The accompanying notes are an integral part
of these condensed consolidated financial statements.
The accompanying notes are an integral part
of these condensed consolidated financial statements
Notes to Unaudited Condensed Consolidated
Financial Statements
(Tabular dollars and shares in thousands,
except per share data)
NOTE A – Nature of Business
Matinas BioPharma Holdings Inc.
(“Holdings”) is a Delaware corporation formed in 2013. Holdings is the parent company of Matinas BioPharma, Inc. (“BioPharma”),
and Matinas BioPharma Nanotechnologies, Inc. (“Nanotechnologies,” formerly known as Aquarius Biotechnologies, Inc.),
its operating subsidiaries (“Nanotechnologies”, and together with “Holdings” and “BioPharma”,
“the Company” or “we” or “our” or “us”). The Company is a development stage biopharmaceutical
company with a focus on identifying and developing novel pharmaceutical products.
On January 29, 2015, we completed
the acquisition of Nanotechnologies (the “2015 Merger”), a New Jersey-based, early-stage pharmaceutical company focused
on the development of differentiated and orally delivered therapeutics based on a proprietary, lipid-based, drug delivery platform
called “cochleate delivery technology.” Following the 2015 Merger, we are a clinical-stage biopharmaceutical company
focused on identifying and developing safe and effective broad spectrum antifungal and anti-bacterial therapeutics for the treatment
of serious and life-threatening infections, using our innovative lipid-crystal nano-encapsulation drug delivery platform.
On September, 13, 2016, the Company
completed the closing of an $8.0 million private placement equity financing. The Company sold to accredited investors an aggregate
of 1,600,000 Series A Preferred Shares at a purchase price of $5.00 per share resulting in net proceeds of approximately $6.9 million.
Each Series A Preferred Share is convertible into ten shares of common stock based on the current conversion price.
On January 13, 2017, the
Company completed its tender offer to amend and exercise certain categories of existing warrants. Pursuant to the Offer to
Amend and Exercise, an aggregate of 30,966,350 warrants were tendered by their holders and were amended and exercised in
connection herewith . The gross cash proceeds from such exercises were approximately $13.5 million and the net cash proceeds
after deducting warrant solicitation agent fees and other estimated offering expenses were approximately $12.7 million.
|
[2]
|
Proprietary Products and
Technology Portfolios
|
We leveraged our platform cochleate
delivery technology to develop two clinical-stage products that we believe have the potential to become best-in-class drugs. Our
lead product candidate MAT2203 is an orally-administered cochleate formulation of a broad spectrum anti-fungal drug called amphotericin
B. We are initially developing MAT2203 for the treatment of serious fungal infections as well as the prevention of invasive fungal
infections (IFIs) due to immunosuppressive therapy. We are currently conducting two Phase 2 clinical trials involving MAT2203 and
expect to report interim results from our open label NIH run Phase 2a clinical trial and topline results from our ongoing Phase
2 study of MAT2203 in Vulvovaginal Candidiasis in the first half of 2017.
Our second clinical stage product
candidate is MAT2501, an orally administered, encochleated formulation of the broad spectrum aminoglycoside antibiotic amikacin
which may be used to treat different types of multidrug-resistant bacteria, including non-tuberculous mycobacterium infections
(NTM), as well as various multidrug-resistant gram negative and intracellular bacterial infections. We recently completed and
announced topline results from a Phase 1 single escalating dose clinical trial of MAT2501 in healthy volunteers in which no serious
adverse events were reported and where oral administration of MAT2501 at all tested doses yielded blood levels that were well
below the safety levels recommended for injected amikacin, supporting further development of MAT2501 for the treatment of NTM
infections.
NOTE B – Plan of Operations
The accompanying financial statements
have been prepared in conformity with generally accepted accounting principles.
The Company has experienced net
losses and negative cash flows from operations each period since its inception. Through March 31, 2017, the Company had an accumulated
deficit of approximately $39.7 million. The Company’s operations have been financed primarily through the sale of equity
securities. The Company’s net loss for the quarters ended March 31, 2017 and 2016 was approximately $4.5 million and $2.2
million, respectively.
