NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
1. Organization, Business
EyeGate Pharmaceuticals,
Inc. (“EyeGate”, the “Company” or “we”) a Delaware corporation, began operations in
December 2004 and is a clinical-stage specialty pharmaceutical company that is focused on developing and commercializing
products for treating diseases and disorders of the eye. EyeGate’s first product in clinical trials incorporates a
reformulated topically active corticosteroid, dexamethasone phosphate, EGP-437, that is delivered into the ocular tissues
though our proprietary iontophoresis drug delivery system, the EyeGate® II Delivery System. The Company is developing the
EyeGate® II Delivery System and EGP-437 combination product (together, the “EGP-437 Product”) for the
treatment of various inflammatory conditions of the eye, including anterior uveitis, a debilitating form of intraocular
inflammation of the anterior portion of the uvea, such as the iris and/or ciliary body, post-cataract surgery inflammation
and pain, and macular edema, an abnormal thickening of the macula associated with the accumulation of excess fluids in the
retina. Effective March 7, 2016, the Company acquired all of the capital stock of Jade Therapeutics, Inc.
(“Jade”), a privately-held company developing locally-administered, polymer-based products designed to treat
poorly-served ophthalmic indications (the “Jade Acquisition”).
See
Note 12, “Acquisitions”.
EyeGate and Jade are an integrated line of business developing ophthalmic solutions for a variety of ocular diseases and
disorders.
On February 13, 2015, the Company completed
an underwritten initial public offering (the “IPO”) for 683,250 shares of Common Stock. The net proceeds to the Company
from the IPO, after deducting the underwriting discounts, commissions, and offering expenses, were approximately $2.7 million.
Shares of the Company’s Common Stock began trading on the OTCQB Venture Marketplace under the symbol “EYEG” on
February 13, 2015, and the IPO was closed on February 19, 2015. Immediately prior to the IPO, in related transactions, the Company
converted all outstanding notes payable into shares of Common Stock, and all shares of its convertible preferred stock into shares
of Common Stock. The various classes of shares of preferred stock were converted to shares of Common Stock at a different ratio
for each class of preferred stock for 1.00 share of Common Stock. On August 5, 2015, the Company closed an underwritten follow-on
public offering of 1,176,470 shares of its Common Stock, and warrants to purchase 1,176,470 shares of its Common Stock. The net
proceeds to the Company from this follow-on offering, after deducting underwriting discounts, commissions, and offering expenses,
were approximately $8.8 million. The warrants are immediately exercisable, and expire on August 5, 2020. At the closing of
this follow-on offering, the Company also issued and sold additional warrants to purchase up to 176,470 shares of Common Stock
in connection with the full exercise of the underwriters’ over-allotment option to purchase additional warrants. On June
30, 2016, the Company completed a subsequent registered direct offering of 441,000 shares of Common Stock and 2,776.5 shares of
Series A Preferred Stock (convertible into 1,234,000 shares of Common Stock), along with a concurrent private placement of warrants
to purchase Common Stock. The total net proceeds to the Company from this subsequent offering, after deducting the placement agent
fees and offering expenses, were approximately $3.4 million. The warrants are initially exercisable on December 30, 2016, and expire
on December 30, 2021.
See
Note 6, “Capital Stock”.
As of September 30, 2016, there were 9,585,883
shares of Common Stock outstanding, $0.01 par value, and 1,226.25 shares of Series A Preferred Stock outstanding, $0.01 par value.
Effective July 31, 2015, the Company’s
Common Stock began trading on the Nasdaq Capital Market under the symbol “EYEG”.
Since its inception, EyeGate has devoted
substantially all of its efforts to business planning, research and development, and raising capital.
The accompanying Condensed Consolidated
Financial Statements have been prepared assuming that EyeGate will continue as a going concern, which contemplates the realization
of assets and satisfaction of liabilities in the normal course of business. At September 30, 2016, EyeGate had Cash and Cash Equivalents
of $5,682,374, and an Accumulated Deficit of $74,897,677. EyeGate has incurred losses and negative cash flows since inception,
and future losses are anticipated. The Company anticipates having sufficient cash to fund planned operations for approximately
six months, however, the acceleration or reduction of cash outflows by Company management can significantly impact the timing for
raising additional capital to complete development of its products. To continue development, EyeGate will need to raise additional
capital through equity financing, license agreements, and/or additional U.S. government grants. Although the Company successfully
completed its IPO, a follow-on offering, and a registered direct offering, additional capital may not be available on terms favorable
to EyeGate, if at all. On May 6, 2016, the SEC declared effective EyeGate’s registration statement on Form S-3, registering
a total of $100,000,000 of its securities for sale to the public from time to time in what is known as a “shelf offering”.
The Company does not know if any future offerings pursuant to its shelf registration statement will succeed. Accordingly, no assurances
can be given that Company management will succeed in these endeavors. These conditions raise substantial doubt about the Company’s
ability to continue as a going concern. The Condensed Consolidated Financial Statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities
or any other adjustments that might be necessary should the Company be unable to continue as a going concern.
EYEGATE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying Condensed Consolidated
Financial Statements include the accounts of the Company and its subsidiaries, EyeGate Pharma S.A.S. and Jade (since the date of
the Jade Acquisition), collectively referred to as “the Company”. All intercompany balances and transactions have been
eliminated in consolidation. These Condensed Consolidated Financial Statements have been prepared in accordance with accounting
principles generally accepted in the United States (“U.S. GAAP”) for interim financial information. Certain information
and disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed
or eliminated. Accordingly, these unaudited Condensed Consolidated Financial Statements should be read in conjunction with the
annual financial statements of the Company as of and for the year ended December 31, 2015.
Unaudited Interim Financial Information
The accompanying Condensed Consolidated
Financial Statements and related disclosures are unaudited, have been prepared on the same basis as the annual financial statements
and, in the opinion of Company management, reflect all adjustments, which include normal recurring adjustments, necessary for a
fair presentation of the results of operations for the periods presented. The year-end balance sheet was derived from audited financial
statements, but does not include all disclosures required by U.S. GAAP. The results of operations for an interim period are not
necessarily indicative of the results to be expected for the full year or for any other future year or interim period.
