The accompanying notes are an integral part
of these condensed consolidated financial statements.
The accompanying notes are an integral part
of these condensed consolidated financial statements
Notes to Unaudited Condensed Consolidated
Financial Statements
(Tabular dollars and shares in thousands,
except per share data)
NOTE A – Nature of Business
Matinas BioPharma Holdings Inc.
(“Holdings”) is a Delaware corporation formed in 2013. Holdings is the parent company of Matinas BioPharma, Inc. (“BioPharma”),
and Aquarius Biotechnologies, Inc., its operating subsidiaries (“Aquarius”, and together with “Holdings”
and “BioPharma”, “the Company” or “we” or “our” or “us”). The Company
is a development stage biopharmaceutical company with a focus on identifying and developing novel pharmaceutical products.
On January 29, 2015, we completed
the acquisition of Aquarius (“Aquarius Merger”), a New Jersey-based, early-stage pharmaceutical company focused on
the development of differentiated and orally delivered therapeutics based on a proprietary, lipid-based, drug delivery platform
called “cochleate delivery technology.” Following the Aquarius Merger, we are a clinical-stage biopharmaceutical company
focused on identifying and developing safe and effective broad spectrum antifungal and anti-bacterial therapeutics for the treatment
of serious and life-threatening infections, using our innovative lipid-crystal nano-encapsulation drug delivery platform. See Note
D for additional information on this transaction.
On March 31, 2015 and April 10, 2015, we completed
a private placement (“2015 Private Placement”), under which the Company sold an aggregate of 20,000,000 shares of common
stock and warrants to purchase 20,000,000 shares of common stock (see Note E for additional details) resulting in net proceeds
of approximately $8.5 million after offering expenses. On July 29, 2016, we conducted a closing of a private placement offering
(“2016 Private Placement”) and issued and sold an aggregate of 880,058 shares (the “Series A Preferred Shares”)
of the Company’s Series A Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”) resulting
in net proceeds to us of approximately $3.8 million, after deducting the placement agent fees described below (see Note J) and
other estimated offering expenses.
|
[2]
|
Proprietary
Products and Technology Portfolios
|
Our proprietary cochleate lipid-crystal
nano-particle delivery technology platform, licensed from Rutgers University on an exclusive worldwide basis, is designed specifically
for the targeted and safe delivery of orally bioavailable pharmaceuticals directly to the site of infection or inflammation. This
license comprises a range of issued patents and patent applications, as well as the use of proprietary know-how with respect to
the manufacturing and testing of products using this technology.
Our lead product
candidate using the cochleate delivery technology is MAT2203, an oral formulation of the broad spectrum
intravenous(IV)-delivered anti-fungal agent amphotericin B. MAT2203 is under development for serious fungal infections and a
single-escalating-dose Phase 1 study with MAT2203 has been completed. The Company is developing MAT2203 in collaboration with
the National Institute of Allergy and Infectious Diseases, or NIAID, of the National Institutes of Health, or NIH. The U.S.
Food and Drug Administration (FDA) has designated MAT2203 as a Qualified Infectious Disease Product (QIDP) with Fast Track
status for the treatment of invasive candidiasis aspergillus. We are developing a pipeline of targeted delivery formulations
by applying our cochleate oral delivery technology to a potentially broad array of proven medications, including MAT2501.
MAT2501 is an oral cochleate formulation of the broad spectrum intravenous (IV)-delivered aminoglycoside antibiotic called
amikacin, which is most often used for treating severe, hospital-acquired infections, including Gram-negative bacterial
infections. The Company has an open Investigational New Drug (IND) application for MAT2501. MAT2501 has been granted a QIDP
designation and Orphan Drug designation by the U.S. FDA for the treatment of Nontuberculous Mycobacteria (NTM).
In addition, the Company is exploring
development and partnership options for MAT9001, a prescription-only omega-3 fatty acid-based composition under development for
hypertriglyceridemia.
NOTE B – Going Concern
and Plan of Operations
The accompanying financial statements
have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as
a going concern.
The Company has experienced net
losses and negative cash flows from operations each period since its inception. Through June 30, 2016, the Company had an accumulated
deficit of approximately $27.1 million. The Company’s operations have been financed primarily through the sale of equity
securities. The Company’s net loss for the six months ended June 30, 2016 was approximately $3.9 million and $9.1 million
for the year ended December 31, 2015.
The Company has been engaged
in developing a pipeline of product candidates since 2011. To date, the Company has not obtained regulatory approval for any of
its product candidates nor generated any revenue from products and the Company expects to incur significant expenses to complete
development of its product candidates. The Company may never be able to obtain regulatory approval for the marketing of any of
its product candidates in any indication in the United States or internationally and there can be no assurance that the Company
will generate revenues or ever achieve profitability.
The Company will need
to secure additional capital in order to fund operations and to continue and complete its planned clinical and
operational activities related to the product candidates and technologies that the Company recently acquired from Aquarius.
The Company can provide no assurances that such additional financing will be available to the Company on acceptable terms, or
at all. During the third quarter of 2015, the Company instituted cost deferral and savings measures to preserve its cash. The
Company has taken steps to reduce and delay expenses through the timing and monitoring of our preclinical animal programs and
as well as reducing professional fees, and compensation expenses in the short term. The Company is anticipating that the
existing cash balance on hand at the filing of this form 10Q would be sufficient to meet its operating obligations through
January 2017. The Company’s recurring losses from operations, and need for additional
funding, raise substantial doubt about its ability to continue as a going concern, and as a result, the Company’s
independent registered public accounting firm included an explanatory paragraph on the Company’s financial statements
for the year ended December 31, 2015 with respect to this uncertainty.
