ORGANOVO HOLDINGS, INC. - Quarter Report: 2020 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

For the quarterly period ended December 31, 2020

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, 2021, a total of 7,117,083 shares of the registrant’s Common Stock, $0.001 par value, were outstanding.

ORGANOVO HOLDINGS, INC.

INDEX

PART I. FINANCIAL INFORMATION

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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.

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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.

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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.

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Organovo Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Description of Business

Nature of operations

Organovo Holdings, Inc. (“Organovo” or the “Company”) is an early-stage biotechnology company that is developing and utilizing highly customized 3D human tissues as dynamic models of healthy and diseased human biology for drug development. The Company’s proprietary technology is being used to build functional 3D human tissues that mimic key aspects of native human tissue composition, architecture, function and disease. The Company’s advances include cell type-specific compartments, prevalent intercellular tight junctions, and the formation of microvascular structures. The Company believes these attributes can enable critical complex, multicellular disease models that the Company will use to develop clinically effective drugs for selected therapeutic areas. Except where specifically noted or the context otherwise requires, references to the “Company,” or “Organovo” in these notes to the unaudited condensed consolidated financial statements refers to Organovo Holdings, Inc. and its wholly owned subsidiaries, Organovo, Inc. and Opal Merger Sub, Inc.

Historical Operations and Strategic Alternatives Process

Prior to August 2019, the Company has focused its efforts on developing its 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. The Company also explored the development of other potential pipeline in vivo tissue constructs in-house and through collaborations with academic and government researchers. In the past, the Company also explored the development of in vitro tissues, including proof of concept models of diseased tissues, for use in drug discovery and development.

In August 2019, after a rigorous assessment of its in vivo liver therapeutic tissue program, the Company concluded that the variability of biological performance and related duration of potential benefits no longer supported an attractive opportunity due to redevelopment challenges and lengthening timelines to compile sufficient data to support an investigational new drug (“IND”) filing. As a result, the Company suspended development of its lead program and all other related in-house pipeline development activities.

The Company’s Board of Directors (the “Board”) also engaged a financial advisory firm to explore the Company’s available strategic alternatives, including evaluating a range of ways to generate value from its technology platform and intellectual property, its commercial and development capabilities, its listing on the Nasdaq Capital Market, and the Company’s remaining financial assets. These strategic alternatives included possible mergers and business combinations, sales of part or all of its assets, and licensing and partnering arrangements. The Company implemented various restructuring 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. Additionally, in November 2019, the Company sold certain inventory and equipment and related proprietary information held by its wholly-owned subsidiary, Samsara Sciences, Inc. (“Samsara”), and as a result of such sale, Samsara ceased its operations.

After conducting a diligent and extensive process of evaluating strategic alternatives and identifying and reviewing potential candidates for a strategic acquisition or other transaction, which included the receipt of more than 27 non-binding indications of interest from interested parties and careful evaluation and consideration of those proposals, and following extensive negotiation with Tarveda Therapeutics, Inc. (“Tarveda”), on December 13, 2019, the Company entered into a merger agreement with Tarveda (the “Merger Agreement”). Pursuant to the Merger Agreement, and subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, the Company’s wholly-owned merger subsidiary would merge with and into Tarveda (the “Merger”), with Tarveda becoming a wholly-owned subsidiary of Organovo and the surviving corporation of the Merger . The Merger Agreement included various conditions to the consummation of the Merger, including approval by the Company’s stockholders at a Special Meeting of Stockholders to be held on April 7, 2020 (the “Special Meeting”).

At the Special Meeting, the Merger was not approved by the Company’s stockholders. As a result, the Company terminated the Merger Agreement with Tarveda. Pursuant to the terms of the Merger Agreement, the Company was obligated to reimburse certain of Tarveda’s merger-related expenses not to exceed $300,000, which was offset by Tarveda’s portion of shared expenses incurred by Organovo in fiscal 2020.

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The Cooperation Agreement and Advisory Nominees Proposal

Following the Special Meeting and the termination of the Merger Agreement, the Board continued to solicit stockholder feedback regarding the Company’s strategic alternatives and how to maximize stockholder value. In response to feedback from its largest stockholder regarding its desire for the Board to consider opportunities in the 3D bioprinting field and suggestion that the Board should speak with Keith Murphy, the Company’s founder, stockholder and former Chief Executive Officer and Chairman, for potential business ideas, the Board initiated discussions with Mr. Murphy. Based on these discussions, the Company entered into a Cooperation Agreement with Mr. Murphy on July 14, 2020 (the “Cooperation Agreement”). Under the terms of the Cooperation Agreement, the Board appointed Mr. Murphy and Adam K. Stern to the Board as Class III directors, and two of the Company’s existing directors, Richard Maroun and David Shapiro, resigned from the Board and all Board committees. The Board also agreed to nominate, recommend, support and solicit proxies for the re-election of Messrs. Murphy and Stern at the Company’s 2020 Annual Meeting of Stockholders (the “2020 Annual Meeting”). The Board also agreed to nominate, recommend, support and solicit proxies for an advisory stockholder vote (the “Advisory Nominees Proposal”) at the 2020 Annual Meeting to appoint three individuals, Douglas Jay Cohen, David Gobel and Alison Tjosvold Milhous (collectively, the “Advisory Nominees”), to the Board. Mr. Murphy identified each of the Advisory Nominees. The Board approved the appointment of the Advisory Nominees, to be automatically effective immediately following the final adjournment of the 2020 Annual Meeting if the final vote tabulation for the Advisory Nominees Proposal received more votes cast “FOR” than “AGAINST” its approval. In addition, each of the Company’s then-current directors (other than Messrs. Murphy and Stern) agreed to resign from the Board immediately following the appointment of the Advisory Nominees. At the 2020 Annual Meeting held on September 15, 2020, the Company’s stockholders approved the re-election of Messrs. Murphy and Stern to the Board as Class III directors with votes “For” of 59,229,909 (98.9%) and 59,147,657 (98.8%), respectively, to hold office until the 2023 Annual Meeting of Stockholders. The final vote tabulation for the Advisory Nominees Proposal received more votes cast “FOR” than “AGAINST” its approval, with votes “For” of 54,368,360 (91.4%) and, accordingly, effective upon the final adjournment of the 2020 Annual Meeting, Ms. Milhous was appointed as a Class I director to hold office until the 2021 Annual Meeting of Stockholders and Messrs. Cohen and Gobel were appointed as Class II directors to hold office until the 2022 Annual Meeting (collectively, the “New Director Slate”) and Carolyn Beaver, Taylor Crouch, Mark Kessel and Kirk Malloy, Ph.D. each resigned as directors.