Use of Estimates
The preparation of financial statements
in conformity with U.S. GAAP requires management to make significant estimates and assumptions that affect the reported amounts
of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements, and the
reported amounts of expenses during the reporting periods. The Company makes significant estimates and assumptions in recording
the accruals for our clinical trial and research activities, establishing the useful lives of intangible assets and property and
equipment, and conducting impairment reviews of long-lived assets. The Company bases its estimates on historical experience and
various other assumptions that it believes to be reasonable under the circumstances. Although the Company monitors and regularly
assesses these estimates, actual results could differ significantly from these estimates. The Company records changes in estimates
in the period that we become aware of the change.
Cash and Cash Equivalents and Restricted Cash
The Company considers all highly liquid
investments purchased with a maturity of 90 days or less when acquired that are not restricted as to withdrawal, to be a Cash Equivalent
for the purpose of the Condensed Consolidated Balance Sheet and Statement of Cash Flows presentation. Cash Equivalents, which were
nominal in amount, consisted of money market accounts that are readily convertible to Cash. As of September 30, 2016 and December
31, 2015, the Company had classified $45,000 and $20,000, respectively, as Restricted Cash.
Impairment of Long-Lived Assets
The Company evaluates the potential impairment
of long-lived assets, and long-lived assets to be disposed of, and considers whether long-lived assets held for use have been impaired
whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. Company management
makes significant estimates and assumptions regarding future revenues, milestones, cost trends, productivity and market developments
in order to test for impairment. Company management reports those long-lived assets to be disposed of and assets held for sale
at the lower of carrying amount or fair value less cost to sell. Based on current facts, estimates and assumptions, Company management
believes that no assets are impaired at September 30, 2016. There is no assurance that Company management’s estimates and
assumptions will not change in future periods.
Research and Development Expenses
The Company expenses research and development
(“R&D”) expenditures as incurred. R&D expenses are comprised of costs incurred in performing R&D activities,
including salaries, benefits, facilities, research-related overhead, sponsored research costs, contracted services, license fees,
and other external costs. Because the Company believes that, under its current process for developing its products, the viability
of the products is essentially concurrent with the establishment of technological feasibility, no costs have been capitalized to
date.
EYEGATE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
2. Summary of Significant Accounting Policies (continued)
In-Process Research and Development
The Company records in-process R&D
projects acquired as asset acquisitions that have not reached technological feasibility and which have no alternative future use.
For in-process R&D projects acquired in business combinations, the Company capitalizes the in-process R&D project and periodically
evaluates this asset for impairment until the R&D process has been completed. Once the R&D process is complete, the Company
amortizes the R&D asset over its remaining useful life.
Accrued Clinical Expenses
As part of the Company’s process
of preparing the Condensed Consolidated Financial Statements, we estimate accrued clinical expenses. This process includes reviewing
open contracts and purchase orders, communicating with applicable personnel to identify services that have been performed on the
Company’s behalf, and estimating the level of service performed and the associated costs incurred for the service when we
have not yet been invoiced or otherwise notified of actual expenditures. The majority of the Company’s service providers
invoice monthly in arrears for services performed. The Company estimates its accrued clinical expenses as of each balance sheet
date in the Condensed Consolidated Financial Statements based on facts and circumstances we know at that time. The Company periodically
confirms the accuracy of these estimates with the service providers and makes adjustments if necessary.
Business Segment and Geographical Information
The Company identifies operating segments
as components of the enterprise for which separate discrete financial information is available for evaluation by the chief operating
decision maker, or decision making group, in making decisions on how to allocate resources and assess performance. The Company
views its operations and manages its business as fully integrated and operating in one business segment, and the Company operates
in one geographic segment.
Income Taxes
The Company will record a deferred income
tax asset and liability for the expected future income tax consequences of events that have been recognized in the Company’s
Condensed Consolidated Financial Statements and income tax returns. The Company will record a deferred income tax asset and liability
based on differences between the financial statement carrying, or “book”, amounts of assets and liabilities, and the
tax bases of the assets and liabilities using the enacted income tax regulations in effect in the years in which the differences
are expected to reverse. A valuation allowance against deferred income tax asset will be recorded if, based on the weight of available
evidence, it is more likely than not that some or all of the deferred income tax assets will not be realized. As of September 30,
2016, the Company had no deferred income tax asset or liability on its Condensed Consolidated Financial Statements.
The Company recognizes the impact of an
uncertain income tax position in the financial statements if we believe that the position is more likely than not to be sustained
by the relevant taxing authority. As of September 30, 2016, the Company had no unrecognized uncertain income tax positions.
Stock-Based Compensation
Stock-based compensation represents the
cost related to stock-based awards granted to employees and others. The Company measures stock-based compensation cost to employees
at grant date, based on the estimated fair value of the award, and recognizes the cost as expense on a straight-line basis (net
of estimated forfeitures) over the employee requisite service period. The Company estimates the fair value of stock options using
the Black-Scholes valuation model. The Company recognizes compensation expense for non-employee stock option grants at the fair
value of the goods or services received or the equity instruments issued, whichever is more reliably measurable. The Company recorded
compensation expense for non-employee awards with graded vesting using the accelerated expense attribution method. In applying
the Black-Sholes valuation model, prior to July 1, 2016 the Company estimated the volatility factor in the valuation calculation
by using the historic stock volatility of a group of peer public companies. Effective July 1, 2016, the Company determined that
the prior methodology for measuring the volatility of its Common Stock was no longer the best estimate of volatility, and the Company
will instead measure volatility using its own Common Stock volatility. The Company believes that the public market for its Common
Stock is the best measure to use as an input in the option pricing model. All future grants of stock options will use the Company’s
historic Common Stock volatility.