NOTE C – Summary of Significant
Accounting Policies
|
[1]
|
Basis
of Presentation
|
The accompanying unaudited condensed
consolidated financial statements include the consolidated accounts of Matinas BioPharma Holdings Inc. (“Holdings”)
and its wholly owned subsidiaries, Matinas BioPharma, Inc. and Aquarius Biotechnologies, Inc. the operational subsidiaries of Holdings.
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with accounting
principles generally accepted in the United States of America (“U.S. GAAP”) and reflect the operations of the Company
and its wholly-owned subsidiary. All intercompany transactions have been eliminated in consolidation.
These interim unaudited financial
statements do not include all the information and footnotes required by U.S. GAAP for annual financial statements and should be
read in conjunction with the audited financial statements for the year ended December 31, 2015, which are included in the
Form 10-K filed with the SEC on March 30, 2016. In the opinion of management, the interim unaudited financial statements reflect
all normal recurring adjustments necessary to fairly state the Company’s financial position and results of operations for
the interim periods presented. The year-end condensed consolidated balance sheet data presented for comparative purposes was derived
from audited financial statements, but does not include all disclosures required by U.S. GAAP.
Operating results for the six
months ended June 30, 2016 are not necessarily indicative of the results that may be expected for any future interim periods or
for the year ending December 31, 2016. For further information, refer to the consolidated financial statements and notes thereto
included in the Company’s Form 10-K for the year ended December 31, 2015.
The preparation of financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Certain accounting principles
require subjective and complex judgments to be used in the preparation of financial statements. Accordingly, a different financial
presentation could result depending on the judgments, estimates, or assumptions that are used. Such estimates and assumptions include,
but are not specifically limited to, those required in the assessment of the impairment of intangible assets, all acquired assets
and liabilities, the valuation of Level 3 financial instruments and determination of stock-based compensation.
The Company considers all highly
liquid instruments purchased with original maturity of three months or less to be cash to the extent the funds are
not being held for investment purposes.
|
[4]
|
Concentration
of Credit Risk
|
The Company’s financial
instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents. Cash balances are
maintained principally at one major U.S. financial institution and are insured by the Federal Deposit Insurance Corporation (“FDIC”)
up to regulatory limits. At all times throughout the six months ended June 30, 2016, the Company’s cash balances exceeded
the FDIC insurance limit. The Company has not experienced any losses in such accounts.
Equipment is stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets.
The estimated useful lives of the Company equipment ranges from three to ten years. Capitalized costs associated with leasehold
improvements are amortized over the lesser of the useful life of the asset or the remaining life of the lease.
Deferred taxes are provided on
a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit
carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates.
The Company adopted the provisions
of ASC 740-10 and has analyzed its filing positions in jurisdictions where it may be obligated to file returns. The Company believes
that its income tax filing position and deductions will be sustained on audit and does not anticipate any adjustments that will
result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded.
The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company
had no accrual for interest or penalties as of June 30, 2016.
Since the Company incurred net
operating losses in every tax year since inception, the 2013, 2014 and 2015 income tax returns are subject to examination and adjustments
by the IRS for at least three years following the year in which the tax attributes are utilized.
|
[7]
|
Stock-Based
Compensation
|
The Company accounts for stock-based
compensation to employees in conformity with the provisions of ASC Topic 718, “
Stock Based Compensation”
. Stock-based compensation to employees consist of stock options grants and restricted shares that are recognized in the statement
of operations based on their fair values at the date of grant.
The Company accounts for equity
instruments issued to non-employees in accordance with the provisions of ASC Topic 505, subtopic 50,
Equity-Based
Payments to Non-Employees
based upon the fair-value of the underlying instrument. The equity instruments, consisting of stock
options granted to consultants, are valued using the Black-Scholes valuation model. The measurement of stock-based compensation
is subject to periodic adjustments as the underlying equity instruments vest and is recognized as an expense over the period which
services are received.
The Company calculates the fair
value of option grants utilizing the Black-Scholes pricing model, and estimates the fair value of the restricted stock based upon
the estimated fair value of the common stock. The amount of stock-based compensation recognized during a period is based on the
value of the portion of the awards that are ultimately expected to vest. The authoritative guidance requires forfeitures to be
estimated at the time stock options are granted and warrants are issued and revised. If necessary in subsequent periods, an adjustment
will be booked if actual forfeitures differ from those estimated. The term “forfeitures” is distinct from “cancellations”
or “expirations” and represents only the unvested portion of the surrendered stock option or warrant. The Company estimates
forfeiture rates for all unvested awards when calculating the expense for the period. In estimating the forfeiture rate, the Company
monitors both stock option and warrant exercises as well as employee and non-employee termination patterns.
The resulting stock-based compensation
expense for both employee and non-employee awards is generally recognized on a straight-line basis over the requisite service period
of the award.
|
[8]
|
Fair
Value Measurements
|
ASC 820 “Fair Value Measurements”
defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements.
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. ASC 820 establishes a fair value hierarchy that distinguishes between (1)
market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an
entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances
(unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level
3). The three levels of the fair value hierarchy under ASC 820 are described below:
|
•
|
Level 1 - Quoted prices (unadjusted) in active markets that are accessible at the measurement date
for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
|
|
•
|
Level 2 - Directly or indirectly observable inputs as of the reporting date through correlation
with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that
are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do
not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors,
are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.
|
|
•
|
Level 3 - Unobservable inputs that are supported by little or no market activity and reflect the
use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize
management’s estimates of market participant assumptions.
|
In determining fair value, the
Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to
the extent possible as well as considers counterparty credit risk in its assessment of fair value.