The Company has been engaged
in developing a pipeline of product candidates since 2011. To date, the Company has not obtained regulatory approval for any of
its product candidates nor generated any revenue from products and the Company expects to incur significant expenses to complete
development of its product candidates. The Company may never be able to obtain regulatory approval for the marketing of any of
its product candidates in any indication in the United States or internationally and there can be no assurance that the Company
will generate revenues or ever achieve profitability.
Assuming the Company
obtains FDA approval for one or more of its product candidates, which the Company does not expect to receive until 2021 at
the earliest, the Company expects that its expenses will continue to increase once the Company reaches commercial launch. The
Company also expects that its research and development expenses will continue to increase as it moves forward with additional
clinical studies for its current product candidates and developing additional product candidates. As a result, the Company
expects to continue to incur substantial losses for the foreseeable future, and that these losses will be increasing.
The Company will need to secure
additional capital in order to fund its long term continuing operations. The Company can provide no assurances
that such additional financing will be available to the Company on acceptable terms, or at all. On January 13, 2017, the Company
completed its warrant tender offer, with gross cash proceeds of $ 13.5 million and net proceeds estimated at $ 12.7 million (see
Footnote D for additional details). The Company anticipates that current cash on hand at March 31, 2017 would be sufficient to
meet its operating obligations into June 2018.
NOTE C – Summary of Significant Accounting
Policies
|
[1]
|
Basis of Presentation
|
The accompanying unaudited condensed
consolidated financial statements include the consolidated accounts of Holdings and its wholly owned subsidiaries, BioPharma,
and Nanotechnologies, 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 subsidiaries. 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, 2016, which are included in the
Form 10-K filed with the SEC on March 31, 2017. 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 three
months ended March 31, 2017 are not necessarily indicative of the results that may be expected for any future interim periods or
for the year ending December 31, 2017. 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, 2016.
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.
|
[3]
|
Cash and Cash Equivalents
|
The Company considers all highly
liquid instruments purchased with original maturity of three months or less to be cash and cash equivalents to the extent the funds
are not being held for investment purposes.
|
[4]
|
Concentration of Credit
Risk
|
The Company’s financial
instruments that are exposed to concentrations of credit risk consist primarily of cash. Cash balances are maintained principally
at two major U.S. financial institutions and are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to
regulatory limits. At all times throughout the three months ended March 31, 2017, 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 March 31, 2017.
|
[7]
|
Stock-Based Compensation
|
The Company accounts for stock-based
compensation to employees in conformity with the provisions of ASC Topic 718, “
Stock Based Compensation
”.
Stock-based compensation to employees consist of stock options grants and restricted shares that are recognized in the statement
of operations based on their fair values at the date of grant.
The Company accounts for equity
instruments issued to non-employees in accordance with the provisions of ASC Topic 505, subtopic 50, “
Equity-Based
Payments to Non-Employees
” based upon the fair-value of the underlying instrument. The equity instruments, consisting
of stock options granted to consultants, are valued using the Black-Scholes valuation model. The measurement of stock-based compensation
is subject to periodic adjustments as the underlying equity instruments vest and is recognized as an expense over the period which
services are received.
The Company calculates the fair
value of option grants utilizing the Black-Scholes pricing model, and estimates the fair value of the restricted stock based upon
the estimated fair value of the common stock. The amount of stock-based compensation recognized during a period is based on the
value of the portion of the awards that are ultimately expected to vest.
The resulting stock-based compensation
expense for both employee and non-employee awards is generally recognized on a straight-line basis over the requisite service period
of the award.
|
[8]
|
Fair Value Measurements
|
ASC 820 “Fair Value Measurements”
defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements.
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. ASC 820 establishes a fair value hierarchy that distinguishes between (1)
market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an
entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances
(unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level
3). The three levels of the fair value hierarchy under ASC 820 are described below:
|
•
|
Level 1 - Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
|
|
•
|
Level 2 - Directly or indirectly observable inputs as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.
|
|
•
|
Level 3 - Unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.
|
In determining fair value, the
Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to
the extent possible as well as considers counterparty credit risk in its assessment of fair value.
