1.	Summary of Significant Accounting Policies A summary of significant accounting policies, consistently applied in the preparation of the accompanying consolidated financial statements follows:

Nature of operations and basis of presentation

Organovo Holdings, Inc., (“the Company”), through its wholly-owned subsidiary, Organovo, Inc., a Delaware corporation, has devoted substantially all of its resources to product development, raising capital, and building infrastructure. The Company has developed and is commercializing a platform technology for the generation of functional human tissues that can be employed in drug discovery and development, biological research, and as therapeutic implants for the treatment of damaged or degenerating tissues and organs.

All of the Company’s potential products are in research and development phases and as of December 31, 2012, the Company has not generated revenue from its planned principal operations. The Company does earn revenue from research and development agreements with collaborators and grants from governmental entities. Accordingly, the Company is considered to be in the development stage.

Reverse merger transaction

On February 8, 2012, Organovo, Inc., a privately held Delaware corporation, merged with and into Organovo Acquisition Corp., a wholly-owned subsidiary of Organovo Holdings, Inc., a publicly traded Delaware corporation, with Organovo, Inc. surviving the merger as a wholly-owned subsidiary of the Company (the “Merger”). As a result of the Merger, the Company acquired the business of Organovo, Inc., and will continue the existing business operations of Organovo, Inc.

Simultaneously with the Merger, on February 8, 2012 (the “closing date”), all of the issued and outstanding shares of Organovo, Inc.’s common stock converted, on a 1 for 1 basis, into shares of the Company’s common stock, par value $0.001 per share. Also, on the closing date, all of the issued and outstanding options to purchase shares of Organovo, Inc.’s common stock and other outstanding warrants to purchase Organovo, Inc.’s common stock, and all of the issued and outstanding bridge warrants to purchase shares of Organovo, Inc.’s common stock, converted, respectively, on a 1 for 1 basis, into options, warrants and new bridge warrants to purchase shares of the Company’s common stock.

Immediately following the consummation of the Merger: (i) the former security holders of Organovo, Inc. common stock had an approximate 75% voting interest in the Company and the Company stockholders retained an approximate 25% voting interest, (ii) former executive management team of Organovo, Inc. remained as the only continuing executive management team for the Company, and (iii) the Company’s ongoing operations consist solely of the ongoing operations of Organovo, Inc. Based primarily on these factors, the Merger was accounted for as a reverse merger and a recapitalization in accordance with accounting principles generally accepted in the United States (“GAAP”). As a result, these financial statements reflect the historical results of Organovo, Inc. prior to the Merger, and the combined results of the Company following the Merger. The par value of Organovo, Inc. common stock immediately prior to the Merger was $0.0001 per share. The par value subsequent to the Merger is $0.001 per share, and therefore the historical results of Organovo, Inc. prior to the Merger have been retroactively adjusted to affect the change in par value.

In connection with three separate closings of a private placement transaction completed in connection with the Merger (the “Private Placement”), the Company received gross proceeds of approximately $5.0 million, $1.8 million and $6.9 million on closings on February 8, 2012, February 29, 2012 and March 16, 2012, respectively. In 2011, the Company received $1.5 million from the purchase of 6% convertible notes which were automatically converted into 1,500,000 shares of common stock, plus 25,387 shares for accrued interest of $25,387 on the principal, on February 8, 2012.

The cash transaction costs related to the Merger were approximately $2.1 million.

Before the Merger, Organovo Holdings’ Board of Directors and stockholders adopted the 2012 Equity Incentive Plan (the “2012 Plan”). The 2012 Plan provides for the issuance of 6,553,986 shares of the Company’s common stock to executive officers, directors, advisory board members and employees. In addition, Organovo Holdings assumed and adopted Organovo, Inc.’s 2008 Equity Incentive Plan, which provided for the issuance of 896,256 shares of common stock, for total shares available for issuance under these plans of 7,450,242.

Liquidity

As of December 31, 2012, the Company had an accumulated deficit of approximately $50.2 million. The Company also had negative cash flows from operations of approximately $9.7 million during the year ended December 31, 2012.

On February 8, 2012, the Company received gross proceeds of approximately $5.0 million from the initial closing of a private placement offering in conjunction with the Merger (the “Private Placement”). On February 29, 2012 and March 16, 2012, the Company completed two additional closings of its Private Placement receiving gross proceeds of approximately $1.8 million and $6.9 million respectively.

On December 21, 2012, the Company consummated its Warrant Tender Offer to amend certain of its outstanding warrants to purchase approximately 14.5 million shares of the Company’s common stock. The Warrant Tender Offer, which expired on December 21, 2012, resulted in approximately 9.6 million warrants tendered by their holders for aggregate proceeds of approximately $7.7 million.

Subsequent to December 31, 2012, on February 5, 2013, the Company provided a Notice of Redemption to affected warrant holders, of approximately 2.4 million warrant shares, that they would have until March 14, 2013 to exercise their outstanding warrants at $1.00 per share. Thereafter, any warrants that remain unexercised will automatically be redeemed by the Company at a redemption price of $0.0001 per share of common stock then issuable upon exercise of the redeemed warrant. As of March 12, 2013, all redeemable warrants had been exercised for proceeds of approximately $2.3 million.

The Company has financed its operations primarily through the sale of convertible notes, the private placement of equity securities, and through revenue derived from grants or collaborative research agreements. Based on its current operating plan and available cash resources, the Company has sufficient resources to fund its business for at least the next 12 months.

The Company will need additional capital to further fund product development and commercialization of its human tissues that can be employed in drug discovery and development, biological research, and as therapeutic implants for the treatment of damaged or degenerating tissues and organs. The Company intends to cover its future operating expenses through cash on hand, through additional financing from existing and prospective investors, and from revenue derived from grants and collaborative research agreements. However, we may not be successful in obtaining funding from new or existing collaborative research agreements. In addition, we cannot be sure that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to us or to our stockholders. Further, the NIH has notified all grant recipients that due to the current Congressional budget sequestration, the NIH may not be able to issue continuation awards, or it may be required to negotiate a reduction in the scope of existing awards to meet the constraints imposed. Additionally, plans for new grants or cooperative agreements may be re-scoped, delayed, or canceled depending on the nature of the work and the availability of resources. As a result, we cannot assure you that we will receive the funding under our existing NIH grants, and we may not be successful in securing additional grants from the NIH in the future.

 

Having insufficient funds may require us to delay, scale back, or eliminate some or all of our development programs or relinquish rights to our technology on less favorable terms than we would otherwise choose. Failure to obtain adequate financing could eventually adversely affect our ability to operate as a going concern. If we raise additional funds from the issuance of equity securities, substantial dilution to our existing stockholders would likely result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business.

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 consolidated financial statements include those assumed in computing the valuation of warrants and conversion features, revenue recognized under the proportional performance model, the valuation of stock-based compensation expense, and the valuation allowance on deferred tax assets.

Financial instruments

For certain of the Company’s financial instruments, including cash and cash equivalents, grants receivable, inventory, prepaid expenses and other assets, accounts payable, accrued expenses, deferred revenue and convertible notes payable, the carrying amounts are generally considered to be representative of their respective fair values because of the short-term nature of those instruments.

Cash and cash equivalents

The Company considers all highly liquid investments with original maturities of 90 days or less to be cash equivalents.

Derivative financial instruments

The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency.

The Company reviews the terms of convertible debt and equity instruments it issues to determine whether there are derivative instruments, including an embedded conversion option that is required to be bifurcated and accounted for separately as a derivative financial instrument. In circumstances where a host instrument contains more than one embedded derivative instrument, including a conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument. Also, in connection with the sale of convertible debt and equity instruments, the Company may issue freestanding warrants that may, depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity.

Derivative instruments are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported as non-operating income or expense. When the convertible debt or equity instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds allocated to the convertible host instruments are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the convertible instruments themselves, usually resulting in those instruments being recorded at a discount from their face value.

The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to interest expense, using the effective interest method.

 

Restricted cash

As of December 31, 2012, the Company had approximately $88,300 of restricted cash deposited with a financial institution. $38,300 is held in certificates of deposit to support a letter of credit agreement related to the facility lease entered into during 2012. The additional $50,000 is held by the financial institution as a guarantee for the Company’s commercial credit cards.

Grant receivable

Grant receivable represents the amount due from the NIH under a research grant. The Company considers the grant receivable to be fully collectible; and accordingly, no allowance for doubtful amounts has been established. If amounts become uncollectible, they are charged to operations.

Inventory

Inventories are stated at the lower of the cost or market (first-in, first-out). Inventory at December 31, 2012 consisted of approximately $196,000 in finished goods, $60,000 work-in-process and $104,000 in raw materials. Inventory at December 31, 2011 consisted of approximately $204,000 in finished goods, $24,000 in work-in-process and $64,000 in raw materials.

The Company provides inventory allowances based on excess or obsolete inventories determined based on anticipated use in the final product. There was no obsolete inventory reserve as of December 31, 2012 or December 31, 2011.

Deferred financing costs

As of December 31, 2012, there were no deferred financing costs. As of December 31, 2011, deferred financing costs consisted of approximately $140,000 associated with the Merger transaction and approximately $179,000 associated with convertible notes as part of the private placement offering that was initiated in the fourth quarter of 2011. The deferred financing costs related to the private placement offering were being amortized over the life of the convertible notes and were fully amortized to expense upon conversion of the convertible notes on February 8, 2012. The deferred financing costs associated with the Merger transaction were recorded as an offset to the proceeds received, with the amount in excess of the proceeds received expensed at the effective Merger date.