The carrying amounts of cash, restricted cash, accounts payable and accrued expenses approximate fair value due to the short-term nature of these instruments.
|
[9]
|
Basic
Net Loss per Common Share
|
Basic earnings per common share
is computed as net loss divided by the weighted average number of common shares outstanding during the period. Diluted earnings
per common share is the same as basic earnings per common share because the Company incurred a net loss during each period presented,
and the potentially dilutive securities from the assumed exercise of all outstanding stock options and warrants would have an antidilutive
effect. The following schedule details the number of shares issuable upon the exercise of stock options and warrants, which have
been excluded from the diluted loss per share calculation for the six months ended June 30, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
8,270,694
|
|
|
|
6,755,361
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
39,250,000
|
|
|
|
39,250,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
47,520,694
|
|
|
|
46,005,361
|
|
The Company recognizes revenue
from the NIH contracts when the specified performance milestone is achieved. The milestones are analyzed and approved on a monthly
basis through progress reports submitted by the Company.
|
[11]
|
Research
and Development
|
Research and development costs
are charged to operations as they are incurred. Legal fees and other direct costs incurred in obtaining and protecting patents
are also expensed as incurred, due to the uncertainty with respect to future cash flows resulting from the patents and our included
as part of general and administrative expenses.
|
[12]
|
Recent
Accounting Pronouncements
|
In March 2016, the FASB issued
ASU 2016-09, “Stock Compensation (Topic 718): Improvements to Employee share-Based Payment Accounting.” This ASU simplifies
several aspects of the accounting for share –based payment award transactions. The ASU is effective for interim and annual
periods beginning after December 15, 2016. Early application is permitted. The Company is in the process of evaluating the
impact of this standard but does not expect this standard to have a material impact on the Company’s consolidated financial
position or results of operation.
In February 2016, the FASB issued
ASU No. 2016-02, Leases. The new standard will require most leases to be recognized on the balance sheet which will increase reported
assets and liabilities. Lessor accounting remains substantially similar to current guidance. The new standard is effective for
annual and interim periods in fiscal years beginning after December 15, 2018, which for us is the first quarter of fiscal 2019
and mandates a modified retrospective transition method. We are currently assessing the impact of this update, and believe that
its adoption will not have a material impact on our consolidated financial statements.
In November 2015, the FASB
issued ASU 2015-17 “Simplifying the Classification of Deferred Tax Assets and Liabilities.” The new standard requires that all
deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance
sheet. The standard is effective for interim and annual periods beginning after December 15, 2016 and allows for early
adoption using a full retrospective method or a prospective method. We have elected to early adopt the provisions of this new
standard using a prospective method. As a result, all deferred taxes as of June 30, 2016 are classified as noncurrent in our
consolidated balance sheet, while prior periods remain as previously reported. As of June 30, 2016 there are no deferred tax
assets.
In September 2015, the FASB issued
ASU 2015-16 “Simplifying the Accounting for Measurement-Period Adjustments.” The new standard eliminates the requirement
to restate prior period financial statements for measurement period adjustments. The new standard requires that the cumulative
impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which
the adjustment is identified. The standard was effective for interim and annual periods beginning after December 15, 2015 and does
not have a material impact on our financial condition or results of operations.
In August 2014, the FASB issued
ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This ASU
describes how an entity should assess its ability to meet obligations and sets rules for how this information should be disclosed
in the financial statements. The standard provides accounting guidance that will be used along with existing auditing standards.
The ASU is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted. The Company
is in the process of evaluating the impact of this standard and we do expect this standard to have a material impact on the
Company’s consolidated financial position or results of operation.
In May 2014, the FASB issued
ASU 2014-09 “Revenue From Contracts with Customers.” This standard specifies how and when an entity will recognize
revenue arising from contracts with customers. The ASU is effective beginning after December 15, 2017. The Company will evaluate
the adoption of this standard when it generates revenue.
|
[13]
|
Business
Combination
|
The Company accounts for acquisitions
using the acquisition method of accounting which requires the recognition of tangible and identifiable intangible assets acquired
and liabilities assumed at their estimated fair values as of the business combination date. The Company allocates any excess purchase
price over the estimated fair value assigned to the net tangible and identifiable intangible assets acquired and liabilities assumed
to goodwill. Transaction costs are expensed as incurred in general and administrative expenses. Results of operations and cash
flows of acquired companies are included in the Company's operating results from the date of acquisition.
The Company's intangible assets
are comprised of acquired in-process research and development, or IPR&D. The fair value of IPR&D acquired through a business
combination is capitalized as an indefinite-lived intangible asset until the completion or abandonment of the related research
and development activities. IPR&D is tested for impairment annually or when events or circumstances indicate that the fair
value may be below the carrying value of the asset. There was no impairment for the three or six months ended June 30, 2016. If
and when research and development is complete, the associated assets would then be amortized over their estimated useful lives.
|
[14]
|
Goodwill
and Other Intangible Assets
|
Goodwill is assessed for impairment
at least annually on a reporting unit basis, or more frequently when events and circumstances occur indicating that the recorded
goodwill may be impaired. In accordance with the authoritative accounting guidance we have the option to perform a qualitative
assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount.
If we determine this is the case, we are required to perform the two-step goodwill impairment test to identify potential goodwill
impairment and measure the amount of goodwill impairment loss to be recognized, if any. If we determine that it is more-likely-than-not
that the fair value of the reporting unit is greater than its carrying amounts, the two-step goodwill impairment test is not required.