The Company will record a deferred income
tax asset for any stock-based award that results in a deduction on the Company’s income tax return, based on the amount of
compensation expense recognized multiplied by the Company’s statutory income tax rate in the jurisdiction in which it will
receive the deduction for compensation expense. Differences between the deferred income tax asset recognized for financial reporting
purposes and the actual income tax benefit realized on the Company’s income tax return will be recorded in additional paid-in
capital on the Condensed Consolidated Balance Sheets if the income tax benefit exceeds the deferred income tax asset, or in the
Condensed Consolidated Statements of Operations if the deferred income tax asset exceeds the income tax benefit and no additional
paid-in capital exists from previous awards. As of September 30, 2016, there are no such differences that are recorded in
the Company’s Condensed Consolidated Financial Statements.
EYEGATE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
2. Summary of Significant Accounting Policies (continued)
Related-Party Transactions
The Company has entered into certain related-party
transactions, making payments for services to one vendor, eight consultants and a public university, all of whom also are stockholders
of the Company. These transactions generally are ones that involve a shareholder or optionholder of the Company to whom we also
make payments during the quarter, typically as a consultant or a service provider. The amounts recorded or paid are not material
to the accompanying Condensed Consolidated Financial Statements.
Net Loss Per Share – Basic and Diluted
The computation of Net Loss per Common
Share – Basic and Diluted, is based on the weighted-average number of shares outstanding Common Stock.
In computing diluted loss per share, no
effect has been given to the shares of Common Stock issuable upon the conversion or exercise of the following dilutive securities
as the Company’s net loss would make the effect anti-dilutive.
|
|
September 30,
2016
(unaudited)
|
|
|
September 30,
2015
(unaudited)
|
|
Preferred Stock
|
|
|
545,000
|
|
|
|
-
|
|
Common Stock Warrants
|
|
|
2,852,736
|
|
|
|
1,807,203
|
|
Employee Stock Options
|
|
|
1,533,311
|
|
|
|
1,255,010
|
|
Total Shares of Common Stock Issuable
|
|
|
4,931,047
|
|
|
|
3,062,213
|
|
Fair Value of Financial Instruments
The carrying amounts of
Accounts Receivable and Accounts Payable approximate their fair values due to the short-term nature of these items. As of
September 30, 2016 and December 31, 2015, the fair value of the Company’s money market funds and contingent
consideration was $2,000,838 and $1,210,000, and $7,200,450 and $0, respectively.
At September 30, 2016 and December 31,
2015, the Company had no other assets or liabilities that are subject to fair value methodology and estimation in accordance with
FASB Accounting Standards Codification (“ASC”) Topic 820,
Fair Value Measurement
.
Revenue Recognition
The Company follows Accounting Standards
Update (“ASU”) 2009-13,
Multiple-Deliverable Revenue Arrangements,
and ASU 2010-17,
Revenue Recognition-Milestone
Method
in connection with its accounting for collaboration arrangements. The Company’s revenues are generated primarily
through arrangements which generally contain multiple elements, or deliverables, including licenses and R&D activities to be
performed by the Company on behalf of the licensor or grantor. Payments to EyeGate under these arrangements typically include one
or more of the following: (1) nonrefundable, upfront license fees, (2) funding of discovery research efforts on a full-time
equivalent basis, (3) reimbursement of research, development and intellectual property costs, (4) milestone payments,
and (5) royalties on future product sales.
When evaluating multiple element arrangements,
Company management considers whether the deliverables under the arrangement represent separate units of accounting. This evaluation
requires subjective determinations and requires Company management to make judgments about individual deliverables, including whether
such deliverable is separable from the other aspects of the contractual relationship. In determining a unit of accounting, Company
management evaluates certain criteria, including whether the deliverable has standalone value, based on the consideration of the
relevant facts and circumstances for each arrangement. The consideration received is allocated among each separate unit of accounting
using the relative selling price method, and the applicable revenue recognition criteria is applied to each separate unit.
EYEGATE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
2. Summary of Significant Accounting Policies (continued)
The Company generally recognizes revenue
attributable to a license on a straight-line basis over the Company’s contractual or estimated performance period, which
is typically the term of the Company’s R&D obligation. If Company management cannot reasonably estimate when the Company’s
performance obligation ends, then revenue is deferred until Company management can reasonably estimate when the performance obligation
ends. The periods over which revenue should be recognized are subject to estimates by management and may change over the course
of the R&D agreement. Such a change could have a material impact on the amount of revenue the Company records in future periods.
At the inception of arrangements that include milestone payments, Company management evaluates whether each milestone is substantive
and at risk to both parties on the basis of the contingent nature of the milestone. This evaluation includes an assessment of whether
(a) the consideration is commensurate with either (1) the entity’s performance to achieve the milestone, or (2) the enhancement
of the value of the delivered item(s) as a result of a specific outcome resulting from the entity’s performance to achieve
the milestone, (b) the consideration relates solely to past performance, and (c) the consideration is reasonable relative to all
of the deliverables and payment terms within the arrangement. Company management evaluates factors such as the scientific, regulatory,
commercial and other risks that must be overcome to achieve the respective milestone, the level of effort and investment required
to achieve the respective milestone and whether the milestone consideration is reasonable relative to all deliverables and payment
terms in the arrangement in making this assessment. The Company has concluded that the clinical and development milestones pursuant
to its R&D arrangements are substantive.
The Company aggregates its milestones into
four categories: (i) clinical and development milestones, (ii) the chemistry, manufacturing and controls (“CMC”) validation,
(iii) regulatory milestones, and (iv) commercial milestones. Clinical and development milestones are typically achieved when a
product candidate advances into a defined phase of clinical research or completes such phase or when a contractually specified
clinical trial enrollment target is attained. CMC validation milestones are typically achieved when the validation paperwork is
finalized. Regulatory milestones are typically achieved upon acceptance of the submission for marketing approval of a product candidate
or upon approval to market the product candidate by the FDA or other global regulatory authorities. For example, a milestone payment
may be due to the Company upon the FDA’s acceptance of an NDA. Commercial milestones are typically achieved when an approved
pharmaceutical product reaches certain defined levels of net sales by the licensee, such as when a product first achieves global
sales or annual sales of a specified amount.