Fixed assets and depreciation

Property and equipment are carried at cost. Expenditures that extend the life of the asset are capitalized and depreciated. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets or, in the case of leasehold improvements, over the lesser of the useful life of the related asset or the lease term. The estimated useful lives of the fixed assets ranges between two and five years.

Impairment of long-lived assets

In accordance with authoritative guidance the Company reviews its long-lived assets, including property and equipment and other assets, for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. To determine recoverability of its long-lived assets, the Company evaluates whether future undiscounted net cash flows will be less than the carrying amount of the assets and adjusts the carrying amount of its assets to fair value. Management has determined that no impairment of long-lived assets occurred in the period from inception through December 31, 2012.

Fair value measurement

Financial assets and liabilities are measured at fair value, which is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The following is a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:

 

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Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

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Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

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Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

As of December 31, 2012 and December 31, 2011, cash and cash equivalents were comprised of cash in checking accounts.

The Company uses Level 3 inputs for its valuation methodology for the warrant derivative liabilities. The estimated fair values were determined using a Monte Carlo option pricing model based on various assumptions (see Note 4). The Company’s derivative liabilities are adjusted to reflect estimated fair value at each period end, with any decrease or increase in the estimated fair value being recorded in other income or expense accordingly, as adjustments to the fair value of derivative liabilities.

The estimated fair values of the liabilities measured on a recurring basis are as follows:

 

		Fair Value Measurements at December 31, 2012 and 2011:
		Balance at December 31, 2012				Quoted Prices in Active Markets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Other Unobservable Inputs (Level 3)
Warrant liability		$	20,618,706				—				—			$	20,618,706

 

		Balance at December 31, 2011				Quoted Prices in Active Markets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Other Unobservable Inputs (Level 3)
Warrant liability		$	1,266,869				—				—			$	1,266,869

The following table presents the activity for liabilities measured at estimated fair value using unobservable inputs for 2011 and 2012:

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 

		Warrant Derivative Liability ($000’s)
Balance at December 31, 2010		$	—
Issuances			1,260
Adjustments to estimated fair value			7
Balance at December 31, 2011			1,267
Issuances			32,742
Adjustments to estimated fair value			9,931
Warrant liability removal due to settlements			(23,321	)
Balance at December 31, 2012		$	20,619

Research and development

Research and development expenses, including direct and allocated expenses, consist of independent research and development costs, as well as costs associated with sponsored research and development. Research and development costs are expensed as incurred.

 

Income taxes

Deferred income taxes are recognized for the tax consequences in future years for differences between the tax basis of assets and liabilities and their financial reporting amounts at each year end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the combination of the tax payable for the year and the change during the year in deferred tax assets and liabilities.

Revenue recognition

The Company’s revenues are derived from collaborative research agreements, NIH and U.S. Treasury Department Grants, the sale of bioprinter related products and services, and license agreements.

The Company recognizes revenue when the following criteria have been met: (i) persuasive evidence of an arrangement exists; (ii) services have been rendered or product has been delivered; (iii) price to the customer is fixed and determinable; and (iv) collection of the underlying receivable is reasonably assured.

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, 2012 and December 31, 2011, the Company had $0 and $152,500, respectively, in deferred revenue related to its collaborative research programs.

Product Revenue

The Company recognizes product revenue at the time of shipment to the customer, provided all other revenue recognition criteria have been met. The Company recognizes product revenues upon shipment to distributors, provided that (i) the price is substantially fixed or determinable at the time of sale; (ii) the distributor’s obligation to pay the Company is not contingent upon resale of the products; (iii) title and risk of loss passes to the distributor at time of shipment; (iv) the distributor has economic substance apart from that provided by the Company; (v) the Company has no significant obligation to the distributor to bring about resale of the products; and (vi) future returns can be reasonably estimated. For any sales that do not meet all of the above criteria, revenue is deferred until all such criteria have been met.

Research and Development Revenue Under Collaborative Agreements.

The Company’s collaboration revenue consists of license and collaboration agreements that contain multiple elements, including non-refundable upfront fees, payments for reimbursement of third-party research costs, payments for ongoing research, payments associated with achieving specific development milestones and royalties based on specified percentages of net product sales, if any. The Company considers a variety of factors in determining the appropriate method of revenue recognition under these arrangements, such as whether the elements are separable, whether there are determinable fair values and whether there is a unique earnings process associated with each element of a contract.

The Company recognizes revenue from research funding under collaboration agreements when earned on a “proportional performance” basis as research hours are incurred. The Company performs services as specified in each respective agreement on a best-efforts basis, and is reimbursed based on labor hours incurred on each contract. The Company initially defers revenue for any amounts billed or payments received in advance of the services being performed and recognizes revenue pursuant to the related pattern of performance, based on total labor hours incurred relative to total labor hours estimated under the contract.

In December 2010, the Company entered into a 12 month research contract agreement with a third party, whereby the Company was engaged to perform research and development services on a fixed-fee basis for approximately $600,000. Based on the proportional performance criteria, the Company recognized approximately $150,000 and $450,000 in revenue related to the contract during the years ended December 31, 2012 and 2011, respectively. Total revenue recognized on the contract from inception through December 31, 2012 was approximately $600,000.

In October 2011, the Company entered into a research contract agreement with a third party, whereby the Company will perform research and development services on a fixed-fee basis for $1,365,000. The agreement included an initial payment to the Company of approximately $239,000 with remaining payments expected to occur over a twenty-one month period. On November 27, 2012, the agreement was amended to include additional research and development services, for an additional $135,000, bringing the total contract value to $1,500,000. This extends the original contract (which runs concurrently) from twenty-one months to twenty-eight months. The Company recorded approximately $885,000 and $239,000 in 2012 and 2011, respectively, in revenue related to the research contract in recognition of the proportional performance achieved by the Company. Total revenue recognized on the contract from inception through December 31, 2012 was approximately $1,100,000.

Revenue Arrangements with Multiple Deliverables

The Company occasionally enters into revenue arrangements that contain multiple deliverables. Judgment is required to properly identify the accounting units of the multiple deliverable transactions and to determine the manner in which revenue should be allocated among the accounting units. Moreover, judgment is used in interpreting the commercial terms and determining when all criteria of revenue recognition have been met for each deliverable in order for revenue recognition to occur in the appropriate accounting period. For multiple deliverable agreements, consideration is allocated at the inception of the agreement to all deliverables based on their relative selling price. The relative selling price for each deliverable is determined using VSOE of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence of selling price exists, the Company uses its best estimate of the selling price for the deliverable.

The Company recognizes revenue for delivered elements only when it determines there are no uncertainties regarding customer acceptance. While changes in the allocation of the arrangement consideration between the units of accounting will not affect the amount of total revenue recognized for a particular sales arrangement, any material changes in these allocations could impact the timing of revenue recognition, which could affect the Company’s results of operations.

The Company expects to periodically receive license fees for non-exclusive research licensing associated with funded research projects. License fees under these arrangements are recognized over the term of the contract or development period as it has been determined that such licenses do not have stand-alone value.

NIH and U.S. Treasury Grant Revenues

During 2010, the U.S. Treasury awarded the Company two one-time grants totaling approximately $397,000 for investments in qualifying therapeutic discovery projects under section 48D of the Internal Revenue Code. The grants cover reimbursement for qualifying expenses incurred by the Company in 2010 and 2009. The proceeds from these grants are classified in “Revenues – Grants” for the period from inception through December 31, 2012.

During 2012, 2010 and 2009, the NIH awarded the Company three research grants totaling approximately $558,000. Revenues from the NIH grants are based upon internal and subcontractor costs incurred that are specifically covered by the grants, and where applicable, an additional facilities and administrative rate that provides funding for overhead expenses. These revenues are recognized when expenses have been incurred by subcontractors and as the Company incurs internal expenses that are related to the grants. Revenue recognized under these grants for the years ended December 31, 2012 and 2011 was approximately $162,000 and $57,000, respectively. Total revenue recorded under these grants from inception through December 31, 2012 was approximately $430,000.

The Company accounts for stock-based compensation in accordance with the Financial Accounting and Standards Board’s ASC Topic718, Compensation – Stock Compensation, which establishes accounting for equity instruments exchanged for employee services. Under such provisions, stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense, under the straight-line method, over the employee’s requisite service period (generally the vesting period of the equity grant).

Stock-based compensation

The Company accounts for equity instruments, including restricted stock or stock options, issued to non-employees in accordance with authoritative guidance for equity based payments to non-employees. Stock options issued to non-employees are accounted for at their estimated fair value determined using the Black-Scholes option-pricing model. The fair value of options granted to non-employees is re-measured as they vest, and the resulting increase in value, if any, is recognized as expense during the period the related services are rendered. Restricted stock issued to non-employees is accounted for at their estimated fair value as they vest.

Comprehensive income (loss)

Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. The Company is required to record all components of comprehensive income (loss) in the financial statements in the period in which they are recognized. Net income (loss) and other comprehensive income (loss), including unrealized gains and losses on investments, are reported, net of their related tax effect, to arrive at comprehensive income (loss). For the years ended December 31, 2012 and 2011, and for the period April 19, 2007 (inception) through December 31, 2012, the comprehensive loss was equal to the net loss.

