See accompanying notes to unaudited condensed
consolidated financial statements.
See accompanying notes to unaudited condensed
consolidated financial statements.
See accompanying notes to unaudited condensed
consolidated financial statements.
See accompanying notes to unaudited condensed
consolidated financial statements.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
1. Organization, Nature of Operations and Basis of Presentation
Description of Business
Synthetic Biologics, Inc. (the “Company”
or “Synthetic Biologics”) is a diversified clinical-stage company developing therapeutics designed to prevent and treat
gastrointestinal (GI) diseases in areas of high unmet need. The Company’s lead clinical development candidates are: (1) SYN-004
(ribaxamase) which is designed to degrade certain commonly used intravenous (IV) beta-lactam antibiotics within the gastrointestinal
(GI) tract to prevent (a) microbiome damage, (b) Clostridioides difficile infection (CDI), (c) overgrowth of pathogenic
organisms, (d) the emergence of antimicrobial resistance (AMR) and (e) acute graft-versus-host-disease (aGVHD) in allogeneic hematopoietic
cell transplant (HCT) recipients, and (2) SYN-020, a recombinant oral formulation of the enzyme intestinal alkaline phosphatase
(IAP) produced under cGMP conditions and intended to treat both local GI and systemic diseases. .
The Company was also developing SYN-010
to reduce the impact of methane-producing organisms in the gut microbiome to treat an underlying cause of irritable bowel syndrome
with constipation (IBS-C). On September 30, 2020, Cedars Sinai Medical Center’s (CSMC) (the Company’s SYN-010 clinical
development partner) informed the Company that it agreed to discontinue the ongoing Phase 2b investigator-sponsored clinical study
of SYN-010 IBS-C patients. Based on the results of a planned interim futility analysis, it was concluded that although SYN-010
was well tolerated, it was unlikely to meet its primary endpoint by the time enrollment is completed.
Basis of Presentation
The accompanying condensed consolidated
financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”)
for interim financial information. Accordingly, they do not include all of the information and notes required by Accounting Principles
Generally Accepted in the United States of America (“U.S. GAAP”) for complete financial statements. The accompanying
condensed consolidated financial statements include all adjustments, comprised of normal recurring adjustments, considered necessary
by management to fairly state the Company’s results of operations, financial position and cash flows. The operating results
for the interim periods are not necessarily indicative of results that may be expected for any other interim period or for the
full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company’s 2019 Form 10-K. The interim results for the three and nine months ended September
30, 2020 are not necessarily indicative of results for the full year.
The condensed consolidated financial statements
are prepared in conformity with U.S. GAAP, which requires the use of estimates, judgments and assumptions that affect the amounts
of assets and liabilities at the reporting date and the amounts of revenue and expenses in the periods presented. The Company believes
that the accounting estimates employed are appropriate and the resulting balances are reasonable; however, due to the inherent
uncertainties in making estimates, actual results may differ from the original estimates, requiring adjustments to these balances
in future periods.
Recent Accounting Pronouncements
and Developments
In August 2020, the FASB issued Accounting
Standards Update 2020-06 Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging –
Contracts in Entity’s Own Equity (subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s
Own Equity. This ASU amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s
own equity and improves and amends the related EPS guidance for both Subtopics. The ASU will be effective for annual reporting
periods after December 15, 2023 and interim periods within those annual periods and early adoption is permitted in annual reporting
periods ending after December 15, 2020. The Company is currently assessing the impact of ASU 2020-06 on our consolidated financial
statements.
On January 30, 2020, the World Health Organization
(WHO) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the COVID-19 outbreak
or “COVID-19”) and the risks to the international community as the virus spreads globally beyond its point of origin.
In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.
On March 27, 2020, the Coronavirus Aid,
Relief and Economic Security Act (CARES Act) was enacted. The CARES Act is an emergency economic stimulus package that includes
spending and tax breaks to strengthen the United States’ economy and fund a nationwide effort to curtail the effect of COVID-19.