Revenues from clinical and development,
CMC and regulatory milestone payments (if the milestones are deemed substantive and the milestone payments are nonrefundable) are
recognized upon successful accomplishment of the milestones. Revenue from commercial milestone payments are accounted for as royalties
and are recorded as Revenue upon achievement of the milestone, assuming all other revenue recognition criteria are met.
Payments or reimbursements resulting from
the Company’s R&D activities are recognized as the services are performed and are presented on a gross basis so long
as there is persuasive evidence of an arrangement, the fee is fixed or determinable, and collection of the related receivable is
reasonably assured. Amounts received prior to satisfying the above revenue recognition criteria are recorded as Deferred Revenue
on the Balance Sheet.
On July 9, 2015, the Company entered into
an exclusive, worldwide licensing agreement with a subsidiary of Valeant Pharmaceuticals International, Inc. (“Valeant”),
through which we granted to Valeant an exclusive, worldwide commercial and manufacturing right to the Company’s EGP-437 Product
in the field of anterior uveitis, as well as a right of last negotiation to license our EGP-437 Product for indications other than
anterior uveitis (the “Valeant Agreement”). There are four principal R&D milestones under the Valeant Agreement:
(i) the Phase 3 Clinical Trial, (ii) the Endothelial Cell Count Safety Trial (a trial to determine that treatment has not adversely
affected a patient’s corneal endothelial cell density), (iii) the CMC Validation, and (iv) the New Drug Application,
or “NDA”, filing with the FDA (collectively, the “Four Milestones”, and each individually, a “Milestone”).
Under the Valeant Agreement, Valeant paid to the Company an initial upfront payment, and we are eligible to receive certain other
payments, upon and subject to the achievement of certain specified development and commercial progress of the EGP-437 Product for
the treatment of anterior uveitis. The Company received the initial up-front payment in 2015, which it recorded as Deferred Revenue
on its Condensed Consolidated Balance Sheet, and later in 2015 began receiving certain additional payments, based on R&D progress,
to continue over several years. The Company receives payments both when it crosses certain thresholds on the way to each Milestone
(each, a “Progress Payment”), as well as once it achieves each Milestone. The Company is entitled to retain all of
these payments. The Company defers each Progress Payment, capitalizes each payment on its Condensed Consolidated Balance Sheet
as Deferred Revenue, and recognizes these payments in the aggregate as Revenue once it achieves the Milestone to which the Progress
Payment relates. The Company recognizes the initial upfront payment as Revenue ratably as it completes each of the Four Milestones,
the amount recognized being the total upfront payment times the percentage represented by the proportionate share of fair value
of each Milestone relative to the total fair value of all Milestones. Accordingly, the Deferred Revenue account on the Condensed
Consolidated Balance Sheet is reduced as Revenue is recognized in the Condensed Consolidated Statement of Operations. The Company
expects to begin recognizing Revenue with respect to the Valeant Agreement Progress Payments in 2017.
The Company receives government grant funds
from two sources: the U.S. Department of Defense (“DoD”) and the National Science Foundation (“NSF”). The
Company is paid by the DoD after it performs specified, agreed-upon research, and it records these grant funds as Revenue as it
performs the research. The Company is paid by the NSF before it performs specified, agreed-upon research. We record these NSF funds
on our Condensed Consolidated Balance Sheet as Deferred Revenue when invoiced, and recognize these amounts as Revenue ratably as
the research is performed, typically over a six-month period.
EYEGATE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
2. Summary of Significant Accounting Policies (continued)
The DoD and NSF have each committed to
grant funds to Jade for specified ocular therapeutic research activities (together, the “U.S. Government Grants”) to
be conducted through 2017, of which grants approximately $1.028 million remain to be funded. The Company recognizes grant funds
as Revenue when it performs the activities specified by the terms of the grant and is entitled to the funds.
Recent Accounting Pronouncements
In March 2016, the Financial Accounting
Standard Board (“FASB”) issued ASU No. 2016-09,
Compensation—Stock Compensation (Topic 718)
. The standard
is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact,
classification of the award as equity or as a liability, and classification on the statement of cash flows. ASU 2016-09 is effective
for fiscal years and interim periods beginning after December 15, 2016, including interim periods within those reporting period.
The Company is currently evaluating the effect that the new guidance will have on its financial statements and related disclosures.
In February 2016, the FASB issued ASU
No. 2016-02,
Leases
, which is effective for fiscal years, and interim periods within those years, beginning after December
15, 2018, with early adoption permitted. Under ASU 2016-02, lessees will be required to recognize for all leases at the commencement
date a lease liability, which is a lessee’s obligation to make lease payments arising from a lease measured on a discounted
basis, and the right-to-use assets, which are asset that represents the lessee’s right to use or control the use of a specified
asset for the lease term. The Company does not expect to early adopt this standard and currently has one lease (
see
Note
10) which will be in place at the effective date. The Company is currently evaluating the effect that the new guidance will have
on its financial statements and related disclosures.
In August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements—Going Concern (Subtopic 205-40)
. The new guidance addresses management’s responsibility
to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related
footnote disclosures. Management’s evaluation should be based on relevant conditions and events that are known and reasonably
knowable at the date that the financial statements are issued. The standard will be effective for the first interim period within
annual reporting periods beginning after December 15, 2016. The Company believes that the new guidance will not have a material
effect on its financial statements and related disclosures.
In May 2014, the FASB issued guidance
that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts
with customers and supersedes most recent current revenue recognition guidance, including industry-specific guidance. The
core principle of the revenue model is that an entity recognizes revenue 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. The guidance also specifies the accounting for certain incremental costs of obtaining a contract, and
costs to fulfill a contract with a customer. Entities have the option of applying either a full retrospective approach to all
periods presented, or a modified approach that reflects differences prior to the date of adoption as an adjustment to equity.