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 the assumed issuance of common stock under restricted stock units, shares subject to repurchase and warrants as the effect would be anti-dilutive. No dilutive effect was calculated for the year ended December 31, 2012 or 2011 as the Company reported a net loss for each respective year and the effect would have been anti-dilutive. Total common stock equivalents that were excluded from computing diluted net loss per share were approximately 14.1 million and 5.3 million for the years ended December 31, 2012 and 2011, respectively.

Reclassifications

Certain reclassifications were made to the 2011 financial statements in order to conform to the presentation of the 2012 financial statements. The reclassifications did not have any effect on previously reported net loss.

New accounting standards

In June 2011, FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.” This ASU presents an entity with the option to present the total of comprehensive income, the components of net income, and the component of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity/deficit. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other Comprehensive income must be reclassified to net income. ASU No. 2011-05 should be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company’s adoption of this standard in 2012 had no effect on presentation of the consolidated financial statements for the years ended December 31, 2012 or 2011, or for the period from April 19, 2007 (inception) to December 31, 2012, as the Company did not have other comprehensive income for the respective periods.

2. Fixed Assets

Fixed assets consisted of the following (in thousands):

 

December 31,		2012				2011
Laboratory equipment		$	759			$	345
Leasehold improvements			—				34
Computer software and equipment			114				28
Furniture and fixtures			33				19
			906				426
Less accumulated depreciation and amortization			(192	)			(148	)
		$	714			$	278

Depreciation and amortization expense for the years ended December 31, 2012 and 2011 was approximately $188,000 and $63,000, respectively. Depreciation and amortization expense was approximately $336,000 for the period from April 19, 2007 (inception) through December 31, 2012.

3. Accrued Expenses

Accrued expenses consisted of the following (in thousands):

 

December 31,		2012				2011
Accrued compensation		$	720			$	317
Other accrued expenses			73				92
Deferred rent			188				29
		$	981			$	438

4. Derivative Liability

During 2012, in relation to the reverse Merger and the three offerings under the Private Placement, the Company issued 21,347,182 five-year warrants to purchase the Company’s common stock. In October and November of 2011, the Company issued 1,500,000 five-year warrants in connection with Convertible Notes. The exercise price of the warrants is protected against down-round financing throughout the term of the warrant, as described below. Pursuant to ASC 815-15 and ASC 815-40, the fair value of the warrants of approximately $32.7 million and $1.3 million in 2012 and 2011, respectively, was recorded as a derivative liability on the issuance dates.

 

The Company revalued the warrants at the end of 2012 and 2011, and the estimated fair value of the outstanding warrant liabilities was $20.6 million and $1.3 million at December 31, 2012 and 2011, respectively. The change in fair value of the derivative liabilities for the years ended December 31, 2012 and 2011 was an increase of $9.9 million and less than $0.1 million, respectively, and is included in other income (expense) in the statements of operations.

During the year ended December 31, 2012, 13,010,237 warrants that were classified as derivative liabilities were exercised. The warrants were revalued as of the settlement date, and the change in fair value was recognized to earnings. The Company also recognized a reduction in the warrant liability based on the fair value as of the settlement date, with a corresponding increase in additional paid-in capital.

The derivative liabilities were valued at the closing dates of the Private Placement and the end of each reporting period using a Monte Carlo valuation model with the following assumptions:

 

		December 31, 2011				December 31, 2012
Closing price per share of common stock		$	N/A			$	2.60
Exercise price per share		$	1.00			$	1.00
Expected volatility			109.8%				92.9	%
Risk-free interest rate			0.83%				0.54	%
Dividend yield			—				—
Remaining expected term of underlying securities (years)			5.00				4.16

In addition, as of the valuation dates, management assessed the probabilities of future financings assumptions in the Monte Carlo valuation models. Management also applied a discount for lack of marketability to the valuation of the derivative liabilities based on such trading restrictions due to the shares not being registered.

In accordance with the terms of the warrant agreements, if, prior to the expiration date of the warrants, the Company issues additional shares of common stock, as defined below, without consideration or for a consideration per share less than the exercise price of the warrants in effect immediately prior to such issue, then the exercise price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such exercise price by a fraction, (A) the numerator of which shall be (1) the number of shares of common stock outstanding immediately prior to such issue plus (2) the number of shares of common stock which the aggregate consideration received or to be received by the Company for the total number of additional shares of common stock so issued would purchase at such exercise price; and (B) the denominator of which shall be the number of shares of common stock outstanding immediately prior to such issue plus the number of such additional shares of common stock so issued; provided that (i) all shares of common stock issuable upon conversion or exchange of convertible securities outstanding immediately prior to such issue shall be deemed to be outstanding, and (ii) the number of shares of common stock deemed issuable upon conversion or exchange of such outstanding convertible securities shall be determined without giving effect to any adjustments to the conversion or exchange price or conversion or exchange rate of such convertible securities resulting from the issuance of additional shares of common stock that is the subject of this calculation. For purposes of the warrants, “additional shares of common stock” shall mean all shares of common stock issued by the Company after the effective date (including without limitation any shares of common stock issuable upon conversion or exchange of any convertible securities or upon exercise of any option or warrant, on an as-converted basis), other than: (i) shares of common stock (and/or warrants for any class of equity securities of the Company) issued or issuable upon conversion or exchange of any convertible securities or exercise of any options or warrants outstanding on the effective date; (ii) shares of common stock issued or issuable by reason of a dividend, stock split, split-up or other distribution on shares of common stock; (iii) shares of common stock (or options with respect thereto) issued or issuable to employees or directors of, or consultants to, the Company or any of its subsidiaries pursuant to a plan, agreement or arrangement approved by the Board of Directors of the Company; (iv) any securities issued or issuable by the Company pursuant to (A) the Private Placement; or (B) the Merger; (v) securities issued pursuant to acquisitions or strategic transactions approved by a majority of disinterested directors of the Company, provided that any such issuance shall only be to a person which is, itself or through its subsidiaries, an operating company in a business synergistic with the business of the Company and in which the Company receives benefits in addition to the investment of funds, but shall not include a transaction in which the Company is issuing securities primarily for the purpose of raising capital or to an entity whose primary business is investing in securities and (vi) securities issued to financial institutions, institutional investors or lessors in connection with credit arrangements, equipment financings or similar transactions approved by a majority of disinterested directors of the Company, but shall not include a transaction in which the Company is issuing securities primarily for the purpose of raising capital or to an entity whose primary business is investing in securities.

Upon each adjustment of the exercise price pursuant to the provisions stated above, the number of warrant shares issuable upon exercise of the warrants shall be adjusted by multiplying a number equal to the exercise price in effect immediately prior to such adjustment by the number of warrant shares issuable upon exercise of the warrant immediately prior to such adjustment and dividing the product so obtained by the adjusted exercise price.

5. Convertible Notes Payable

Convertible notes

From February 9, 2008 through December 31, 2011 the Company raised an aggregate of $2,390,000 in funds through loans consisting of convertible notes (“Convertible Notes”) to certain shareholders, management, vendors, and investors. The notes bore interest at rates ranging from 8% to 10% per annum and had maturity dates ranging from 2011 to 2018. The Convertible Notes were unsecured and subordinated to certain senior indebtedness of the Company, and for all Convertible Notes the principal plus accrued interest was convertible into the Company’s Common stock. During October 2011, in connection with the Exchange Agreement and Release, the Convertible Notes and accrued interest converted into the Company’s common stock.

Local Bridge

During July and August 2011, $740,000 of Convertible Notes bearing interest at 20% per annum, and warrants to purchase shares of common stock were issued to investors. The Convertible Notes were due at the earlier of 1) one year from the issuance date or 2) one week after the consummation of a Merger transaction. The number of warrants to be issued was equal to the note principal divided by the exercise price. The exercise price was the per share or per unit fair market value received in the Merger. The notes were convertible at a price per share equal to seventy-five percent (75%) of the per share fair market value of the total consideration received for a share of a public company’s common stock to be determined to be identified upon consummation of a merger.

The Company determined that the beneficial conversion feature and the warrants did not represent embedded derivative instruments. Additionally, the Company did not record the discount for the beneficial conversion feature due to the contingencies surrounding conversion. The beneficial conversion feature was recorded when the contingencies were resolved. In accordance with ASC 470-20, Debt with Conversion and Other Options, the Company recorded a discount of approximately $583,700 for the warrants. The discount was amortized to interest expense over the term of the Convertible Notes using the effective interest method.

The Company calculated the fair value of the warrants using the Black-Scholes Model using a volatility of 109.84%, an interest rate of 1.12% and a dividend yield of zero. Certain of these Convertible Notes and accrued interest were converted into the Company’s common stock in October 2011, in connection with the Exchange Agreement and Release, as discussed below. Upon conversion the Company recognized the unamortized debt discount related to these notes to interest expense. The Company recognized approximately $583,700 of interest expense for the amortization of the note discount during the year ended December 31, 2011.

 

Exchange agreement and Release

In October 2011, the Company’s Board of Directors and shareholders approved an Exchange Agreement, whereby the note holders could exchange their Convertible Notes and accrued interest for shares of the Company’s common stock and warrants to purchase the Company’s common stock. A total of $3,030,000 of principal and approximately $459,800 of accrued interest converted, at prices ranging from $0.27 to $0.75, into 7,676,828 shares of the Company’s common stock, plus five-year warrants to purchase 1,309,750 common shares at an exercise price of $1.00 per share. For the holders that elected to participate, the Exchange Agreement and Release resulted in the cancellation of the Convertible Notes and release from the note holders for any claims related to the Convertible Notes.

