Notes to Financial Statements (Unaudited)
Note 1
–
Nature of Operations
Edge Therapeutics, Inc. (the “Company”) is a clinical-stage biotechnology company that discovers, develops and seeks to commercialize novel, hospital-based therapies capable of transforming treatment paradigms in the management of acute, life-threatening critical care conditions. The Company’s product candidates utilize the Company’s proprietary, programmable, biodegradable polymer-based development platform (the “Precisa Platform
TM
”), and a novel delivery mechanism that seeks to enable targeted and sustained drug exposure and avoid the dose-limiting side effects associated with the current standard of care.
From the Company’s inception, it has devoted substantially all of its efforts to business planning, engaging regulatory, manufacturing and other technical consultants, acquiring operating assets, planning and executing clinical trials and raising capital. The Company’s future operations are highly dependent on a combination of factors, including (i) the success of its research and development, (ii) the development of competitive therapies by other biotechnology and pharmaceutical companies, and, ultimately, (iii) regulatory approval and market acceptance of the Company’s proposed future products.
On October 6, 2015, the Company completed an initial public offering (the “IPO”) of 8,412,423 shares of its common stock, par value of $0.00033 per share (“Common Stock”) at a price of $11.00 per share for aggregate gross proceeds of approximately $92.5 million. The Company received approximately $82.8 million in net proceeds after deducting underwriting discounts and commissions and other offering costs. Immediately prior to the closing of the IPO, all of the Company’s outstanding shares of convertible preferred stock, including shares issued for accrued dividends, automatically converted into 18,566,856 shares of Common Stock at the applicable conversion ratio then in effect.
On April 21, 2017, the Company issued and sold 1,800,000 shares of Common Stock pursuant to a Subscription Agreement (the “Subscription Agreement”) with certain investors in a registered direct offering at a price of $10.00 per share. The Company received approximately $17.4 million in net proceeds after deducting a finder’s fee and other offering costs.
Note 2 – Summary of Significant Accounting Policies
(A)
|
Unaudited interim financial statements:
|
The interim balance sheet at June 30, 2017, the statements of operations and comprehensive loss for the three and six months ended June 30, 2017 and 2016, and cash flows for the six months ended June 30, 2017 and 2016 are unaudited. The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), and following the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments that are necessary for a fair statement of its financial information. The results of operations for the six months ended June 30, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017 or for any other future annual or interim period. The balance sheet as of December 31, 2016 included herein was derived from the audited financial statements as of that date. These financial statements should be read in conjunction with the Company’s audited 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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(C)
|
Significant risks and uncertainties:
|
The Company’s operations are subject to a number of factors that may affect its operating results and financial condition. Such factors include, but are not limited to: the results of clinical testing and trial activities of the Company’s product candidates, the Company’s ability to manufacture its products or have its products manufactured, the Company’s ability to obtain regulatory approval to market its products, the Company’s intellectual property, competition from products manufactured and sold or being developed by other companies, the price of, and demand for, Company products if approved for sale, the Company’s ability to negotiate favorable licensing or other manufacturing and marketing agreements for its products, and the Company’s ability to raise capital.
The Company currently has no commercially approved products and there can be no assurance that the Company’s research and development programs will be successfully commercialized. Developing and commercializing a product requires significant time and capital and is subject to regulatory review and approval as well as competition from other biotechnology and pharmaceutical companies. The Company operates in an environment of rapid change and is dependent upon the continued services of its employees and consultants and obtaining and protecting its intellectual property.
(D)
|
Cash equivalents and concentration of cash balance:
|
The Company considers all highly liquid securities with an original maturity of less than three months to be cash equivalents. The Company’s cash and cash equivalents in bank deposit accounts, at times, may exceed federally insured limits.
(E)
|
Research and development:
|
Costs incurred in connection with research and development activities are expensed as incurred. These costs include licensing fees to use certain technology in the Company’s research and development projects as well as fees paid to consultants and various entities that perform certain research and testing on behalf of the Company.
Costs for certain development activities, such as clinical trials, are recognized based on an evaluation of the progress to completion of specific tasks using data, such as patient enrollment, clinical site activations or information provided by vendors on their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred.