As defined in the authoritative
guidance, a reporting unit is an operating segment, or one level below an operating segment. Historically, we conducted our business
in a single operating segment and reporting unit. In the quarter ended June 30, 2016, we assessed goodwill impairment by performing
a qualitative test for our reporting unit. During our qualitative review, we considered the Company’s cash position and our
ability to obtain additional financing in the near term to meet our operational and strategic goals and substantiate the value
of our business. Based on the results of our assessment, it was determined that it is more-likely-than-not that the fair value
of the reporting units are greater than their carrying amounts. There was no impairment of goodwill for the quarter ended June
30, 2016.
We review other intangible assets
for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be
fully recoverable or that the useful lives of these assets are no longer appropriate. The authoritative accounting guidance allows
a qualitative approach for testing indefinite-lived intangible assets for impairment, similar to the impairment testing guidance
for goodwill. It allows the option to first assess qualitative factors (events and circumstances) that could have affected the
significant inputs used in determining the fair value of the indefinite-lived intangible asset. The qualitative factors assist
in determining whether it is more-likely-than-not (i.e. > 50% chance) that the indefinite-lived intangible asset is impaired.
An organization may choose to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed
directly to calculating its fair value. Our indefinite-lived intangible assets are IPR&D intangible assets. In all other instances
we used the qualitative test and concluded that it was more-likely-than-not that all other indefinite-lived assets were not impaired
and therefore, there were no impairments in quarter ended June 30, 2016.
NOTE D – Acquisition of Aquarius Biotechnologies,
Inc.
On January 29, 2015, we
entered into the Merger Agreement with Aquarius, Saffron Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary
of ours (“Merger Sub”) and J. Carl Craft, as the stockholder representative. The merger contemplated by the Aquarius
Merger became effective on January 29, 2015, following the satisfaction or waiver of the conditions described in the Merger
Agreement, including approval of the transaction by 100% of Aquarius’ stockholders. Pursuant to the Aquarius Merger, the
Merger Sub merged with and into Aquarius, with Aquarius surviving the merger as a wholly-owned subsidiary of ours.
Pursuant to the terms of the
Merger Agreement, we were obligated to issue an aggregate of up to 5,000,000 shares of our common stock at closing, subject to
adjustment as set forth in the Merger Agreement. At closing, we issued 4,608,020 shares (the “Closing Shares”) of our
common stock as closing consideration. In addition, subject to our right of offset for indemnification claims, we may issue up
to an additional 3,000,000 shares (the “Additional Shares”) of our common stock upon the achievement of certain milestones.
The milestone consideration consists of (i) 1,500,000 shares issuable upon the dosing of the first patient in a phase III trial
sponsored by us for a product utilizing Aquarius’ proprietary cochleate delivery technology and (ii) 1,500,000 shares issuable
upon FDA approval of the first NDA submitted by us for a product utilizing Aquarius’ proprietary cochleate delivery technology. The Company concluded that the contingent share issuance represented equity settled contingent
consideration and have recorded the amounts to equity as of December 31, 2015.
The transaction was accounted
for as a business combination, and accordingly the Company has included the results of operations of Aquarius subsequent to the
January 29, 2015 closing date. The transaction resulted in a significant amount of in-process research and development, goodwill
and deferred tax liability on the balance sheet, as detailed below.
The acquisition-date fair value
of the consideration transferred totaled $2,873,035 as of January 29, 2015 and consisted of the following items:
Fair value of 4,608,020 of common stock issued at a price per share of $0.46 as of January 29, 2015 the closing date of the merger.
|
|
$
|
2,119,689
|
|
|
|
|
|
|
Fair value of potential Matinas common stock as contingent consideration that will be issued upon achieving certain future clinical milestone-(a)
|
|
|
422,609
|
|
|
|
|
|
|
Fair value of potential Matinas common stock as contingent consideration that will be issued upon achieving certain future regulatory milestone-(a)
|
|
|
330,737
|
|
|
|
|
|
|
Total consideration
|
|
$
|
2,873,035
|
|
(a)-Reflects recognition of the
estimated fair value of the contingent consideration payable with issuance of Matinas common stock upon achievement of certain
future clinical and regulatory milestones, the achievement of which is uncertain. The fair value of the additional shares were
established by assigning probabilities and projected dates of positive outcome for the milestones and valuing the future issuance
of the shares by using the Black-Scholes options pricing model to account for the uncertainty in the future value of the shares.
The value of the shares as derived using the options pricing model were then weighted based on the probability of achieving the
milestones to determine the fair market value of the additional shares. The entire $753,346 of contingent consideration was recorded
as additional paid-in capital at December 31, 2015.
The allocation of the total purchase
price is described below based on the estimated fair value of the assets acquired and liabilities assumed on the date of the acquisition.
Cash
|
|
$
|
70,754
|
|
Contract/ Grant receivable
|
|
|
45,644
|
|
Prepaid expenses and other current assets
|
|
|
5,084
|
|
Equipment, net
|
|
|
5,051
|
|
Other assets
|
|
|
700
|
|
In-process research and development-(b)
|
|
|
3,017,377
|
|
Total identifiable assets
|
|
|
3,144,610
|
|
|
|
|
|
|
Accounts payable
|
|
|
300,413
|
|
Notes payable-(d)
|
|
|
10,000
|
|
Accrued expenses
|
|
|
92,509
|
|
Total liabilities assumed
|
|
|
402,922
|
|
Net identifiable assets acquired
|
|
|
2,741,688
|
|
Goodwill-(c)
|
|
|
1,336,488
|
|
Deferred income taxes arising from basis differences of tax aspects of in-process research and development
|
|
|
(1,205,141
|
)
|
Net assets acquired
|
|
$
|
2,873,035
|
|
(b)-The fair value of the in-process
research and development asset was estimated on the basis of its replacement cost as determined by a buildup of the costs incurred
to develop the technology as it existed as of the acquisition date resulting in a fair value of $3,017,377. The fair value of other
assets and liabilities approximate their book value.