The carrying amounts of cash,
restricted cash, accounts payable and accrued expenses approximate fair value due to the short-term nature of these instruments.
|
[9]
|
Basic Net Loss per Common
Share
|
Basic earnings per common share
is computed as net loss 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 three months ended March 31, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
10,326
|
|
|
|
8,281
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
15,900
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
6,373
|
|
|
|
39,250
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
32,599
|
|
|
|
47,531
|
|
The Company recognizes revenue
from grants and contracts when the specified performance milestones are achieved. These milestones are analyzed and approved on a
monthly basis.
|
[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 January 2017, the Financial
Accounting Standards Board (FASB) issued Accounting Standards Update (“ASU”) 2017-04
“Intangibles –
Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”
The Board is issuing the amendments in
this update to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Instead
an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.
An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s
fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. We are
required to apply the amendments in this for its annual or any interim goodwill impairment tests in fiscal years beginning after
December 15, 2019. We have evaluated this standard and believe it will not have a material impact on our consolidated financial
position or results of operation.
In August 2016, the (FASB) issued
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 statement of cash flows. The Company is required to adopt the guidance in the first quarter of 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 does not
believe the adoption will have a material impact on the Company's consolidated statements of cash flows.
In March and April 2016, the
FASB issued ASU No. 2016-08 “
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Consideration (Reporting
Revenue Gross versus Net)”
and ASU No. 2016-10 “
Revenue from Contracts with Customers (Topic 606):
Identifying Performance Obligations and Licensing”,
respectively
,
which clarifies the guidance on reporting
revenue as a principal versus agent, identifying performance obligations and accounting for intellectual property licenses. In
addition, in May 2016, the FASB issued ASU No. 2016-12 “
Revenue from Contracts with Customers (Topic 606):
Narrow-Scope
Improvements and Practical Expedients”,
which amends certain narrow aspects of Topic 606. We will adopt this standard
once we begin to generate revenue from operations. We do not believe these standards will have a material impact on our consolidated
financial position or results of operation.
In May 2014, the FASB
issued ASU No. 2014-09,
Revenue from Contracts with Customers”
(“ASU 2014-09”). ASU 2014-09
represents a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration to which the Partnership expects to
be entitled to receive in exchange for those goods or services. This ASU sets forth a new five-step revenue recognition model
which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific
pieces of revenue recognition guidance that have historically existed. In August 2015, the FASB issued ASU
No. 2015-14, “
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective
Date”,
which defers the effective date of ASU 2014-09 by one year, but permits companies to adopt one year
earlier if they choose (i.e., the original effective date). As such, this ASU is effective for annual reporting periods
beginning after December 15, 2017 for public companies and 2018 for private companies. Companies may use either a full
retrospective or a modified retrospective approach to adopt this ASU. We will adopt this standard once we begin to generate
revenue from operations and successful adoption of ASU 2014-09 is contingent upon the commencement of the marketing of our
products.
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. Pursuant to the adoption requirements for forfeitures,
we now account for forfeitures as they occur rather than using an estimated forfeiture rate. The adoption of this standard effective
January 1, 2017 did not have a material impact on our 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 2019 and mandates a modified retrospective
transition method. We do not intend to early adopt and are currently assessing the impact of this update, but preliminarily believe
that its adoption will not have a material impact on our consolidated financial statements.
|
[13]
|
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 March 31, 2017, 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 March
31, 2017.
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 March 31, 2017.
|
[14]
|
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 – 2017 Warrant Tender Offer
On January 13, 2017, the Company
completed its tender offer to amend and exercise certain categories of existing warrants.