The Company expenses patent costs as incurred and classifies such costs as general and administrative expenses in the accompanying statements of operations and comprehensive loss.
(G)
|
Stock-based compensation:
|
The Company measures employee stock-based awards at grant-date fair value and recognizes employee compensation expense on a straight-line basis over the vesting period of the award.
Determining the appropriate fair value of stock-based awards requires the input of subjective assumptions, including, for stock options, the expected life of the option, and expected stock price volatility. The Company uses the Black-Scholes option pricing model to value its stock option awards. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, stock-based compensation expense could be materially different for future awards.
The expected life of stock options was estimated using the “simplified method,” as the Company has limited historical information to develop reasonable expectations about future exercise patterns and employment duration for its stock options grants. The simplified method is based on the average of the vesting tranches and the contractual life of each grant. For stock price volatility, the Company uses comparable public companies as a basis for its expected volatility to calculate the fair value of options grants. The risk-free interest rate is based on U.S. Treasury notes with a term approximating the expected life of the option.
(H)
|
Net loss per common share:
|
Basic and diluted net loss per common share is determined by dividing net loss attributable to common stockholders by the weighted average common shares outstanding during the period. For all periods presented, Common Stock underlying the options and warrants have been excluded from the calculation because their effect would be anti-dilutive. Therefore, the weighted average shares outstanding used to calculate both basic and diluted loss per common share are the same.
The following potentially dilutive securities have been excluded from the computations of diluted weighted average shares outstanding as they would be anti-dilutive:
|
|
As of June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Stock options to purchase Common Stock
|
|
|
6,320,295
|
|
|
|
5,137,775
|
|
Warrants to purchase Common Stock
|
|
|
403,782
|
|
|
|
562,539
|
|
Total
|
|
|
6,724,077
|
|
|
|
5,700,314
|
|
(I)
|
Accounting standards not yet adopted:
|
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842).” The new standard requires organizations that lease assets—referred to as “lessees”—to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases (see Note 7). This standard is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the impact of adoption.
(J)
|
Accounting standards adopted:
|
In March 2016, the FASB issued ASU No. 2016-09 which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Public companies will be required to adopt this standard in annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted this ASU on January 1, 2017.
The impact of adopting ASU 2016-09 resulted in the following:
|
●
|
The Company recognized $84,786 of tax benefit along with a full valuation allowance as of the adoption date related to the historical excess tax benefits from historical option exercises related to employee equity award activity.
|
|
●
|
The Company elected to recognize forfeitures as they occur. The cumulative effect adjustment as a result of the adoption of this amendment on a modified retrospective basis was not material.
|
There were no other material impacts to our consolidated financial statements as a result of adopting this updated standard.
Note 3 – Fair Value of Financial Instruments
There were no transfers between Levels 1, 2, or 3 during 2017 or 2016.
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
Total
|
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
|
Quoted Prices in
Inactive Markets
(Level 2)
|
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
As of June 30, 2017: (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
108,714,544
|
|
|
$
|
108,714,544
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
106,398,919
|
|
|
$
|
106,398,919
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Note 4 – Accrued Expenses
Accrued expenses and other liabilities consist of the following:
|
|
As of June 30,
|
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Accrued research and development costs
|
|
$
|
1,806,862
|
|
|
$
|
654,795
|
|
Accrued professional fees
|
|
|
507,974
|
|
|
|
366,394
|
|
Accrued compensation
|
|
|
1,466,455
|
|
|
|
1,866,255
|
|
Accrued other
|
|
|
356,172
|
|
|
|
319,434
|
|
Deferred rent
|
|
|
16,556
|
|
|
|
6,837
|
|
Total
|
|
$
|
4,154,019
|
|
|
$
|
3,213,715
|
|
Note 5 – Stock Options
The Company has three equity compensation plans: the 2010 Equity Incentive Plan, the 2012 Equity Incentive Plan and the 2014 Equity Incentive Plan (the “Plans”). The Company was able to grant up to 1,350,412 and 1,096,411 shares of Common Stock as both incentive stock options (“ISOs”) and nonqualified stock options (“NQs”) under the 2010 Equity Incentive Plan and the 2012 Equity Incentive Plan, respectively.
