NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
Principles of Consolidation.
The accompanying consolidated financial statements have been derived from the historical cost basis of the assets and liabilities, financial condition and cash flows of Presbia PLC and Presbia Ireland, Limited, both organized in Ireland, Presbia Investments, a wholly-owned subsidiary of Presbia PLC organized in the Cayman Islands, and Presbia Ireland, Limited’s subsidiaries, Presbia Deutchland GmbH, Presbia USA, Inc., and OPL, LLC. Presbia Deutchland GmbH is organized in Germany, and Presbia USA, Inc. and OPL, LLC are both entities organized in the United States, and include Presbia USA, Inc.’s subsidiaries, Visitome, Inc. and PresbiBio, LLC, both organized in the United States, and OPL, LLC’s direct and indirect subsidiaries, PIP Holdings, C.V and Presbia Cooperatief U.A., both organized in the Netherlands, and PresbiOptical LLC, organized in the United States (collectively, including Presbia PLC, the “Company”). The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The Company’s fiscal year ends on December 31. The entities presented in the consolidated financial statements have been under common control during the periods presented. All intercompany accounts have been eliminated in consolidation.
Basis of Presentation.
The accompanying unaudited consolidated financial statements as of September 30, 2018 and for the three and nine months ended September 30, 2018 and 2017, respectively, have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial reporting, and with the instructions to Form 10-Q and Article 8 of Regulation S-X. The accompanying consolidated balance sheet at December 31, 2017 has been derived from the audited consolidated balance sheet at December 31, 2017, contained in the annual report on Form 10-K for the year ended December 31, 2017. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements presented in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the Securities and Exchange Commission on March 30, 2018. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments which are necessary for a fair presentation of the results of operations and cash flows for the periods presented. The results of operations for such interim periods are not necessarily indicative of results of operations to be expected for the full year.
References to amounts in the consolidated financial statement sections are in thousands, except per share data, unless otherwise specified.
Liquidity
At September 30, 2018, the Company has an accumulated deficit of $94.8 million and it expects to incur significant additional future operating losses. As it continues to incur losses, the Company’s transition to profitability will depend on the successful development, approval and commercialization of its microlens. On October 5, 2018, the Company received notification from the FDA that 36-month data on all subjects enrolled in the Company’s staged pivotal clinical trial, including additional safety and efficacy related information, is required before the FDA can complete its review of the Company’s PMA. The Company must respond by April 3, 2019, otherwise it must amend the PMA within the 180-day period to request an extension of time to respond. In light of the FDA’s typical 180-day review period following the Company’s anticipated response date of April 3, 2019, the Company does not anticipate PMA approval prior to the fourth quarter 2019. The foregoing targeted milestones and associated estimated timeframes could be delayed by further interactions with the FDA or by a variety of other factors, including requests for further safety and efficacy related information pertaining to our microlens ophthalmic device.
To continue to pursue FDA pre-market approval, the Company will need to raise funds in the fourth quarter of 2018
. Based on the Company’s current business plan, management believes that its cash and cash equivalents at September 30, 2018 will not be sufficient to meet its anticipated cash requirements during the twelve-month period subsequent to the issuance of the financial statements included in this Quarterly Report on Form 10-Q nor even for the next three months. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year from the date this Quarterly Report on Form 10-Q filed with the U.S. Securities and Exchange Commission (SEC). The Company’s current commercialization strategy is targeted to countries where the Company can establish the market for its technology. This commercialization strategy will undergo continual prioritization and in the future the Company may adjust its commercialization efforts to preserve its existing cash or realize better results than anticipated which could have a positive impact on cash. The Company’s U.S. pivotal clinical trial and planned FDA approval is its highest priority. The Company must raise additional capital to fund its operations. It plans to raise additional capital through equity offerings, debt financings, collaborations and/or licensing arrangements. Additional funds may not be available when the Company needs them on terms that are acceptable to the Company, or at all. If adequate funds are not available on acceptable terms, the Company may be required to delay, reduce the scope of,
7
or curtail, its operations. To the extent that the Company raises additional funds by issuing equity securities, its shareholders will experience dilution,
and debt financing, if available, may involve restrictive covenants. The Company may never achieve profitability, and unless and until it does, it will need to continue to raise additional capital.