The Company determined that the warrants issued in connection with the Exchange Agreement and Release did not represent derivative instruments. The warrants, valued at approximately $527,600, were classified as equity instruments and recorded as interest expense on the date of issuance in 2011. The Company calculated the fair value of the warrants using the Black-Scholes Model, using a volatility of 110.13%, an interest rate of 1.11% and a dividend yield of zero.

At December 31, 2011, an unsecured $100,000 Convertible Note, with interest at 10% and a maturity date of April 2014, remained outstanding. In February 2012, at the close of the Merger, the convertible note and accrued interest in the aggregate of approximately $110,000 were repaid.

2011 Private placement

On September 18, 2011, Organovo, Inc.’s Board of Directors authorized a private placement offering of up to 30 Units of its securities at a price of $50,000 per Unit for an aggregate purchase price of $1,500,000. Each Unit consisted of a convertible note in the principal amount of $50,000 accruing simple interest at the rate of 6% per annum (the “Convertible Notes”), plus five-year warrants to purchase 50,000 shares of the next Qualified Round of Equity Securities, at an exercise price of $1.00 per share. The principal plus accrued interest was convertible into the Company’s common stock upon consummation of the Merger.

During October and November 2011, $1,500,000 of Convertible Notes bearing interest at 6% per annum with a maturity date of March 30, 2012, and five-year warrants to purchase 1,500,000 shares of the Company’s common stock were issued to investors under the Private Placement. The warrants are exercisable at $1.00 per share, expire in five years, and contain down-round price protection. The Convertible Notes were outstanding at December 31, 2011, and were converted into 1,525,387 Units during February 2012, in connection with the Merger.

The Company determined that the warrants represent a derivative instrument due to the down-round price protection, and accordingly, the Company recorded a derivative liability related to the warrants, with a corresponding debt discount of approximately $1,260,300. See Note 4. Additionally, upon issuance of the notes during 2011, the Company recorded the discount for the beneficial conversion feature of $239,700. The debt discount associated with the warrants and beneficial conversion feature were amortized to interest expense over the life of the Convertible Notes, and fully amortized upon conversion of the Convertible Notes. The Company recorded approximately $896,200 and $603,800 of interest expense for the amortization of the debt discount during the years ended December 31, 2012 and 2011, respectively, and approximately $1,500,000 for the period from inception through December 31, 2012.

As consideration for locating investors to participate in the Private Placement, the placement agent earned a cash payment of $195,000 in 2011. Additionally, upon closing of the Merger transaction in 2012, the placement agent earned five-year warrants to purchase 610,155 shares of the Company’s common stock at $1.00 per share. These warrants contain down round protection and were classified as derivative liabilities upon issuance. See Note 4.

 

2012 Private placement

During 2012, concurrently with the closing of the Merger and in contemplation of the Merger, the Company completed the initial closing of the Private Placement of up to 8,000,000 Units of its securities, at a price of $1.00 per Unit, with the ability to increase the offering to an aggregate of up to 16,000,000 Units. Each Unit consisted of one share of common stock and a warrant to purchase one share of common stock. The Company completed three closings under the Private Placement during 2012, and raised total gross proceeds of $13,722,600 and total net proceeds of $11,593,066. The Company issued 13,722,600 shares of its common stock and warrants to purchase 15,247,987 shares of its common stock (including warrants to purchase 1,525,387 shares to former holders of the bridge notes) exercisable at $1.00 to investors in the Offering. The placement agent and its selected dealers were paid total cash commissions of $1,372,260 and the placement agent was paid an expense allowance of $411,678 and was issued placement agent warrants to purchase 6,099,195 shares of the Company’s common stock at an exercise price of $1.00 per share.

The warrants issued to the investors and the placement agent, as described above, contain down round protection, and accordingly, were classified as derivative liabilities upon issuance. On the closing date, the derivative liabilities were recorded at an estimated fair value of approximately $32,742,000. Given that the fair value of the derivative liabilities exceeded the total proceeds of the private placement of $13,722,600, no net amounts were allocated to the common stock. The amount by which the recorded liabilities exceeded the proceeds of approximately $19,019,400 was charged to other expense at the closing dates. The Company has revalued the derivative liability as of December 31, 2012, and will continue to do so on each subsequent balance sheet date until the securities to which the derivative liabilities relate are exercised or expire, with any changes in the fair value recognized through earnings in the statement of operations. See Note 4.

Interest expense, including amortization of the note discounts was approximately $1,088,000 and $2,067,000 for the years ended December 31, 2012 and December 31, 2011, respectively. Interest expense, including amortization of the note discounts, for the period from April 19, 2007 (inception) through December 31, 2012 was approximately $3,406,000.

Registration rights agreement

The Company entered into a registration rights agreement (“Registration Rights Agreement”) with the investors in the Offering. Under the terms of the Registration Rights Agreement, the Company agreed to file a registration statement covering the resale of the common stock underlying the Units and the common stock that is issuable on exercise of the Investor Warrants (but not the common stock that is issuable upon exercise of the warrants issued as compensation to the placement agent in connection with the Offering) within 90 days from the final closing date of the Offering (the “Filing Deadline”). The Company filed the registration statement on June 13, 2012. The registration statement became effective during July 2012.

The Company agreed to use reasonable efforts to maintain the effectiveness of the registration statement through the one year anniversary from the date the registration statement was declared effective by the Securities and Exchange Commission (the “SEC”), or until Rule 144 of the 1933 Act is available to investors in the Offering with respect to all of their shares, whichever is earlier. If the Company had not met the Effectiveness Deadline, the Company would have been liable for monetary penalties equal to one-half of one percent (0.5%) of each investor’s investment in the offering at the end of every 30 day period following such Effectiveness Deadline failure until such failure was cured. No payments shall be owed with respect to any period during which all of the investor’s registrable securities may be sold by such investor under Rule 144 or pursuant to another exemption from registration.

 

6. Stockholders’ Equity

Common stock

In October 2011, the Company issued 7,676,828 shares of common stock to note holders for the conversion of Convertible Notes with a principal balance totaling $3,030,000 and accrued interest totaling approximately $459,800.

During February and March 2012, the Company issued 21,247,987 shares of common stock related to the Merger. See Note 1. During the year ended December 31, 2012, the Company issued 13,423,622 shares of common stock upon exercise of 13,532,487 warrants.

During the year ended December 31, 2012, 224,064 stock options were exercised for 224,064 shares of common stock.

Restricted stock awards

In February 2008, four founders, including the Chief Executive Officer (“CEO”) and three directors of the Company received 11,779,960 shares of restricted common stock, 25% vesting after the first year and the remaining 75% vesting in equal quarterly portions over the following three years. These shares are fully vested as of December 31, 2012.

In May of 2008, the Board of Directors of the Company approved the 2008 Equity Incentive Plan (the “2008 Plan”). The 2008 Plan authorized the issuance of up to 1,521,584 common shares for awards of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock award units, and stock appreciation rights. The 2008 Plan terminates on July 1, 2018. No shares were issued under the 2008 Plan during 2012, and the Company does not intend to issue any additional shares from the 2008 Plan in the future.

From 2008 through December 31, 2011, the Company issued a total of 1,258,934 shares of restricted common stock to various employees, advisors, and consultants of the Company. Of those shares, 1,086,662 were issued under the 2008 Plan and the remaining 172,272 shares were issued outside the plan.

In January of 2012, the Board of Directors of the Company approved the 2012 Equity Incentive Plan (the “2012 Plan). The 2012 Plan authorized the issuance of up to 6,553,986 shares of common stock for awards of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, performance shares, and other stock or cash awards. The 2012 Plan terminates ten years after its adoption.

During the year ended December 31, 2012, the Company issued an aggregate 950,000 of restricted stock units to certain members of senior management and 230,000 restricted stock units to non-executive employees. The vesting schedule is 25% on the anniversary of the vesting start date over four years.

During the year ended December 31, 2012, the Company issued an aggregate 200,000 restricted stock units to certain members of senior management, the vesting of which is performance based. As of December 31, 2012, the Company believes the financial targets will be met, and accordingly is recognizing the related stock based compensation expense over the requisite service period.

During the year ended December 31, 2012, there were 185,516 shares of restricted stock cancelled. 148,016 of the restricted stock units that were forfeited relate to shares of common stock returned to the Company, at the option of the holders, to cover the tax liability related to the vesting of 211,250 restricted stock units. Upon the return of the common stock, 83,986 stock option grants with immediate vesting, were granted to the individuals at the vesting date market value strike price. The remaining 37,500 restricted stock units were forfeited by one staff member upon termination of their employment with the company.

 

A summary of the Company’s restricted stock award activity is as follows:

 

		Number of Shares
Unvested at December 31, 2007			—
Granted			12,627,697
Vested			(65,211	)
Canceled / forfeited			—
Unvested at December 31, 2008			12,562,486
Granted			130,422
Vested			(5,373,004	)
Canceled / forfeited			—
Unvested at December 31, 2009			7,319,904
Granted			219,369
Vested			(3,256,191	)
Canceled / forfeited			—
Unvested at December 31, 2010			4,283,082
Granted			61,406
Vested			(3,233,193	)
Canceled / forfeited			—
Unvested at December 31, 2011			1,111,295
Granted			1,380,000
Vested			(1,143,735	)
Canceled / forfeited			(185,516	)
Unvested at December 31, 2012			1,162,044

The fair value of each restricted common stock award is recognized as stock-based expense over the vesting term of the award. The Company recorded restricted stock-based compensation expense in operating expenses for employees and non-employees of approximately $834,000 and $3,000 during the years ended December 31, 2012 and 2011, respectively. The Company recorded restricted stock-based compensation expense of approximately $854,000 for the period from April 19, 2007 (inception) through December 31, 2012.