Current Drug Discovery Business

Following the election of the New Director Slate, the Company has recommenced operations and is now focusing its future efforts on developing highly customized 3D human tissues as dynamic models of healthy and diseased human biology for drug development. The Company’s proprietary technology is being used to build functional 3D human tissues that mimic key aspects of native human tissue composition, architecture, function and disease. The Company’s advances include cell type-specific compartments, prevalent intercellular tight junctions, and the formation of microvascular structures. The Company believes these attributes can enable critical complex, multicellular disease models that it will use to develop clinically effective drugs for selected therapeutic areas. Market opportunities may include externally-partnered or internally-directed drug discovery and the clinical development of new molecular entities or repurposed drugs in-licensed from other pharmaceutical companies. The Company's goal is to establish a pipeline of drug candidates in high-value disease areas, aiming to commence human clinical testing for at least one drug candidate within a three to five year timeframe.

COVID-19

In December 2019, a respiratory illness caused by a novel strain of coronavirus, SARS-CoV-2, causing the Coronavirus Disease 2019, also known as COVID-19,  emerged. While initially the outbreak was largely concentrated in China, it has since spread globally and been declared a pandemic by the World Health Organization. Global health concerns relating to the COVID-19 pandemic have been weighing on the macroeconomic environment, and the pandemic has significantly increased economic volatility and uncertainty. The pandemic has resulted in government authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place or stay-at-home orders, and business shutdowns.

The extent to which the coronavirus impacts the Company’s operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak and travel bans and restrictions, quarantines, shelter-in-place or stay-at-home orders, and business shutdowns. In particular, the continued coronavirus pandemic could adversely impact the Company’s operations, including among others, raising additional capital, the timing and ability to pursue its strategy, given the impact it may have on the manufacturing and supply chain, sales and marketing and clinical trial operations of potential strategic partners, and the ability to advance its research and development activities and pursue development of its pipeline products, each of which could have an adverse impact on the Company’s business and financial results.

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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, 2020 is derived from the Company’s audited consolidated balance sheet at that date.

The unaudited condensed consolidated financial statements include the accounts of Organovo 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, 2020, 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, 2021 (see “Note 1. Description of Business”).

On August 18, 2020, the Company effected a 1-for-20 reverse stock split of its common stock (the “Reverse Stock Split”). Unless otherwise indicated, all share amounts, per share data, share prices, exercise prices and conversion rates set forth in these notes and the accompanying condensed consolidated financial statements have, where applicable, been adjusted retroactively to reflect the Reverse Stock Split.

Liquidity

As of December 31, 2020, the Company had cash and cash equivalents of approximately $18.8 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 agreement for its facilities. The Company had an accumulated deficit of approximately $293.7 million. The Company also had negative cash flows from operations of approximately $11.2 million during the nine months ended December 31, 2020.

Through December 31, 2020, 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, 2020, the Company issued 379,655 shares of its common stock through its ATM facility and received net proceeds of approximately $3.0 million.

Throughout the strategic alternatives assessment process, the Company implemented steps to manage its resources and extend its cash runway including 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.

The Company believes its cash and cash equivalents on hand will be sufficient to meet its financial obligations for at least the next 12 months of operations. The approval of the Advisory Nominees Proposal triggered a “Change of Control” under the Company’s severance plan, as well as its Directors and Officers (“D&O”) liability insurance policies, which required the following cash outlays: (i) approximately $2.8 million for severance obligations; (ii) approximately $2.0 million (or $1.7 million net of returned premium) for a six year D&O tail insurance policy; and (iii) a new D&O policy premium at approximately $0.8 million. The cash outlays for severance obligations and D&O tail insurance policies were one-time non-recurring expenses that occurred in September 2020 and therefore are reflected in the ending cash balance. In addition, as the Company recommences its operations and is focusing its efforts on drug discovery and development, the Company will need to raise additional capital to implement this new business plan. The Company cannot predict with certainty the exact amount or timing for any future capital raises. If required, the Company may seek to raise additional capital through debt or equity financings, or through some other financing arrangement. However, the Company cannot be sure that additional financing will be available if and when needed, or that, if available, it can obtain financing on terms favorable to its stockholders. Any failure to obtain financing when required will have a material adverse effect on the Company’s business, operating results, financial condition and ability to continue as a going concern.

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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 unaudited condensed consolidated financial statements include those assumed in the valuation of stock-based compensation expense and the valuation allowance on deferred tax assets. On an ongoing basis, management reviews these estimates and assumptions. Though the impact of the COVID-19 pandemic to its business and operating results presents additional uncertainty, the Company continues to use the best information available to inform its critical accounting estimates.