(2) Summary of Significant Accounting Policies
During the nine months ended September 30, 2018 there have been no changes to the Company’s significant accounting policies as described in the Annual Report on Form 10-K for the fiscal year ended December 31, 2017, other than the adoption of the new revenue recognition standard noted below.
Revenue Recognition
Prior to 2018, we recognized revenue when there is persuasive evidence that an arrangement exists with our customers, selling prices are fixed or determinable, title or risk of loss has passed, and collection is reasonably assured. Revenue was recognized upon shipment and payments are either received in advance, or net 30 days for lenses or net 14 days for accessories. Distributor arrangements included certain perfunctory acceptance provisions and a one-year warranty, from the date of shipment, that products are free from defects in material workmanship. Under such provisions customers may reject shipments via written notifications ranging from 14-45 days or exchange defective product under warranty for the same non-defective product. We have not had any significant rejected shipments or warranty claims. We did not grant price concessions to our distributors.
In 2012, we changed our commercialization strategy from exclusively using distributors to also targeting refractive laser centers equipped with femtosecond lasers, except in countries that require the use of distributors or sales representatives. In December 2017, in light our re-ordering of operational priorities, we have focused our commercialization and clinical trial efforts outside of the U.S. in Germany and South Korea, including established ophthalmic clinics in those countries. We recognize revenue from laser centers and ophthalmic clinics based upon an analysis of the terms of each customer arrangement and upon determination that persuasive evidence of an arrangement exists, selling prices are fixed or determinable, title or risk of loss has passed, and collection is reasonably assured. Revenues from laser centers and ophthalmic clinics during the three and nine months ended September 30, 2018 and 2017 were not material.
Effective January 1, 2018, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective transition method. Under this method, the Company recognizes revenue based on an analysis of the goods and services provided to our customers in the ordinary course. We analyze all commercial agreements to identify (i) contracts and arrangements with customers that meet the criteria for revenue recognition under the new standard (ii) identify all performance obligations under the contractual arrangement, such as the delivery of our Microlens to our customers and any other deliverable(s) as defined in a commercial arrangement (iii) the determination of the transaction price and the allocation of such pricing over the defined contractual obligations in the contract with the customer and (iv) the recognition of revenue once the customer has assumed control over the contractual obligations. Control refers to the ability on the part of the customer to obtain substantially all the benefits of possession of the delivered product or service.
Foreign Currency
The functional currency of subsidiaries outside the United States of America is the U.S. Dollar. Transactions in foreign currencies during the year are re-measured at rates of exchange on the dates of the transactions. Gains and losses related to re-measurement of items arising through operating activities are accounted for in the statement of operations and comprehensive loss and included in general and administrative expense. Aggregate foreign exchange gains and losses are included in the Condensed Consolidated Statement of Operations. Aggregate foreign exchange gain was $12,000 and $19,000 for the three months ended September 30, 2018 and 2017, respectively. Aggregate foreign exchange loss was $12,000 and $60,000 for the nine months ended September 30, 2018 and 2017, respectively.
8
Comprehensive Loss
Comprehensive income or loss is defined as a change in equity of a company attributable to all transactions excluding those transactions resulting from investment with owners and distributions to owners. There were no differences between net loss and comprehensive loss in the three and nine months ended September 30, 2018 and 2017
.
Future Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets and eliminates certain real estate-specific provisions. ASU 2016-02 will be effective for the Company in the first quarter of 2019. ASU 2016-02 will be adopted on a modified retrospective transition basis for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Although the Company is currently evaluating the full impact of ASU 2016-02 on its consolidated financial statements, upon adoption of ASU 2016-02 the Company anticipates that its operating leases will be recognized on the balance sheet as a lease liability if certain criteria is met, with a corresponding right of use asset.