In 2014, the Company’s stockholders approved the 2014 Equity Incentive Plan pursuant to which the Company may grant up to 1,827,351 shares as both ISOs and NQs, subject to increases as hereafter described (the “Plan Limit”). On January 1, 2015 and each January 1 thereafter prior to the termination of the 2014 Equity Incentive Plan, pursuant to the terms of the 2014 Equity Incentive Plan, the Plan Limit was and shall be increased by the lesser of (x) 4% of the number of shares of Common Stock outstanding as of the immediately preceding December 31 and (y) such lesser number as the Board of Directors may determine in its discretion. On January 1, 2016 the Plan Limit was increased to 3,047,323 shares. As of January 1, 2017, the Plan Limit increased to 4,204,063 shares.
Pursuant to the terms of the Plans, ISOs have a term of ten years from the date of grant or such shorter term as may be provided in the option agreement. Unless specified otherwise in an individual option agreement, ISOs generally vest over a four year term and NQs generally vest over a three or four year term. Unless terminated by the Board, the Plans shall continue to remain effective for a term of ten years or until such time as no further awards may be granted and all awards granted under the Plans are no longer outstanding.
On March 1, 2017, the Company issued non-qualified options to purchase a total of 80,000 shares of Common Stock to its newly appointed Senior Vice President, Regulatory Affairs. The award was granted outside of the Company’s 2014 Equity Incentive Plan and vests over four years with 25% vesting on February 28, 2018, which is one year following the employee's date of hire, and the remaining 75% vesting in 36 equal monthly installments thereafter, subject to the employee's continued service to the Company through each vesting date and subject to acceleration or forfeiture upon the occurrence of certain events as set forth in the employee's stock option agreement. The foregoing grant award was made pursuant to the NASDAQ inducement grant exception as a material component of the employee's employment compensation. Together with the other inducement grants made by the Company, there are options covering an aggregate of 395,000 shares outstanding that were granted outside of the Plans.
The Company’s stock-based compensation expense was recognized in operating expense as follows:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Stock-Based Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
779,349
|
|
|
$
|
544,702
|
|
|
$
|
1,387,792
|
|
|
$
|
1,042,232
|
|
General and administrative
|
|
|
801,174
|
|
|
|
836,292
|
|
|
|
1,678,436
|
|
|
|
1,754,064
|
|
Total
|
|
$
|
1,580,523
|
|
|
$
|
1,380,994
|
|
|
$
|
3,066,228
|
|
|
$
|
2,796,296
|
|
The fair value of options and warrants granted during the three months ended June 30, 2017 and 2016 was estimated using the Black-Scholes option valuation model utilizing the following assumptions:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
Weighted
Average
|
|
|
Weighted
Average
|
|
|
Weighted
Average
|
|
|
Weighted
Average
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Volatility
|
|
|
85.71
|
%
|
|
|
71.80
|
%
|
|
|
88.93
|
%
|
|
|
78.50
|
%
|
Risk-Free Interest Rate
|
|
|
1.84
|
%
|
|
|
1.29
|
%
|
|
|
1.89
|
%
|
|
|
1.39
|
%
|
Expected Term in Years
|
|
|
5.56
|
|
|
|
5.68
|
|
|
|
5.99
|
|
|
|
6.01
|
|
Dividend Rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Fair Value of Option on Grant Date
|
|
$
|
7.15
|
|
|
$
|
5.81
|
|
|
$
|
6.73
|
|
|
$
|
5.11
|
|
The following table summarizes the number of options outstanding and the weighted average exercise price:
|
|
Number
of Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual
Life in Years
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2016
|
|
|
5,316,511
|
|
|
$
|
5.84
|
|
|
|
|
|
Granted
|
|
|
1,098,200
|
|
|
|
9.12
|
|
|
|
|
|
Exercised
|
|
|
(30,666
|
)
|
|
|
3.00
|
|
|
|
|
|
Forfeited
|
|
|
(63,750
|
)
|
|
|
8.20
|
|
|
|
|
|
Options outstanding at June 30, 2017
|
|
|
6,320,295
|
|
|
$
|
6.40
|
|
|
|
7.55
|
|
|
$
|
25,245,277
|
|
Vested and expected to vest at June 30, 2017
|
|
|
6,320,295
|
|
|
$
|
6.40
|
|
|
|
7.55
|
|
|
$
|
25,245,277
|
|
Exercisable at June 30, 2017
|
|
|
3,730,052
|
|
|
$
|
4.90
|
|
|
|
6.59
|
|
|
$
|
20,402,210
|
|
At June 30, 2017 there was approximately $14,636,623 of unamortized stock compensation expense, which is expected to be recognized over a remaining average vesting period of 2.73 years.