While the CARES Act provides sweeping tax changes in response to the COVID-19 pandemic, some of the more significant provisions
include removal of certain limitations on utilization of net operating losses, increasing the loss carryback period for certain
losses to five years, and increasing the ability to deduct interest expense, as well as amending certain provisions of the previously
enacted Tax Cuts and Jobs Act. The Company has assessed the impact of the CARES Act and, based upon our initial assessment, we
do not believe that it will have a significant effect on our financial position, results of operations or cash flows. The Company
continues to evaluate its impact as new information becomes available.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Impairment of Long-Lived Assets
Long-lived assets include property, equipment
and right-of-use assets. In accordance with Accounting Standards Codification (“ASC”) 360 - Property, Plant and
Equipment (“ASC 360”), management reviews the Company’s recorded long-lived assets for impairment annually
or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. The
Company determines the extent to which an asset may be impaired based upon its expectation of the asset’s future usability
as well as whether there is reasonable assurance that the future cash flows associated with the asset will be in excess of its
carrying amount. If the total of the expected undiscounted future cash flows is less than the carrying amount of the asset, a loss
is recognized for the difference between fair value and the carrying value of the asset. During the quarter ending March 31, 2020
the Company identified COVID-19 as a triggering event and performed a qualitative assessment of the fair value of its long-lived
assets. The results from this analysis determined that it is still more likely than not that the fair value of its long-lived assets
remain higher than the carrying value of these assets. As a result, no impairment charges were recorded during the three and nine
months ended September 30, 2020.
2. Going Concern
The accompanying consolidated financial
statements have been prepared assuming the Company will continue as a going concern. The Company continues to incur losses and,
as of September 30, 2020, the Company had an accumulated deficit of approximately $245 million. Since inception, the Company has
financed its activities primarily from the proceeds from the issuance of equity securities.
The Company does not have sufficient capital
to fund its operations for the next twelve months following the issuance date of its Quarterly Report on Form 10-Q. The Company’s
ability to continue as a going concern, address its capital needs, and execute the required clinical trials, is therefore dependent
upon the Company’s ability to obtain capital through the issuance of debt and/or additional equity offerings. The Company
is actively pursuing additional equity or debt financing in the form of either a private placement or a public offering and the
Company continues ongoing discussions with strategic institutional investors and investment banks with respect to such possible
offerings. Included in these options is utilizing the “at-the-market” Issuance Sales Agreement (the “FBR Sales
Agreement”) that the Company entered into with B. Riley Securities (formerly FBR Capital Markets & Co.) in August 2016.
Nonetheless, there can be no assurance that such capital will be available in sufficient amounts or on terms acceptable to the
Company when and if needed or that the Company will meet the requirements for use of the FBR Sales Agreement.
If the Company is unable to obtain additional
financing in sufficient amounts or on acceptable terms under such circumstances, the Company’s operating results and prospects
will be adversely affected. These factors individually and collectively, including the Company’s dependence on its ability
to raise additional capital to fund its operations for the next twelve months following the issuance date of these financial statements
raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments relating to the recoverability of the recorded assets or the classification of liabilities
that may be necessary should the Company be unable to continue as a going concern.
In January 2020, the World Health Organization
declared a global pandemic for the novel strain of coronavirus, COVID-19. Since then, COVID-19 has spread to the United States
and countries worldwide. As COVID-19 continues to spread around the globe, the Company has experienced disruptions that impact
our business and clinical trials, including the temporary halt of the enrollment of new patients in its SYN-010 Phase 2b clinical
study during the quarter ended June 30, 2020_and the postponement of clinical site initiation for its SYN-004 Phase 1b/2a clinical
study. While the Company has experienced limited financial impact at this time, given the global economic slowdown, the overall
disruption of global healthcare systems and the other risks and uncertainties associated with the pandemic, the Company’s
business, financial condition, results of operations and growth prospects could be materially adversely affected, including its
ability to raise capital. To maximize patient participation and safeguard the trial’s integrity and patient safety, initiation
of the Company’s Phase 1b/2a clinical study of SYN-004 to be conducted by Washington University in Allogeneic HCT Recipients
is deferred until Q1 2021, pandemic conditions permitting.
At September 30, 2020, the Company had
cash and cash equivalents of approximately $6.0 million. Management has been able to extend its cash runway since its clinical
development partners CSMC and Washington University continued to limit non-essential activities during the third quarter, which
included the SYN-010 Phase 2b clinical study and SYN-004 Phase 1b/2a clinical study. The Company anticipates its current cash will
allow it to cover overhead costs, manufacturing costs for clinical supply, commercial scale up costs and limited research efforts,
including funding requirements to initiate its planned Phase 1b/2a clinical study of SYN-004 in allogeneic HCT recipients and Phase
1-enabling assay development and manufacturing of drug supply in support of the planned Phase 1 single ascending dose (SAD) study
of SYN-020 intestinal alkaline phosphatase (IAP).