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 recognized revenue under Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“Topic 606”) when (or as) the promised services were transferred to customers in an amount that reflects the consideration to which it expected to be entitled in exchange for those services. To determine revenue recognition for arrangements the Company concluded were within the scope of Topic 606, the Company performed the following five steps: (i) identified the contract(s) with a customer; (ii) identified the performance obligation(s) in the contract; (iii) determined the transaction price; (iv) allocated the transaction price to the performance obligation(s) in the contract; and (v) recognized revenue when (or as) the performance obligation(s) were satisfied. At contract inception, the Company assessed the goods or services promised within each contract, assessed whether each promised good or service was distinct and identified those that were performance obligations. The Company recognized as revenue the amount of the transaction price that was allocated to the respective performance obligation when (or as) the performance obligation was satisfied.

Billings to customers or payments received from customers were included in deferred revenue on the consolidated balance sheet until all revenue recognition criteria were met. As of December 31, 2020 and March 31, 2020, the Company had no deferred revenue.

Service revenues

The Company’s service-based business, Organovo, Inc., previously 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 with the Company’s decision to pursue its strategic alternatives, the Company halted commercial activities related to its liver tissues. The Company expects to maintain certain external research collaborations and its intellectual property portfolio to the extent they are relevant to the Company’s current business model and strategic goals.

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Product sales, net

The Company’s former product-based business, Samsara, produced high-quality cell-based products for use in the Company’s 3D tissue manufacturing and for use by life science customers. The Company recognized product revenue when the performance obligation was satisfied, which was at the point in time the customer obtained control of the Company’s product, typically upon delivery. Product revenues were recorded at the transaction price, net of any estimates for variable consideration under Topic 606. The Company’s process for estimating variable consideration did not differ materially from its historical practices. Variable consideration was 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 reflected the Company’s best estimates of the amount of consideration to which it was entitled based on the terms of the individual contracts. Actual amounts of consideration ultimately received may have differed from the Company’s estimates. If actual results varied materially from the Company’s estimates, the Company would have adjusted these estimates, which would have affected revenue from product sales and earnings in the period such estimates were adjusted.

The Company provided no right of return to its customers except in cases where a customer obtained authorization from the Company for the return. To date, there have been no product returns.

In March 2020, the Company dissolved Samsara.

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 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 Topic 808, Collaborative Arrangements (“Topic 808”).

The Company considered a variety of factors in determining the appropriate estimates and assumptions under these arrangements, such as whether the elements were distinct performance obligations, whether there were determinable stand-alone prices, and whether any licenses were functional or symbolic. The Company evaluated each performance obligation to determine if it could 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 were considered fixed, while milestone payments were identified as variable consideration which must be evaluated to determine if it was 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 provided 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 determined that the intellectual property license was not distinct from the continued support promised under the agreement and was 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.

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 concluded this government grant was 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 concluded this government grant did meet the definition of a contribution and is a non-reciprocal transaction, however, Subtopic 958-605, Not-for-Profit-Entities-Revenue Recognition did not apply, as the Company is a business entity and the grant was with a governmental agency.

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

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

Cost of revenues

The Company reported no cost of revenues for the three and nine months ended December 31, 2020 and less than $0.1 million and approximately $0.3 million for the three and nine months ended December 31, 2019, respectively. Cost of revenues consisted of costs related to manufacturing and delivering product and service revenue.

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, 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, 2020 or 2019, 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 due to their anti-dilutive effect were approximately 0.8 million at December 31, 2020 and 0.8 million at December 31, 2019.

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 November 2018, the FASB issued Accounting Standard Update (“ASU”) 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606 (“ASU 2018-18”), which provides guidance on whether certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606. ASU 2018-18 provides more comparability in the presentation of revenue for certain transactions between collaborative arrangement participants. The key improvements to GAAP for collaborative arrangements resulting from ASU 2018-18 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. ASU 2018-18 is 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 became effective for the Company on April 1, 2020 and did not have a significant impact on the Company’s unaudited condensed consolidated financial statements.

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 ESPP. The Company calculates the grant date fair value of all stock-based awards in determining the stock-based compensation expense.

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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, 2020 was approximately $2,442,000 and the weighted average period over which these grants are expected to vest is 3.24 years.

The total unrecognized compensation cost related to unvested restricted stock units (not including performance-based restricted stock units) as of December 31, 2020 was approximately $30,000, which will be recognized over a weighted average period of 1.95 years.

The total unrecognized compensation cost related to unvested performance-based restricted stock units as of December 31, 2020 was approximately $30,000, which will be recognized over a weighted average period of 0.5 years.

As of December 31, 2020, there are no participants enrolled in the employee stock purchase plan for the current purchase period, beginning September 1, 2020.

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 is 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 weighted average expected life of options was estimated using the average of the contractual term and the weighted average vesting term of the options. The measurement and classification of share-based payments to non-employees is consistent with the measurement and classification of share-based payments 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.

The Company uses the Black-Scholes valuation model to calculate the fair value of shares issued pursuant to the 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:

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*There were no participants in the ESPP for the purchase periods beginning September 1, 2019, March 1, 2020 and the current purchase period (beginning September 1, 2020).

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 met 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. On March 26, 2020, the Company obtained shareholder approval to effect a reverse stock split in a range from 20:1 to 40:1 in order to meet the minimum closing bid price per share requirement under the Nasdaq Listing Rules.