Note 6 – Income Taxes
In assessing the realizability of the net deferred tax assets, the Company considers all relevant positive and negative evidence to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent on several factors, including the generation of sufficient taxable income prior to the expiration of the net operating loss carryforwards. There was a full valuation allowance against the net deferred tax assets as of June 30, 2017 and December 31, 2016.
At December 31, 2016, the Company had federal net operating loss (“NOL”) carryforwards of approximately $69.5 million which expire between 2029 and 2036. At December 31, 2016, the Company had federal research and development credits carryforwards of approximately $1.3 million and an orphan drug credit carryover of approximately $11.4 million. The Company may be subject to the net operating loss utilization provisions of Section 382 of the Internal Revenue Code. The effect of an ownership change would be the imposition of an annual limitation on the use of NOL carryforwards attributable to periods before the change. The amount of the annual limitation depends upon the value of the Company immediately before the change, changes to the Company’s capital during a specified period prior to the change, and the federal published interest rate. Although the Company has not completed an analysis under Section 382 of the Code, it is likely that the utilization of the NOLs will be limited.
At December 31, 2016, the Company had approximately $26.2 million of State of New Jersey NOL’s which expire between 2030 and 2035. At December 31, 2016, the Company had approximately $0.6 million of the State of New Jersey research development credits carryforwards. The State of New Jersey has enacted legislation permitting certain corporations located in New Jersey to sell state tax loss carryforwards and state research and development credits, or net loss carryforwards. In 2016, the Company sold $19,196,765 of State of New Jersey NOL's and $257,222 of State of New Jersey R&D Credits for $1,845,986.
Entities are also required to evaluate, measure, recognize and disclose any uncertain income tax provisions taken on their income tax returns. The Company has analyzed its tax positions and has concluded that as of December 31, 2016, there were no uncertain positions. The Company’s U.S. federal and state net operating losses have occurred since its inception in 2009 and as such, tax years subject to potential tax examination could apply from that date because the utilization of net operating losses from prior years opens the relevant year to audit by the IRS and/or state taxing authorities. The IRS is currently auditing the Company's 2015 tax year. Even though the audit is ongoing, the Company does not expect any material audit adjustments. Interest and penalties, if any, as they relate to income taxes assessed, are included in the income tax provision. The Company did not have any unrecognized tax benefits and has not accrued any interest or penalties for the six months ended June 30, 2017 and 2016.
Note 7 – Commitments and Contingencies
Evonik
The Company entered into an agreement with SurModics Pharmaceuticals, Inc. (“SurModics”) in October 2010 for the exclusive worldwide licensing of certain technology, patent rights and know-how rights related to the production of EG-1962, the Company’s lead product candidate (the “Evonik Agreement”). This agreement was later transferred to Evonik Industries AG (“Evonik”) when it purchased substantially all the assets of SurModics.
Pursuant to the Evonik Agreement, in exchange for the license, the Company agreed to make milestone payments totaling up to $14.75 million upon the achievement of certain development, regulatory and sales milestones detailed in the Evonik Agreement. The Company paid $0.25 million upon execution of the Evonik Agreement. In August 2016, the Company paid a milestone of $1.0 million after the first patient in the Phase 3 clinical trial of EG-1962 was dosed. In addition, the Evonik Agreement calls for the Company to pay royalties on sales of certain products based on a mid-single digit percentage of net sales. The Evonik Agreement provides for the reduction of royalties in certain limited circumstances.
