recovered). During the second quarter of Fiscal 2020, the Company announced the restructuring of its operations. This event required the reevaluation of the recoverability of the gross carrying value of its long-lived assets. Upon the Company’s announcement and at each quarter-end, the Company performed an asset impairment analysis on its long-lived asset group, consisting primarily of licensed intangible assets, computer equipment, and software following the completion of various asset sales prior to December 31, 2019, which concluded that the carrying amount is not recoverable. However, the Company’s analysis indicated that carrying amount of the asset group does not exceed its fair value. As such, no impairment loss is required to be recognized. Nonetheless, it is reasonably possible that the impairment analysis may change in the near term resulting in the need to write down those assets to fair value. The Company will continue to monitor assets for impairment.

Revenue recognition

The Company has generated revenues from payments received from research service agreements, product sales, collaborative agreements with partners including pharmaceutical and biotechnology companies and academic institutions, licenses, and grants from the National Institutes of Health (“NIH”) and private not-for-profit organizations.

The Company recognizes revenue under Topic 606, Revenue from Contracts with Customers (“Topic 606”) when (or as) the promised services are transferred to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those services. To determine revenue recognition for arrangements the Company concludes are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) the performance obligation(s) are satisfied. At contract inception, the Company assesses the goods or services promised within each contract, assesses whether each promised good or service is distinct and identifies those that are performance obligations. The Company recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

Billings to customers or payments received from customers are included in deferred revenue on the balance sheet until all revenue recognition criteria are met. As of December 31, 2019 and March 31, 2019, the Company had approximately $0 and $525,000, respectively, in deferred revenue related to its research service agreements, collaborative agreements, and licenses within the scope of Topic 606. In the nine months ended December 31, 2019, the Company recognized revenue on approximately $525,000, of which $490,000 related to the expiration of an agreement with a non-refundable up-front fee, that had been recorded as deferred revenue at March 31, 2019.

9

Service revenues

The Company’s service-based business, Organovo, Inc., utilized its NovoGen® bioprinting platform to provide customers access to its highly specialized tissues that model human biology and disease, and to in vitro testing services based on that technology. These contracts with customers contained multiple performance obligations including: (i) bioprinting tissues for the customer, (ii) reporting the results of tests performed on the printed tissues pursuant to the agreed upon work plan through exposure of the tissue to various factors (including the customer’s proprietary compound), and (iii) delivering specific byproduct study materials, which were satisfied, respectively, at each of the following points in time: (i) upon completion of manufacturing of the bioprinted tissue for the customer, (ii) upon delivery of the report on tests performed on the tissue, and (iii) upon making certain study materials generated from the aforementioned testing process available to the customer. The customer did not have access or control of any performance obligation prior to the point in time of full completion of the corresponding performance satisfying event as defined above. Furthermore, although the service could be customized for each customer, it was not so highly customized as to not have an alternative use either to other customers or to the Company without significant economic consequences or rework. Accordingly, the Company’s service-based business utilized point-in-time recognition under Topic 606.

For service contracts, the Company allocated the transaction price to each performance obligation based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. If the standalone selling price was not observable through past transactions, the Company estimated the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations. The transaction price for service business contracts was a fixed consideration.

In connection to the Company’s decision to pursue its strategic alternatives, the Company reduced commercial activities related to its liver tissues, except for sales of primary human cells out of inventory. The Company is expected to continue to maintain its external research collaborations and its intellectual property portfolio through the closing of the Merger.

Product sales, net

The Company’s product-based business, Samsara Sciences, Inc., produced high-quality cell-based products for use in Organovo’s 3D tissue manufacturing and for use by life science customers. The Company recognizes product revenue when the performance obligation is satisfied, which is at the point in time the customer obtains control of the Company’s product, typically upon delivery. Product revenues are recorded at the transaction price, net of any estimates for variable consideration under Topic 606. The Company’s process for estimating variable consideration does not differ materially from its historical practices. Variable consideration is estimated using the expected value method which considers the sum of probability-weighted amounts in a range of possible amounts under the contract. Product revenue reflects the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the individual contracts. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results vary materially from the Company’s estimates, the Company will adjust these estimates, which will affect revenue from product sales and earnings in the period such estimates are adjusted.

The Company provides no right of return to its customers except in cases where a customer obtains authorization from the Company for the return. To date, there have been no product returns. The Company will continue to assess its estimates of variable consideration as it accumulates additional historical data and adjusts its estimates accordingly.

On November 7, 2019, the Company entered into an agreement to sell substantially all of the Samsara inventory and associated assets for $1.5 million, which was recorded to other income. As a result, the Company will have no further product sales of cells nor tissues beyond what it sold prior to the November 7^th sale.

Collaborative research, development, and licenses

The Company has entered into collaborative agreements with partners that typically include one or more of the following: (i) non-exclusive license fees; (ii) non-refundable up-front fees; (iii) payments for reimbursement of research costs; (iv) payments associated with achieving specific development milestones; and (v) royalties based on specified percentages of net product sales, if any. At the initiation of an agreement, the Company has analyzed whether it results in a contract with a customer under Topic 606 or in an arrangement with a collaborator subject to guidance under ASC 808, Collaborative Arrangements (“Topic 808”).

10

The Company has considered a variety of factors in determining the appropriate estimates and assumptions under these arrangements, such as whether the elements are distinct performance obligations, whether there are determinable stand-alone prices, and whether any licenses are functional or symbolic. The Company has evaluated each performance obligation to determine if it can be satisfied and recognized as revenue at a point in time or over time. Typically, non-exclusive license fees, non-refundable upfront fees, and funding of research activities have been considered fixed, while milestone payments have been identified as variable consideration which must be evaluated to determine if it has been constrained and, therefore, excluded from the transaction price.

The Company’s collaborative agreements that were not completed at the implementation of Topic 606 on April 1, 2018, consisted of research collaboration and limited technology access licenses. These agreements provide the licensee with a non-exclusive, non-transferable, limited, royalty-free technology license, including access to Organovo’s proprietary bioprinter platform, training, and continued support by means of consumables and consultation throughout the duration of the contract. The Company has determined that the intellectual property license is not distinct from the continued support promised under the agreement and is therefore a single combined performance obligation. The Company recognized revenue for these combined performance obligations over time for the duration of the license period, as the combined performance obligation would not be fully satisfied until the end of the contract.