(c)-The Company allocated the
purchase price to the net tangible and intangible assets based upon their estimated fair values at the Merger date. The excess
of the purchase price over the estimated fair values of the net tangible and intangible assets acquired has been recorded as goodwill
including deferred tax liabilities resulting from the tax attributes of the in-process research and development (see Note C 14).
In connection with the Aquarius acquisition, the Company made an adjustment as a result of the purchase accounting requirements
to reflect a change in the value of the deferred tax liabilities resulting from an adjustment to the Company's effective tax rate,
recording a $48,186 reduction to the deferred tax liabilities with an offsetting credit to Goodwill.
(d)- Aquarius issued a note
for a loan that was made to a related party. Interest on the note is calculated using the applicable federal rate for midterm
loans. Since the note has no specified repayment terms, it is considered a current liability. This note was subsequently paid
in full in 2015.
NOTE E – 2015 Private Placement Funding
The Company had two closings
for a private placement, on March 31, 2015 and April 10, 2015, respectively.
This private placement offered
to accredited investors (the “Offering”) of units (the “Units”) at a price of $0.50 per Unit, with each
Unit consisting of: (i) one share of the Company’s common stock and (ii) a five-year warrant to purchase one share of common
stock at an exercise price of $0.75 per share (“Warrants”). The Warrants are callable by the Company following the
effectiveness of the registration statement covering the resale of the shares of common stock underlying the Warrants (which occurred
on July 23, 2015) if the closing bid price for the Company’s common stock is at or above $3.00 per share for the twenty (20)
consecutive trading days immediately prior to such a call and provided that the registration statement is current at the time.
In connection with the Offering,
the Company also entered into definitive subscription agreements (the “Subscription Agreements”) with accredited investors
(the “Investors”) and issued an aggregate of 20,000,000 Units in the Offering, consisting of an aggregate of 20,000,000
shares of common stock and Warrants to purchase an aggregate 20,000,000 shares of common stock for aggregate gross proceeds to
the Company of $10 million and net proceeds of approximately $8.5 million after paying expenses after deducting the placement agent
fees described below and other estimated Offering expenses.
In addition, the Company entered
into a Registration Rights Agreement with the Investors pursuant to which the Company granted the Investors certain registration
rights which terminated in July 2016.
The Company entered into a Placement
Agency Agreement with Aegis Capital Corp. (“Aegis”) pursuant to which Aegis acted as the Company’s exclusive
placement agent (the “Placement Agent”) for the Offering. Immediately prior to the Offering, the Placement Agent and
its affiliates beneficially owned an aggregate of more than 10% of our outstanding equity securities. In addition, Adam Stern,
Head of Private Equity Banking at Aegis, is a member of the Company’s board of directors. Pursuant to the terms of the Placement
Agency Agreement, in connection with the Offering, the Company paid the Placement Agent an aggregate cash fee of $1,000,000 and
non-accountable expense allowance of $300,000 through April 2015 and issued to the Placement Agent and its designees warrants (substantially
similar to the Warrants) to purchase 2,000,000 shares of common stock at $0.50 per share and additional warrants to purchase 2,000,000
shares of common stock at $0.75 per share. In addition, the Company has agreed to engage the Placement Agent as our warrant
solicitation agent in the event the Warrants are called for redemption and shall pay a warrant solicitation fee to the Placement
Agent equal to five (5%) percent of the amount of funds solicited by the Placement Agent upon the exercise of the Warrants following
such redemption.
NOTE F – Equipment
Fixed assets, summarized by major
category, consist of the following ($ in thousands) for the six months ended June 30, 2016 and year ended December 31, 2015:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Lab equipment
|
|
$
|
438
|
|
|
|
327
|
|
Furniture and fixtures
|
|
|
20
|
|
|
|
20
|
|
Capitalized Leased equipment
|
|
|
31
|
|
|
|
111
|
|
Leasehold improvements
|
|
|
7
|
|
|
|
7
|
|
Total
|
|
|
496
|
|
|
|
465
|
|
Less accumulated depreciation and amortization
|
|
|
114
|
|
|
|
87
|
|
Equipment, net
|
|
$
|
382
|
|
|
$
|
378
|
|
On February 12, 2016, the Company
entered in a new 36 month capital lease for lab equipment. The payments under the lease are accounted for as interest and payments
under capital lease using 3 year amortization. During the six months ended June 30, 2016 the Company recognized interest expense
of $204 associated with the lease payments.
NOTE G – Stock Holders Equity
Warrants
As of June 30, 2016, the Company
had outstanding warrants to purchase an aggregate of 39,250,000 shares of common stock at exercise prices ranging from $0.50 to
$2.00 per share.
The Warrants are exercisable
immediately upon issuance and have a five-year term. The Warrants may be exercised at any time in whole or in part upon payment
of the applicable exercise price until expiration of the Warrants. No fractional shares will be issued upon the exercise of the
Warrants. All of the Warrants may be exercised on a “cashless” basis in certain circumstances. However, since all such
cashless exercises are settled on a net share basis, the exercise price and the number of warrant shares purchasable upon the exercise
of the Investor Warrants (as opposed to Placement Agent Warrants) are subject to adjustment upon the occurrence of certain events,
which include stock dividends, stock splits, combinations and reclassifications of the Company capital stock or similar “organic
changes” to the equity structure of the Company (see Warrant table below). Accordingly, pursuant to ASC 815, the warrants
are classified as equity in the accompanying statement of stockholder’s Equity.