In September 2015, the Company and Evonik entered into Amendment No. 1 to the Evonik Agreement. This amendment clarified the Company’s obligations to pay Evonik certain royalty and milestone payments with respect to the sale of certain products whether or not manufactured by Evonik and removed the Company’s obligation to negotiate exclusively with Evonik for Phase 3 and commercial supply of EG-1962. The term of the Evonik Agreement will continue until the expiration of the Company’s obligation to pay royalties to Evonik. Either party may terminate the Evonik Agreement due to material breach by the other party. Evonik may terminate the Evonik Agreement or convert it to a non-exclusive license, in either case upon giving the Company written notice, if the Company fails to use commercially reasonable efforts to hit certain specified development, regulatory and commercial milestones.
Oakwood Amended and Restated Master Formulation Development Agreement
On June 30, 2017, the Company entered into an Amended and Restated Master Formulation Development Agreement (the “Restated
Development Agreement”) with Oakwood Laboratories, L.L.C. (“Oakwood”), pursuant to which Oakwood will continue to provide the Company with certain drug formulation development and non-commercial manufacturing services for EG-1962, the Company’s lead product candidate, in accordance with project plans to be entered into from time to time. Oakwood is currently performing process engineering, optimization and other scale up activities for the Company and is currently the sole manufacturer of EG-1962 used in Edge’s ongoing NEWTON 2 Phase 3 pivotal trial for EG-1962.
Under the Restated Development Agreement, the Company agreed to pay Oakwood to perform services under agreed upon project plans and to pay Oakwood up to an aggregate of $4.50 million upon the achievement of various regulatory milestones, but no later than April 1, 2019. In July 2017, the Company paid $1.5 million of such amount in connection with entering into the Restated Development Agreement. The remaining payments are subject to acceleration in the event that the Company closes an equity or similar financing in excess of a predetermined amount ahead of the achievement of the regulatory milestones and April 1, 2019.
As additional consideration for performance under the Restated Development Agreement and the Supply Agreement (as defined below), the Company agreed to pay Oakwood a royalty, during the Royalty Term, in an amount equal to a low single digit percentage of net sales of EG-1962, regardless of the manufacturer or supplier thereof. The “Royalty Term” is the period commencing upon the commercial launch of EG-1962 by the Company and continuing until twelve (12) years following such launch.
The term of the Restated Development Agreement continues until the expiration or termination of the Supply Agreement, unless earlier terminated (the “Term”). The Company has the right to terminate project plans upon the occurrence of various circumstances described in the Restated Development Agreement. In the event that the Company terminates the most recent project plan prior to completion (including due to the Company’s decision to discontinue the development or commercialization of EG-1962), the Company must pay to Oakwood a termination fee. Either party has the right to terminate the Restated Development Agreement upon sixty (60) days written notice for failure by the other party to cure a material breach during the applicable cure period. The Company can terminate the Restated Development Agreement immediately upon notice to Oakwood if Oakwood’s annual financial audit report required to be provided to the Company contains any going concern or similar qualification or if Oakwood fails to maintain a pre-determined working capital ratio. Either party may also terminate the Restated Development Agreement immediately in the event of certain failures with regard to validation of the manufacturing process and other specified regulatory failures.
Oakwood Manufacturing and Supply Agreement
Concurrent with its entry into the Restated Development Agreement, on June 30, 2017, the Company entered into a Manufacturing and Supply Agreement with Oakwood (the “Supply Agreement”), pursuant to which Oakwood will manufacture and supply, and the Company will purchase from Oakwood, EG-1962 in commercial quantities following the commercial launch of the product.
Pursuant to the Supply Agreement, the price per unit of EG-1962 to be purchased by the Company is based on the expected commercially usable units per batch. In addition, the Company has agreed to pay Oakwood milestone payments that could total up to an aggregate of $2.25 million upon the achievement of certain development and regulatory milestones.