For the nine months ended December 31, 2019, all collaborations and licenses revenue was within the scope of Topic 606 and recognized accordingly. As of September 30, 2019, the Company completed its obligations under the existing agreements with respect to receipts of revenue and does not anticipate recording any further revenue. See “Note 4. Collaborative Research, Development, and License Agreements” for more information on the Company’s collaborative agreements.

Grant revenue

In July 2017, the NIH awarded the Company a “Research and Development” grant totaling approximately $1,657,000 of funding over three years. The Company has concluded this government grant is not within the scope of Topic 606, as government entities do not meet the definition of a “customer” as defined by Topic 606, as there is not considered to be a transfer of control of goods or services to the government entity funding the grant. Additionally, the Company has concluded this government grant does meet the definition of a contribution and is a non-reciprocal transaction, however, Subtopic 958-605, Not-for-Profit-Entities-Revenue Recognition does not apply, as the Company is a business entity and the grant is with a governmental agency.

Revenues from this grant have been based upon internal costs incurred that are specifically covered by the grant, plus an additional rate that provides funding for overhead expenses. Revenue has been recognized as the Company incurs expenses that are related to the grant. The Company believes this policy is consistent with the overarching premise in Topic 606, to ensure that it recognizes revenues to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services, even though there is no “exchange” as defined in the ASC. The Company believes the recognition of revenue as costs are incurred and amounts become earned/realizable is analogous to the concept of transfer of control of a service over time under Topic 606.

As of December 31, 2019, the Company has recognized approximately $1.2 million in grant revenue. Revenue recognized under this grant was approximately $0 and $52,000 for the three and nine months ended December 31, 2019, respectively. Revenue recognized under this grant was approximately $66,000 and $574,000 for the three and nine months ended December 31, 2018, respectively.

In connection to the Company’s decision to pursue its strategic alternatives, specific to the NIH NASH grant, all internal research activities have been halted, leaving a remaining available balance of approximately $0.5 million that will not be utilized by the Company.

Cost of revenues

The Company reported approximately less than $0.1 million and $0.3 million in cost of revenues for the three and nine months ended December 31, 2019, respectively, which includes an inventory write-off during the fiscal second quarter of approximately $0.2 million consisting of raw materials related to the Company’s bioprinting and testing services and is a result of the Company’s decision to pursue its strategic alternatives. The Company reported approximately $0.1 million and $0.4 million in cost of revenues for the three and nine months ended December 31, 2018, respectively. Cost of revenues consists of costs related to manufacturing and delivering product and service revenue.

11

Net loss per share

Basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period. The weighted-average number of shares used to compute diluted loss per share excludes any assumed exercise of stock options and warrants, shares reserved for purchase under the Company’s 2016 Employee Stock Purchase Plan (“ESPP”), the assumed release of restriction of restricted stock units, and shares subject to repurchase as the effect would be anti-dilutive. No dilutive effect was calculated for the three and nine months ended December 31, 2019 or 2018, as the Company reported a net loss for each respective period and the effect would have been anti-dilutive.

Common stock equivalents excluded from computing diluted net loss per share were approximately 16.7 million at December 31, 2019 and 15.6 million at December 31, 2018.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies. Unless otherwise stated, the Company believes that the impact of the recently issued accounting pronouncements that are not yet effective will not have a material impact on its consolidated financial position or results of operations upon adoption.

Adoption of New Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases (“ASC 842”), which supersedes the lease guidance under ASC 840 – Leases. The new accounting standard requires an entity to recognize right-of-use assets and corresponding lease liabilities on the balance sheet for all leases with terms of more than 12 months and to disclose key information about leasing arrangements. This new guidance became effective for the Company on April 1, 2019. The Company adopted ASC 842 on April 1, 2019 and elected the optional transition method that allows for a cumulative-effect adjustment in the period of adoption and did not require restatement of prior periods. The Company elected the package of practical expedients permitted under the transition guidance, but not the hindsight practical expedient. Please refer to “Note 6. Leases” for more information regarding the Company’s adoption of the new lease standard.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (“Topic 220”), which allows stranded tax effects resulting from the Tax Cuts and Jobs Act to be reclassified from accumulated other comprehensive income to retained earnings. The amendment only relates to the reclassification of the income tax effects of the Tax Cuts and Jobs Act; thus, the underlying guidance relating to the effect of a change in tax laws be included in income from continuing operations is not affected. The amendments in Topic 220 are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. This new guidance became effective for the Company on April 1, 2019. The requirements of ASU 2018-02 did not have a significant impact on the Company’s financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting, which aligns the measurement and classification guidance for share-based payment to non-employees with the guidance for share-based payments to employees. Under the new guidance, the measurement period for equity-classified non-employee awards will be fixed at the grant date. This new guidance became effective for the Company on April 1, 2019. The requirements of ASU 2018-07 did not have a significant impact on the Company’s financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, which provides guidance on whether certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606. The amendments in this update provide more comparability in the presentation of revenue for certain transactions between collaborative arrangement participants. The key improvements to GAAP for collaborative arrangements resulting from this amendment are to (i) clarify that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit-of-account, (ii) add unit-of-account guidance in Topic 808 to align with the guidance in Topic 606, and (iii) require that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under Topic 606 is precluded if the collaborative arrangement participant is not a customer. The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years with early adoption permitted. This new guidance is effective for us on April 1, 2020. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements.

12

Note 3. Stockholders’ Equity

Stock-based compensation expense and valuation information

Stock-based awards include stock options and restricted stock units under the 2012 Equity Incentive Plan, as amended (“2012 Plan”) and Inducement Awards, performance-based restricted stock units under an Incentive Award Performance-Based Restricted Stock Unit Agreement, and rights to purchase stock under the 2016 Employee Stock Purchase Plan (“ESPP”). The Company calculates the grant date fair value of all stock-based awards in determining the stock-based compensation expense.