Pursuant to the Offer
to Amend and Exercise, an aggregate of 30,966,350 Warrants were tendered by their holders and were amended and exercised
in connection therewith for an aggregate exercise price of approximately $15.5 million, including the following:
3,750,000 Formation Warrants; 754,000 Merger Warrants; 7,243,750 2013 Investor Warrants; 500,000 Private Placement Warrants;
14,750,831 2015 Investor Warrants; 722,925 $2.00 Placement Agent (PA) Warrants (of which 721,987 were exercised on a cashless
basis); 1,426,687 $1.00 PA Warrants (of which 1,424,812 were exercised on a cashless basis); and 1,818,157 $0.75 PA Warrants
(of which 1,774,017 were exercised on a cashless basis). The gross cash proceeds from such exercises were approximately
$13.5 million and the net cash proceeds after deducting warrant solicitation agent fees and other estimated offering expenses
were approximately $12.7 million. Prior to the Offer to Amend and Exercise, the Company had 58,159,495 shares of common
stock outstanding and warrants to purchase an aggregate of 40,255,234 shares of common stock. Immediately following the Offer
to Amend and Exercise (after the effect of certain cash and cashless exercises), the Company issued in exchange for the warrants
29,666,782 common shares. This resulted in 87,826,277 shares of common stock outstanding and warrants to purchase an
aggregate of 9,288,884 shares of common stock. As of March 31, 2017 the Company has 90,985,192 shares of common stock
outstanding and warrants to purchase an aggregate of 6,373,283 shares of common stock.
The Company considers the
warrant amendment to be of an equity nature as the amendment allowed the warrant holder to exercise a warrant and receive a
common share which represents an equity for equity exchange. Therefore, the change in the fair value before and after the
modification of approximately $16.7 million will be treated as a change in additional paid in capital (APIC) as an inducement
charge. The cash received upon exercise in excess of par is also accounted through APIC.
The Company retained Aegis Capital
Corp. (“Aegis Capital”) to act as its Warrant Agent for the Offer to Amend and Exercise pursuant to a Warrant Agent
Agreement. Aegis Capital received a fee equal to 5% of the cash exercise prices paid by holders of the warrants (excluding the
placement agent warrants) who participated in the Offer to Amend and Exercise. In addition, the Company agreed to reimburse Aegis
Capital for its reasonable out-of-pocket expenses and attorney’s fees, including a $35,000 non- accountable expense allowance.
NOTE E – Equipment
Fixed assets, summarized by
major category, consist of the following ($ in thousands) for the three months ended March 31, 2017 and year ended December 31,
2016:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Lab equipment
|
|
$
|
438
|
|
|
|
438
|
|
Furniture and fixtures
|
|
|
20
|
|
|
|
20
|
|
Equipment under capital lease
|
|
|
31
|
|
|
|
31
|
|
Leasehold improvements
|
|
|
7
|
|
|
|
7
|
|
Total
|
|
|
496
|
|
|
|
496
|
|
Less: accumulated depreciation and amortization
|
|
|
152
|
|
|
|
140
|
|
Equipment, net
|
|
$
|
344
|
|
|
$
|
356
|
|
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 three months ended March 31, 2017 the Company recognized interest expense
of $504 associated with the lease payments.
NOTE F – 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 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. As of March 31,
2017, the Company had 1,590,000 shares of Series A Preferred Stock outstanding.
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, each share
of the Series A Preferred Stock is convertible into ten 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 accumulated deficit as the conversion rights were 100% effective at the
time of issuance in the third quarter of 2016.
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 March
31, 2017 are approximately $320,000. 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 March
31, 2017, 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 March 31, 2017, the Company
had outstanding warrants to purchase an aggregate of 6,373,283 shares of common stock at exercise prices ranging from $0.50 to
$2.00 per share.
The Warrants were 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 warrants issued in 2013) or above
$ 3.00 (for 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 March 31, 2017 is presented below, all of which are fully vested.
|
|
Shares
|
|
Total Warrants Outstanding at December 31, 2016
|
|
|
40,255
|
|
Warrants tendered on January 13, 2017
|
|
|
(30,966
|
)
|
Warrants exercised first quarter, 2017 outside of tender offer
|
|
|
(2,916
|
)
|
Total Warrants Outstanding at March 31, 2017
|
|
|
6,373
|
|
After the effect
of certain cash and cashless exercises of warrants, the Company received net cash proceeds of $12.7 million from the warrants
tendered on January 13, 2017 and $2.1 million for warrants exercised outside the tender offer, for a total of $14.8 million
of proceeds.