The Company shall have no minimum order requirement under the Supply Agreement until the third (3
rd
) year following commercial launch of EG-1962. Beginning in the third year following commercial launch and continuing until the fifth year following commercial launch, the Company shall be required to (x) order, at a minimum, the greater of (a) five (5) batches and (b) fifty percent (50%) of the aggregate vials of EG-1962 purchased by the Company from all sources in such year (such greater amount being the “Minimum Order Commitment”) or (y) pay a catch-up price to Oakwood based on the amount of EG-1962 actually ordered by the Company during the applicable time period.
The term of the Supply Agreement shall continue (unless earlier terminated) until three (3) years following commercial launch of EG-1962. Thereafter, the Supply Agreement shall automatically renew for additional two (2)-year periods unless Edge provides notice of non-renewal at least twelve (12) months prior to the end of the then-current term. The Supply Agreement shall also terminate automatically upon the termination of the Restated Development Agreement for any reason. Following the first anniversary of the commercial launch of EG-1962, either party may terminate upon two (2) years written notice. Further, either party may terminate the Supply Agreement upon a material breach by the other party that fails to be cured in the applicable cure period.
The Company may terminate the Supply Agreement immediately upon notice to Oakwood in the event that (a) any regulatory authority requires or causes the withdrawal of EG-1962 from the market or (b) the Company ceases to develop or commercialize EG-1962; provided, that in the latter case of termination prior to completion of the most recent project plan attached to the Restated Development Agreement, the Company must pay to Oakwood a termination fee.
Employment Agreements
The Company has entered into employment agreements with each of its executive officers. The agreements generally provide for, among other things, salary, bonus and severance payments. The employment agreements provide for between 12 months and 18 months of severance benefits to be paid to an executive (as well as certain potential bonus, COBRA and equity award benefits), subject to the effectiveness of a general release of claims, if the executive terminates his or her employment for good reason or if the Company terminates the executive’s employment without cause. The continued provision of severance benefits is conditioned on each executive’s compliance with the terms of the Company’s confidentiality and invention and assignment agreement as well as his or her release of claims.
Leases
Effective December 13, 2013, the Company entered into a 63 month lease for approximately 8,000 square feet of office space in Berkeley Heights, New Jersey. On February 18, 2016, the Company entered into a new 63 month lease for approximately 20,410 square feet of office space within the same office complex in Berkeley Heights, New Jersey. The terms of the new lease were structured so that the termination date of the December 13, 2013 lease coincided with the commencement date of the new lease on August 13, 2016.
Rent expense is recognized on a straight line basis where there are escalating payments, and was approximately $150,614 and $56,050 for the three months ended June 30, 2017 and 2016, respectively and $298,674 and $114,159 for the six months ended June 30, 2017 and 2016, respectively.
The following is a schedule by years of future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of June 30, 2017:
Year ended December 31,
|
|
|
|
2017 (remaining)
|
|
$
|
296,766
|
|
2018
|
|
|
602,461
|
|
2019
|
|
|
604,541
|
|
2020
|
|
|
603,371
|
|
2021
|
|
|
530,384
|
|
2022 and after
|
|
|
-
|
|
Total minimum payments required
|
|
$
|
2,637,523
|
|
Note 8 – Debt
On August 28, 2014, the Company entered into a loan and security agreement with Hercules Technology Growth Capital, Inc., (the “Original Loan Agreement”). The Original Loan Agreement provided funding for an aggregate principal amount of up to $10,000,000 in three separate term loans. The first term loan was funded on August 28, 2014 in the amount of $3,000,000. The second term loan of $3,000,000 was funded on January 29, 2015. Both the first and second term loans were due to mature on March 1, 2018. The Company elected not to draw the third term loan of $4.0 million, the availability of which expired on June 30, 2015. Initially, the loan bore interest at a rate per annum equal to the greater of (i) 10.45% or (ii) the sum of (a) 10.45% plus (b) the prime rate (as reported in
The Wall Street Journal
) minus 4.50%. On April 6, 2015, the base rate on the loan was lowered to the greater of (i) 9.95% or (ii) the sum of (a) 9.95% plus (b) the prime rate (as reported in
The Wall Street Journal
) minus 4.50. The Company was required to make interest-only payments on the loan through September 2015.