Stock-based compensation expense for all stock-based awards consists of the following (in thousands):

The total unrecognized compensation cost related to unvested stock option grants as of December 31, 2019 was approximately $4,855,000 and the weighted average period over which these grants are expected to vest is 2.12 years.

The total unrecognized compensation cost related to unvested restricted stock units (not including performance-based restricted stock units) as of December 31, 2019 was approximately $1,642,000, which will be recognized over a weighted average period of 1.97 years.

The total unrecognized compensation cost related to unvested performance-based restricted stock units as of December 31, 2019 was approximately $2,339,000, which will be recognized over a weighted average period of 1.60 years.

As of December 31, 2019, there are no participants enrolled into the employee stock purchase plan for the current purchase period, beginning September 1, 2019.

The Company uses the Black-Scholes valuation model to calculate the fair value of stock options. Stock-based compensation expense is recognized over the vesting period using the straight-line method. The fair value of stock options was estimated at the grant date using the following weighted average assumptions:

*No options were granted in the three months ended December 31, 2019.

The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future. Prior to fiscal year 2020, the Company used a blend of historical volatility and implied volatility of comparable companies. As of April 1, 2019, the Company is using the Company-specific historical volatility rate as it is more reflective of market conditions and a better indicator of expected volatility. The risk-free interest rate assumption was based on U.S. Treasury rates. The weighted average expected life of options was estimated using the average of the contractual term and the weighted average vesting term of the options. Prior to fiscal year 2020, certain options granted to consultants were subject to variable accounting treatment and were required to be revalued until vested. As of April 1, 2019, the measurement and classification of share-based payment to non-employees is consistent with the measurement and classification of share-based payment to employees.

The fair value of each restricted stock unit and performance-based restricted stock unit is recognized as stock-based compensation expense over the vesting term of the award. The fair value is based on the closing stock price on the date of the grant.

13

The Company uses the Black-Scholes valuation model to calculate the fair value of shares issued pursuant to the Company’s ESPP. Stock-based compensation expense is recognized over the purchase period using the straight-line method. The fair value of ESPP shares was estimated at the purchase period commencement date using the following assumptions:

*There are no participants in the ESPP for the current purchase period (beginning September 1, 2019).

The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future. The Company uses the Company-specific historical volatility rate as the indicator of expected volatility. The risk-free interest rate assumption was based on U.S. Treasury rates. The expected life is the 6-month purchase period.

Preferred stock

The Company is authorized to issue 25,000,000 shares of preferred stock. There are no shares of preferred stock currently outstanding, and the Company has no current plans to issue shares of preferred stock.

Common stock

On June 25, 2019, the Company received a notice letter from the Listing Qualifications Staff of the Nasdaq Stock Market LLC (“Nasdaq”) indicating that, based upon the closing bid price of the Company’s common stock for the last 30 consecutive business days, the Company no longer meets the requirement to maintain a minimum closing bid price of $1 per share, as set forth in Nasdaq Listing Rule 5450(a)(1). On December 26, 2019, the Company obtained an additional compliance period of 180 calendar days by electing to transfer to The Nasdaq Capital Market. To qualify, the Company would be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market. In connection with the Merger with Tarveda, the Company is also seeking to effect a reverse stock split, which would be subject to the prior approval of the Company’s stockholders. There can be no assurance that the Company will be able to regain compliance with the minimum bid price requirement or maintain compliance with the other listing requirements necessary to maintain the listing of its common stock on the Nasdaq Capital Market. The Company’s failure to regain compliance during this second compliance period could result in delisting and impact our ability to complete the Merger with Tarveda.

The Company has an effective shelf registration statement on Form S-3 (File No. 333-222929) and the related prospectus previously declared effective by the Securities and Exchange Commission (the “SEC”) on February 22, 2018 (the “2018 Shelf”), that expires on February 22, 2021, which registered $100,000,000 of common stock, preferred stock, warrants and units, or any combination of the foregoing.

On March 16, 2018, the Company entered into a Sales Agreement (“2018 Sales Agreement”) with H.C. Wainwright & Co., LLC and Jones Trading Institutional Services LLC (each an “Agent” and together, the “Agents”) and filed a prospectus supplement to the 2018 Shelf, pursuant to which the Company may offer and sell, from time to time through the Agents, shares of its common stock in at-the-market sales transactions having an aggregate offering price of up to $50,000,000 (the “Shares”). Any shares offered and sold will be issued pursuant to the Company’s 2018 Shelf.

During the three and nine months ended December 31, 2019, the Company issued 0 and 6,087,382 shares of common stock, respectively, for net proceeds of $0 and $5.0 million in at-the-market offerings under the 2018 Sales Agreement. During the three and nine months ended December 31, 2018, the Company issued 1,798,384 and 5,560,514 shares of common stock, respectively, for net proceeds of approximately $1.9 million and $6.9 million under the 2018 Sales Agreement.

As of December 31, 2019, the Company has sold an aggregate of 17,719,185 shares of common stock in at-the-market offerings under the 2018 Sales Agreement, with gross proceeds of approximately $18.7 million. Based on these sales, the Company cannot raise more than an aggregate of $81.3 million in future offerings under the 2018 Shelf, including the $31.3 million remaining available for future issuance through its at-the-market program under the 2018 Sales Agreement.

14

On July 26, 2018, the Company filed an amendment to its certificate of incorporation to increase the number of authorized shares of common stock to 200,000,000 shares.