As of December 31, 2012, total unrecognized restricted stock-based compensation expense was approximately $1,400,000, which will be recognized over a weighted average period of 2.85 years.

Stock options

Under the 2008 Equity Incentive Plan, on October 12, 2011, the Company granted an officer incentive stock options to purchase 896,256 shares of common stock at an exercise price of $0.08 per share, a quarter of which vested on the one year anniversary of employment, in May 2012, and the remaining options will vest ratably over the remaining 36 month term. Other than this grant, the Company does not intend to issue any additional shares under the 2008 Plan.

During the year ended December 31, 2012 under the 2012 Equity Incentive Plan, 2,023,394 incentive stock options were issued, at various exercise prices, a quarter of which will vest on either the one year anniversary of employment or one year anniversary of the vesting commencement date. The remaining options will vest ratably over the remaining 36 month terms, with the exception of 80,653 of the incentive stock option grants that have immediate vesting at the grant date and 124,000 of the incentive stock option grants that vest quarterly over three years.

 

The following table summarizes stock option activity for 2011 and 2012:

 

		Options Outstanding				Weighted- Average Exercise Price				Aggregate Intrinsic Value
Outstanding at December 31, 2010			—				—				—
Options granted			896,256			$	0.08
Options canceled			—				—
Options exercised			—				—
Outstanding at December 31, 2011			896,256			$	0.08				—
Options granted			2,023,394			$	1.95
Options canceled			(5,000	)		$	2.25
Options exercised			(224,064	)		$	0.08			$	564,641
Outstanding at December 31, 2012			2,690,586			$	1.48			$	3,041,476
Vested and Exercisable at December 31, 2012			96,304			$	2.12			$	46,335

The weighted-average remaining contractual term of options exercisable and outstanding at December 31, 2012 was approximately 9.7 years and 9.4 years, respectively.

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:

 

		December 31, 2012				December 31, 2011
Dividend yield			—				—
Volatility			96.22	%			111.00	%
Risk-free interest rate			0.89	%			1.07	%
Expected life of options			6.05 years				5.0 years
Weighted average grant date fair value		$	1.50			$	0.06

The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future. Due to the Company’s limited historical data, the estimated volatility incorporates the historical and implied volatility of comparable companies whose share prices are publicly available. The risk-free interest rate assumption was based on the 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 total employee stock-based compensation recorded as operating expenses was approximately $600,000 and $6,000 for the years ended December 31, 2012 and 2011 respectively. The Company recorded stock-based compensation expense of approximately $606,000 for the period from April 19, 2007 (inception) through December 31, 2012.

The total unrecognized compensation cost related to unvested stock option grants as of December 31, 2012 was approximately $2,479,000, and the weighted average period over which these grants are expected to vest is 3.3 years.

Warrants

During the years ended December 31, 2012 and 2011, the Company issued warrants to investors to purchase 21,347,182 and 2,909,750 shares, respectively, of its common stock. These warrants are immediately exercisable at $1.00 per share, and have a weighted average remaining term of approximately 4.16 years.

 

During 2012, 13,259,987 of these warrants were exercised for cash proceeds of $11,356,251, and 272,500 of these warrants were exercised through a cashless exercise for issuance of 163,635 shares of common stock. No warrants were exercised during 2011.

In December 2012, the Company consummated a Warrant Tender Offer to amend certain of its warrants to purchase approximately 14.5 million shares of the Company’s common stock. In accordance with the Tender Offer, for those warrant holders that elected to participate, this resulted in a reduction of the exercise price of the warrants from $1.00 per share to $0.80 per share of common stock in cash, shortened the exercise period of the warrants so that they expired concurrently with the tender offer, and removed the price-based anti-dilution provisions contained in the warrants. The Company completed the Tender Offer on December 21, 2012, resulting in approximately 9.6 million warrants exercised for gross proceeds of approximately $7.7 million. In connection with the transaction, the Company recognized an expense for the inducement to exercise the warrants of approximately $1.9 million. The Company also incurred approximately $0.4 million in placement agent fees, legal costs, and other related fees, which have been recognized as an offset to the proceeds received from the warrant exercises.

13,010,237 of the warrants exercised in 2012 were derivative liabilities and were valued at the settlement date. The warrant liability was reduced to equity at the fair value on the settlement date. See Note 4.

Additionally, during the year ended December 31, 2012 the Company entered into four agreements with consultants for services. In connection with the agreements, the Company issued a total of 650,000 warrants to purchase common stock, at prices ranging from $1.70 to $3.24, with lives ranging from two to five years, to be earned over service periods of up to six months. The fair value of the warrants was estimated to be approximately $890,000, which was recognized as a prepaid asset and is being amortized over the term of the consulting agreements. These warrants were classified as equity instruments because they do not contain any anti-dilution provisions. The Black-Scholes model, using volatility rates ranging from 79.8% to 103.8% and risk free interest rate factors ranging from 0.24% to 0.63%, were used to determine the value. The value is being amortized over the term of the agreements. During the year ended December 31, 2012, the Company recognized approximately $556,000 of expense related to these services.

The following table summarizes warrant activity for the years ended December 31, 2012 and 2011:

 

		Warrants				Weighted- Average Exercise Price
Balance at December 31, 2010			—			$	—
Granted			2,909,750			$	1.00
Expired / Canceled			—			$	—
Exercised			—			$	—
Balance at December 31, 2011			2,909,750			$	1.00
Granted			21,997,182			$	1.04
Exercised			(13,532,487	)		$	0.84
Balance at December 31, 2012			11,374,445			$	1.08

Common stock reserved for future issuance

Common stock reserved for future issuance consisted of the following at December 31, 2012:

 

Common stock warrants outstanding			11,374,445
Common stock options outstanding under the 2008 Plan			672,192
Common stock options outstanding and reserved under the 2012 Plan			4,651,160
Total			16,697,797

 

7. Commitments and Contingencies

Operating leases

The Company leases office and laboratory space under non-cancelable operating leases. The Company records rent expense on a straight-line basis over the life of the lease and records the excess of expense over the amounts paid as deferred rent. Deferred rent is included in accrued expenses in the consolidated balance sheets.

Rent expense was approximately $325,600 and $145,200 for the years ended December 31, 2012 and 2011, respectively. Rent expense was approximately $650,200 for the period from April 19, 2007 (inception) through December 31, 2012.

The Company entered into a new facilities lease at 6275 Nancy Ridge Drive, San Diego, CA 92121. The lease was signed on February 27, 2012 with occupancy as of July 15, 2012. The base rent under the lease is approximately $38,800 per month with 3% annual escalators. The lease term is 48 months with an option for the Company to extend the lease at the end of the lease term.

Future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2012, are as follows (in thousands):

 

2013		$	379
2014			490
2015			503
2016			297
2017			—
Total		$	1,669

During the year ended December 31, 2012, the Company entered into an agreement to lease certain laboratory equipment under a non-cancelable capital lease, which is included in fixed assets as follows (in thousands):

 

December 31, 2012
Lab equipment		$	34
Less accumulated depreciation			(3	)
Net book value		$	31

Depreciation expense related to the capital lease obligation was approximately $2,900, for the year ended December 31, 2012.

Future minimum capital lease payments at December 31, 2012 are as follows (in thousands):

 

Year Ending December 31,
2013		$	11
2014			11
2015			7
Total minimum lease payments			29
Amount representing interest			(2	)
Present value of minimum lease payments			27
Less current portion			(10	)
Long term portion		$	17

 

8. Licensing Agreements and Research Contracts

University of Missouri

On March 24, 2009, the Company entered into a license agreement with the Curators of the University of Missouri to in-license certain technology and intellectual property relating to self-assembling cell aggregates and to intermediate cellular units. The Company received the exclusive worldwide rights to commercialize products comprising this technology for all fields of use. The Company paid to the University of Missouri a nonrefundable license fee of $25,000 and has committed to reimburse the University of Missouri for certain prior and future patent costs. Each year the Company is required to pay the University of Missouri royalties ranging from 1% to 3% of net sales depending on the level of net sales achieved by the Company each year. A minimum annual royalty of $25,000 is due beginning 2 years after the calendar year of the first commercial sale and is credited to sales royalties. The license agreement terminates upon expiration of the patents licensed and is subject to certain conditions as defined in the license agreement, which are expected to expire after 2029. The $25,000 license fee is included in Other Assets in the accompanying balance sheets and is being amortized over the life of the related patent.

On March 12, 2010, the Company entered into a license agreement with the Curators of the University of Missouri to in-license certain technology and intellectual property relating to engineered biological nerve grafts. The Company received the exclusive worldwide rights to commercialize products comprising this technology for all fields of use. The Company paid to University of Missouri a nonrefundable license fee of $5,000 and has committed to reimburse the University of Missouri for certain prior and future patent costs. In 2012 and 2011, the Company paid the University of Missouri approximately $193,500 and $23,800, respectively, for prior patent costs relating to the license agreements with the University of Missouri. Each year the Company is required to pay the University of Missouri royalties ranging from 1% to 3% of net sales depending on the level of net sales achieved by the Company each year. A minimum annual royalty of $5,000 is due beginning 2 years after the calendar year of the first commercial sale and is credited to sales royalties. An additional royalty of $12,500 is due if there are no net sales within five years from the effective date of the license. The license agreement terminates upon expiration of the patents licensed and is subject to certain conditions as defined in the license agreement. The $5,000 license fee is included in Other Assets and is being amortized over the life of the related patent.

