NOTE C – Summary of Significant Accounting
Policies
[1]
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Basis of Presentation
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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 Matinas BioPharma Nanotechnologies, Inc. (formerly 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 nine
months ended September 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]
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Concentration of Credit Risk
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The Company’s financial
instruments that are exposed to concentrations of credit risk consist primarily of cash. 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 nine months ended September 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 and amortization. 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 an 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 September 30, 2016.
[7]
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Stock-Based Compensation
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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]
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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:
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•
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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.
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•
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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.
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•
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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.
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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 available for common shareholders 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, preferred stock and warrants would have an antidilutive effect. The following schedule
details the number of shares issuable upon the exercise of stock options, warrants and conversion of preferred stock, which have
been excluded from the diluted loss per share calculation for the nine months ended September 30, 2016 and 2015:
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2016
|
|
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2015
|
|
|
|
|
|
|
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Stock options
|
|
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8,320,694
|
|
|
|
7,078,694
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|
|
|
|
|
|
|
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Preferred Stock
|
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16,000,000
|
|
|
|
—
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|
|
|
|
|
|
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|
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Warrants
|
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|
40,517,500
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|
|
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39,250,000
|
|
|
|
|
|
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|
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Total
|
|
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64,838,194
|
|
|
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46,328,694
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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
August
2016,
the
Financial
Accounting Standards Board (FASB)
issued Accounting Standards
Update (
ASU)
2016-15
,
Statement
of
Cash
Flows
(
Topic
230): Classification of Certain Cash
Receipts
and Cash
Payments
("ASU 2016-15")
,
which
amended the existing accounting
standards
for
the
statement of cash
flows. The amendments provide
guidance
on eight classification
issues related
to
the
s
tatement of cash flows.
The
Company
is required
to
adopt
the
guidance in
the first quarter of fiscal
2018
and
early adoption is permitted.
The
amendments
should
be applied retrospectively to all periods presented.
For
issues
that are impracticable to apply retrospectively
,
the amendments may be applied prospectively as of the
earliest
date practicable
.
The
Company
is currently in the process of assessing the impact
of this
standard
but does
not
believe the adoption will have a material impact on the
Company's
consolidated
statements
of
cash flows.
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 September 30, 2016 and December 31, 2015 are classified as noncurrent
in our consolidated balance sheet, while prior periods remain as previously reported. As of September 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]
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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 nine months ended September 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 September 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 September
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 September 30, 2016.
[15]
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Beneficial Conversion Feature of Convertible Preferred Stock
|
The Company accounts for the
beneficial conversion feature on its convertible preferred stock in accordance with ASC 470-20,
Debt with Conversion and Other
Options
. The Beneficial Conversion Feature (“BCF”) of convertible preferred stock is normally characterized as the
convertible portion or feature that provides a rate of conversion that is below market value or in-the-money when issued. We record
a BCF related to the issuance of convertible preferred stock when issued. Beneficial conversion features that are contingent upon
the occurrence of a future event are recorded when the contingency is resolved.
To determine the effective conversion
price, we first allocate the proceeds received to the convertible preferred stock and then use those allocated proceeds to determine
the effective conversion price. If the convertible instrument is issued in a basket transaction (i.e., issued along with other
freestanding financial instruments), the proceeds should first be allocated to the various instruments in the basket. Any amounts
paid to the investor when the transaction is consummated (e.g., origination fees, due diligence costs) represent a reduction in
the proceeds received by the issuer. The intrinsic value of the conversion option should be measured using the effective conversion
price for the convertible preferred stock on the proceeds allocated to that instrument. The effective conversion price represents
proceeds allocable to the convertible preferred stock divided by the number of shares into which it is convertible. The effective
conversion price is then compared to the per share fair value of the underlying shares on the commitment date.