NOTE G – Stock Based Compensation
In August 2013, the Company adopted
the 2013 Equity Compensation Plan (the “Plan”), which provides for the granting of incentive stock options, nonqualified
stock options, restricted stock units, performance units, and stock purchase rights. Options under the Plan may be granted at prices
not less than 100% of the fair value of the shares on the date of grant as determined by the Board Committee. The Board Committee
determines the period over which the options become exercisable subject to certain restrictions as defined in the Plan, with the
current outstanding options generally vesting over three years. The term of the options is no longer than ten years. The Company
currently has available 14,155,292 shares of common stock for issuance under the plan.
With the approval of the Board
of Directors and majority Shareholders, effective May 8, 2014, the Plan was amended and restated. The amendment provides for an
automatic increase in the number of shares of common stock available for issuance under the Plan each January (with Board approval),
commencing January 1, 2015 in an amount up to four percent (4%) of the total number of shares of common stock outstanding on the
preceding December 31st.
The Company recognized stock-based
compensation expense (options, and restricted share grants) in its condensed consolidated statements of operations as follows ($
in thousands):
|
|
Quarter Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Research and Development
|
|
$
|
435
|
|
|
$
|
131
|
|
General and Administrative
|
|
|
937
|
|
|
|
262
|
|
Total
|
|
$
|
1,372
|
|
|
$
|
393
|
|
The following table contains
information about the Company’s stock plan at March 31, 2017:
|
|
Reserved
|
|
|
|
|
|
Awards
|
|
|
|
for
|
|
|
Awards
|
|
|
Available
|
|
|
|
Issuance
|
|
|
Issued
|
|
|
for Grant
|
|
2013 Equity Compensation Plan
|
|
|
14,155
|
|
|
|
11,645
|
*
|
|
|
2,510
|
|
* 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, 2016 to March 31, 2017 (number
of options in thousands):
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
Outstanding at December 31, 2016
|
|
|
8,290
|
|
|
$
|
0.93
|
|
Granted
|
|
|
2,036
|
|
|
|
3.32
|
|
Outstanding at March 31, 2017
|
|
|
10,326
|
|
|
$
|
1.34
|
|
As of March 31, 2017, the number
of vested shares underlying outstanding options was 6,930,209 at a weighted average exercise price of $2.61. The aggregate intrinsic
value of in the-money options outstanding as of March 31, 2017 was $15.9 million. The aggregate intrinsic value is calculated as
the difference between the Company’s closing stock price of $2.77 on March 31, 2017, and the exercise price of options, multiplied
by the number of options. As of March 31, 2017, there was $5.8 million of total unrecognized share-based compensation. Such costs
are expected to be recognized over a weighted average period of approximately 0.9 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 Three months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Volatility
|
|
|
75.03 % - 82.26
|
%
|
|
|
87.24% - 89.15
|
%
|
Risk-free interest rate
|
|
|
1.93 % - 2.22
|
%
|
|
|
1.22% - 1.37
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected life
|
|
|
6.0 years
|
|
|
|
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 H – COMMITMENTS
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.
On December 15, 2016, the Company
entered into a 10 year, 3-month lease to consolidate our locations while expanding our laboratory and manufacturing facilities.
We estimate that the lease will begin on June 1, 2017, upon completion of construction. The monthly rent will start at approximately
$43,000, increasing to approximately $64,000 in the final year.
The Company records rent expense
on a straight-line basis. Rent expense for the three months ended March 31, 2017 and 2016 was $103,000 and $62,000, respectively.