In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220)—Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This update was issued to address the income tax accounting treatment of the stranded tax effects within other comprehensive income due to the prohibition of backward tracing due to an income tax rate change that was initially recorded in other comprehensive income. This issue came about from the enactment of the Tax Cuts and Jobs Act on December 22, 2017, which changed the Company’s income tax rate from 35% to 21%. The ASU changed current accounting whereby an entity may elect to reclassify the stranded tax effect from accumulated other comprehensive income to retained earnings. The ASU is effective for periods beginning after December 15, 2018, although early adoption is permitted. The Company does not anticipate that the adoption of this ASU will have a material impact on its consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The new standard expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services from nonemployees. ASU No. 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which the grantor acquires goods and services to be used or consumed in its own operations by issuing share-based payment awards. ASU NO. 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606. ASU No. 2018-07 will be effective for the Company beginning after December 15, 2019, with early adoption permitted, but no earlier than the Company’s adoption of ASC 606. The Company is currently assessing the potential impact of adopting this guidance on its consolidated financial statements.
Recent Accounting Standards
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The new standard is based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 became effective for the Company in the first quarter of 2018 and allowed for full retrospective or a modified retrospective adoption approach. The Company adopted this new standard in January 2018 and it did not have a material adjustment on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows
, which clarifies the classification of certain cash receipts and payments. The specific cash flow issues addressed by ASU 2016-15, with the objective of reducing the existing diversity in practice, are as follows: (1) Debt prepayment or debt extinguishment costs; (2) Settlement of zero-coupon debt instruments or other debt instruments with insignificant coupon interest rates; (3) Contingent consideration payments made after a business combination; (4) Proceeds from the settlement of insurance claims; (5) Proceeds from the settlement of corporate-owned life insurance policies; (6) Distributions received from equity method investees; (7) Beneficial interest in securitization transactions; and (8) Separately identifiable cash flows and application of the predominance in principle. ASU 2016-15 became effective for fiscal years beginning after December 15, 2017. The Company adopted this new standard in January 2018 and it did not have a material impact on its consolidated financial statements.
In October 2016, the FASB issued ASU. 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory.
This update requires entities to recognize the income tax consequences of an intra-entity transfer of an asset
9
other than inventory when the t
ransfer occurs. This update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted as of the beginning of a fiscal year. The new standard must be adopted using a mod
ified retrospective transition method, which is a cumulative-effective adjustment to retained earnings as of the beginning of the first effective reporting period. The Company adopted this new standard in January 2018 and it did not have a material impact
on its consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting,
which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This update is effective for annual reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company adopted this ASU in January 2018 and it did not have a material impact on its consolidated financial statements.
(3) Loss per Share
Basic net loss per ordinary share is calculated by dividing net loss allocated to ordinary shareholders by the weighted average number of ordinary shares outstanding during the reporting period, excluding unvested restricted stock awards. Diluted net loss allocated to ordinary shareholders per share is calculated based on the weighted average number of Ordinary Shares and dilutive potential Ordinary Shares outstanding during the period. Dilutive potential ordinary shares consist of the shares issuable upon the exercise of options and upon the vesting of restricted shares under the treasury stock method. In net loss periods, basic and diluted net loss per share are identical since the effect of potential ordinary shares is anti-dilutive and therefore excluded.
Basic and diluted loss per share for the three and nine months ended September 30, 2018 and 2017 were calculated as follows:
|
|
Three-Months Ended September 30,
|
|
|
Nine-Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net Loss
|
|
$
|
(2,250
|
)
|
|
$
|
(4,740
|
)
|
|
$
|
(6,513
|
)
|
|
$
|
(13,866
|
)
|
Weighted average shares outstanding
- basic and diluted
|
|
|
17,110,677
|
|
|
|
16,963,468
|
|
|
|
17,065,382
|
|
|
|
16,071,419
|
|
Net loss per ordinary share - basic and
diluted
|
|
$
|
(0.13
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(0.86
|
)
|
Antidilutive securities, which consist of options and unvested restricted shares that are not included in the diluted net loss per share calculation, consisted of an aggregate of 1,456,219 and 1,048,859 weighted average shares for the three months ended September 30, 2018 and 2017, respectively and 1,091,751 and 1,097,068 for the nine months ended September 30, 2018 and 2017, respectively.