The Company may call the Warrants,
other than the Placement Agent Warrants, at any time the common stock trades above $5.00 (for 13 million warrants issued in 2013)
or above $ 3.00 (for 20 million warrants issued in 2015) for twenty (20) consecutive days following the effectiveness of the registration
statement covering the resale of the shares of common stock underlying the Warrants, provided that the Warrants can only be called
if such registration statement is current and remains effective at the time of the call and provided further that the Company can
only call the Investor Warrants for redemption, if it also calls all other Warrants for redemption on the terms described above.
The Placement Agent Warrants do not have a redemption feature. Such term is a contingent feature and within the control of the
Company, therefore does not require liability classification.
A summary of equity warrants
outstanding as of June 30, 2016 is presented below, all of which are fully vested.
|
|
Shares
|
|
July 11, 2013 formation of Holdings, 4,000,000 warrants issued, terms 5 years, exercisable at $2.00, including 250,000 warrants sold to Mr. Adam Stern
|
|
|
4,000,000
|
|
July 11, 2013 recapitalization of Matinas BioPharma Inc. 1,000,000 warrants issued, terms 5 years, exercisable at $2.00
|
|
|
1,000,000
|
|
July and August 2013 completion of Private Placement, 7,500,000 warrants issued, terms 5 years, exercisable at $2.00
|
|
|
7,500,000
|
|
July 30, 2013 Placement Agent warrants issued as part of compensation for Private Placement. Terms 5 years, exercisable at $2.00
|
|
|
750,000
|
|
July 30, 2013 Placement Agent warrant issued as part of compensation for Private Placement. Terms 5 years exercisable at $1.00
|
|
|
1,500,000
|
|
July 30, 2013 500,000 warrants sold to Chairman of Board Mr. Herb Conrad for $20,000. Terms 5 years, exercisable at $2.00 per share
|
|
|
500,000
|
|
March 31, 2015 Warrants:
|
|
|
|
|
March 31, 2015 first close of Private Placement, 9,875,0000 warrants issued, terms 5 years, exercisable at $0.75
|
|
|
9,875,000
|
|
March 31, 2015, Placement Agent Warrants, 987,500 issued, terms 5 years, exercisable at $0.75
|
|
|
987,500
|
|
March 31, 2015, Placement Agent Warrants, 987,500 issued, terms 5 years, exercisable at $ 0.50
|
|
|
987,500
|
|
April 10, 2015 Warrants:
|
|
|
|
|
April 10, 2015 first close of Private Placement, 10,125,000 warrants issued, terms 5 years, exercisable at $0.75
|
|
|
10,125,000
|
|
April 10, 2015, Placement Agent Warrants, 1,012,500 issued, terms 5 years, exercisable at $0.75
|
|
|
1,012,500
|
|
April 10, 2015, Placement Agent Warrants, 1,012,500 issued, terms 5 years, exercisable at $0.50
|
|
|
1,012,500
|
|
|
|
|
|
|
Total Warrants Outstanding at June 30, 2016
|
|
|
39,250,000
|
|
NOTE H – Stock Based Compensation
In August 2013, the Company adopted
the 2013 Equity Compensation Plan (the “Plan”), which provides for the granting of incentive stock options, nonqualified
stock options, restricted stock units, performance units, and stock purchase rights. Options under the Plan may be granted at prices
not less than 100% of the fair value of the shares on the date of grant as determined by the Board Committee. The Board Committee
determines the period over which the options become exercisable subject to certain restrictions as defined in the Plan, with the
current outstanding options generally vesting over three years. The term of the options is no longer than ten years. The Company
currently has 11,828,912 shares of common stock for issuance under the plan.
With the approval of the Board
of Directors and majority Shareholders, effective May 8, 2014, the Plan was amended and restated. The amendment provides for an
automatic increase in the number of shares of common stock available for issuance under the Plan each January (with Board approval),
commencing January 1, 2015 in an amount up to four percent (4%) of the total number of shares of common stock outstanding on the
preceding December 31st.
The Company recognized stock-based
compensation expense (options, and restricted share grants) in its consolidated statements of operations as follows ($ in thousands):
|
|
Quarter Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development
|
|
$
|
140
|
|
|
$
|
86
|
|
|
$
|
271
|
|
|
$
|
288
|
|
General and Administrative
|
|
|
261
|
|
|
|
315
|
|
|
|
523
|
|
|
|
446
|
|
Total
|
|
$
|
401
|
|
|
$
|
401
|
|
|
$
|
794
|
|
|
$
|
734
|
|
The following table contains
information about the Company’s stock plan at June 30, 2016:
|
|
Awards
Reserved
|
|
|
|
|
|
Awards
|
|
|
|
for
|
|
|
Awards
|
|
|
Available
|
|
|
|
Issuance
|
|
|
Issued
|
|
|
for Grant
|
|
2013 Equity Compensation Plan
|
|
|
11,828,912
|
|
|
|
9,255,393
|
*
|
|
|
2,573,519
|
|
* includes
both stock grants and option grants
The following table summarizes
the Company’ stock option activity and related information for the period from December 31, 2015 to June 30, 2016 (number
of options in thousands):
|
|
|
|
|
Weighted
|
|
|
|
Number of
Options
|
|
|
average
Exercise Price
|
|
Outstanding at December 31, 2015
|
|
|
6,904
|
|
|
$
|
0.93
|
|
Granted
|
|
|
1,467
|
|
|
|
0.43
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(100
|
)
|
|
|
0.43
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding at June 30, 2016
|
|
|
8,271
|
|
|
$
|
0.85
|
|
As of June 30, 2016, the number
of vested shares underlying outstanding options was 5,462,288 at a weighted average exercise price of $1.66. The aggregate intrinsic
value of in the-money options outstanding as of June 30, 2016 was $1.0 million. The aggregate intrinsic value is calculated as
the difference between the Company’s closing stock price of $0.79 on June 30, 2016, and the exercise price of options, multiplied
by the number of options. As of June 30, 2016, there was $2.3 million of total unrecognized share-based compensation. Such costs
are expected to be recognized over a weighted average period of approximately 1.06 years.