Clemson University

On May 2, 2011, the Company entered into a license agreement with Clemson University Research Foundation to in-license certain technology and intellectual property relating to ink-jet printing of viable cells. The Company received the exclusive worldwide rights to commercialize products comprising this technology for all fields of use. The Company agreed to pay Clemson University a nonrefundable license fee of $32,500, as well as an additional $32,500 to reimburse Clemson University for certain prior and future patent costs. These fees, totaling $65,000, are included in Other Assets and are being amortized over the life of the related patent. Each year the Company is required to pay the University royalties ranging from 1.5% to 3% of net sales depending on the level of net sales reached each year and minimum annual fees ranging from $20,000 to $40,000. Specific terms of the royalty and license agreements are confidential. The license agreement terminates upon expiration of the patents licensed, which is expected to expire in May 2024, and is subject to certain conditions as defined in the license agreement.

No royalty payments have been made under the above license agreements as of December 31, 2012. Approximately $4,000 will be due to the University of Missouri in 2013 relating to the first commercial sale. Annual royalty payments of $25,000 will be due to the University of Missouri beginning in 2014 per the terms of the respective license agreements.

 

Capitalized license fees consisted of the following (in thousands):

 

December 31,		2012				2011
License fees		$	95			$	95
Less accumulated amortization			(15	)			(8	)
License fees, net		$	80			$	87

Amortization expense of licenses was approximately $7,000, $5,200 and $14,700 for 2012, 2011 and for the period from April 19, 2007 (inception) through December 31, 2012, respectively. At December 31, 2012, the weighted average remaining amortization period for all licenses was approximately 12 years. The annual amortization expense of licenses for the next five years is estimated to be approximately $7,000 per year.

9. Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s net deferred tax assets are as follows as of December 31, 2012 and 2011 (in thousands):

 

December 31,		2012				2011
Deferred tax assets:
Net operating loss carry forwards		$	—			$	1,620
Research and development credits			—				190
Depreciation and amortization			(2	)			8
Accrued expenses and reserves			290				107
Stock Compensation			562				—
Total deferred tax assets			850				1,925
Valuation allowance			(850	)			(1,925	)
		$	—			$	—

A full valuation allowance has been established to offset the deferred tax assets as management cannot conclude that realization of such assets is more likely than not. Under the Internal Revenue Code (“IRC”) Sections 382 and 383, annual use of our net operating loss and research tax credit carryforwards to offset taxable income may be limited based on cumulative changes in ownership. We have not completed an analysis to determine whether any such limitations have been triggered as of December 31, 2012. Until this analysis is completed, we have removed the deferred tax assets related to net operating losses and research credits from our deferred tax asset schedule and recorded a corresponding decrease to the valuation allowance. As a result, the valuation allowance decreased by approximately $1,075,000 during 2012.

At December 31, 2012, the Company had federal and state net operating loss carryforwards of approximately $11,867,000 and $11,863,000, respectively. The federal and state net operating loss carryforwards will begin expiring in 2028, unless previously utilized.

At December 31, 2012, the Company had federal and state research tax credit carryforwards of approximately $112,000 and $252,000, respectively. The federal research tax credit carryforwards begin expiring in 2028. The state research tax credit carryforwards do not expire.

In 2009 the Company adopted the accounting guidance for uncertainty in income taxes pursuant to ASC 740-10. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements. The Company did not record any accruals for income tax accounting uncertainties for the years ended December 31, 2012 or 2011.

The Company’s policy is to recognize interest and penalties that would be assessed in relation to the settlement value of unrecognized tax benefits as a component of income tax expense. The Company did not accrue either interest or penalties as of December 31, 2012 or 2011.

The Company is subject to tax in the United States and in the state of California. As of December 31, 2012, the Company’s tax years from inception are subject to examination by the tax authorities. The Company is not currently under examination by any U.S. federal or state jurisdictions.

10. 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 primarily located in San Diego. Accounts at these institutions are secured by the Federal Deposit Insurance Corporation. At times, 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.

11. Subsequent Events

OHSU Collaboration

On January 4, 2013, the Company entered into a collaboration agreement with the Knight Cancer Institute at Oregon Health & Science University (“OHSU”), a national leader in translational oncology research, to develop more clinically predictive in vitro three dimensional cancer models which are ultimately expected to advance discovery of novel cancer therapeutics.

Warrant redemption

On February 5, 2013, the Company announced its intention to redeem one class of outstanding warrants initially issued to investors participating in private placement financings in 2011 and 2012. The warrant redemption was intended to raise non-dilutive capital, enable the Company to significantly improve its balance sheet, help position the Company to qualify to list its common stock on the NYSE MKT or NASDAQ exchange, and decrease a significant portion of the derivative liability from its balance sheet.

A Notice of Redemption was mailed to affected warrant holders on February 5, 2013. These warrant holders had until 5:00 p.m. ET on March 14, 2013, to exercise their outstanding warrants at $1.00 per share. Thereafter, any warrants that remained unexercised would have automatically been redeemed by the Company at a redemption price of $0.0001 per share of common stock then issuable upon exercise of the redeemed warrant. Approximately 2.4 million warrant shares are affected by this Notice of Redemption. As of March 14, 2013, 2.4 million shares were redeemed for total proceeds of approximately $2.3 million.

Previously, on December 21, 2012, the Company completed a tender offer including the same warrants. At that time, approximately two-thirds of warrant holders elected to participate in the tender offer and exercised their warrants at $0.80 per share. The Notice of Redemption was given to the remaining warrant holders at the Company’s option following the qualifying event of its common stock trading at $2.50 per share or higher for twenty (20) consecutive trading days. All affected warrant holders elected to exercise their warrants prior to the redemption date. Approximately $2.4 million of additional equity capital was raised by the Company without any increase to its fully diluted shares. If none of the warrant holders exercised their warrants prior to the redemption date the Company would have redeemed and canceled all affected warrants at an aggregate cost of approximately $293. As of March 14, 2013, all redeemable warrants had been exercised.

Nature of operations and basis of presentation

Organovo Holdings, Inc., (“the Company”), through its wholly-owned subsidiary, Organovo, Inc., a Delaware corporation, has devoted substantially all of its resources to product development, raising capital, and building infrastructure. The Company has developed and is commercializing a platform technology for the generation of functional human tissues that can be employed in drug discovery and development, biological research, and as therapeutic implants for the treatment of damaged or degenerating tissues and organs.

All of the Company’s potential products are in research and development phases and as of December 31, 2012, the Company has not generated revenue from its planned principal operations. The Company does earn revenue from research and development agreements with collaborators and grants from governmental entities. Accordingly, the Company is considered to be in the development stage.

Reverse merger transaction

On February 8, 2012, Organovo, Inc., a privately held Delaware corporation, merged with and into Organovo Acquisition Corp., a wholly-owned subsidiary of Organovo Holdings, Inc., a publicly traded Delaware corporation, with Organovo, Inc. surviving the merger as a wholly-owned subsidiary of the Company (the “Merger”). As a result of the Merger, the Company acquired the business of Organovo, Inc., and will continue the existing business operations of Organovo, Inc.

Simultaneously with the Merger, on February 8, 2012 (the “closing date”), all of the issued and outstanding shares of Organovo, Inc.’s common stock converted, on a 1 for 1 basis, into shares of the Company’s common stock, par value $0.001 per share. Also, on the closing date, all of the issued and outstanding options to purchase shares of Organovo, Inc.’s common stock and other outstanding warrants to purchase Organovo, Inc.’s common stock, and all of the issued and outstanding bridge warrants to purchase shares of Organovo, Inc.’s common stock, converted, respectively, on a 1 for 1 basis, into options, warrants and new bridge warrants to purchase shares of the Company’s common stock.

Immediately following the consummation of the Merger: (i) the former security holders of Organovo, Inc. common stock had an approximate 75% voting interest in the Company and the Company stockholders retained an approximate 25% voting interest, (ii) former executive management team of Organovo, Inc. remained as the only continuing executive management team for the Company, and (iii) the Company’s ongoing operations consist solely of the ongoing operations of Organovo, Inc. Based primarily on these factors, the Merger was accounted for as a reverse merger and a recapitalization in accordance with accounting principles generally accepted in the United States (“GAAP”). As a result, these financial statements reflect the historical results of Organovo, Inc. prior to the Merger, and the combined results of the Company following the Merger. The par value of Organovo, Inc. common stock immediately prior to the Merger was $0.0001 per share. The par value subsequent to the Merger is $0.001 per share, and therefore the historical results of Organovo, Inc. prior to the Merger have been retroactively adjusted to affect the change in par value.

In connection with three separate closings of a private placement transaction completed in connection with the Merger (the “Private Placement”), the Company received gross proceeds of approximately $5.0 million, $1.8 million and $6.9 million on closings on February 8, 2012, February 29, 2012 and March 16, 2012, respectively. In 2011, the Company received $1.5 million from the purchase of 6% convertible notes which were automatically converted into 1,500,000 shares of common stock, plus 25,387 shares for accrued interest of $25,387 on the principal, on February 8, 2012.