(4) Equity Based Awards
Equity Issued by Presbia PLC
Presbia Incentive Plan
On January 14, 2015, the Company approved a compensation incentive plan (the “Presbia Incentive Plan”). The Presbia Incentive Plan permits the Company to grant awards of options, restricted shares, share appreciation rights, restricted share units, performance shares, performance share units, dividend equivalent rights in respect of awards and other share-based and cash-based awards, including annual and long-term cash incentive awards. A total of 2,500,000 ordinary shares are authorized for issuance under the Presbia Incentive Plan of which approximately 254,693 were available on September 30, 2018 for future grants and awards. The exercise price of each option award shall be determined by the Board of Directors (or a committee thereof) at the date of grant in accordance with the terms of the 2005 Plan, and under the Presbia Incentive Plan awards generally vest 20% annually over a five-year period and expire no later than 10 years from the grant date. The Presbia Incentive Plan terminates on January 14, 2025, unless terminated earlier by the board of directors. Awards under the Presbia Incentive Plan may be granted to employees, directors, consultants and other persons who perform services for the Company or a subsidiary of the Company.
The following table shows share-based compensation expense based upon all equity awards issued by Presbia PLC included in the Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017. The Company recorded a credit of $23,000 and $547,000 as a result of the reversal of stock-based compensation
10
for participants whose relationship with the Company terminated in the three and nine months ended September 30, 2018, respectively.
|
|
Three-Months Ended September 30,
|
|
|
Nine-Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Research and development
|
|
$
|
39
|
|
|
$
|
135
|
|
|
$
|
(188
|
)
|
|
$
|
377
|
|
General and administrative
|
|
|
304
|
|
|
|
446
|
|
|
|
479
|
|
|
|
1,087
|
|
Sales and marketing
|
|
|
31
|
|
|
|
(17
|
)
|
|
|
91
|
|
|
|
138
|
|
|
|
$
|
374
|
|
|
$
|
564
|
|
|
$
|
382
|
|
|
$
|
1,602
|
|
Options
The following table sets forth the Company’s option activity for the nine months ended September 30, 2018:
|
|
Number of
Presbia PLC
Shares
|
|
|
Weighted Average
Exercise Price
Per Share
|
|
|
Aggregate
Intrinsic Value
|
|
Balance, January 1, 2018
|
|
|
849,100
|
|
|
$
|
9.77
|
|
|
|
—
|
|
Granted
|
|
|
678,943
|
|
|
|
2.19
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited/cancelled/expired
|
|
|
(163,250
|
)
|
|
$
|
8.41
|
|
|
|
—
|
|
Balance, September 30, 2018
|
|
|
1,364,793
|
|
|
$
|
6.16
|
|
|
|
—
|
|
Vested, September 30, 2018
|
|
|
667,350
|
|
|
$
|
9.80
|
|
|
|
—
|
|
Non Vested, September 30, 2018
|
|
|
697,443
|
|
|
$
|
2.68
|
|
|
|
—
|
|
Exercisable, September 30, 2018
|
|
|
667,350
|
|
|
$
|
9.80
|
|
|
|
—
|
|
Employee Options
The Company utilizes the Black-Scholes valuation model for estimating the fair value of granted stock options with the following assumptions in addition to the closing price of the Company’s ordinary shares on the date of the grant: (i) the Company estimates the expected term of the option utilizing the simplified method because of its limited history of option exercise activity and its options meet the criteria of a "plain-vanilla" option as defined by the Securities Exchange Commission (ii) due to its limited stock price volatility history, the Company uses a peer group average as permitted under Accounting Standards Codification (“ASC”) 718 consistent with the expected term of the stock option at the time of the grant and (iii) applies a risk-free interest rate based on the U.S. Treasury securities yield consistent with the expected term of the option at the time of the grant. The simplified method calculates the expected term as the average of the weighted average vesting period and contractual terms of the award.