Restricted stock units

A summary of the Company’s restricted stock units (not including performance-based restricted stock units) activity from March 31, 2019 through December 31, 2019 is as follows:

Performance-based restricted stock units

On April 24, 2017, the Company issued a Performance-Based Restricted Stock Unit Award for 208,822 shares of common stock (the “PBRSU”) to its newly hired Chief Executive Officer. The PBRSU was issued outside of the 2012 Plan, in the Inducement Award Agreement, as an “inducement award” within the meaning of Nasdaq Marketplace Rule 5635(c)(4). While outside the Company’s 2012 Plan, the terms and conditions of these awards are consistent with awards granted to the Company’s executive officers pursuant to the 2012 Plan. On August 23, 2017, the Board of Directors formally approved the vesting criteria for the PBRSU. The vesting of the PBRSU is divided into five separate tranches each with independent vesting criteria. The first four tranches had performance criteria related to annual revenue goals with measurement at the end of fiscal year 2018 (20 percent), fiscal year 2019 (20 percent), fiscal year 2020 (20 percent), and fiscal year 2021 (20 percent). The fifth tranche had a performance metric related to a path to profitability goal measured as Negative Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) achievable at any point between the grant date and the end of fiscal year 2020 (20 percent). The number of units that ultimately vest for each tranche will range from 0 percent to 120 percent of the target amount, not to exceed 208,822 in aggregate. On December 12, 2018, the Board of Directors formally approved an amendment to the vesting criteria for the PBRSUs. As of December 12, 2018, 100% of the Negative Adjusted EBITDA tranche, or 41,764 shares had vested and 8,352 units had been forfeited. Based on the amendment to the vesting criteria, the remaining 158,706 units eligible to vest upon future performance were divided into three separate but equal tranches with independent vesting criteria based on the achievement of certain regulatory milestones. As of December 31, 2019, no tranches are expected to vest unless there is a change in control.

Based on the amended PBRSU vesting terms, a Type III modification, the modified grant date fair value of the PBRSUs is $165,000 of which one-third is being recognized over the expected service period of each tranche ending on April 23, 2023. The Company began recording stock-based compensation expense for the initial performance tranches after the August 23, 2017 grant date when the initial financial performance goals were established and approved and has modified its recording of compensation expense in accordance with the amended performance tranches beginning on December 12, 2018.

On July 2, 2019, the Company issued Performance-Based Restricted Stock Unit Awards (the “PBRSU Retention Awards”) for an aggregate of 6,027,899 shares of common stock to its management team. The PBRSUs were issued pursuant to the 2012 Plan. The PBRSU Retention Awards will vest in full upon the earlier of the Company’s engagement in a pre-IND meeting with the FDA, twenty-four months from the grant date, or a change in control. As of December 31, 2019, all PBRSUs are expected to vest twenty-four months from the grant date.

A summary of the Company’s performance-based restricted stock unit activity from March 31, 2019 through December 31, 2019 is as follows:

15

Stock options

A summary of the Company’s stock option activity from March 31, 2019 to December 31, 2019 is as follows:

The weighted average remaining contractual term of options exercisable and outstanding at December 31, 2019 was approximately 7.23 years.

Employee Stock Purchase Plan

In June 2016, our Board of Directors adopted, and in August 2016 stockholders subsequently approved, the 2016 Employee Stock Purchase Plan (“ESPP”). The Company reserved 1,500,000 shares of common stock for issuance thereunder. The ESPP permits employees after five months of service to purchase common stock through payroll deductions, limited to 15 percent of each employee’s compensation up to $25,000 per employee per year or 10,000 shares per employee per six-month purchase period. Shares under the ESPP are purchased at 85 percent of the fair market value at the lower of (i) the closing price on the first trading day of the six-month purchase period or (ii) the closing price on the last trading day of the six-month purchase period. The initial offering period commenced in September 2016. At December 31, 2019, there were 1,188,718 shares available for purchase under the ESPP.

Warrants

The following table summarizes warrant activity for the nine months ended December 31, 2019:

There are no warrants outstanding as of December 31, 2019.    

Common stock reserved for future issuance

Common stock reserved for future issuance consisted of the following at December 31, 2019:

16

Note 4. Collaborative Research, Development, and License Agreements

In December 2016, the Company signed a collaborative non-exclusive research affiliation with a university medical school and a non-profit medical charity, under which the Company received a one-time grant from the charity towards the placement of a NovoGen® Bioprinter at the university for the purpose of developing a kidney organoid for potential therapeutic applications. The Company received up-front payments in January and March 2017, which has been recorded as deferred revenue. Revenue of $0 and $19,000 was recorded under this agreement for the three and nine months ended December 31, 2019, respectively. Revenue of $10,000 and $29,000 was recorded under this agreement for the three and nine months ended December 31, 2018, respectively. The Company completed its obligations under this agreement and does not anticipate recording any further revenue.

In April 2017, the Company signed a collaborative non-exclusive research affiliation with a university, under which the Company received a one-time non-refundable payment toward the placement of a NovoGen® Bioprinter at the university for the purpose of specific research projects mutually agreed upon by the university and the Company in the field of volumetric muscle loss. The Company received an up-front payment in May 2017, which was recorded as deferred revenue. No revenue has been recorded under this agreement for the three and nine months ended December 31, 2019. Revenue of approximately $14,000 and $43,000 has been recorded under this agreement for the three and nine months ended December 31, 2018, respectively. In addition, during April 2017, the Company signed a non-exclusive patent license agreement with the university including an annual fee of $75,000 for each of the two years for the license to the Company patents for research use limited to the field of volumetric muscle loss. The Company received the first annual payment of $75,000 in April 2017 and the second annual payment of $75,000 in May 2018, which were initially recorded as deferred revenue. No revenue has been recorded under this agreement for the three and nine months ended December 31, 2019. Revenue of $18,000 and $56,000 was recorded under this agreement for the three and nine months ended December 31, 2018, respectively. The Company completed its obligations under these agreements with respect to receipts of revenue and does not anticipate recording any further revenue.

Note 5. Commitments and Contingencies

Legal matters

In addition to commitments and obligations in the ordinary course of business, the Company may be subject, from time to time, to various claims and pending and potential legal actions arising out of the normal conduct of its business. On October 10, 2019, a putative class action lawsuit was filed in the U.S. District Court for the District of Delaware against the Company and its board of directors in connection with the annual proxy statement filed by the Company on July 26, 2019. The case is captioned Rianhard v. Crouch., et al., Case No. 19-cv-1922 (D. Del. Oct. 10, 2019) (the “Action”). The complaint alleged that the Schedule 14A proxy statement contained material misrepresentations in connection with the reverse stock split proposal recommended therein and asserted claims for violations of Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9 promulgated thereunder, as well as claims for breach of fiduciary duty. On November 25, 2019, the Action was voluntarily dismissed.

On December 31, 2019, the Company received a demand pursuant to Delaware General Corporation Law Section 220 for certain books and records of the Company (the “Demand”). The Company has objected to the Demand and is in discussions with the demanding stockholder to provide certain records.