Commencing in October 2015, the term loans began amortizing in equal monthly installments of principal and interest over 30 months. On the maturity date or the date the loan otherwise became due and payable, the Company was also required to make a payment equal to 1.5% of the total amounts funded under the Original Loan Agreement.
On August 1, 2016, the Company entered into an Amended and Restated Loan and Security Agreement (the “Amended Loan Agreement”) with Hercules Capital, Inc., formerly known as Hercules Technology Growth Capital, Inc. Pursuant to the Amended Loan Agreement, the Company may borrow up to $20,000,000. At closing, the Company borrowed $15,000,000 of the amount available for draw under the Amended Loan Agreement (and received proceeds net of the amount then outstanding under the Original Loan Agreement, fees and expenses). On May 23, 2017, the Company elected to draw down the second tranche of $5 million. Amounts drawn under the Amended Loan Agreement bear interest at a rate per annum equal to the greater of either (i) the sum of (a) 9.15%, plus (b) the prime rate as reported in The Wall Street Journal minus 4.50% or (ii) 9.15%. The effective interest rate on the loan as of June 30, 2017 was 9.15%. Pursuant to the terms of the Amended Loan Agreement, the Company will make interest-only payments until March 1, 2018, and on that date begin to repay the principal balance of the loan in 24 equal monthly payments of principal and interest through the scheduled maturity date of February 3, 2020. The period of interest-only payments and the maturity date may be extended if the Company satisfies certain conditions as described in the Amended Loan Agreement.
Pursuant to the Amended Loan Agreement, in March 2018, the Company must make a payment of $90,000, which is equal to 1.5% of the total amounts funded under the Original Loan Agreement. On the maturity date or the date the loan otherwise becomes due and payable, under the Amended Loan Agreement the Company must also make a payment of $900,000, which is equal to 4.5% of the total amounts available under the Amended Loan Agreement. In addition, if the Company prepays the term loan (i) during the first year following the initial closing, the Company must pay a prepayment charge equal to 2% of the amount being prepaid, (ii) during the second year following the closing, the Company must pay a prepayment charge equal to 1% of the amount being prepaid, and (iii) after the second year following the closing, the Company must pay a prepayment charge equal to 0.5% of the amount being prepaid.
The loan is secured by substantially all of the Company’s assets, other than intellectual property, which is the subject of a negative pledge. Under the Amended Loan Agreement, the Company is subject to certain customary covenants that limit or restrict the Company's ability to, among other things, incur additional indebtedness, investments, distributions, transfer assets, make acquisitions, grant any security interests, pay cash dividends, repurchase its Common Stock, make loans, or enter into certain transactions without prior consent. The Amended Loan Agreement contains several events of default, including, among others, payment defaults, breaches of covenants or representations, material impairment in the perfection of Hercules’ security interest or in the collateral and events related to bankruptcy or insolvency. Upon an event of default, Hercules may declare all outstanding obligations immediately due and payable (along with a prepayment charge), a default rate of an additional 5.0% may be applied to the outstanding loan balances, and Hercules may take such further actions as set forth in the Amended Loan Agreement, including collecting or taking such other action with respect to the collateral pledged in connection with the Amended Loan Agreement.
Future principal payments on the note as of June 30, 2017 were as follows:
Year Ending in December 31:
|
|
(000's)
|
|
2017 (remaining)
|
|
$
|
-
|
|
2018
|
|
|
7,882
|
|
2019
|
|
|
10,287
|
|
2020
|
|
|
1,831
|
|
Total
|
|
$
|
20,000
|
|
The estimated fair value of the debt (categorized as a Level 2 liability for fair value measurement purposes) is determined using current market factors and the ability of the Company to obtain debt at comparable terms to those that are currently in place. The Company believes the estimated fair value at June 30, 2017 approximates the carrying amount.
Note 9 – Subsequent Events
Subsequent events have been evaluated through the date these financial statements were issued.