For those options granted to employees, stock-based compensation expense was based upon the fair value of the option as of the grant-date and attributed to future reporting periods on a straight-line basis over the vesting period, or the requisite service period. The Company adopted ASU 2016-09 on January 01, 2018, electing to account for forfeitures when they occur. The Company issued 314,000 and 679,000 options to employee and directors during the three and nine months ended September 30, 2018. Options granted to employees in 2018 vest 20% annually over a five-year period and expire 6.75 years from the grant date. Options granted to directors in in 2018 have a one-year vesting period and expire 6.75 years from the grant date. The Company did not issue employee options during the three and nine months ended September 30, 2017.
11
Non-Employee Options
During the three and nine months ended September 30, 2018 and 2017, the Company did not grant options to non-employee consultants and medical advisors. Grants issued prior to 2017 were fully vested as of September 30, 2018. In contrast to the determination of the fair value of options granted to employees, which are determined based upon the grant-date assumptions and applying the Black-Scholes model, the fair values for non-employee options and the related stock-based compensation expense are remeasured each financial reporting period based upon the assumptions applicable on the dates in which the financial statements are prepared, which are disclosed in the following table:
|
|
Three-Months Ended September 30,
|
|
|
Nine-Months Ended September 30,
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
2017
|
Stock price per share
|
|
|
—
|
|
|
$2.38 -$2.83
|
|
|
$0.85 -$1.95
|
|
$1.31 -$2.83
|
Expected term
|
|
|
—
|
|
|
7.7 - 7.9 Yrs.
|
|
|
6.6 - 7.4 Yrs.
|
|
7.7 - 8.3 Yrs.
|
Volatility
|
|
|
—
|
|
|
69.3% - 78.7%
|
|
|
72.9% - 77.3%
|
|
69.3% - 85.8%
|
Dividends
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
Risk-free rate
|
|
|
—
|
|
|
2.20%
|
|
|
2.6% - 2.8%
|
|
2.2% - 2.3%
|
Because the performance criteria of these grants is based solely upon a requisite service period, but are subject to forfeiture if the service conditions are not met, stock-based compensation expense is determined by a straight-line attribution of the remeasured expense (mark-to-market) over the requisite service period subject to an adjustment to previously recognized expense in the event forfeitures occur.
Restricted Shares
The following table sets forth the Company’s restricted share activity for the nine months ended September 30, 2018:
|
|
Unvested Number of
Shares
|
|
Weighted Average Fair
Value per Share
|
|
Balance, December 31, 2017
|
|
|
134,367
|
|
$
|
3.78
|
|
Granted
|
|
|
23,255
|
|
|
2.2
|
|
Vested
|
|
|
(115,180
|
)
|
|
3.2
|
|
Forfeited/cancelled
|
|
|
—
|
|
|
—
|
|
Unvested, September 30, 2018
|
|
|
42,442
|
|
$
|
5.45
|
|
During the three and nine-month periods ended September 30, 2018, 0 and 23,255 restricted shares were awarded.
Restricted Share Units
During the three and nine months ended September 30, 2018, the Board of Directors awarded 170,000 restricted share units (“RSU” or “RSU’s” or “RSU Plan”) to officers and employees in accordance with the guidelines provided by the Presbia Incentive Plan, which includes a performance provision as well as a provision that the recipient must be employed as a condition of vesting.