The cash transaction costs related to the Merger were approximately $2.1 million.

Before the Merger, Organovo Holdings’ Board of Directors and stockholders adopted the 2012 Equity Incentive Plan (the “2012 Plan”). The 2012 Plan provides for the issuance of 6,553,986 shares of the Company’s common stock to executive officers, directors, advisory board members and employees. In addition, Organovo Holdings assumed and adopted Organovo, Inc.’s 2008 Equity Incentive Plan, which provided for the issuance of 896,256 shares of common stock, for total shares available for issuance under these plans of 7,450,242.

Liquidity

As of December 31, 2012, the Company had an accumulated deficit of approximately $50.2 million. The Company also had negative cash flows from operations of approximately $9.7 million during the year ended December 31, 2012.

On February 8, 2012, the Company received gross proceeds of approximately $5.0 million from the initial closing of a private placement offering in conjunction with the Merger (the “Private Placement”). On February 29, 2012 and March 16, 2012, the Company completed two additional closings of its Private Placement receiving gross proceeds of approximately $1.8 million and $6.9 million respectively.

On December 21, 2012, the Company consummated its Warrant Tender Offer to amend certain of its outstanding warrants to purchase approximately 14.5 million shares of the Company’s common stock. The Warrant Tender Offer, which expired on December 21, 2012, resulted in approximately 9.6 million warrants tendered by their holders for aggregate proceeds of approximately $7.7 million.

Subsequent to December 31, 2012, on February 5, 2013, the Company provided a Notice of Redemption to affected warrant holders, of approximately 2.4 million warrant shares, that they would have until March 14, 2013 to exercise their outstanding warrants at $1.00 per share. Thereafter, any warrants that remain unexercised will automatically be redeemed by the Company at a redemption price of $0.0001 per share of common stock then issuable upon exercise of the redeemed warrant. As of March 12, 2013, all redeemable warrants had been exercised for proceeds of approximately $2.3 million.

The Company has financed its operations primarily through the sale of convertible notes, the private placement of equity securities, and through revenue derived from grants or collaborative research agreements. Based on its current operating plan and available cash resources, the Company has sufficient resources to fund its business for at least the next 12 months.

The Company will need additional capital to further fund product development and commercialization of its human tissues that can be employed in drug discovery and development, biological research, and as therapeutic implants for the treatment of damaged or degenerating tissues and organs. The Company intends to cover its future operating expenses through cash on hand, through additional financing from existing and prospective investors, and from revenue derived from grants and collaborative research agreements. However, we may not be successful in obtaining funding from new or existing collaborative research agreements. In addition, we cannot be sure that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to us or to our stockholders. Further, the NIH has notified all grant recipients that due to the current Congressional budget sequestration, the NIH may not be able to issue continuation awards, or it may be required to negotiate a reduction in the scope of existing awards to meet the constraints imposed. Additionally, plans for new grants or cooperative agreements may be re-scoped, delayed, or canceled depending on the nature of the work and the availability of resources. As a result, we cannot assure you that we will receive the funding under our existing NIH grants, and we may not be successful in securing additional grants from the NIH in the future.

 

Having insufficient funds may require us to delay, scale back, or eliminate some or all of our development programs or relinquish rights to our technology on less favorable terms than we would otherwise choose. Failure to obtain adequate financing could eventually adversely affect our ability to operate as a going concern. If we raise additional funds from the issuance of equity securities, substantial dilution to our existing stockholders would likely result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business.

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 consolidated financial statements include those assumed in computing the valuation of warrants and conversion features, revenue recognized under the proportional performance model, the valuation of stock-based compensation expense, and the valuation allowance on deferred tax assets.

Financial instruments

For certain of the Company’s financial instruments, including cash and cash equivalents, grants receivable, inventory, prepaid expenses and other assets, accounts payable, accrued expenses, deferred revenue and convertible notes payable, the carrying amounts are generally considered to be representative of their respective fair values because of the short-term nature of those instruments.

Cash and cash equivalents

The Company considers all highly liquid investments with original maturities of 90 days or less to be cash equivalents.

Derivative financial instruments

The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency.

The Company reviews the terms of convertible debt and equity instruments it issues to determine whether there are derivative instruments, including an embedded conversion option that is required to be bifurcated and accounted for separately as a derivative financial instrument. In circumstances where a host instrument contains more than one embedded derivative instrument, including a conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument. Also, in connection with the sale of convertible debt and equity instruments, the Company may issue freestanding warrants that may, depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity.

Derivative instruments are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported as non-operating income or expense. When the convertible debt or equity instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds allocated to the convertible host instruments are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the convertible instruments themselves, usually resulting in those instruments being recorded at a discount from their face value.

The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to interest expense, using the effective interest method.

Restricted cash

As of December 31, 2012, the Company had approximately $88,300 of restricted cash deposited with a financial institution. $38,300 is held in certificates of deposit to support a letter of credit agreement related to the facility lease entered into during 2012. The additional $50,000 is held by the financial institution as a guarantee for the Company’s commercial credit cards.

Grant receivable

Grant receivable represents the amount due from the NIH under a research grant. The Company considers the grant receivable to be fully collectible; and accordingly, no allowance for doubtful amounts has been established. If amounts become uncollectible, they are charged to operations.

Inventory

Inventories are stated at the lower of the cost or market (first-in, first-out). Inventory at December 31, 2012 consisted of approximately $196,000 in finished goods, $60,000 work-in-process and $104,000 in raw materials. Inventory at December 31, 2011 consisted of approximately $204,000 in finished goods, $24,000 in work-in-process and $64,000 in raw materials.

The Company provides inventory allowances based on excess or obsolete inventories determined based on anticipated use in the final product. There was no obsolete inventory reserve as of December 31, 2012 or December 31, 2011.

Deferred financing costs

As of December 31, 2012, there were no deferred financing costs. As of December 31, 2011, deferred financing costs consisted of approximately $140,000 associated with the Merger transaction and approximately $179,000 associated with convertible notes as part of the private placement offering that was initiated in the fourth quarter of 2011. The deferred financing costs related to the private placement offering were being amortized over the life of the convertible notes and were fully amortized to expense upon conversion of the convertible notes on February 8, 2012. The deferred financing costs associated with the Merger transaction were recorded as an offset to the proceeds received, with the amount in excess of the proceeds received expensed at the effective Merger date.

Fixed assets and depreciation

Property and equipment are carried at cost. Expenditures that extend the life of the asset are capitalized and depreciated. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets or, in the case of leasehold improvements, over the lesser of the useful life of the related asset or the lease term. The estimated useful lives of the fixed assets ranges between two and five years.

Impairment of long-lived assets

In accordance with authoritative guidance the Company reviews its long-lived assets, including property and equipment and other assets, for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. To determine recoverability of its long-lived assets, the Company evaluates whether future undiscounted net cash flows will be less than the carrying amount of the assets and adjusts the carrying amount of its assets to fair value. Management has determined that no impairment of long-lived assets occurred in the period from inception through December 31, 2012.

Fair value measurement

Financial assets and liabilities are measured at fair value, which is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The following is a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:

 

•

Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

•

Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

•

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

As of December 31, 2012 and December 31, 2011, cash and cash equivalents were comprised of cash in checking accounts.

The Company uses Level 3 inputs for its valuation methodology for the warrant derivative liabilities. The estimated fair values were determined using a Monte Carlo option pricing model based on various assumptions (see Note 4). The Company’s derivative liabilities are adjusted to reflect estimated fair value at each period end, with any decrease or increase in the estimated fair value being recorded in other income or expense accordingly, as adjustments to the fair value of derivative liabilities.

The estimated fair values of the liabilities measured on a recurring basis are as follows:

 

		Fair Value Measurements at December 31, 2012 and 2011:
		Balance at December 31, 2012				Quoted Prices in Active Markets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Other Unobservable Inputs (Level 3)
Warrant liability		$	20,618,706				—				—			$	20,618,706

 

		Balance at December 31, 2011				Quoted Prices in Active Markets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Other Unobservable Inputs (Level 3)
Warrant liability		$	1,266,869				—				—			$	1,266,869

The following table presents the activity for liabilities measured at estimated fair value using unobservable inputs for 2011 and 2012:

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 

		Warrant Derivative Liability ($000’s)
Balance at December 31, 2010		$	—
Issuances			1,260
Adjustments to estimated fair value			7
Balance at December 31, 2011			1,267
Issuances			32,742
Adjustments to estimated fair value			9,931
Warrant liability removal due to settlements			(23,321	)
Balance at December 31, 2012		$	20,619

Research and development

Research and development expenses, including direct and allocated expenses, consist of independent research and development costs, as well as costs associated with sponsored research and development. Research and development costs are expensed as incurred.

Income taxes

Deferred income taxes are recognized for the tax consequences in future years for differences between the tax basis of assets and liabilities and their financial reporting amounts at each year end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the combination of the tax payable for the year and the change during the year in deferred tax assets and liabilities.

Revenue recognition

The Company’s revenues are derived from collaborative research agreements, NIH and U.S. Treasury Department Grants, the sale of bioprinter related products and services, and license agreements.

The Company recognizes revenue when the following criteria have been met: (i) persuasive evidence of an arrangement exists; (ii) services have been rendered or product has been delivered; (iii) price to the customer is fixed and determinable; and (iv) collection of the underlying receivable is reasonably assured.