On April 17, 2020, the Company received an additional notice letter from Nasdaq indicating that based on extraordinary market conditions, Nasdaq has determined to toll the compliance periods for bid price and market value of publicly held shares requirements (collectively, the “Price-based Requirements”) through June 30, 2020. Accordingly, since the Company had 66 calendar days remaining in its compliance period as of April 16, 2020, the Company had until September 4, 2020 to regain compliance. On August 18, 2020, the Company effected the Reverse Stock Split with a ratio of 20:1, and on September 2, 2020, the Company received notification from Nasdaq that the closing bid price of its common stock had been at $1.00 per share or greater for ten consecutive business days and that Nasdaq had closed the matter. There can be no assurance that the Company will be able to maintain compliance with the Price-based Requirements or other listing requirements necessary to maintain the listing of its common stock on the Nasdaq Capital Market.

The Company previously had 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 was set to expire on February 22, 2021, which registered $100,000,000 of common stock, preferred stock, warrants and units, or any combination of the foregoing. On January 19, 2021, the Company filed a shelf registration statement on Form S-3 (File No. 333-252224) and related prospectus. The shelf registration statement was declared effective by the SEC on January 29, 2021 (the “2021 Shelf”). The 2021 Shelf registered $150,000,000 of common stock, preferred stock, debt securities, warrants and units, or any combination of the foregoing. The 2021 Shelf replaced the 2018 Shelf on January 29, 2021.

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 could 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. On January 29, 2021, the Company filed a prospectus to the 2021 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. Any shares offered and sold will be issued pursuant to the Company’s 2021 Shelf. $

During the three and nine months ended December 31, 2020, the Company issued 379,655 shares of common stock for net proceeds of $3.0 million in at-the-market offerings under the 2018 Sales Agreement. During the three and nine months ended December 31, 2019, the Company issued 0 and 304,369 shares of common stock, respectively, for net proceeds of  $0 and $5.0 million, respectively, in at-the-market offerings under the 2018 Sales Agreement.  

As of December 31, 2020, the Company has sold an aggregate of 1,265,614 shares of common stock in at-the-market offerings under the 2018 Sales Agreement, with gross proceeds of approximately $22.0 million. Under the 2021 Shelf, the Company can raise up to an aggregate of $150.0 million in future offerings, which includes $50.0 million available for future issuance through its at-the-market program under the 2018 Sales Agreement.

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During the three and nine months ended December 31, 2020, the Company issued 5,200 and 7,800 shares of common stock upon the exercise of stock options, respectively. No stock option exercises occurred during the three and nine months ended December 31, 2019.

Restricted stock units

The following table summarizes the Company’s restricted stock units (not including performance-based restricted stock units) activity from March 31, 2020 through December 31, 2020:

Performance-based restricted stock units

On April 24, 2017, the Company issued a Performance-Based Restricted Stock Unit Award for 10,441 shares of common stock (the “PBRSU”) to its then-newly hired Chief Executive Officer. The PBRSU was issued outside of the 2012 Plan, pursuant to an 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 the awards are consistent with awards granted to the Company’s executive officers pursuant to the 2012 Plan. On August 23, 2017, the Board 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 10,441 in aggregate. On December 12, 2018, the Board formally approved an amendment to the vesting criteria for the PBRSUs. As of December 12, 2018, 100 percent of the Negative Adjusted EBITDA tranche, or 2,088 shares had vested and 418 units had been forfeited. Based on the amendment to the vesting criteria, the remaining 7,935 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.

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 September 15, 2020, vesting of all tranches accelerated due to a change in control.

On July 2, 2019, the Company issued Performance-Based Restricted Stock Unit Awards (the “PBRSU Retention Awards”) for an aggregate of 301,391 shares of common stock to its management team. The PBRSUs were issued pursuant to the 2012 Plan. The PBRSU Retention Awards vest in full upon the earlier of: (i) the Company’s engagement in a pre-IND meeting with the FDA, (ii) twenty-four months from the grant date, or (iii) a change in control. As of December 31, 2020, 111,682 shares were forfeited due to terminations and vesting for 177,480 shares accelerated due to a change in control. The remaining 12,229 shares are expected to vest twenty-four months from the grant date as these particular shares require two of the conditions to be met in order to vest.

The following table summarizes the Company’s performance-based restricted stock unit activity from March 31, 2020 through December 31, 2020:

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Stock options

The following table summarizes the Company’s stock option activity from March 31, 2020 to December 31, 2020:

The weighted average remaining contractual term of options exercisable and outstanding at December 31, 2020 was approximately 1.09 years.

Employee Stock Purchase Plan

In June 2016, the Board adopted, and in August 2016, the Company’s stockholders subsequently approved, the ESPP. The Company reserved 75,000 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 500 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, 2020, there were 59,435 shares available for purchase under the ESPP. 

Common stock reserved for future issuance

Common stock reserved for future issuance consisted of the following at December 31, 2020:

Treasury stock

Repurchased shares of common stock are recorded as treasury stock, at cost, but may from time to time be retired. Following the Reverse Stock Split in August 2020, the Company purchased 46 shares of treasury stock at cost of less than $0.1 million related to the funding of cash payments in lieu of the issuance of fractional shares.

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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 have been recorded as deferred revenue. No revenue has been recorded under this agreement for the three and nine months ended December 31, 2020. Revenue of $0 and $19,000 was recorded under this agreement for the three and nine months ended December 31, 2019. The Company completed its obligations under this agreement 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 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 U.S. Securities and Exchange Commission (“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 and now moot.

On March 4, 2020, the Company received a letter from the SEC regarding an inquiry into certain of the Company’s prior disclosures and related operations. The Company has cooperated with the SEC in response to this subpoena. On October 5, 2020, the Company received a letter from the SEC with the following response: “We have concluded the investigation as to Organovo Holdings, Inc. (“Organovo”). Based on the information we have as of this date, we do not intend to recommend an enforcement action by the Commission against Organovo.”