On January 30, 2020, the Company received a demand letter (the “Letter”) from a purported stockholder alleging that the disclosures in the Form S-4 filed with the SEC on December 23, 2019 violated federal securities laws by failing to disclose certain allegedly material information. The Letter demands, among other things, that the Company make corrective disclosures and reserves the right to pursue legal action. The Company believes the assertions in the Letter are without merit.

The Company assesses contingencies to determine the degree of probability and range of possible loss for potential accrual in its financial statements. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing litigation contingencies is subjective and requires judgments about future events. When evaluating contingencies, the Company may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. In addition, damage amounts claimed in litigation against it may be unsupported, exaggerated or unrelated to possible outcomes, and as such are not meaningful indicators of its potential liability.

The Company regularly reviews contingencies to determine the adequacy of its accruals and related disclosures. During the period presented, the Company has not recorded any accrual for loss contingencies associated with any claims or legal proceedings; determined that an unfavorable outcome is probable or reasonably possible; or determined that the amount or range of any possible loss is reasonably estimable. However, the outcome of legal proceedings and claims brought against the Company is subject to significant uncertainty. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company in a reporting period, the Company’s consolidated financial statements for that reporting period could be materially adversely affected.

17

Note 6. Leases

Adoption of ASC 842

As of April 1, 2019, the Company adopted ASC 842, which requires lessees to recognize a right-of-use asset (ROU asset) and lease liability for leases with terms of greater than twelve months. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The Company implemented this new accounting standard using the modified retrospective method for its existing leases, which did not cause any adjustments to prior year financial statements. The Company elected the package of practical expedients available for existing contracts, which allowed it to carry forward its historical assessments of whether contracts are or contain leases and the classification of its existing operating leases. Additionally, the Company elected the practical expedient to treat lease and non-lease components as a single lease component.

At the time of adoption, the Company leased property and equipment under operating leases, specifically its office building and various copier machines. The Company also had a short-term lease (lease term is less than 12 months), which is not required to be recorded on the balance sheet under ASC 842. Instead, under ASC 842, the Company elected the accounting policy for short term leases to recognize lease payments as an expense on a straight-line basis over the lease term. Upon adoption of ASC 842, the Company recognized ROU assets and corresponding lease liabilities based on the present value of remaining lease payments over the lease terms. ROU assets were measured as lease liabilities plus prepaid rent less any deferred rent. As interest rates were not implicitly stated in the respective lease agreements, nor were they readily determinable, the Company used its incremental borrowing rate as the discount rate when measuring lease liabilities. As a result, the Company recorded ROU assets and lease liabilities of $4.5 million and $5.0 million, respectively. The Company also classified deferred rent of $0.6 million as an offset to the Company’s ROU asset upon adoption.

The impact of the adoption of ASC 842 on the consolidated balance sheet as of April 1, 2019 is as follows (in thousands):

After the initial adoption of ASC 842, on an on-going basis, the Company evaluates all contracts upon inception and determines whether the contract contains a lease by assessing whether there is an identified asset and whether the contract conveys the right to control the use of identified asset in exchange for consideration over a period of time. If a lease is identified, the Company will apply the guidance from ASC 842 to properly account for the lease.

18

Operating Leases

From July 2012 to November 2019, the Company leased its main facilities at 6275 Nancy Ridge Drive, San Diego, California 92121. The lease, as amended in 2013, 2015, 2016, 2018, and 2019, consisted of approximately 45,580 rentable square feet containing laboratory, clean room and office space. Monthly rental payments are approximately $87,000 with 3% annual escalators. The lease for 14,685 of the total rentable square footage was amended to accelerate the expiration date from December 15, 2018 to October 31, 2018. On November 30, 2018, the Company agreed to extend the term for the remainder of the total rentable square footage under the lease from August 31, 2021 to August 31, 2024 in exchange for $500,000 of landlord funded tenant improvements and a rescission of its option to terminate the lease on or after September 1, 2019 with 9 months prior written notice. On October 11, 2019, the Company entered into an agreement to accelerate the expiration date of the term of the lease for its main facilities on 6275 Nancy Ridge Drive from August 31, 2024 to November 15, 2019. Under this agreement, the Landlord and Tenant agreed that the other is excused as of the termination date from any further obligations. As such, the Company wrote-off its associated right-of-use asset of approximately $4.1 million and lease liabilities of approximately $4.6 million in the third quarter of Fiscal 2020, which resulted in a $0.5 million gain on lease termination.  

In addition to the Company’s main facility lease, on March 21, 2019, the Company entered into an agreement to lease several copy machines for a term of 36 months. The lease contained fixed monthly payments through the entire term of the lease, and it did not contain an option to extend the term or a bargain purchase option. This lease was also carried forward as an operating lease through the adoption of Topic 842. On October 9, 2019, the Company entered into an agreement to assume its leased copy machines, which terminates future obligations. As such, the Company wrote-off its associated right-of-use asset of approximately $26,000 and lease liabilities of approximately $26,000 in the third quarter of Fiscal 2020.

On October 2, 2019, the Company entered into an agreement to rent office space at 440 Stevens Avenue, Suite 200, Solana Beach, California 92075. This agreement is a month-to-month contract and can be terminated at-will by either party at any time. As such, the Company has concluded that this agreement does not contain a lease and will be expensed as incurred. Monthly rental payments are approximately $4,000 per month.

The Company recorded operating lease expense on a straight-line basis over the life of the leases. This is consistent with the Company’s historical treatment of the lease costs included in operating expenses (referred to as “Rent Expense” prior to adoption of Topic 842). For the three and nine months ended December 31, 2019, the Company recorded operating lease expense of approximately $45,000 and $568,000, respectively. In addition, the Company recorded rent expense for the office space of approximately $7,000 for the three and nine months ended December 31, 2019. For the three and nine months ended December 31, 2018, the Company recorded rent expense of approximately $264,000 and $915,000, respectively. Variable lease costs associated with the Company’s leases, such as payments for additional monthly fees to cover the Company’s share of certain facility expenses (common area maintenance, or CAM) are not included in operating lease right-of-use assets and lease liabilities, but rather expensed as incurred. Variable lease expense was approximately $65,000 and $302,000 for the three and nine months ended December 31, 2019, respectively. Short-term lease cost for the three and nine months ended December 31, 2019 was approximately $0 and $37,000, respectively. The short-term lease was terminated in the fiscal second quarter.