In April 2015, the FASB deferred the effective date of this guidance until January 1, 2018. The Company is not early
adopting this standard. The Company’s sole revenue activities currently relate to the Valeant Agreement and its U.S.
Government Grants, and based upon its initial review, the Company does not expect the new standard to have a financial effect
on its financial statements and related disclosures; however, the Company is currently evaluating in depth the effect that the new guidance will
have on its financial statements and related disclosures.
3. Property and Equipment
Property and equipment at September 30,
2016 (unaudited) and December 31, 2015 consists of the following:
|
|
Estimated Useful
Life (Years)
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Laboratory Equipment
|
|
|
7
|
|
|
$
|
-
|
|
|
$
|
14,661
|
|
Computer Equipment
|
|
|
3
|
|
|
|
-
|
|
|
|
182,914
|
|
Computer Software
|
|
|
3
|
|
|
|
-
|
|
|
|
46,038
|
|
Furniture, Fixtures and Office Equipment
|
|
|
5
|
|
|
|
-
|
|
|
|
24,480
|
|
Leased Equipment
|
|
|
3
|
|
|
|
42,576
|
|
|
|
-
|
|
|
|
|
|
|
|
|
42,576
|
|
|
|
268,093
|
|
Less: Accumulated Depreciation
|
|
|
|
|
|
|
-
|
|
|
|
268,093
|
|
|
|
|
|
|
|
$
|
42,576
|
|
|
$
|
-
|
|
Depreciation expense was $649 and $1,026
for the nine-month periods ended September 30, 2016 and 2015, respectively. Effective March 7, 2016 with the Jade Acquisition,
the Company added computer equipment of $649.
4. Accrued Expenses
Accrued expenses consist of the following:
|
|
September 30,
2016
(unaudited)
|
|
|
December 31,
2015
|
|
Payroll and Benefits
|
|
$
|
229,515
|
|
|
$
|
652,609
|
|
Clinical Trials
|
|
|
967,282
|
|
|
|
365,277
|
|
Consulting
|
|
|
7,000
|
|
|
|
18,500
|
|
Professional Fees
|
|
|
104,132
|
|
|
|
59,352
|
|
Capital Lease
|
|
|
31,576
|
|
|
|
-
|
|
Total Accrued Expenses
|
|
$
|
1,339,505
|
|
|
$
|
1,095,738
|
|
5. Debt
The Company has no indebtedness other than
trade and accounts payable and capital lease obligations in the ordinary course of business.
6. Capital Stock
On May 24, 2016, the Company entered into
an At The Market Offering Agreement (the “ATM Agreement”) with H.C. Wainwright & Co., LLC (the “Sales Agent”),
to create an at the market equity program under which the Company can from time to time offer and sell up to 1,319,289 shares of
its Common Stock through the Sales Agent. Effective June 26, 2016, the Company halted indefinitely all future offers and sales
of its Common Stock pursuant to the ATM Agreement. As of September 30, 2016, the Company had not sold any shares of Common Stock
pursuant to the ATM Agreement. On June 30, 2016, the Company closed on the sale of its equity securities in connection with a registered
direct offering, described below, and as a result, the Company was restricted from issuing any shares pursuant to the ATM Agreement
for a period of 90 days following the close of the ATM Agreement. This restriction lapsed on September 28, 2016.
On June 27, 2016, in connection with the
issuance of 2,776.5 shares of Series A Preferred Stock in the Company’s registered direct offering, the Company filed a Certificate
of Designation of Preferences, Rights and Limitations of Series A Preferred Stock with the Delaware Secretary of State. Each share
of Series A Preferred Stock has a stated value of $1,000 and is convertible into shares of the Company’s Common Stock at
any time at the holder’s option at an initial conversion price of $2.25. The holder, however, will be prohibited from converting
shares Preferred Stock into shares of Common Stock if, as a result of such conversion, the holder, together with its affiliates,
would own more than 4.99% of the shares of the Company’s shares of Common Stock then issued and outstanding, which may be
increased to 9.99% in certain circumstances. In the event of the Company’s liquidation, dissolution, or winding up, holders
of Series A Preferred Stock will receive a payment equal to $0.01 per share of Series A Preferred Stock before any proceeds are
distributed to the holders of shares of Common Stock. Shares of Series A Preferred Stock will generally have no voting rights,
except as required by law and except that the consent of holders of a majority of the outstanding Series A Preferred Stock will
be required to amend any provision of the Company’s certificate of incorporation that would have a materially adverse effect
on the rights of the holders of the Series A Preferred Stock. Shares of Series A Preferred Stock will not be entitled to receive
any dividends, unless and until specifically declared by the Company’s Board of Directors, and will rank:
EYEGATE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
6. Capital Stock (continued)
|
•
|
senior to all of the Company’s Common Stock to the extent of its liquidation preference of $0.01;
|
|
•
|
senior to any class or series of the Company’s capital stock hereafter created specifically ranking by its terms junior
to the Series A Preferred Stock to the extent of its liquidation preference of $0.01;
|
|
•
|
senior to all of the Company’s outstanding warrants; and
|
|
•
|
on parity to any class or series of the Company’s capital stock hereafter created specifically ranking by its terms on
parity with the Series A Preferred Stock.
|
On June 30, 2016, the Company
completed a registered direct offering of 441,000 shares of Common Stock and 2,776.5 shares of Series A Preferred stock
(convertible into 1,234,000 shares of Common Stock), along with a concurrent private placement of warrants. Concurrently with
the closing of the registered direct offering, the holder elected to convert 123.75 shares of Series A Preferred Stock into
55,000 shares of Common Stock. The total net proceeds to the Company from this offering, after deducting the placement agent
fees and offering expenses, were approximately $3.4 million. Additionally, the investor received, for each share of Common
Stock, or for each share of Common Stock issuable upon conversion of a share of Series A Preferred Stock purchased in the
registered direct offering, warrants to purchase one-half of a share of Common Stock at an exercise price of $3.50 per share,
aggregating warrants to purchase 837,500 shares of Common Stock. Upon conversion, any fractional shares will be paid in cash.