The accounting for a BCF requires that the BCF be recognized by allocating the intrinsic value of the
conversion option to additional paid-in capital, resulting in a discount on the convertible preferred stock. This discount should
be accreted from the date on which the BCF is first recognized through the earliest conversion date for instruments that do not
have a stated redemption date. The intrinsic value of the BCF is recognized as a deemed dividend on convertible preferred stock
over a period specified in the guidance.
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. There were no changes to the recorded amounts in 2016.
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 $0.46 as of January 29, 2015 the closing date of the merger.
|
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$
|
2,119,689
|
|
|
|
|
|
|
Fair value of potential Matinas common stock as contingent consideration that will be issued upon achieving certain future clinical milestone-(a)
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422,609
|
|
|
|
|
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Fair value of potential Matinas common stock as contingent consideration that will be issued upon achieving certain future regulatory milestone-(a)
|
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|
330,737
|
|
|
|
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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.
Deferred income taxes arising from basis differences of tax aspects of in-process research and development
from the transaction amounted to $ 1.2 million as indicated on the Consolidated Balance Sheet.
NOTE E – 2016 Private Placement Funding
In July, August
and September 2016, we conducted closings for a private placement, or the “2016 Private Placement,” pursuant to which we sold
to accredited investors an aggregate of 1,600,000 Series A Preferred Shares, which are convertible into 16,000,000 shares
of common stock based on the current conversion price, at a purchase price of $5.00 per share, for aggregate gross proceeds
to the Company of $8.0 million (see note G for additional information about Preferred Stock)
We entered into a
Placement Agency Agreement with Aegis Capital Corp. pursuant to which Aegis acted as our exclusive placement agent for the
2016 Private Placement. Immediately prior to the 2016 Private Placement, 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 our board of directors. Pursuant to the terms of the Placement Agency Agreement, in
connection with the 2016 Private Placement, we paid the Placement Agent an aggregate cash fee of $800,000 and a
non-accountable expense allowance of $240,000 and have issued to the Placement Agent warrants to purchase 1,600,000 shares of
common stock at $0.50 per share. These warrants are equity classified and accounted for as preferred stock issuance cost
within equity. 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 Offering,
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
$7,000,000.
NOTE F – Equipment
Fixed assets, summarized by major
category, consist of the following ($ in thousands) for the nine months ended September 30, 2016 and year ended December 31, 2015:
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September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Lab equipment
|
|
$
|
438
|
|
|
|
327
|
|
Furniture and fixtures
|
|
|
20
|
|
|
|
20
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|
Equipment under capital lease
|
|
|
31
|
|
|
|
111
|
|
Leasehold improvements
|
|
|
7
|
|
|
|
7
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Total
|
|
|
496
|
|
|
|
465
|
|
Less accumulated depreciation and amortization
|
|
|
127
|
|
|
|
87
|
|
Equipment, net
|
|
$
|
369
|
|
|
$
|
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 nine months ended September 30, 2016 the Company recognized interest expense of $1,353
associated with the lease payments.
NOTE G – Stock Holders Equity
Preferred Stock
In accordance with the Certificate of Incorporation,
there are 10,000,000 authorized preferred shares at a par value of $ 0.001
.
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.
Conversion:
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 fundamental transactions). Based on the current conversion price, the Series
A Preferred Stock is convertible into 16,000,000 shares of common stock. A fundamental transaction means:
(i)
our merger or consolidation with or into another entity, (ii) any
sale
of all or
substantially
all
of our assets in one transaction or
a series
of related
transactions, or
(iii)
any reclassification of our Common
Stock or any compulsory share exchange by which Common Stock is effectively converted into or exchanged for other
securities,
cash or property.
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 July 29, 2019,
which is 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.
Beneficial Conversion Feature- Series A Preferred
Stock (deemed dividend):
Each share of Series A Preferred Stock is convertible
into shares of common stock, at any time at the option of the holder at a conversion price of $0.50 per share. On July 29, 2016,
August 16, 2016, and September 12, 2016, the date of issuances of the Series A, the publicly traded common stock prices were $0.67,
$0.70, and $1.00 per share, respectively.