The following table sets forth the Company’s RSU activity for the nine months ended September 30, 2018:
|
|
Unvested Number of
Shares
|
|
|
Weighted Average Fair
Value per Share
|
|
Balance, December 31, 2017
|
|
|
739,000
|
|
|
$
|
2.09
|
|
Granted
|
|
|
170,000
|
|
|
$
|
2.00
|
|
Vested
|
|
|
—
|
|
|
|
—
|
|
Forfeited/cancelled
|
|
|
(234,500
|
)
|
|
|
2.75
|
|
Unvested, September 30, 2018
|
|
|
674,500
|
|
|
$
|
1.27
|
|
Unrecognized Share-based Compensation
As of September 30, 2018 and 2017, there were $965,000 and $2,484,000, respectively, of unrecognized compensation expense related to employee and non-employee options of the Company, which collectively is expected to be recognized
12
by the Company over the weighte
d average vesting period of 2.0 and 1.6 years, respectively. Unrecognized compensation expense for the same periods related to restricted shares was $203,000 and $453,000, respectively, and is expected to be recognized over the weighted average vesting per
iods of 1.7 and 1.5 years, respectively. As of September 30, 2018 and 2017, there was approximately $593,000 and 7,265,000 of unrecognized compensation expense with respect to the RSU’s over a weighted average remaining derived service period of 1.9 and 2.
2 years, respectively.
(5) Concentration of Credit Risk
The Company had cash of $1.4 million and $3.2 million as of September 30, 2018 and December 31, 2017, respectively, which consists of checking account deposits. The Company maintains cash balances at financial institutions located in the United States and secured by the Federal Deposit Insurance Corporation up to $250,000.
As of September 30, 2018, the Company was not authorized to manufacture or sell any of its products or services within the United States and, as a result, all of the Company’ revenues are derived from foreign customers.
With respect to suppliers for the microlens, the Company had a five-year supplier agreement that expired in January 2017 with a lens manufacturer in Israel from which the Company received 100% of its lens supply for use in commercial activities outside the United States.
The Company also has its own manufacturing facility in Irvine, California that the Company believes will be sufficient to supply lenses for commercial activities outside the United States once existing inventory is utilized, as well as in the United States, pending FDA approval.
(6) Income Taxes
Deferred income tax assets and liabilities are recognized for temporary differences between financial statement and income tax carrying values, using tax rates in effect for the years such differences are expected to reverse. Due to uncertainties surrounding the Company's ability to generate future taxable income and consequently realize such deferred income tax assets, a full valuation allowance has been established. The Company continues to maintain a full valuation allowance against its deferred tax assets as of September 30, 2018.
The impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. In December 2017, the Company recorded a liability of $199,000 with respect to unpaid Irish income taxes in accordance with ASC 740-10, Accounting for Uncertainty of Income Taxes, and decreased that liability during the nine months ended September 30, 2018 to $36,000. The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of the income tax provision. As of September 30, 2018 and December 31, 2017, the Company has recognized $7,000 and $39,000, respectively, of tax related accrued interest and penalties on its consolidated balance sheets.
A reconciliation of gross unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Balance at the beginning of the year
|
|
|
|
199,000
|
|
|
—
|
|
Decreases related to current year tax positions
|
|
|
|
163,000
|
|
|
199,000
|
|
Balance at the end of the year
|
|
|
$
|
36,000
|
|
$
|
199,000
|
|
(7) Equity Transaction with Related Party
Private Placements with Related Party
On April 12, 2018, Presbia PLC, its wholly-owned subsidiary, Presbia USA, Inc. and Richard Ressler, a member of Presbia PLC’s board of directors and its majority stockholder, entered into a Stock Purchase Agreement pursuant to which Mr. Ressler purchased in a private placement offering 100 preferred shares of the Company, with the rights set forth in the Subscription Letter, dated April 12, 2018, and 4,900 shares of preferred stock of Presbia USA, Inc. for an aggregate purchase price of $5.0 million. Upon closing the offering, Mr. Ressler received a warrant to purchase 1,953,125 ordinary shares of Presbia PLC at an exercise price of $2.56 per share, subject to adjustments as provided under the terms of the warrants. The warrant is exercisable for five years from the issuance date and it contains a cashless exercise provision.