All options expire ten years
from date of grant. Except for options granted to consultants, all remaining options vest entirely and evenly over three years.
A portion of options granted to consultants vests over four years, with the remaining vesting being based upon the achievement
of certain performance milestones, which are tied to either financing or drug development initiatives.
The Company recognizes compensation
expense for stock option awards on a straight-line basis over the applicable service period of the award. The service period is
generally the vesting period, with the exception of options granted subject to a consulting agreement, whereby the option vesting
period and the service period defined pursuant to the terms of the consulting agreement may be different. Stock options issued
to consultants are revalued quarterly until fully vested, with any change in fair value expensed. The following weighted-average
assumptions were used to calculate share based compensation:
|
|
For the Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Volatility
|
|
|
68.38 % - 89.15
|
%
|
|
|
91.1
|
%
|
Risk-free interest rate
|
|
|
1.15 % - 1.375
|
%
|
|
|
1.34% - 1.85
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected life
|
|
|
6.0 years
|
|
|
|
4.29 – 6.0 years
|
|
The Company does not have sufficient
historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination
behavior. Hence, the Company uses the “simplified method” described in Staff Accounting Bulletin (SAB) 107 to estimated
expected term of share option grants.
The expected stock price volatility
assumption was determined by examining the historical volatilities for industry peers, as the Company has limited history for the
Company’s common stock. The Company will continue to analyze the historical stock price volatility and expected term assumptions
as more historical data for the Company’s common stock becomes available.
The risk-free interest rate assumption
is based on the U.S treasury instruments whose term was consistent with the expected term of the Company’s stock options.
The expected dividend assumption
is based on the Company’s history and expectation of dividend payouts. The Company has never paid dividends on its common
stock and does not anticipate paying dividends on its common stock in the foreseeable future. Accordingly, the Company has assumed
no dividend yield for purposes of estimating the fair value of the Company share-based compensation.
The Company estimates the forfeiture
rate at the time of grant and revisions, if necessary, were estimated based on management’s expectation through industry
knowledge and historical data.
NOTE I – COMMMITMENTS
On November 1, 2013, the
Company entered into a 7 year lease for office space in Bedminster, New Jersey which commenced in June, 2014 at a monthly rent
of $12,723, increasing to approximately $14,200 per month toward the end of the term. The Company records rent expense on a straight-line
basis.
In December of 2015, the
Company renewed its agreement to lease laboratory space for one year starting January 1, 2016 in Monmouth Junction, New Jersey
at a monthly rent of $2,287.
Listed below is a summary of
future lease rental payments (including the remainder of 2016) as of June 30, 2016:
|
|
Lease
|
|
|
|
Commitments
|
|
2016
|
|
|
92,976
|
|
2017
|
|
|
160,012
|
|
2018
|
|
|
162,948
|
|
2019
|
|
|
165,896
|
|
2020
|
|
|
168,220
|
|
2021
|
|
|
84,544
|
|
Total future minimum lease payments
|
|
$
|
834,596
|
|
The Company was obligated to
provide a security deposit of $300,000 to obtain lease space. This deposit was reduced by $100,000 in 2015 and $100,000 in June
2016, down to $100,000. An additional $50,000 will be received in June 2017.
Through our acquisition of Aquarius,
we acquired a license from Rutgers University for the cochleate delivery technology. The Amended and Restated Exclusive License
Agreement between Aquarius and Rutgers, The State University of New Jersey (successor in interest to the University of Medicine
and Dentistry of New Jersey) provides for, among other things, (1) royalties on a tiered basis between low single digits and the
mid-single digits of net sales of products using such licensed technology, (2) a one-time sales milestone fee of $100,000 when
and if sales of products using the licensed technology reach the specified sales threshold and (3) an annual license fee of initially
$10,000, increasing to $50,000 over the term of the license agreement.
The Company also has employment
agreements with certain employees which require the funding of a specific level of payments, if certain events, such as a change
in control, termination without cause or retirement, occur.
NOTE J – SUBSEQUENT
EVENTS
On July 29, 2016, the Company conducted a closing
(the “Initial Closing”) of the 2016 Private Placement. In connection with the Initial Closing, the Company entered
into definitive subscription agreements (the “Subscription Agreements”) with accredited investors (the “Investors”)
and issued an aggregate of 880,058 Series A Preferred Shares at a purchase price of $5.00 per share, for aggregate gross proceeds
to the Company of $4.4 million. The Subscription Agreements contain customary representations, warranties and agreements. The net
proceeds to the Company from the Initial Closing, after deducting the placement agent fees described below and other estimated
offering expenses, were approximately $3.8 million. Certain of our officers and directors, and entities affiliated with such individuals,
and affiliates and related parties of the Placement Agent purchased Series A Preferred Shares in this 2016 Private Placement.