The warrants issued to the investor are initially exercisable six months following issuance, and terminate five years
following the initial exercise date (December 30, 2016). In addition, the Company issued to the Sales Agent warrants to
purchase 33,500 shares of Common Stock. The warrants and the shares of Common Stock underlying the warrants issued in this
offering have not been registered under the Securities Act, or applicable state securities laws. During the three months
ended September 30, 2016, the holder of the Series A Preferred Stock converted 1,427 shares of preferred stock into 634,000
shares of Common Stock.
At each of September 30, 2016 and December
31, 2015, the Company had 100,000,000 and 100,000,000 authorized shares of Common Stock, $0.01 par value, respectively, of which
9,585,883 and 7,657,287 shares, respectively, were outstanding, and 10,000,000 and 10,000,000 authorized shares of Preferred Stock,
$0.01 par value, respectively, of which 3,750 and 0 shares, respectively, were designated as Series A Preferred Stock, and 1,226.25
are issued and outstanding. At September 30, 2016, there were 545,000 shares of Common Stock underlying the outstanding shares
of Series A Preferred Stock
.
7. Warrants
At September 30, 2016, the following warrants
to purchase Common Stock were outstanding:
|
|
|
Number of
Awards
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Term in Years
|
|
|
Outstanding at December 31, 2015
|
|
|
|
1,983,673
|
|
|
$
|
9.18
|
|
|
|
5.32
|
|
|
Issued
|
|
|
|
871,000
|
1
|
|
|
3.50
|
2
|
|
|
4.74
|
|
|
Forfeited
|
|
|
|
(1,937
|
)
|
|
|
9.18
|
|
|
|
4.82
|
|
|
Outstanding at September 30, 2016
|
|
|
|
2,852,736
|
|
|
$
|
7.45
|
|
|
|
4.59
|
|
1
Consists of 1,742,000 warrants to
purchase 837,500 shares of Common Stock issued to the investor, and 33,500 shares issued to the Sales Agent, in connection
with the Company’s registered direct offering on June 30, 2016.
2
Warrant exercise price for a full share
of Common Stock. Each warrant issued is for the purchase of one-half of a share of Common Stock.
EYEGATE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
7. Warrants (continued)
All of the warrant agreements provide
for a cashless exercise, whereby the number of warrants to be issued will be reduced by the number of shares which could be
purchased from the proceeds of the exercise of the respective warrant. The outstanding warrants expire from 2016 through
2021.
8. Stockholder Notes Receivable
In 2005 and 2006, certain of the Company’s
Stockholders and officers issued various promissory notes totaling $195,000 for the sale of Common Stock. The notes were full recourse
and were collateralized by the shares of Common Stock sold. The amended notes bore compound interest at 0.93%, effective October
1, 2012. As of October 1, 2016, these notes had matured.
As of September 30, 2016 and December
31, 2015, principal of $58,824 and $58,824 and accrued interest of $89,616 and $88,995, respectively, was outstanding on the
remaining stockholder note.
9. Equity Incentive Plan
In 2005, the Company approved the 2005
Equity Incentive Plan (the “2005 Plan”). The 2005 Plan provides for the granting of options, restricted stock or other
stock-based awards to employees, officers, directors, consultants and advisors. During 2010, the maximum number of shares of Common
Stock that may be issued pursuant to the 2005 Plan was increased to 891,222 shares. The Board of Directors (the “Board”)
is responsible for administration of the 2005 Plan. The Company’s Board determines the term of each option, the option exercise
price, the number of shares for which each option is granted and the rate at which each option is exercisable. Incentive stock
options may be granted to any officer or employee at an exercise price per share of not less than the fair value per common share
on the date of the grant (not less than 110% of fair value in the case of holders of more than 10% of the Company’s voting
stock) and with a term not to exceed ten years from the date of the grant (five years for incentive stock options granted to holders
of more than 10% of the Company’s voting stock). Nonqualified stock options may be granted to any officer, employee, consultant
or director at an exercise price per share of not less than the par value per share.
The Company’s adopted the 2014 Equity
Incentive Plan (the “2014 Plan”), and the Employee Stock Purchase Plan the (the “ESPP”), and the Company’s
Stockholders approved the 2014 Plan and the ESPP Plan in February 2015. The maximum number of shares of Common Stock that may be
issued pursuant to the 2014 Plan and the ESPP is 1,034,888 and 70,567 shares, respectively.
In January 2016, the number of shares of
Common Stock issuable under the 2014 Plan automatically increased by 306,291 shares pursuant to the terms of the 2014 Plan, which
additional shares are included in the total of 1,034,888 shares issuable under the 2014 Plan.
The following is a summary of stock option
activity under the 2005 Plan, the 2014 Plan and the ESPP for the nine months ended September 30, 2016 and 2015:
|
|
Number of Options
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted-Average
Contractual Life
(In Years)
|
|
Nine Months Ended September 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at Beginning of Year
|
|
|
752,372
|
|
|
$
|
0.91
|
|
|
|
4.55
|
|
Granted
|
|
|
535,393
|
|
|
|
4.14
|
|
|
|
9.38
|
|
Exercised
|
|
|
(24,155
|
)
|
|
|
0.65
|
|
|
|
|
|
Expired
|
|
|
(8,600
|
)
|
|
|
0.65
|
|
|
|
|
|
Outstanding at End of Period
|
|
|
1,255,010
|
|
|
$
|
2.76
|
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at End of Period
|
|
|
870,810
|
|
|
$
|
2.89
|
|
|
|
5.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and Expected to Vest at End of Period
|
|
|
870,810
|
|
|
$
|
2.89
|
|
|
|
5.27
|
|
EYEGATE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
9. Equity Incentive Plan (continued)
|
|
Number of Options
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted-Average
Contractual Life
(In Years)
|
|
Nine Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at Beginning of Year
|
|
|
1,277,367
|
|
|
$
|
2.75
|
|
|
|
4.94
|
|
Granted
|
|
|
355,071
|
|
|
|
2.81
|
|
|
|
9.50
|
|
Exercised
|
|
|
(86,765
|
)
|
|
|
0.65
|
|
|
|
|
|
Forfeited
|
|
|
(12,362
|
)
|
|
|
3.93
|
|
|
|
|
|
Outstanding at End of Period
|
|
|
1,533,311
|
|
|
$
|
2.91
|
|
|
|
6.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at End of Period
|
|
|
907,445
|
|
|
$
|
2.84
|
|
|
|
4.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and Expected to Vest at End of Period
|
|
|
1,533,311
|
|
|
$
|
2.91
|
|
|
|
6.44
|
|
On February 24, 2015, the Board approved
the issuance of 350,000 stock options under the 2014 Plan to two executives and seven members of the Board. These options vest
25% on the grant date, 25% on the one-year anniversary of the grant date, and the remaining 50% in 24 monthly equal installments
thereafter.
