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. In early June, 2017 Company reported interim data from NIH-Conducted Phase
2a Clinical Study of Orally-Administered MAT2203 for the Treatment of Chronic Refractory Mucocutaneous Candidiasis. Later that
month, the Company reported topline results from our Phase 2 study of MAT2203 in Vulvovaginal Candidiasis
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 – Liquidity and 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 June 30, 2017, the Company had an accumulated
deficit of approximately $43.6 million. The Company’s operations have been financed primarily through the sale of equity
securities. The Company’s net loss for the six months ended June 30, 2017 and 2016 was approximately $8.5 million and $3.9
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
2022 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 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 June 30, 2017 and
anticipated proceeds from future sales of our common stock through the Controlled Equity Offering Sales Agreement would be
sufficient to meet its operating obligations through August 2018. The Company has entered into a Controlled
Equity Offering
SM
Sales Agreement with Cantor Fitzgerald & Co. “Cantor”, which allows the
Company, subject to certain limited restrictions and daily sales limits, to sell shares of common stock having an offering
price of up to $30 million, which if fully utilized would finance the Company’s operations into 2019.
Through August 7, 2017, the
Company has sold zero shares of common stock pursuant to the Controlled Equity Offering
SM
Sales Agreement with
Cantor.
Management believes it can
control the timing and amount of certain expenditures and it can utilize the Sales agreement to fund the continuing
operations of the Company beyond August 2018. A registration statement (Form S-3) was filed on April 3, 2017 as well as a
prospectus covering the possible sales of these shares.
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 six months
ended June 30, 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, 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 six months ended June 30, 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 June 30, 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
and cash equivalents, 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 and diluted loss per
share is computed by dividing net loss available to common stockholders by the weighted average number of 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, the potentially dilutive securities from the assumed exercise of all
outstanding stock options, preferred stock and warrants would have an anti-dilutive 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 as the inclusion would be anti-dilutive for the three and six month
periods ended June 30, 2017 and 2016:
|
|
Three month period
Ended June 30,
|
|
|
Six month period
Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Stock options
|
|
|
11,026
|
|
|
|
8,271
|
|
|
|
11,026
|
|
|
|
8,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock issuable upon conversion
|
|
|
15,240
|
|
|
|
—
|
|
|
|
15,240
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
5,961
|
|
|
|
39,250
|
|
|
|
5,961
|
|
|
|
39,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
32,227
|
|
|
|
47,521
|
|
|
|
32,227
|
|
|
|
47,521
|
|
The Company recognizes revenue from
grants and contracts when the specified performance milestones are achieved.
|
[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 after obtaining FDA approval.
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 has adopted this standard with an effective
date January 1, 2017 which had an immaterial 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 June 30, 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 June
30, 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 June 30, 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.
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 $35,000 non- accountable expense allowance.
NOTE E – Leasehold
improvements and equipment
Fixed assets, summarized by major
category, consist of the following ($ in thousands) for the six months ended June 30, 2017 and year ended December 31, 2016:
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Lab equipment
|
|
$
|
438
|
|
|
|
438
|
|
Furniture and fixtures
|
|
|
20
|
|
|
|
20
|
|
Equipment under capital lease
|
|
|
81
|
|
|
|
31
|
|
Leasehold improvements
|
|
|
797
|
|
|
|
7
|
|
Total
|
|
|
1,336
|
|
|
|
496
|
|
Less: accumulated depreciation and amortization
|
|
|
165
|
|
|
|
140
|
|
Equipment, net
|
|
$
|
1,171
|
|
|
$
|
356
|
|
Depreciation and
amortization expense for the three and six months ended June 30, 2017 was $12 thousand and $25 thousand, respectively.
Depreciation and amortization expense for the three and six months ended June 30, 2016 was $13 thousand and $26 thousand,
respectively.
On February 12, 2016,
the Company entered in a new 36 month capital lease for lab equipment. On May 15, 2017 the Company entered into a second 36
month capital lease for lab equipment. The payments under the leases are accounted for as interest and payments under capital
lease using 3 year amortization. During the three and six months ended June 30, 2017 the Company recognized interest expense
of $1,194 and $1,697, respectively, 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 June 30, 2017, the Company had 1,524,000 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 July 29, 2019, which is the third anniversary of the Initial Closing, (ii) three years from the Initial Closing, (iii) the
approval of the Company’s MAT2203 product candidate by the U.S. Food and Drug Administration or the European Medicines Agency
(the “Regulatory Approval”) or (iv) the Regulatory Approval of the Company’s MAT2501 product candidate.
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 June 30, 2017 are approximately
$559,000. 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 June
30, 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 June 30, 2017, the Company
had outstanding warrants to purchase an aggregate of 5,961,269 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 June 30, 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
|
)
|
Warrants exercised second quarter, 2017
|
|
|
(412
|
)
|
Total Warrants Outstanding at June 30, 2017
|
|
|
5,961
|
|
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 $14.8 million of proceeds in the first
quarter. All warrants tendered in the second quarter were cashless warrants.