Based on the guidance in
ASC 470-20-20, the Company determined that a beneficial conversion feature exists, as the effective conversion price for the
Series A preferred shares at issuance was less than the fair value of the common stock into which the preferred shares are
convertible. A beneficial conversion feature based on the intrinsic value of the date of issuances for the Series A was
approximately $4.4 million. The beneficial conversion amount of approximately $4.4 million was then accreted back to the
preferred stock as a deemed dividend and charged to accumulate deficit as the conversion rights were 100% effective at the
time of issuance.
Liquidity Value and Dividends:
Pursuant to the Certificate
of Designations, the Series A Preferred Shares 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. Dividends which have been earned but not declared
through September 30, 2016 are approximately $50 thousand. The Series A Preferred Shares 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 are 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.
Royalty:
The Series A Preferred
Shares include the right, as a group, to receive: (i) 4.5% 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) 7.5% 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 is 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
allocated 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 July 29, 2017, July 29, 2018, and July 29,
2019, which are 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; after July 29, 2019 the royalty payment rights may be transferred separately from the Series A Preferred
Stock subject to available exemption from registration under applicable securities laws. The Company believes that such
rights are not separable free standing instruments requiring bifurcation at the date of transaction. The Company may
recognize a deemed dividend for the estimated fair value of the vested portion of the royalty rights in future periods. As of
September 30, 2016, no accrual has been recorded for royalty payments as it is not probable at this time that any amount will
be paid.
Classification:
These Series A Preferred Shares
are classified within permanent equity on the Company’s condensed consolidated balance sheet as they do not meet the criteria
that would require presentation outside of permanent equity under ASC 480
Distinguishing Liabilities from Equity
.
Warrants
As of September 30, 2016, the
Company had outstanding warrants to purchase an aggregate of 40,517,500 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. 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.
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. The
Placement Agent warrants may be exercised on a “cashless” basis. 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 September 30, 2016 is presented below, all of which are fully vested.
|
|
Shares
|
|
Total Warrants Issued through December 31, 2015
|
|
|
39,250,000
|
|
2016 Warrant activity:
|
|
|
|
|
September 12, 2016, Placement Agent Warrants, 1,600,000 issued, terms 5 years, exercisable at $0.50
|
|
|
1,600,000
|
|
September, 2016, exercised Investor Warrants at $0.75
|
|
|
(320,000
|
)
|
September, 2016, exercised Placement Agent Warrants at $0.50 (cashless exercise)
|
|
|
(6,250
|
)
|
September, 2016, exercised Placement Agent Warrants at $0.75 (cashless exercise)
|
|
|
(6,250
|
)
|
|
|
|
|
|
Total Warrants Outstanding at September 30, 2016
|
|
40,517,500
|
|
NOTE H – Stock Based Compensation
In August 2013, the Company adopted
the 2013 Equity Compensation Plan (the “Plan”), which provides for the granting of incentive stock options, nonqualified
stock options, restricted stock units, performance units, and stock purchase rights. Options under the Plan may be granted at prices
not less than 100% of the fair value of the shares on the date of grant as determined by the Board Committee. The Board Committee
determines the period over which the options become exercisable subject to certain restrictions as defined in the Plan, with the
current outstanding options generally vesting over three years. The term of the options is no longer than ten years. The Company
currently has 11,828,912 shares of common stock for issuance under the plan.
With the approval of the Board
of Directors and majority Shareholders, effective May 8, 2014, the Plan was amended and restated. The amendment provides for an
automatic increase in the number of shares of common stock available for issuance under the Plan each January (with Board approval),
commencing January 1, 2015 in an amount up to four percent (4%) of the total number of shares of common stock outstanding on the
preceding December 31st.