Listed below is a summary of
future minimum rental payments (including the remainder of 2017) as of March 31, 2017:
Year Ending December 31,
|
|
|
|
|
|
Lease
|
|
|
|
Commitments
|
|
Remainder of 2017
|
|
$
|
292
|
|
2018
|
|
|
686
|
|
2019
|
|
|
711
|
|
2020
|
|
|
735
|
|
2021
|
|
|
675
|
|
Total future minimum lease payments
|
|
$
|
3,099
|
|
The Company was obligated
to provide a security deposit of $300,000 to obtain the headquarter office lease space located in Bedminster, New Jersey.
This deposit was reduced by $100,000 in 2016 and 2015 and can be reduced down to $50,000 in 2017, as long as the Company
makes timely rental payments.
To obtain the laboratory and
facility site located in Bridgewater, New Jersey, the Company was obligated to provide a security deposit of $586,000. This security
deposit can be reduced $100,000 on each of the first three anniversaries of the rent commencement date. On the fourth anniversary,
it can be reduced another $86,000, with the balance over the remaining life of the lease.
On February 18, 2016 the Company
entered into a Cooperative Research and Development Agreement (CRADA) with the National Institute of Allergy and Infectious Diseases
to support NIH investigators in the conduct of clinical research to investigate the safety, efficacy, and pharmacokinetics of encochleated
drug products in patients with fungal, bacterial, or viral infections at an annual funding of $200,000 per year for 3 years.
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.
On November 10, 2016 the Company
entered into a Cooperative Research and Development Agreement (CRADA) with the National Institute of Allergy and Infectious Diseases
to support NIH investigators to acquire technical, statistical and administrative support for research activities as well as to
pay for supplies and travel expenses for a total amount of $132,568 paid in 4 equal quarterly installments beginning in the fourth
quarter 2016 and each quarter during 2017.
Through the 2015 Merger, we acquired
a license from Rutgers University, The State University of New Jersey (successor in interest to the University of Medicine and
Dentistry of New Jersey) for the cochleate delivery technology. The Amended and Restated Exclusive License Agreement between Nanotechnologies
and Rutgers 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.
On September 12, 2016 the Company
conducted a final closing of a private placement offering to accredited investors shares of the Company’s Series A Preferred
Stock. As part of this offer, the investors received royalty payment rights if and when the Company generates sales of MAT2203
or MAT2501. Pursuant to the terms of the Certificate of Designations of Preferences, Rights and Limitations (the “Certificate
of Designations”) for our outstanding Series A Preferred Stock, we may be required to pay royalties of up to $35 million
per year. If and when we obtain FDA or EMA approval of MAT2203 and/or MAT2501, which we do not expect to occur before 2020, if
ever, and/or if we generate sales of such products, or we receive any proceeds from the licensing or other disposition of MAT2203
or MAT2501, we are required to pay to the holders of our Series A Preferred Stock, subject to certain vesting requirements, in
aggregate, a royalty equal to (i) 4.5% of Net Sales (as defined in the Certificate of Designations), 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), subject
in all cases to a cap of $10 million per calendar year. The Royalty Payment Rights 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.
NOTE I – Subsequent Events
On April 3, 2017, the Company filed a shelf registration
statement on Form S-3 with the Securities and Exchange Commission which allows us to offer, issue and sell from time to time together
or separately, in one or more offerings, any combination of (i) our common stock, (ii) our preferred stock, which we may issue
in one or more series, (iii) warrants, (iv) senior or subordinated debt securities, (v) subscription rights and (vi) units, consisting
of any combination of the securities listed above. We will describe in a prospectus supplement the securities we are offering and
selling, as well as the specific terms of the securities. The aggregate public offering price of the securities that we may offer
from time to time pursuant to the shelf registration statement will not exceed $150.0 million. We will offer the securities in
an amount and on terms that market conditions will determine at the time of the offering.
On April 28, 2017, the Company
entered into a Controlled Equity Offering
SM
Sales Agreement, or sales agreement, with Cantor Fitzgerald & Co.,
or Cantor Fitzgerald, pursuant to which the Company may issue and sell, from time to time, shares of our common stock having an
aggregate offering price of up to $30.0 million.. Cantor Fitzgerald will be acting as sales agent and be paid a 3% commission
on each sale.