The Company does not anticipate any additional
expense related to the Phase 1b/2a SYN-004 (ribaxamase) clinical trial until the trial is cleared for commencement by Washington
University (expected Q1 2021). Commencement of the FDA-agreed Phase 3 clinical trial of SYN-004 for the prevention of C. difficile
infection in the future is subject to the Company’s successful pursuit of opportunities that will allow it to establish the
clinical infrastructure and financial resources necessary to successfully initiate and complete its plan. The Company will be required
to obtain additional funding in order to continue the development of its current product candidates beyond its planned Phase 1b/2a
clinical study of SYN-004 in allogeneic HCT recipients, its planned Phase 1 SAD study of SYN-020 IAP in healthy volunteers, and
to continue to fund operations at the current cash expenditure levels. Currently, the Company does not have commitments from any
third parties to provide it with capital. If the Company fails to obtain additional funding for its clinical trials, it will not
be able to fully execute its business plan as planned and will be forced to cease certain development activities until funding
is received.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
2. Going Concern – (continued)
Further, on September 30, 2020, the Company
and CSMC agreed to discontinue the ongoing Phase 2b investigator -sponsored clinical study of SYN-010 following the results
of a planned interim futility analysis. Although it was concluded that SYN-010 was well tolerated, it was also concluded that SYN-010
is unlikely to meet its primary endpoint by the time enrollment is completed. The Company anticipates additional reductions in
clinical development expense during the remainder of 2020 as a result of the discontinuation of this clinical program.
The actual amount of funds the Company will need to operate
is subject to many factors, some of which are beyond its control. These factors include the following:
|
·
|
the progress of its research activities;
|
|
·
|
the number and scope of its research programs;
|
|
|
|
|
·
|
the ability to recruit patients for clinical studies in a timely manner;
|
|
·
|
the progress of its preclinical and clinical development activities;
|
|
·
|
the progress of the development efforts of parties with whom the Company has entered into research and development agreements and amount of funding received from partners and collaborators;
|
|
·
|
its ability to maintain current research and development licensing arrangements and to establish new research and development and licensing arrangements;
|
|
·
|
its ability to achieve milestones under licensing arrangements;
|
|
·
|
the costs associated with manufacturing-related services to produce material for use in clinical trials;
|
|
·
|
the costs involved in prosecuting and enforcing patent claims and other intellectual property rights;
|
|
·
|
the costs and timing of regulatory approvals; and
|
|
·
|
the ability to commence or complete clinical trials due to the ongoing impact of the COVID-19 global pandemic.
|
The Company has based its estimates of
funding requirements on assumptions that may prove to be wrong. The Company may need to obtain additional funds sooner or in greater
amounts than it currently anticipates.
If the Company raises funds by selling
additional shares of Common Stock or other securities convertible into Common Stock, the ownership interest of the existing stockholders
will be diluted. If the Company is not able to obtain financing when needed, it may be unable to carry out its business plan. As
a result, the Company may have to significantly limit its operations and its business, financial condition and results of operations
would be materially harmed.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
3. Fair Value of Financial Instruments
ASC 820, Fair Value Measurement,
defines fair value as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. As such, fair value is determined based upon assumptions that market participants would use in pricing
an asset or liability. Fair value measurements are rated on a three-tier hierarchy as follows:
|
·
|
Level 1 inputs: Quoted prices (unadjusted) for identical assets or liabilities in active markets;
|
|
·
|
Level 2 inputs: Inputs, other than quoted prices, that are observable either directly or indirectly; and
|
|
·
|
Level 3 inputs: Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
In many cases, a valuation technique used
to measure fair value includes inputs from multiple levels of the fair value hierarchy described above. The lowest level of significant
input determines the placement of the entire fair value measurement in the hierarchy.
The carrying amounts of the Company’s
short-term financial instruments, including cash and cash equivalents, other current assets, accounts payable and accrued liabilities
approximate fair value due to the relatively short period to maturity for these instruments.