In connection with the 2016 Private Placement, on
July 26, 2016, the Company filed a Certificate of Designation (the “Certificate of Designations”) with the Secretary
of State of the State of Delaware to designate the preferences, rights and limitations of the Series A Preferred Shares. Pursuant
to the Certificate of Designations, the Company designated 1,600,000 shares of the Company’s previously undesignated preferred
stock as Series A Preferred Stock. Each Series A Preferred Share is convertible at the option of the holder into such number of
shares of the Company’s common stock equal to the number of Series A Preferred Shares to be converted, multiplied by the
stated value of $5.00 (the “Stated Value”), divided by the Conversion Price in effect at the time of the conversion
(the initial conversion price will be $0.50, subject to adjustment in the event of stock splits, stock dividends, and similar transactions).
Each Series A Preferred Share will automatically convert into common stock upon the earlier of (i) notice by the Company to the
holders that the Company has elected to convert all outstanding Series A Preferred Shares; provided however that in the event the
Company elects to force automatic conversion pursuant to this clause (i), the conversion date for purposes of calculating the accrued
Dividend (as defined below) is deemed to be the third anniversary of the Initial Closing, (ii) three years from the Initial Closing,
(iii) the approval of the Company’s MAT2203 product candidate by the U.S. Food and Drug Administration or the European Medicines
Agency (the “Regulatory Approval”) or (iv) the Regulatory Approval of the Company’s MAT2501 product candidate.
Pursuant to the Certificate of Designations, the Series A Preferred Shares will accrue dividends at a rate of 8.0% per year, payable
to the holders of such Series A Preferred Shares in shares of common stock upon conversion. The Series A Preferred Shares will
vote on an as converted basis with the Company’s common stock. Upon any dissolution, liquidation or winding up, whether voluntary
or involuntary, holders of Series A Preferred Shares will be entitled to (i) first receive distributions out of our assets in an
amount per share equal to the Stated Value plus all accrued and unpaid dividends, whether capital or surplus before any distributions
shall be made on any shares of common stock and (ii) second, on an as-converted basis alongside the common stock.
The Series A Preferred
Shares include the right, as a group, to receive: (i) 3%, and up to 4.5% (depending on the final size of the offering) of the
net sales of MAT2203 and MAT2501, in each case from and after the date, respectively, such candidate has received FDA or EMA
approval, and (ii) 5%, and up to 7.5% (depending on the final size of the offering) of the proceeds, if any, received by the
Company in connection with the licensing or other disposition by the Company of MAT2203 and/or MAT2501 (“Royalty
Payment Rights”). The royalty will be payable so long as the Company has valid patents covering MAT2203 and MAT2501, as
applicable. The Royalty Payment Rights are unsecured obligations of the Company. The royalty payment will be located to the
holders based on their pro rata ownership of vested Series A Preferred Shares. The royalty rights that are part of the Series
A Preferred Shares will vest, in equal thirds, upon each of the first, second and third anniversary dates of the Initial
Closing (each a “Vesting Date”); provided however, if the Series A Preferred Shares automatically convert into
common stock prior to the 36 month anniversary of the Initial Closing, then the royalty rights that are part of the
outstanding Series A Preferred Shares shall be deemed to be fully vested as of the date of conversion. Even if the Series A
Preferred Shares are purchased after the Initial Closing, the vesting periods for the royalty rights that are part of the
Series A Preferred Shares shall still be based on the Vesting Dates. During the first 36 months following the Initial
Closing, the right to receive a royalty will follow the Series A Preferred Shares. Each investor in the 2016 Private
Placement should be aware that in the event such investor transfers any of its Series A Preferred Shares, the transferee of
such shares will thereafter have the right to receive any royalty payments related to the Series A Preferred Shares it
received, including with respect to royalty rights that vested on prior to the date on which the transferee receives the
shares, and the transferring investor will thereafter no longer have any right to receive any royalty payment in respect of
the Series A Preferred Shares it transferred.
The Company entered into a Placement Agency Agreement
with a registered broker dealer, which acted as the Company’s exclusive placement agent (the “Placement Agent”)
for the 2016 Private Placement. Pursuant to the terms of the Placement Agency Agreement, in connection with the Initial Closing,
the Company paid the Placement Agent an aggregate cash fee of $440,029 and non-accountable expense allowance of $132,008.70 and
will issue to the Placement Agent or its designees warrants to purchase 88,006 shares of Common Stock at an exercise price of $0.50
per share. The warrants provide for a cashless exercise feature and are exercisable for a period of five years from the date of
closing. We have also agreed to pay the Placement Agent similar cash and warrant compensation with respect to, and based on, any
individual or entity that the Placement Agent solicits interest from in connection with this 2016 Private Placement, excluding
existing stockholders of the Company and certain other specified investors, who subsequently invests in us at any time prior to
the date that is twelve (12) months following the final Closing of this offering. In addition, we entered into a three year, non-exclusive
finder’s fee agreement with the Placement Agent providing that if the Placement Agent shall introduce us to a third party
that consummates certain types of transactions with our Company, such as business combinations, joint ventures and licensing arrangements,
then the Placement Agent will be paid a finder’s fee, payable in cash at the closing of such transaction, equal to (a) 5%
of the first $1,000,000 of the consideration paid in such transaction; plus (b) 4% of the next $1,000,000 of the consideration
paid in such transaction; plus (c) 3% of the next $5,000,000 of the consideration paid in the such transaction; plus (d) 2.5% of
any consideration paid in such transaction in excess of $7,000,000.