During the year ended December 31, 2015,
and the six months ended June 30, 2016, the Company estimated the volatility of its Common Stock based on the average of published
volatilities contained in the most recent audited financial statements of other SEC reporting companies in industries similar to
that of the Company. Effective July 1, 2016, the Company determined that the prior methodology for measuring the volatility of
its Common Stock was no longer the best estimate of volatility and the Company will measure volatility using its Common Stock volatility.
The Company believes that the public market for its Common Stock is the best measure to use as an input in the option pricing model.
All future grants of stock options will use the Company’s historic Common Stock volatility.
In the first quarter of 2016, the Board
approved the grant of options to purchase 210,524 shares of its Common Stock. In the second quarter of 2016, the Board approved
the grant of options to purchase 41,732 shares of its Common Stock. In the third quarter of 2016, the Board approved the grant
of options to purchase 102,815 shares of Common Stock. All option grants were pursuant to the 2014 Plan. In general, options granted
under the 2014 Plan vest 33.33% on the one-year anniversary of the grant date, and the remainder ratably over the 24-month period
following the one-year anniversary.
The total stock-based compensation expense
for employees and non-employees is included in the accompanying Condensed Consolidated Statements of Operations and as follows:
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Research and Development
|
|
$
|
35,692
|
|
|
$
|
189,625
|
|
General and Administrative
|
|
|
354,777
|
|
|
|
955,231
|
|
|
|
$
|
390,469
|
|
|
$
|
1,144,856
|
|
The fair value of options granted for
the nine months ended September 30, 2016 and September 30, 2015 was approximately $720,000 and $1,597,000, respectively. As
of September 30, 2016 and September 30, 2015, there is approximately $1,209,000 and $900,000 of total unrecognized
compensation expense related to unvested stock-based compensation arrangements granted, which cost is expected to be
recognized over a weighted-average period of 2.35 and 3.13 years, respectively. The Aggregate intrinsic value of stock
options outstanding and exercisable at September 30, 2016 is approximately $597,000. Options to purchase 86,765 shares of
Common Stock options were exercised during 2016. The intrinsic value of the stock options for the nine months ended
September 30, 2016 and September 30, 2015, was approximately $207,000 and $127,000, respectively.
At September 30, 2016, there were options
to purchase 70,076 shares of Common Stock available for grant under the 2014 Plan.
EYEGATE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
10. Commitments and Contingencies
Leases
The Company is a party to a real property
operating lease for the rental of office space in Waltham, Massachusetts of up to 4,516 square feet, that is used for its corporate
headquarters. This lease terminates in December 2017. On July 6, 2016, the Company entered into a real property operating lease
for office and laboratory space of approximately 2,300 square feet in Salt Lake City, Utah. This lease terminates in June 2019.
See
Note 12, “Acquisitions”.
The Company is a party to two equipment
capital lease agreements, one for a three-year term and one for a two-year term, for the use of scientific instruments in its Salt
Lake City laboratory.
License Agreements
The Company is a party to four license
agreements. The Company is a licensee under one license agreement that grants to it the exclusive worldwide right to commercialize
the technology related to its proprietary iontophoresis drug delivery system. The Company is a licensor to Valeant Pharmaceuticals,
Incorporated (“Valeant”), granting to Valeant the exclusive worldwide rights to commercialize the EGP-437 Product to
treat anterior uveitis, as described below. The Company is a licensee under an agreement relating to its EyeGate OBG product technology,
granting to the Company the exclusive worldwide right to commercialize the locally-administered polymer-based product technologies
for ophthalmic treatments in humans. Finally, the Company is a party to a license agreement that grants to it the exclusive worldwide
right to commercialize certain Non-Anticoagulant Sulfated Hyaluronan Oligosaccharides (“NASH”) technology. Three of
the four license agreements require the Company to pay royalties to the licensor based on Revenue related to the licensed technology,
and the agreement with Valeant requires Valeant to pay royalties to the Company based on revenue related to the licensed technology.
On February 15, 1999, the Company entered
in to an exclusive worldwide license agreement with the University of Miami School of Medicine to license technology relating to
the Company’s EyeGate® II Delivery System. This agreement, which was amended in December 2005, requires the Company to
pay to the University of Miami an annual license fee of $12,500. This license also requires payments to the University of Miami
upon the Company’s achievement of certain milestones. Unless terminated pursuant to the license agreement, this license will
expire 12 years after the date of the first commercial sale of a product containing the licensed technology.
On September 12, 2013, Jade entered into
an agreement with BioTime, Inc. granting to it the exclusive worldwide right to commercialize cross-linked thiolated carboxymethyl
hyaluronic acid (“CMHA-S”) for ophthalmic treatments in humans. The agreement calls for a license issue fee paid
to BioTime of $50,000, and requires the Company (through its Jade subsidiary) to pay royalties to BioTime based on revenue relating
to any product incorporating the CMHA-S technology. The agreement expires when patent protection for the CMHA-S technology
lapses.