The table below is a summary of the cash flows associated with the Company’s leases for the nine months ended December 31, 2019 (in thousands):

Note 7. Concentrations

Credit risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments. The Company maintains cash balances at various financial institutions located within the United States. Accounts at these institutions are secured by the Federal Deposit Insurance Corporation. Balances may exceed federally insured limits. The Company has not experienced losses in such accounts and management believes that the Company is not exposed to any significant credit risk with respect to its cash and cash equivalents.

19

The Company is also potentially subject to concentrations of credit risk in its revenues and accounts receivable. Because it is in the early commercial stage, the Company’s revenues to date have been derived from a relatively small number of customers and collaborators. However, the Company has not historically experienced any accounts receivable write-downs and management does not believe significant credit risk exists as of December 31, 2019.

Note 8. Related Parties

From time to time, the Company will enter into an agreement with a related party in the ordinary course of its business and on terms and conditions it believes are as fair as those it offers and receives from independent third parties. These agreements are ratified by the Company’s Board of Directors or a committee thereof pursuant to its related party transaction policy.

In August 2017, the Company entered into a research services agreement with Cirius Therapeutics, Inc. (“Cirius”), an entity for which Robert Baltera, Jr., a former director of the Company, serves as Chief Executive Officer and President. Under this agreement, the Company is providing standard research services to Cirius utilizing its ExVive™ Liver Tissue platform. The Company has provided and recognized revenue for ExVive™ Liver Tissue Services for Cirius in the amount of $281,000 to date. Organovo completed its obligations as of December 2018. No further revenues are expected.

In November 2018, the Company entered into a research services Quote with Viscient Biosciences (“Viscient”), an entity for which Keith Murphy, the Company’s former director, Chief Executive Officer, and President, serves as the Chief Executive Officer and President. Under this Quote, the Company is providing research services in the amount of $142,000, amended in April 2019 to include an additional $7,000 of services. As of March 31, 2019, the Company recognized revenue of $42,000 for services provided and the remaining amount of $107,000 was recognized as revenue in the nine months ended December 31, 2019. In November 2019, the Company entered into an agreement with Viscient to sell certain bioprinting equipment and a non-exclusive license to certain intellectual property for approximately $171,000, of which $101,000 was recognized as other income and $70,000 was recognized as revenue in the nine months ended December 31, 2019. In addition to the services provided by Organovo, Viscient has purchased primary human cell-based products from our subsidiary, Samsara. Pursuant to the terms of multiple Quotes, $44,000 and $128,000 was recognized as revenue in the three and nine months ended December 31, 2019, respectively. Pursuant to the terms of multiple Quotes, $88,000 and $91,000 was recognized as revenue in the three and nine months ended December 31, 2018, respectively.

Note 9. Restructuring

In August 2019, after a rigorous assessment of the Company’s lead liver therapeutic tissue program following completion of various preclinical studies, the Company’s Board of Directors (the “Board”) concluded that the variability of biological performance and related duration of potential benefits presented development challenges and lengthy redevelopment timelines that no longer supported an attractive opportunity for the Company and its stockholders. Furthermore, the Board deemed the stage of development of the Company’s other therapeutic pipeline assets, including stem cell based tissue programs, to be too premature to potentially reach IND filing status within an acceptable investment horizon and with the Company’s available resources. As a result, the Company suspended all development of its lead program and all other related pipeline development activity and engaged a financial advisory firm to explore its strategic alternatives, including evaluating a range of ways to generate value from the Company’s technology platform and intellectual property, its commercial and development capabilities, its listing on the Nasdaq Stock Market, and its remaining financial assets. Under the restructuring plan, the Company terminated the employment of 52 employees, or 90% of its workforce and recorded a restructuring charge during the nine months ended December 31, 2019 of approximately $2.8 million, primarily related to employee severance and benefits costs, of which $1.7 million was paid out during the fiscal second quarter, $0.9 million was paid out during the fiscal third quarter, and the remainder is anticipated to be paid out during the fiscal fourth quarter.

The Company currently expects further restructuring actions tied to progress made on the strategic alternatives process, which could lead to an additional $3.5 million of severance and benefits costs that would be incurred and paid upon the closing of the Merger.

Restructuring charges were recorded in selling, general and administrative expenses and were comprised of the following (in thousands):

20

The following table summarizes the activity and balances of the restructuring reserve (in thousands):

The restructuring accrual is reflected on the condensed consolidated balance sheet at December 31, 2019 as accrued expenses.

Note 10. Subsequent Events

On January 26, 2020, the Company, its wholly owned subsidiary, Opal Merger Sub, Inc., and Tarveda entered into the First Amendment (the “Amendment”) to the Merger Agreement. The Amendment amends the definition of Organovo Valuation (as defined in the Merger Agreement) under the terms of the Merger Agreement to increase the Company’s valuation by $1.5 million for value attributable to the Company’s intellectual property if it does not sell or transfer its intellectual property and remaining assets prior to the closing of the Merger. The Organovo Valuation is used to calculate the Exchange Ratio (as defined in the Merger Agreement) between the Company and Tarveda stockholders. The Amendment also makes technical changes to the Organovo Stockholder Proposals (as defined in the Merger Agreement) to be voted on by the Company’s stockholders.

21

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our historical consolidated financial statements and the related notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2019. This discussion and analysis contains forward-looking statements, such as statements related to our plans, objectives, expectations and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect” and the like, and/or future tense or conditional constructions such as “will,” “may,” “could,” “should,” or similar expressions, identify certain of these forward-looking statements. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to risks and uncertainties, including those described in this Quarterly Report on Form 10-Q, as well as the risk factors disclosed in our Annual Report on the Form 10-K for the fiscal year ended March 31, 2019, filed with the Securities and Exchange Commission on June 3, 2019, that could cause our actual results or events to differ materially from those expressed or implied by such forward-looking statements. Except to the limited extent required by applicable law, the Company does not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report.