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.

Note 6. Leases

Operating Leases

In October 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 rent expense for the office space of approximately $13,000 and $7,000 for the three months ended December 31, 2020 and 2019, respectively. The Company recorded rent expense for the office space of approximately $25,000 and $7,000 for the nine months ended December 31, 2020 and 2019, respectively.

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The Company recorded operating lease expense for its former facilities on 6275 Nancy Ridge Drive, San Diego, California 92121 and its copy machines on a straight-line basis over the life of the leases, which were both terminated in the third quarter of fiscal 2019. For the three months ended December 31, 2020 and 2019, the Company recorded operating lease expense of approximately $0 and $45,000, respectively. For the nine months ended December 31, 2020 and 2019, the Company recorded operating lease expense of approximately $0 and $568,000, respectively.

Variable lease costs associated with the Company’s leases, such as fees to cover the Company’s share of certain facility expenses (common area maintenance, or CAM) are expensed as incurred. Variable lease expense was approximately $0 and $65,000 for the three months ended December 31, 2020 and 2019, respectively. Variable lease expense was approximately $0 and $302,000 for the nine months ended December 31, 2020 and 2019, respectively.

The Company also had a short-term lease that was terminated in the second quarter of fiscal 2020. There was no short-term lease cost for the three months ended December 31, 2020 and 2019, respectively. Short-term lease cost for the nine months ended December 31, 2020 and 2019 was approximately $0 and $37,000, respectively.

On November 23, 2020, the Company entered into two lease agreements, pursuant to which the Company will temporarily lease approximately 3,212 square feet of office space (the “Temporary Lease”) in San Diego and permanently lease approximately 8,051 square feet of office space (the “Permanent Lease”) in San Diego once certain tenant improvements for the Company’s permanent premises have been completed and the premises are ready for occupancy. The Temporary Lease commenced on November 27, 2020 and is intended to serve as temporary premises for approximately seven months. The Permanent Lease is projected to commence on July 1, 2021 and is intended to serve as the Company’s permanent premises for approximately sixty-two months.

The Company has determined that the Temporary Lease is considered a short term lease under ASC 842 and therefore will elect an accounting policy for short term leases to recognize lease payments as an expense on a straight-line basis over the lease term. The Company has also determined that the Permanent Lease will require the balance sheet recognition of a right-of-use asset and lease liability under ASC 842 once the Permanent Lease is in use. The Company is currently evaluating the financial statement impact of the Permanent Lease.  

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.

The Company is also potentially subject to concentrations of credit risk in its revenues and accounts receivable. Because it was 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, 2020.

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 Board or a committee thereof pursuant to its related party transaction policy.

Viscient Biosciences (“Viscient”) is an entity for which Keith Murphy, the Company’s Executive Chairman and Principal Executive Officer, serves as the Chief Executive Officer and President. Dr. Jeffrey Miner, the Company’s Chief Scientific Officer, is also the Chief Scientific Officer of Viscient, and Thomas Jurgensen, the Company’s General Counsel, previously served as outside legal counsel to Viscient through his law firm, Optima Law Group, APC. During fiscal 2020, the Company provided services to Viscient. In addition to the services provided by the Company, Viscient purchased primary human cell-based products from the Company’s former subsidiary, Samsara. There was $0 of accounts receivable outstanding as of December 31, 2020 and approximately $111,000 of accounts receivable outstanding as of March 31, 2020. As of December 31, 2020, Viscient has fully paid off its outstanding balance. Further, in July 2020, the Company entered into a Cooperation Agreement with Mr. Murphy and in September 2020, the Company hired three of Viscient’s employees. See “Note 1. Description of Business” for more information.

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On December 28, 2020, the Company entered into an intercompany agreement (the “Intercompany Agreement”) with Viscient and Organovo, Inc., the Company’s wholly-owned subsidiary, which included an asset purchase agreement for certain lab equipment. Pursuant to the Intercompany Agreement, the Company agreed to provide Viscient certain services related to 3D bioprinting technology which includes, but is not limited to, histology services, cell isolation, and proliferation of cells and Viscient agreed to provide the Company certain services related to 3D bioprinting technology, including bioprinter training, bioprinting services, and qPCR assays, in each case on payment terms specified in the Intercompany Agreement and as may be further determined by the parties. In addition, the Company and Viscient each agreed to share certain facilities and equipment and, subject to further agreement, to each make certain employees available for specified projects for the other party at prices to be determined in good faith by the parties. The Company evaluated the accounting for the Intercompany Agreement and concluded that any services provided by Viscient to the Company will be expensed as incurred, and any compensation for services provided by the Company to Viscient will be considered a reduction of personnel related expenses. Any services provided to Viscient do not fall under Topic 606 as the Intercompany Agreement is not a contract with a customer. For the three months ended December 31, 2020, the Company incurred approximately $27,000 in consulting expenses from Viscient. Additionally, the Company purchased lab equipment from Viscient for approximately $35,000 as part of the asset purchase agreement.    

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 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. Under the restructuring plan, the Company terminated the employment of 52 employees, or 90 percent of its workforce and recorded a restructuring charge during the year ended March 31, 2020 of approximately $2.7 million, related to employee severance and benefits costs, of which approximately $1.7 million was paid out during the second quarter of fiscal 2020, approximately $0.9 million was paid out during the third quarter of fiscal 2020, approximately $0.1 million was paid out during the fourth quarter of fiscal 2020, and less than $0.1 million was paid out during the first quarter of fiscal 2021.