The Company recognized stock-based
compensation expense (options, and restricted share grants) in its consolidated statements of operations as follows ($ in thousands):
|
|
Quarter Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development
|
|
$
|
212
|
|
|
$
|
122
|
|
|
$
|
483
|
|
|
$
|
410
|
|
General and Administrative
|
|
|
268
|
|
|
|
372
|
|
|
|
791
|
|
|
|
818
|
|
Total
|
|
$
|
480
|
|
|
$
|
494
|
|
|
$
|
1,274
|
|
|
$
|
1,228
|
|
The following table contains
information about the Company’s stock plan at September 30, 2016:
|
|
Awards
|
|
|
|
|
|
|
|
|
|
Reserved
|
|
|
|
|
|
Awards
|
|
|
|
for
|
|
|
Awards
|
|
|
Available
|
|
|
|
Issuance
|
|
|
Issued
|
|
|
for Grant
|
|
2013 Equity Compensation Plan
|
|
|
11,828,912
|
|
|
|
9,305,393
|
*
|
|
|
2,523,519
|
|
* 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 September 30, 2016 (number
of options in thousands):
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
Outstanding at December 31, 2015
|
|
|
6,904
|
|
|
$
|
0.93
|
|
Granted
|
|
|
1,581
|
|
|
|
0.41
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(100
|
)
|
|
|
0.43
|
|
Cancelled
|
|
|
(64
|
)
|
|
|
0.94
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding at September 30, 2016
|
|
|
8,321
|
|
|
$
|
0.85
|
|
As of September 30, 2016, the
number of vested shares underlying outstanding options was 6,079,258 at a weighted average exercise price of $1.96. The aggregate
intrinsic value of in the-money options outstanding as of September 30, 2016 was $6.3 million. The aggregate intrinsic value is
calculated as the difference between the Company’s closing stock price of $1.60 on September 30, 2016, and the exercise price
of options, multiplied by the number of options. As of September 30, 2016, there was $2.2 million of total unrecognized share-based
compensation. Such costs are expected to be recognized over a weighted average period of approximately 0.8 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 Nine months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Volatility
|
|
|
44.72 % - 89.15%
|
|
|
|
77.1% - 77.3
|
%
|
Risk-free interest rate
|
|
|
1.14 % - 1.42%
|
|
|
|
1.56% - 1.72
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected life
|
|
|
6.0 years
|
|
|
|
4.04 -
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 September 30, 2016:
|
|
Lease
|
|
|
|
Commitments
|
|
2016
|
|
$
|
46,488
|
|
2017
|
|
|
160,012
|
|
2018
|
|
|
162,948
|
|
2019
|
|
|
165,896
|
|
2020
|
|
|
168,220
|
|
2021
|
|
|
84,544
|
|
Total future minimum lease payments
|
|
$
|
788,108
|
|
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 reduced in June 2017.
Through our acquisition
of Matinas BioPharma Nanotechnologies, Inc. (formerly known as Aquarius Biotechnologies Inc.), 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.
In July 2016, the Company entered
into a Finance Agreement in the amount of $262,324, to fund the premium payments for the Director and Officer Liability policy.
The term of this agreement is 10 months, ending May 30, 2017. Monthly payments including interest at 3.25% are $23,962.
As discussed in Note G,
the Series A Preferred Stock holders have “Royalty Payment Rights” with regards to MAT2203 and/or MAT2501.
Pursuant to the terms of the Certificate of Designations for our outstanding Series A Preferred Stock, we may be required to
pay, subject to certain vesting requirements, in the aggregate, a royalty equal to (i) 4.5% of Net Sales (as defined in the
Certificate of Designation) from MAT 2203 and/or MAT 2501, subject in all cases to a cap of $25 million per calendar year,
and (ii) 7.5% of Licensing Proceeds (as defined in the Certificate of Designations) from MAT2203 and/or MAT2501, subject in
all cases to a cap of $10 million per calendar year. Our obligation to pay such royalty will expire when the patents covering
the applicable product expire, which is currently expected to be in 2033.
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.