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, 2012 and December 31, 2011, the Company had $0 and $152,500, respectively, in deferred revenue related to its collaborative research programs.

Product Revenue

The Company recognizes product revenue at the time of shipment to the customer, provided all other revenue recognition criteria have been met. The Company recognizes product revenues upon shipment to distributors, provided that (i) the price is substantially fixed or determinable at the time of sale; (ii) the distributor’s obligation to pay the Company is not contingent upon resale of the products; (iii) title and risk of loss passes to the distributor at time of shipment; (iv) the distributor has economic substance apart from that provided by the Company; (v) the Company has no significant obligation to the distributor to bring about resale of the products; and (vi) future returns can be reasonably estimated. For any sales that do not meet all of the above criteria, revenue is deferred until all such criteria have been met.

Research and Development Revenue Under Collaborative Agreements.

The Company’s collaboration revenue consists of license and collaboration agreements that contain multiple elements, including non-refundable upfront fees, payments for reimbursement of third-party research costs, payments for ongoing research, payments associated with achieving specific development milestones and royalties based on specified percentages of net product sales, if any. The Company considers a variety of factors in determining the appropriate method of revenue recognition under these arrangements, such as whether the elements are separable, whether there are determinable fair values and whether there is a unique earnings process associated with each element of a contract.

The Company recognizes revenue from research funding under collaboration agreements when earned on a “proportional performance” basis as research hours are incurred. The Company performs services as specified in each respective agreement on a best-efforts basis, and is reimbursed based on labor hours incurred on each contract. The Company initially defers revenue for any amounts billed or payments received in advance of the services being performed and recognizes revenue pursuant to the related pattern of performance, based on total labor hours incurred relative to total labor hours estimated under the contract.

In December 2010, the Company entered into a 12 month research contract agreement with a third party, whereby the Company was engaged to perform research and development services on a fixed-fee basis for approximately $600,000. Based on the proportional performance criteria, the Company recognized approximately $150,000 and $450,000 in revenue related to the contract during the years ended December 31, 2012 and 2011, respectively. Total revenue recognized on the contract from inception through December 31, 2012 was approximately $600,000.

In October 2011, the Company entered into a research contract agreement with a third party, whereby the Company will perform research and development services on a fixed-fee basis for $1,365,000. The agreement included an initial payment to the Company of approximately $239,000 with remaining payments expected to occur over a twenty-one month period. On November 27, 2012, the agreement was amended to include additional research and development services, for an additional $135,000, bringing the total contract value to $1,500,000. This extends the original contract (which runs concurrently) from twenty-one months to twenty-eight months. The Company recorded approximately $885,000 and $239,000 in 2012 and 2011, respectively, in revenue related to the research contract in recognition of the proportional performance achieved by the Company. Total revenue recognized on the contract from inception through December 31, 2012 was approximately $1,100,000.

Revenue Arrangements with Multiple Deliverables

The Company occasionally enters into revenue arrangements that contain multiple deliverables. Judgment is required to properly identify the accounting units of the multiple deliverable transactions and to determine the manner in which revenue should be allocated among the accounting units. Moreover, judgment is used in interpreting the commercial terms and determining when all criteria of revenue recognition have been met for each deliverable in order for revenue recognition to occur in the appropriate accounting period. For multiple deliverable agreements, consideration is allocated at the inception of the agreement to all deliverables based on their relative selling price. The relative selling price for each deliverable is determined using VSOE of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence of selling price exists, the Company uses its best estimate of the selling price for the deliverable.

The Company recognizes revenue for delivered elements only when it determines there are no uncertainties regarding customer acceptance. While changes in the allocation of the arrangement consideration between the units of accounting will not affect the amount of total revenue recognized for a particular sales arrangement, any material changes in these allocations could impact the timing of revenue recognition, which could affect the Company’s results of operations.

The Company expects to periodically receive license fees for non-exclusive research licensing associated with funded research projects. License fees under these arrangements are recognized over the term of the contract or development period as it has been determined that such licenses do not have stand-alone value.

NIH and U.S. Treasury Grant Revenues

During 2010, the U.S. Treasury awarded the Company two one-time grants totaling approximately $397,000 for investments in qualifying therapeutic discovery projects under section 48D of the Internal Revenue Code. The grants cover reimbursement for qualifying expenses incurred by the Company in 2010 and 2009. The proceeds from these grants are classified in “Revenues – Grants” for the period from inception through December 31, 2012.

During 2012, 2010 and 2009, the NIH awarded the Company three research grants totaling approximately $558,000. Revenues from the NIH grants are based upon internal and subcontractor costs incurred that are specifically covered by the grants, and where applicable, an additional facilities and administrative rate that provides funding for overhead expenses. These revenues are recognized when expenses have been incurred by subcontractors and as the Company incurs internal expenses that are related to the grants. Revenue recognized under these grants for the years ended December 31, 2012 and 2011 was approximately $162,000 and $57,000, respectively. Total revenue recorded under these grants from inception through December 31, 2012 was approximately $430,000.

The Company accounts for stock-based compensation in accordance with the Financial Accounting and Standards Board’s ASC Topic718, Compensation – Stock Compensation, which establishes accounting for equity instruments exchanged for employee services. Under such provisions, stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense, under the straight-line method, over the employee’s requisite service period (generally the vesting period of the equity grant).

Stock-based compensation

The Company accounts for equity instruments, including restricted stock or stock options, issued to non-employees in accordance with authoritative guidance for equity based payments to non-employees. Stock options issued to non-employees are accounted for at their estimated fair value determined using the Black-Scholes option-pricing model. The fair value of options granted to non-employees is re-measured as they vest, and the resulting increase in value, if any, is recognized as expense during the period the related services are rendered. Restricted stock issued to non-employees is accounted for at their estimated fair value as they vest.

Comprehensive income (loss)

Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. The Company is required to record all components of comprehensive income (loss) in the financial statements in the period in which they are recognized. Net income (loss) and other comprehensive income (loss), including unrealized gains and losses on investments, are reported, net of their related tax effect, to arrive at comprehensive income (loss). For the years ended December 31, 2012 and 2011, and for the period April 19, 2007 (inception) through December 31, 2012, the comprehensive loss was equal to the net loss.

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 the assumed issuance of common stock under restricted stock units, shares subject to repurchase and warrants as the effect would be anti-dilutive. No dilutive effect was calculated for the year ended December 31, 2012 or 2011 as the Company reported a net loss for each respective year and the effect would have been anti-dilutive. Total common stock equivalents that were excluded from computing diluted net loss per share were approximately 14.1 million and 5.3 million for the years ended December 31, 2012 and 2011, respectively.

Reclassifications

Certain reclassifications were made to the 2011 financial statements in order to conform to the presentation of the 2012 financial statements. The reclassifications did not have any effect on previously reported net loss.

New accounting standards

In June 2011, FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.” This ASU presents an entity with the option to present the total of comprehensive income, the components of net income, and the component of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity/deficit. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other Comprehensive income must be reclassified to net income. ASU No. 2011-05 should be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company’s adoption of this standard in 2012 had no effect on presentation of the consolidated financial statements for the years ended December 31, 2012 or 2011, or for the period from April 19, 2007 (inception) to December 31, 2012, as the Company did not have other comprehensive income for the respective periods.

		Fair Value Measurements at December 31, 2012 and 2011:
		Balance at December 31, 2012				Quoted Prices in Active Markets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Other Unobservable Inputs (Level 3)
Warrant liability		$	20,618,706				—				—			$	20,618,706

 

		Balance at December 31, 2011				Quoted Prices in Active Markets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Other Unobservable Inputs (Level 3)
Warrant liability		$	1,266,869				—				—			$	1,266,869

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 

		Warrant Derivative Liability ($000’s)
Balance at December 31, 2010		$	—
Issuances			1,260
Adjustments to estimated fair value			7
Balance at December 31, 2011			1,267
Issuances			32,742
Adjustments to estimated fair value			9,931
Warrant liability removal due to settlements			(23,321	)
Balance at December 31, 2012		$	20,619

December 31,		2012				2011
Laboratory equipment		$	759			$	345
Leasehold improvements			—				34
Computer software and equipment			114				28
Furniture and fixtures			33				19
			906				426
Less accumulated depreciation and amortization			(192	)			(148	)
		$	714			$	278

December 31,		2012				2011
Accrued compensation		$	720			$	317
Other accrued expenses			73				92
Deferred rent			188				29
		$	981			$	438

		December 31, 2011				December 31, 2012
Closing price per share of common stock		$	N/A			$	2.60
Exercise price per share		$	1.00			$	1.00
Expected volatility			109.8%				92.9	%
Risk-free interest rate			0.83%				0.54	%
Dividend yield			—				—
Remaining expected term of underlying securities (years)			5.00				4.16

		Number of Shares
Unvested at December 31, 2007			—
Granted			12,627,697
Vested			(65,211	)
Canceled / forfeited			—
Unvested at December 31, 2008			12,562,486
Granted			130,422
Vested			(5,373,004	)
Canceled / forfeited			—
Unvested at December 31, 2009			7,319,904
Granted			219,369
Vested			(3,256,191	)
Canceled / forfeited			—
Unvested at December 31, 2010			4,283,082
Granted			61,406
Vested			(3,233,193	)
Canceled / forfeited			—
Unvested at December 31, 2011			1,111,295
Granted			1,380,000
Vested			(1,143,735	)
Canceled / forfeited			(185,516	)
Unvested at December 31, 2012			1,162,044