The approval of the Advisory Nominees Proposal in September 2020 triggered a “Change of Control” under the Company’s severance plan. As a result, the Company terminated the employment of its executive officers and recorded a restructuring charge of approximately $2.8 million, related to employee severance and benefits costs, of which approximately $2.6 million was paid out during the second quarter of fiscal 2021. The Company expects to pay approximately $30,000 each quarter through the end of fiscal 2022 as part of the severance and benefit obligations.

Approximately $0 and $2.8 million of restructuring charges were recorded during the three and nine months ended December 31, 2020, respectively. Approximately $0.3 million and $2.8 million of restructuring charges were recorded during the three and nine months ended December 31, 2019, respectively.

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

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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, 2020. 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, 2020, filed with the Securities and Exchange Commission on May 28, 2020, and discussed in the section titled “Risk Factors” under Part II, Item 1A in this Quarterly Report on Form 10-Q, 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, we do 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 unaudited 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 unaudited 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, 2020, filed with the SEC on Form 10-K on May 28, 2020, 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.

On August 18, 2020, the Company effected a 1-for-20 reverse stock split of its common stock (the “Reverse Stock Split”). Unless otherwise indicated, all share amounts, per share data, share prices, exercise prices and conversion rates set forth in this Form 10-Q, the accompanying unaudited condensed consolidated financial statements and the notes to the unaudited condensed consolidated financial statements have, where applicable, been adjusted retroactively to reflect the Reverse Stock Split.

Unless the context otherwise requires, the terms “Organovo,” the “Company,” “we,” us” and “our” in this Quarterly Report on Form 10-Q refer to Organovo Holdings, Inc. and its wholly owned subsidiaries, Organovo, Inc. and Opal Merger Sub, Inc.

Overview

We are an early-stage biotechnology company that is developing and utilizing highly customized 3D human tissues as dynamic models of healthy and diseased human biology for drug development. Our proprietary technology is being used to build functional 3D human tissues that mimic key aspects of native human tissue composition, architecture, function and disease.  Our advances include cell type-specific compartments, prevalent intercellular tight junctions, and the formation of microvascular structures. We believe these attributes can enable critical complex, multicellular disease models that we will use to develop clinically effective drugs for selected therapeutic areas. Market opportunities may include externally-partnered or internally-directed drug discovery and the clinical development of new molecular entities or repurposed drugs in-licensed from other pharmaceutical companies. Our goal is to establish a pipeline of drug candidates in high-value disease areas, aiming to commence human clinical testing for at least one drug candidate within a three to five year timeframe.  

Historical Operations and Strategic Alternatives Process

Prior to August 2019, we focused our efforts on 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. We also explored the development of other potential pipeline in vivo tissue constructs in-house and through collaborations with academic and government researchers. In the past, we also explored the development of in vitro tissues, including proof of concept models of diseased tissues, for use in drug discovery and development.

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In August 2019, after a rigorous assessment of our in vivo liver therapeutic tissue program, we concluded that the variability of biological performance and related duration of potential benefits no longer supported an attractive opportunity due to redevelopment challenges and lengthening timelines to compile sufficient data to support an Investigational New Drug (“IND”) filing. As a result, we suspended development of our lead program and all other related in-house pipeline development activities.

Our Board of Directors (our “Board”) also engaged a financial advisory firm to explore our available strategic alternatives, including evaluating a range of ways to generate value from our technology platform and intellectual property, our commercial and development capabilities, our listing on the Nasdaq Capital Market, and our remaining financial assets. These strategic alternatives included possible mergers and business combinations, sales of part or all of our assets, and licensing and partnering arrangements. We implemented various restructuring steps to manage our resources and extend our cash runway, including reducing commercial activities related to our liver tissues, except for sales of primary human cells out of inventory, negotiating an exit from our long-term facility lease, selling various assets, and reducing our workforce. Additionally, in November 2019, we sold certain inventory and equipment and related proprietary information held by our wholly-owned subsidiary, Samsara Sciences, Inc. (“Samsara”), and as a result of such sale, Samsara ceased its operations and has since been dissolved.

After conducting a diligent and extensive process of evaluating strategic alternatives and identifying and reviewing potential candidates for a strategic acquisition or other transaction, which included the receipt of more than 27 non-binding indications of interest from interested parties and careful evaluation and consideration of those proposals, and following extensive negotiation with Tarveda Therapeutics, Inc. (“Tarveda”), on December 13, 2019, we entered into a merger agreement with Tarveda (the “Merger Agreement”). Pursuant to the Merger Agreement, and subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, our wholly-owned merger subsidiary would merge with and into Tarveda (the “Merger”), with Tarveda becoming a wholly-owned subsidiary of Organovo and the surviving corporation of the Merger . The Merger Agreement included various conditions to the consummation of the Merger, including approval by our stockholders at a Special Meeting of Stockholders scheduled for April 7, 2020 (the “Special Meeting”).

At the Special Meeting, the Merger was not approved by our stockholders. As a result, we terminated the Merger Agreement with Tarveda. Pursuant to the terms of the Merger Agreement, we were obligated to reimburse certain of Tarveda’s merger-related expenses not to exceed $300,000, which was offset by Tarveda’s portion of shared expenses incurred by Organovo in fiscal 2020.