Basis of Presentation

The condensed consolidated financial statements included in this Form 10-Q have been prepared in accordance with the Securities and Exchange Commission (the “SEC”) instructions to Quarterly Reports on Form 10-Q. Accordingly, the condensed consolidated financial statements presented elsewhere in this Form 10-Q and discussed below are unaudited and do not contain all the information required by U.S. generally accepted accounting principles (“GAAP”) to be included in a full set of financial statements. The audited financial statements for the year ended March 31, 2019, filed with the SEC on Form 10-K on June 3, 2019 include a summary of our significant accounting policies and should be read in conjunction with this Form 10-Q. In the opinion of management, all material adjustments necessary to present fairly the results of operations for such periods have been included in this Form 10-Q. All such adjustments are of a normal recurring nature. The results of operations for interim periods are not necessarily indicative of the results of operations for the entire year.

Overview

We are a biotechnology company that has been focused on pioneering the development of bioprinted human tissues that emulate human biology and disease. We have been developing our in vivo liver tissues to treat end-stage liver disease and a select group of life-threatening, orphan diseases, for which there are limited treatment options other than organ transplantation.

Recent Events

On December 13, 2019, we entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Tarveda Therapeutics, Inc. (“Tarveda”), a privately owned biopharmaceutical company, and Opal Merger Sub, Inc. (“Opal”), a new wholly-owned subsidiary of ours. The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Opal will merge with and into Tarveda, with Tarveda as the surviving corporation, becoming a wholly-owned subsidiary of ours. As a result of the Merger, each outstanding share of Tarveda capital stock will be converted into the right to receive shares of our common stock. Under the terms of the Merger Agreement, we will issue, and Tarveda securityholders will be entitled to receive, in a tax-free exchange, shares of our common stock such that Tarveda securityholders will own approximately 75% of the combined company on a fully diluted basis (as defined in the Merger Agreement) and our securityholders will own approximately 25% of the combined company on a fully diluted basis (as defined in the Merger Agreement). The Merger Agreement provides that the exchange ratio for Tarveda’s capital stock are subject to upward and downward adjustment based on our net cash balance at the closing of the Merger. If our net cash balance at the closing of the Merger is below $22 million, the Merger Agreement provides for adjusting the exchange ratio to increase the number of shares of our common stock issued to former Tarveda securityholders. As a result, Tarveda’s security holders may receive additional shares of our common stock as merger consideration, and consequently our securityholders may be further diluted as a result of the Merger. If our net cash balance at the closing of the Merger is above $22 million, the Merger Agreement provides for adjusting the exchange ratio to decrease the number of shares of our common stock issued to former Tarveda securityholders. Additionally, the Merger Agreement provides for certain adjustments for debt of each of the parties. These percentages are calculated based on other assumptions as well, and, to the extent these assumptions prove to be inaccurate, Tarveda’s securityholders may receive a larger or smaller percentage of the combined company’s pro forma fully diluted capitalization. If Tarveda’s net cash balance at the closing of the Merger is below $15 million, we may elect to not consummate the Merger.

22

The Merger is subject to customary closing conditions, including approval by our stockholders of the issuance of our common stock in the Merger, as well as a reverse stock split of our common shares. We anticipate the Merger will be completed in the fiscal fourth quarter of 2020. The Merger Agreement contains certain termination rights for both us and Tarveda, and further provides that, upon termination of the Merger Agreement under specified circumstances, either party may be required to pay the other party a termination fee ranging between $1.0 million (plus reimbursement of $0.3 million of expenses) and $2.0 million (plus reimbursement of $0.5 million of expenses), depending on the cause of the termination.

Prior to execution of the Merger Agreement, we solicited bids from potential purchasers for our operating assets, which we had sought to sell or otherwise dispose of in one or more strategic transactions. In connection with that process, we entered into an agreement with LifeNet Health (“LifeNet”) on November 7, 2019 to sell certain equipment and inventory of our Samsara Sciences, for $1.5 million in cash, which was recorded to other income. In addition, on January 26, 2020, we and Tarveda agreed to amend the Merger Agreement to provide that we would be credited with $1.5 million for purposes of calculating the number of shares to be issued to Tarveda stockholders in connection with the Merger if we do not sell or transfer our intellectual property and remaining assets prior to the closing of the Merger. Our remaining assets following these actions will consist primarily of our cash, cash equivalents, interest receivables, restricted cash and other working capital items related to our corporate administrative function, our intellectual property portfolio, our license and collaboration agreements, our remaining assets, our listing on the Nasdaq Capital Market and the Merger Agreement with Tarveda. In addition, the majority of our employees have been terminated, except for six general and administrative personnel.

As a result of the sale transaction with LifeNet, aside from the maintenance of our intellectual property portfolio, license and collaboration agreements, remaining assets, and listing on the Nasdaq Capital Market, all of our business immediately following the Merger will be the business conducted by Tarveda immediately prior to the Merger, if the Merger closes. Accordingly, because of the pending Merger with Tarveda and the actions described above, we believe our historical operating results are not indicative of future results. We cannot assure you that we will close the pending Merger with Tarveda on favorable terms, in a timely manner or at all.

Critical Accounting Policies, Estimates, and Judgments

Our financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to revenue recognition, stock-based compensation expense, the valuation of impairment of long-lived assets, and the valuation allowance on deferred tax assets. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known. Besides the estimates identified above that are considered critical, we make many other accounting estimates in preparing our financial statements and related disclosures. All estimates, whether or not deemed critical, affect reported amounts of assets, liabilities, revenues and expenses, as well as disclosures of contingent assets and liabilities. These estimates and judgments are also based on historical experience and other factors that are believed to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known, even for estimates and judgments that are not deemed critical.

There have been no significant changes to our critical accounting policies since March 31, 2019, with the exception of changes made upon adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (“ASC 842”) and the related supplemental ASUs. For a description of critical accounting policies that affect our significant judgments and estimates used in the preparation of our consolidated financial statements, refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Note 1. Description of Business and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended March 31, 2019, filed with the SEC on June 3, 2019. For a description of accounting policy changes resulting from the adoption of ASC 842 and the related supplemental ASUs, refer to Note 1 to our unaudited condensed consolidated financial statements contained in this quarterly report on Form 10-Q.