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The preferred shares of Presbia PLC and Presbia USA, Inc. carry a one times liquidation preference. The preferred shares are redeemable upon a liquidation event in which all classes o
f equity holders are entitled to receive the same form of consideration and are redeemable at any time at our sole election, provided that a majority of the independent directors approve such redemption. The preferred shares accrue a dividend at the rate
of 10% per annum during the first 18 months, 20% for months 19 through 24 and 30% from month 25 until such preferred shares are redeemed, payable in preferred shares on a quarterly basis. Undeclared PIK dividends for
the period from the date of issuance of
April 12, 2018 to
September 30, 2018 total $237,000 or 237 preferred shares of Presbia USA, Inc. at the original issuance price of $1,000.
As long as the preferred shares remain outstanding, neither the Company nor its subsidiary shall take the following actions, without obtaining the prior consent of the holder of the preferred shares: (a) effect any alteration, repeal, change or amendment of the rights, privileges or preferences of the preferred shares in a manner that adversely affects the rights, privileges or preferences of those shares or any series thereof; (b) amend, modify or repeal any provision of the organizational documents in a manner that adversely affects the powers, preferences or rights of the preferred shares; (c) agree to any debt financing in an amount in excess of $8,000,000 (such amount being the maximum amount payable by the company under the debt instruments); (d) execute a guarantee; (e) effect any restructuring or liquidation; (f) settle any lawsuit or civil investigation requiring the payment of more than $1,000,000; or (g) execute any document or enter into any arrangement that has a potential liability to the Company in excess of $1,000,000.
In addition, Presbia PLC guaranteed Presbia USA’s payment of the redemption price and any accrued and unpaid dividends with respect to the preferred shares issued by Presbia USA, Inc.
Shares Issuable Pursuant to Services Agreement with OCV Management, LLC
On December 14, 2017, the Company concluded a services agreement with OCV Management, LLC, a related party co-founded by Richard Ressler and Mark Yung, for the purpose of providing management services for the Company for the period commencing December 14, 2017 until terminated upon thirty (30) days’ prior written notice by either of the parties. OCV Management, LLC will receive an annual fee of $250,000, payable annually in arrears. The obligation will be settled in the form of ordinary shares issued by the Company in a private offering. For 2018, the number of shares to be issued was determined to be 72,464 by dividing $250,000 by the closing price on January 2, 2018 and the shares will be issued on January 2, 2019. The Company recorded stock-based compensation of $20,000 and 88,000 for the three and nine-month periods ended September 30, 2018 in relation to services provided in 2018.
(8) Commitments and Contingencies
In May 2012, the Company entered into a five-year non-cancelable lease for office and manufacturing space in Irvine, California that was renewed on June 1, 2016 and provided for an extension of five consecutive years starting from the original lease expiration date of May 31, 2017 through May 31, 2022. The Company maintains a one-year lease (which is now month to month) in Dublin, Ireland that commenced on December 1, 2013. In February 2018, it terminated a 30-month lease in Amsterdam, the Netherlands, that commenced on January 1, 2016. This termination was based on a mutual agreement with the landlord. In December 2017, the Company vacated one of its Irvine, California locations and consolidated its operations into another location in Irvine. At December 31, 2017, a liability of $222,000, representing the fair value of the remaining lease obligation over the remaining 33 months was recorded as part of the short-term portion of deferred rent in the Consolidated Balance Sheet. During the nine-month period ended September 30, 2018, the Company sublet the facility and settled the remaining lease obligation.
Aggregate company-wide rent expense for the three months ended September 30, 2018 and 2017
was $89,000 and $166,000, respectively, and for the nine months ended for the same period was $297,000 and $502,000, respectively.
From time to time, the Company may be subject to legal proceedings and claims arising in the ordinary course of business. Management does not believe that the outcome of any of these matters will have a material effect on the Company’s consolidated financial operations
.
(9) Subsequent Event
None
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