The Cooperation Agreement and Advisory Nominees Proposal

Following the Special Meeting and the termination of the Merger Agreement, our Board continued to solicit stockholder feedback regarding our strategic alternatives and how to maximize stockholder value. In response to feedback from our largest stockholder regarding its desire for our Board to consider opportunities in the 3D bioprinting field and suggestion that our Board should speak with Keith Murphy, our founder, stockholder and former Chief Executive Officer and Chairman, for potential business ideas, our Board initiated discussions with Mr. Murphy. Based on these discussions, we entered into a Cooperation Agreement with Mr. Murphy on July 14, 2020 (the “Cooperation Agreement”). Under the terms of the Cooperation Agreement, our Board appointed Mr. Murphy and Adam K. Stern to the Board as Class III directors, and two of our existing directors, Richard Maroun and David Shapiro, resigned from our Board and the committees thereof. Our Board also agreed to nominate, recommend, support and solicit proxies for the re-election of Messrs. Murphy and Stern at our 2020 Annual Meeting of Stockholders (the “2020 Annual Meeting”). Our Board also agreed to nominate, recommend, support and solicit proxies for an advisory stockholder vote (the “Advisory Nominees Proposal”) at the 2020 Annual Meeting to appoint three individuals, Douglas Jay Cohen, David Gobel and Alison Tjosvold Milhous (collectively, the “Advisory Nominees”), to our Board. Mr. Murphy identified each of the Advisory Nominees. Our Board approved the appointment of the Advisory Nominees, to be automatically effective immediately following the final adjournment of the 2020 Annual Meeting if the final vote tabulation for the Advisory Nominees Proposal received more votes cast “FOR” than “AGAINST” its approval. In addition, each of our then-current directors (other than Messrs. Murphy and Stern) agreed to resign from our Board immediately following the appointment of the Advisory Nominees. At the 2020 Annual Meeting held on September 15, 2020, our stockholders approved the re-election of Messrs. Murphy and Stern to our Board as Class III directors to hold office until the 2023 Annual Meeting of Stockholders and the final vote tabulation for the Advisory Nominees Proposal received more votes cast “FOR” than “AGAINST” its approval and, accordingly, effective upon the final adjournment of the 2020 Annual Meeting, Ms. Milhous was appointed as a Class I director to hold office until the 2021 Annual Meeting of Stockholders and Messrs. Cohen and Gobel were appointed as Class II directors to hold office until the 2022 Annual Meeting (collectively, the “New Director Slate”) and Carolyn Beaver, Taylor Crouch, Mark Kessel and Kirk Malloy, Ph.D. each resigned as directors.

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Current Drug Discovery Business

Following the election of the New Director Slate, we have recommenced operations and are now focusing our future efforts on developing highly customized 3D human tissues as living, dynamic models of healthy and diseased human biology for drug development. Our proprietary technology is being used to build functional 3D human tissues that mimic key aspects of native human tissue composition, architecture, function and disease. Our advances include cell type-specific compartments, prevalent intercellular tight junctions, and the formation of microvascular structures. We believe these attributes can enable critical complex, multicellular disease models that we will use to develop clinically effective drugs for selected therapeutic areas. Market opportunities may include externally-partnered or internally-directed drug discovery and the clinical development of new molecular entities or repurposed drugs in-licensed from other pharmaceutical companies. Our goal is to establish a pipeline of drug candidates in high-value disease areas, aiming to commence human clinical testing for at least one drug candidate within a three to five year timeframe.

We have a significant opportunity to change the classic model of drug discovery using 3D bioprinted human tissues and other 3D models (sometimes known as “organoids” or “organs on a chip”). Our new paradigm will involve augmenting or replacing available animal disease models in the discovery process with more relevant human disease models utilizing 3D human tissues developed by us. Our 3D human tissues may enable us to study the treatment of human disease by replicating key aspects of human biology in areas where this is currently a challenge with existing models. Rather than offering contract research services (as we have done in the past), we will focus on identifying and developing our own drug candidates, including from unique compounds or repurposed drugs in-licensed from other pharmaceutical companies. After identifying a drug candidate, we may out-license the drug candidate or may elect to develop the drug candidate internally. In addition to drug discovery, we will continue to evaluate opportunities to monetize our intellectual property and technologies along the way as a means to generate funds to support our primary business. We will continue to identify and work with partners and collaborators, including leading academic research sites, to develop new enabling applications which can support our discovery and development mission.

To restart our research operations, we have commenced hiring a team of research and development professionals with drug discovery and 3D tissue development experience. This team will leverage 3D models of disease to discover and develop new drugs with improved clinical efficacy.

We expect our research and development staff to continue to expand as we advance our research and development activities. We also expect to maintain or grow a general and administrative staff to support our operations and reporting requirements as a public company.

We expect to lease sufficient office and laboratory space to support our requirements. On November 23, 2020, we entered into two lease agreements, pursuant to which we will temporarily lease approximately 3,212 square feet of office space (the “Temporary Lease”) in San Diego and permanently lease approximately 8,051 square feet of office space (the “Permanent Lease”) in San Diego once certain tenant improvements for our permanent premises have been completed and it is ready for occupancy. The Temporary Lease commenced on November 27, 2020 and is intended to serve as temporary premises for approximately seven months. The Permanent Lease is projected to commence on July 1, 2021 and is intended to serve as our permanent premises for approximately sixty-two months.

COVID-19

In December 2019, a respiratory illness caused by a novel strain of coronavirus, SARS-CoV-2, causing the Coronavirus Disease 2019, also known as COVID-19, emerged. While initially the outbreak was largely concentrated in China, it has since spread globally and been declared a pandemic by the World Health Organization. Global health concerns relating to the COVID-19 pandemic have been weighing on the macroeconomic environment, and the pandemic has significantly increased economic volatility and uncertainty. The pandemic has resulted in government authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place or stay-at-home orders, and business shutdowns.