23

Results of Operations

Comparison of the three months ended December 31, 2019 and 2018

The following table summarizes our results of operations for the three months ended December 31, 2019 and 2018 (in thousands, except %):

Revenues

For the three months ended December 31, 2019, total revenue was $0.3 million, a decrease of $0.5 million, or 62%, from the three months ended December 31, 2018, due to the reduction of service revenue activities and a reduction in product revenues from sales of primary human cells following the sale of our inventory to LifeNet. Product and service revenues of approximately $0.2 million for the three months ended December 31, 2019 decreased 66% from the prior year period due to a $0.2 million decrease in revenue from the sales of primary human liver cells and related products and a $0.3 million decrease in service revenue. We had no grant revenue for the three months ended December 31, 2019 compared to less than $0.1 million in prior year quarter as we reduced our activities during the quarter.

Costs and Expenses

Cost of Revenues

Cost of product and service revenues, which reflects expenses related to manufacturing our products and delivering services was less than $0.1 million for the three months ended December 31, 2019, compared to approximately $0.1 million for the three months ended December 31, 2018. The decrease was primarily due to the wind-down of certain commercial activities related to our liver tissues during the third quarter of Fiscal 2020. In addition, we sold primary human liver cells and related products during the three months ended December 31, 2019 that had been previously reserved.

Research and Development Expenses

The following table summarizes our research and development expenses for the three months ended December 31, 2019 and 2018 (in thousands, except %):

Research and development expenses were approximately $0.1 million, a decrease of $3.6 million, or 96%, from the prior year period as we reduced nearly all research and development activities following our decision to pursue our strategic alternatives during the second quarter of Fiscal 2020. This action caused a $1.6 million reduction of personnel related costs, a $0.7 million reduction in lab supply costs, a $0.7 million reduction in facilities costs, and a $0.6 million reduction in all other costs. The Company’s average full-time research and development staff decreased from an average of forty-four full-time employees for the three months ended December 31, 2018 to an average of zero full-time employees for the three months ended December 31, 2019. Going forward, we do not expect to incur any further research and development expenses.

24

Selling, General and Administrative Expenses

The following table summarizes our selling, general and administrative expenses for the three months ended December 31, 2019 and 2018 (in thousands, except %):

For the three months ended December 31, 2019, selling, general and administrative expenses were approximately $5.4 million, an increase of $2.0 million, or 59%, over the prior year period as we incurred approximately $1.0 million of legal, accounting and financial printer costs related to our proposed Merger with Tarveda and $0.1 million of costs related to dismissing a stockholder lawsuit. In addition, we also incurred approximately $0.8 million of depreciation and amortization costs related to leasehold improvement write-offs in connection with the early termination of our lease and $0.3 million of severance related costs during the current quarter in connection with restructuring the business following our decision to pursue our strategic alternatives. These actions caused a $1.1 million increase in corporate costs, a $0.6 million increase in depreciation and amortization costs, a $0.4 million increase in allocated facilities costs, which were offset by a $0.1 million decrease in personnel costs. Our average selling, general and administrative headcount was eight full-time employees for the three months ended December 31, 2019 compared to twenty-three full-time employees in the prior year period.

Other Income (Expense)

Other income was approximately $1.9 million for the three months ended December 31, 2019 consisting of $1.2 million of proceeds received from the sale of Samsara assets, $0.5 million of gain on our lease termination, $0.1 million of income from the sale of other assets, and $0.1 million of interest income. Other income was approximately $0.1 million for the three months ended December 31, 2018 and consisted of $0.2 million of interest income, offset by a $0.1 million loss on disposal of assets. Interest income decreased from the same period of fiscal 2019 due to lower average yields and investment balances.

Comparison of the nine months ended December 31, 2019 and 2018

The following table summarizes our results of operations for the nine months ended December 31, 2019 and 2018 (in thousands):

Revenues

For the nine months ended December 31, 2019, total revenue was $2.2 million, a decrease of $0.2 million, or 9%, from the nine months ended December 31, 2018 due to the recognition of a $0.5 million non-refundable up-front fee related to an agreement that expired and higher product revenues from primary human cells out of inventory, which were more than offset by a reduction in grant and service revenues. Product and service revenues of approximately $2.1 million for the nine months ended December 31, 2019 increased 20% from the prior year period. The increase was due to a $0.4 million increase in sales of primary human liver cells and less than $0.1 million decrease in service revenue, which included the recognition of the $0.5 million non-refundable up-front fee referenced above. The increase in product revenues occurred after our customers learned that we intended to cease offering primary human liver cells. Grant revenue decreased by approximately $0.5 million for the nine months ended December 31, 2019 compared to the prior year period as we ceased activities during the second quarter of Fiscal 2020.

25

Costs and Expenses

Cost of Revenues

Cost of product and service revenues, which reflects expenses related to manufacturing our products and delivering services was approximately $0.3 million and $0.4 million for the nine months ended December 31, 2019 and 2018, respectively. The decrease is primarily due to a $0.2 million write-off of inventory related to the wind-down of our commercial activities related to our liver tissues during the second quarter of Fiscal 2020. In addition, there were lower sales from liver tissue research services versus the prior year period.

Research and Development Expenses

The following table summarizes our research and development expenses for the nine months ended December 31, 2019 and 2018 (in thousands):

Research and development expenses were approximately $5.4 million, a decrease of $4.9 million, or 48%, from the prior year period as we reduced nearly all research and development activities following our decision to pursue our strategic alternatives during the second quarter of Fiscal 2020. This action caused a $2.5 million decrease in personnel related costs, a $1.1 million decrease in lab services and supply costs, a $0.9 million decrease in facilities and allocated overhead costs, a $0.3 million decrease in outside services costs, and a $0.2 million decrease in depreciation and amortization costs. Our average full-time research and development staff decreased from an average of forty-seven full-time employees for the nine months ended December 31, 2018 to an average of nineteen full-time employees for the nine months ended December 31, 2019.

Selling, General and Administrative Expenses

The following table summarizes our selling, general and administrative expenses for the nine months ended December 31, 2019 and 2018 (in thousands):