On July 9, 2015, the Company entered into
an exclusive worldwide licensing agreement with a subsidiary of Valeant through which EyeGate has granted Valeant exclusive, worldwide
commercial and manufacturing rights to its EGP-437 Product in the field of anterior uveitis, as well as a right of last negotiation
to license the EGP-437 Product for other indications. Under the agreement, Valeant paid the Company an upfront payment of $1.0
million. The Company is eligible to receive milestone payments totaling up to $32.5 million, upon and subject to the achievement
of certain specified developmental and commercial milestones. In addition, the Company is eligible to receive royalties based on
a specified percent of net sales of the Product throughout the world, subject to adjustment in certain circumstances.
On June 17, 2016, the Company entered into
an exclusive worldwide license agreement with the University of Utah Research Foundation to further the commercial development
of the NASH technology, together with alkylated HA. The agreement calls for payments due to the University of Utah, consisting
of a license grant fee of $15,000 due within 30 days of signing, and an annual licensing fee, initially $5,000, and escalating
ratably up to $20,000 in 2021.
11. Employee Benefit Plans
The Company has an employee benefit plan
for its United States-based employees under Section 401(k) of the Internal Revenue Code. The Plan allows all eligible employees
to make contributions up to a specified percentage of their compensation. Under the Plan, the Company may, but is not obligated
to, match a portion of the employee contribution up to a defined maximum. The Company made no matching contribution for the nine
months ended September 30, 2016 and 2015.
12. Acquisitions
Jade Therapeutics, Inc. Acquisition
Effective March 7, 2016, the
Company acquired all of the capital stock of Jade, a privately-held company developing locally-administered, polymer-based
products designed to treat ophthalmic indications. With the Jade Acquisition, Jade became a wholly-owned subsidiary of
EyeGate. Under the terms of the Jade Acquisition agreement, in consideration for 100% of the outstanding equity interests in
Jade, the Company repaid Jade liabilities of up to $300,000 and agreed to issue 765,728 shares of our Common Stock, 90% of
which were issued at the closing, and 10% of which will be held back for 18 months (the “Holdback Shares”) in
order to satisfy post-closing adjustments or indemnification obligations. Subsequent to the Jade Acquisition, the Company
satisfied an additional $232,457 of Jade obligations that arose prior to the acquisition. This amount exceeded the value of
the Holdback Shares, and as a result the obligation to release the Holdback Shares was extinguished and the Holdback Shares
were retired. The Jade Acquisition also includes a cash earn-out provision calling for an additional cash payment of
$2,164,451, contingent upon a Jade product receiving FDA marketing approval. The cash earn-out was recorded as contingent
consideration and valued at $1,210,000 at the acquisition date based on the probability of FDA approval of the three products
in development. The fair value of the shares the Company agreed to issue in the Jade Acquisition was approximately $2.910
million, based on the closing price per share of our Common Stock as reported by NASDAQ Capital Market on the closing date of
the acquisition, $3.80 per share. The adjusted value of the Holdback Shares was $205,207.
EYEGATE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
12. Acquisitions (continued)
The following table summarizes the final
purchase price allocation and the fair value of the net assets acquired and liabilities assumed in the Jade Acquisition at the
date of acquisition:
|
|
Jade
|
|
Current Assets
1
|
|
$
|
600,604
|
|
Intangible Asset (In-Process R&D)
|
|
|
4,212,314
|
|
Property, Plant and Equipment, Net
|
|
|
649
|
|
Accounts Payable and Other Liabilities
|
|
|
(393,801
|
)
|
Contingent Consideration (face value $2,164,451)
|
|
|
(1,210,000
|
)
|
Assumed Liabilities
|
|
|
(300,000
|
)
|
Total Purchase Price
|
|
$
|
2,909,766
|
|
|
1
|
Current Assets include cash, grants receivable and prepaid
expenses of $0.186 million, $0.046 million and $0.369 million, respectively, related to the Jade Acquisition.
|
During 2016, the Company finalized its purchase
price allocation during the measurement period relating to certain assets acquired and liabilities assumed in the Jade Acquisition.
As a result, for the nine months ended September 30, 2016, the Company adjusted the purchase price for Jade by increasing In-Process
R&D by $0.300 million and increasing Liabilities by $0.300 million. The purchase price allocation had no impact on the Company’s
Condensed Consolidated Statement of Operations.
Net Loss in the Condensed Consolidated
Statement of Operations for the nine months ended September 30, 2016 includes net losses of Jade from the date of acquisition
to September 30, 2016 of $0.384 million. The Company’s Intangible Asset, which consists solely of In-Process R&D,
will not be amortized until the underlying development program for the EyeGate OBG program is completed. Completion is
generally considered to have occurred once regulatory approval is granted, and related intangible assets generally are
accounted for as finite-lived intangible assets and amortized on a straight-line basis over their estimated useful life. The
Company expects to amortize the In-Process R&D over 3 years once it receives FDA approval to commercialize the EyeGate
OBG.
Pro Forma Disclosure for Jade Acquisition
The following table includes the unaudited
pro forma results for the nine months ended September 30, 2016 and 2015 of the combined companies as though the Jade Acquisition
had been completed as of the beginning of the period presented.
|
|
For the nine months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Revenues
|
|
$
|
791,813
|
|
|
$
|
425,792
|
|
Net Loss
|
|
|
(9,574,936
|
)
|
|
|
(5,791,778
|
)
|
Net Loss Attributable to Common Stockholders
|
|
|
(9,575,489
|
)
|
|
|
(5,689,416
|
)
|
The pro forma financial information is
presented for information purposes only. The unaudited pro forma financial information may not necessarily reflect our future results
of operations or what the results of operations would have been had we owned and operated Jade as of the beginning of the period
presented.
13.
Subsequent Events.
On October 31, 2016, the
Company withdrew its Registration Statement on Form S-3, originally filed on August 31, 2016.