The overall extent to which the coronavirus impacts our operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak and travel bans and restrictions, quarantines, shelter-in-place or stay-at-home orders, and business shutdowns. In particular, the continued COVID-19 pandemic could adversely impact our operations, including among others, raising additional capital, the timing and ability to pursue our strategy, given the impact it may have on the manufacturing and supply chain, sales and marketing and clinical trial operations of potential strategic partners, and the ability to advance our research and development activities and pursue development of our pipeline products, each of which could have an adverse impact on our business and our financial results. Our employees and consultants have recently returned to working at our office and lab when necessary and we currently believe our operations have not otherwise been negatively impacted by the pandemic.

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Critical Accounting Policies, Estimates, and Judgments

Our financial statements are prepared in accordance with 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 stock-based compensation expense and the valuation allowance on deferred tax assets. Though the impact of the COVID-19 pandemic to our business and operating results presents additional uncertainty, we continue to use the best information available to inform our critical accounting estimates. 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, 2020. For a description of critical accounting policies that affect our significant judgments and estimates used in the preparation of our unaudited condensed 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, 2020, filed with the SEC on May 28, 2020.

Results of Operations

Comparison of the three months ended December 31, 2020 and 2019

The following table summarizes our results of operations for the three months ended December 31, 2020 and 2019 (in thousands, except %):

Revenues

We had no revenue for the three months ended December 31, 2020 compared to $0.3 million of revenue for the three months ended December 31, 2019, due to an ending of revenue generating activities following our decision to restructure operations to preserve capital as we pursued various strategic alternatives.  

Costs and Expenses

Cost of Revenues

Cost of product and service revenues, which reflects expenses related to manufacturing our products and delivering services was zero for the three months ended December 31, 2020, compared to less than $0.1 million for the three months ended December 31, 2019. The decrease was due to the end of revenue generating activities following our decision to restructure operations to preserve capital as we pursued various strategic alternatives.

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Research and Development Expenses

The following table summarizes our research and development expenses for the three months ended December 31, 2020 and 2019 (in thousands, except %):

Research and development expenses were $0.4 million, an increase of $0.3 million, or approximately 177%, from the prior year period as we began to pursue renewed research and development activities in the third quarter of fiscal 2021. Our average full-time research and development staff increased from an average of zero full-time employees for the three months ended December 31, 2019 to an average of four full-time employees for the three months ended December 31, 2020. The renewed research and development activities caused a $0.1 million increase in personnel related costs, a $0.1 million increase in lab expenses, and a $0.1 million increase in consulting fees. Going forward, we will continue to increase research and development activities with an associated increase in expenses.

Selling, General and Administrative Expenses

The following table summarizes our selling, general and administrative expenses for the three months ended December 31, 2020 and 2019 (in thousands, except %):

For the three months ended December 31, 2020, selling, general and administrative expenses were approximately $2.1 million, a decrease of $3.3 million, or approximately 61%. During the three months ended December 31, 2019, we incurred significant one time costs related to our proposed Merger with Tarveda, including approximately $1.1 million of legal, accounting, and financial printer costs. Additionally, as a result of our business restructuring in the second quarter of fiscal 2020, during the three months ended December 31, 2019, we 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.

We have renewed operations in the third quarter of fiscal 2021. The decrease in selling, general, and administrative expenses year over year was due to a $2.1 million decrease in personnel related costs, a $0.8 million decrease in depreciation and amortization, and $0.2 million decrease in facilities costs, and a $0.4 million decrease in corporate costs. This was offset by a $0.2 million increase in consulting fees. Our average selling, general and administrative headcount was four full-time employees for the three months ended December 31, 2020 compared to an average of eight full-time employees in the prior year period.

Other Income (Expense)

Other income was less than $0.1 million for the three months ended December 31, 2020 as compared to $1.9 million for the three months ended December 31, 2019. The approximate $1.9 million decrease was due to business restructuring activity in fiscal 2020, consisting of $1.1 million of proceeds from the sale of Samsara assets, $0.5 million gain on lease termination, $0.1 million of income from the sale of other assets, and $0.1 million of interest income.

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Comparison of the nine months ended December, 31 2020 and 2019

The following table summarizes our results of operations for the nine months ended December 31, 2020 and 2019 (in thousands, except %):

Revenues

We had no revenue for the nine months ended December 31, 2020 compared to $2.2 million of revenue for the nine months ended December 31, 2019, due to an ending of revenue generating activities following our decision to restructure operations to preserve capital as we pursued various strategic alternatives.  

Costs and Expenses

Cost of Revenues

Cost of product and service revenues, which reflects expenses related to manufacturing our products and delivering services, was zero for the nine months ended December 31, 2020, compared to approximately $0.3 million for the nine months ended December 31, 2019. The decrease was due to the end of revenue generating activities following our decision to restructure operations to preserve capital as we pursued various strategic alternatives.

Research and Development Expenses

The following table summarizes our research and development expenses for the nine months ended December 31, 2020 and 2019 (in thousands, except %):

Research and development expenses were $0.4 million, a decrease of $5.0 million, or approximately 92%, from the prior year period as we eliminated all research and development activities following our decision to pursue our strategic alternatives during the second quarter of fiscal 2020. The significant decrease year over year was slightly offset by our renewed research and development activities commencing in the third quarter of fiscal 2021. Overall, there was a $2.4 million reduction of personnel related costs, a $0.8 million reduction in lab expenses, a $1.0 million reduction in facilities costs, and a $0.8 million reduction in all other costs. Our average full-time research and development staff decreased from an average of nineteen full-time employees for the nine months ended December 31, 2019 to an average of two full-time employees for the nine months ended December 31, 2020. Going forward, we will continue to increase research and development activities with an associated increase in expenses.

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Selling, General and Administrative Expenses

The following table summarizes our selling, general and administrative expenses for the nine months ended December 31, 2020 and 2019 (in thousands, except %):