NOTE G – Stock Based
Compensation
In August 2013, the Company adopted
the 2013 Equity Compensation Plan (the “Plan”), which provides for the granting of incentive stock options, nonqualified
stock options, restricted stock units, performance units, and stock purchase rights. Options under the Plan may be granted at prices
not less than 100% of the fair value of the shares on the date of grant as determined by the Board Committee. The Board Committee
determines the period over which the options become exercisable subject to certain restrictions as defined in the Plan, with the
current outstanding options generally vesting over three years. The term of the options is no longer than ten years. The Company
currently has available 14,155,292 shares of common stock for issuance under the plan.
With the approval of the Board of
Directors and majority Shareholders, effective May 8, 2014, the Plan was amended and restated. The amendment provides for an automatic
increase in the number of shares of common stock available for issuance under the Plan each January (with Board approval), commencing
January 1, 2015 in an amount up to four percent (4%) of the total number of shares of common stock outstanding on the preceding
December 31st.
The Company recognized stock-based
compensation expense (options, and restricted share grants) in its condensed consolidated statements of operations as follows ($
in thousands):
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development
|
|
$
|
70
|
|
|
$
|
140
|
|
|
$
|
505
|
|
|
$
|
271
|
|
General and Administrative
|
|
|
246
|
|
|
|
261
|
|
|
|
1183
|
|
|
|
523
|
|
Total
|
|
$
|
316
|
|
|
$
|
401
|
|
|
$
|
1688
|
|
|
$
|
794
|
|
|
|
Reserved
|
|
|
|
|
|
Awards
|
|
|
|
for
|
|
|
Awards
|
|
|
Available
|
|
|
|
Issuance
|
|
|
Issued
|
|
|
for Grant
|
|
2013 Equity Compensation Plan
|
|
|
14,155
|
|
|
|
12,358
|
*
|
|
|
1,797
|
|
* 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 June 30, 2017 (number of
options in thousands):
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
Outstanding at December 31, 2016
|
|
|
8,290
|
|
|
$
|
0.93
|
|
Granted
|
|
|
2,736
|
|
|
|
3.21
|
|
Outstanding at June 30, 2017
|
|
|
11,026
|
|
|
$
|
1.44
|
|
As of June 30, 2017, the number
of vested shares underlying outstanding options was 7,393,521 at a weighted average exercise price of $2.90. The aggregate intrinsic
value of in the-money options outstanding as of June 30, 2017 was $7.0 million. The aggregate intrinsic value is calculated as
the difference between the Company’s closing stock price of $1.69 on June 30, 2017, and the exercise price of options, multiplied
by the number of options. As of June 30, 2017, there was $5.6 million of total unrecognized share-based compensation. Such costs
are expected to be recognized over a weighted average period of approximately 0.95 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 and six months ended June 30, 2017 and 2016:
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Volatility
|
|
|
67.09%-77.56
|
%
|
|
|
68.38%
- 89.15
|
%
|
|
|
69.22%-82.26
|
%
|
|
|
68.38%-89.15
|
%
|
Risk-free interest rate
|
|
|
2.015%-2.09
|
%
|
|
|
1.150%-1.375
|
%
|
|
|
1.89%-2.22
|
%
|
|
|
1.15%-1.375
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected life
|
|
|
6.0 years
|
|
|
|
6.0 years
|
|
|
|
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 accounts
for forfeitures as they occur.
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, June, 2021.
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 during the third quarter of 2017, upon completion and approval of construction. The monthly
rent will start at approximately $43,000, increasing to approximately $64,000 in the final year. The rental payments total approximately
$6.4 million over the life of the lease which is scheduled to end late 2027.
The Company records rent
expense on a straight-line basis. Rent expense for the three months ended June 30, 2017 and 2016 was $73,000 and $62,000,
respectively. Rent expense for the six months ended June 30, 2017 and 2016 was $176,000 and $125,000, respectively.
Listed below is a summary of
future minimum rental payments (including the remainder of 2017) as of June 30, 2017:
Year Ending December 31,
|
|
Lease
Commitments
|
|
Remainder of 2017
|
|
$
|
167
|
|
2018
|
|
|
683
|
|
2019
|
|
|
707
|
|
2020
|
|
|
731
|
|
2021
|
|
|
671
|
|
Total future minimum lease payments
|
|
$
|
2,959
|
|
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.
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 2021, 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.
On June 1, 2017 the Company entered into an agreement
with Medpace, a clinical research organization, to provide services in a Phase II clinical trial. The overall cost is estimated
to be $1.4 million through August 2018.
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.