Cash and cash equivalents include money
market accounts of $114,000 as of September 30, 2020 and $98,000 as of December 31, 2019 that are measured using Level 1 inputs.
4. Selected Balance Sheet Information
Prepaid expenses and other current assets
(in thousands)
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Prepaid clinical research organizations
|
|
$
|
471
|
|
|
$
|
48
|
|
Prepaid consulting, subscriptions and other expenses
|
|
|
74
|
|
|
|
134
|
|
Prepaid insurances
|
|
|
73
|
|
|
|
549
|
|
Prepaid manufacturing expenses
|
|
|
39
|
|
|
|
622
|
|
Prepaid conferences, travel and other expenses
|
|
|
-
|
|
|
|
25
|
|
Other receivables
|
|
|
-
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
657
|
|
|
$
|
1,381
|
|
Amounts prepaid to clinical research organizations (CROs) were
classified as current assets. The Company makes payments to the CROs based on agreed upon terms that include payments in advance
of study services.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
4. Selected Balance Sheet Information
– (continued)
Property and equipment, net (in thousands)
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Computers and office equipment
|
|
$
|
808
|
|
|
$
|
804
|
|
Leasehold improvements
|
|
|
439
|
|
|
|
439
|
|
Software
|
|
|
11
|
|
|
|
11
|
|
|
|
|
1,258
|
|
|
|
1,254
|
|
Less: accumulated depreciation and amortization
|
|
|
(1,056
|
)
|
|
|
(887
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
202
|
|
|
$
|
367
|
|
Accrued expenses (in thousands)
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Accrued clinical consulting services
|
|
$
|
660
|
|
|
$
|
684
|
|
Accrued vendor payments
|
|
|
309
|
|
|
|
456
|
|
Accrued manufacturing costs
|
|
|
18
|
|
|
|
635
|
|
Other accrued expenses
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
988
|
|
|
$
|
1,776
|
|
Accrued employee benefits (in thousands)
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Accrued bonus expense
|
|
$
|
594
|
|
|
$
|
858
|
|
Accrued vacation expense
|
|
|
158
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
752
|
|
|
$
|
935
|
|
5. Stock-Based Compensation
Stock Incentive Plans
On March 20, 2007, the Company’s
Board of Directors approved the 2007 Stock Incentive Plan (the “2007 Stock Plan”) for the issuance of up to 71,429
shares of Common Stock to be granted through incentive stock options, nonqualified stock options, stock appreciation rights, dividend
equivalent rights, restricted stock, restricted stock units and other stock-based awards to officers, other employees, directors
and consultants of the Company and its subsidiaries. This plan was approved by the stockholders on November 2, 2007. The exercise
price of stock options under the 2007 Stock Plan is determined by the compensation committee of the Board of Directors and may
be equal to or greater than the fair market value of the Company’s Common Stock on the date the option is granted. The total
number of shares of stock with respect to which stock options and stock appreciation rights may be granted to any one employee
of the Company or a subsidiary during any one-year period under the 2007 plan shall not exceed 7,143. Options become exercisable
over various periods from the date of grant, and generally expire ten years after the grant date. As of September 30, 2020, there
were 7,052 options issued and outstanding under the 2007 Stock Plan.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
5. Stock-Based Compensation – (continued)
On November 2, 2010, the Board of Directors
and stockholders adopted the 2010 Stock Incentive Plan (“2010 Stock Plan”) for the issuance of up to 85,714 shares
of Common Stock to be granted through incentive stock options, nonqualified stock options, stock appreciation rights, dividend
equivalent rights, restricted stock, restricted stock units and other stock-based awards to officers, other employees, directors
and consultants of the Company and its subsidiaries. On October 22, 2013, the stockholders approved and adopted an amendment to
the Company’s 2010 Stock Plan to increase the number of shares of the Company’s Common Stock reserved for issuance
under the Plan from 85,714 to 171,429. On May 15, 2015, the stockholders approved and adopted an amendment to the Company’s
2010 Stock Plan to increase the number of shares of the Company’s Common Stock reserved for issuance under the Plan from
171,429 to 228,572. On August 25, 2016, the stockholders approved and adopted an amendment to the 2010 Stock Plan to increase the
number of shares of the Company’s Common Stock reserved for issuance under the 2010 Stock Plan from 228,572 to 400,000. On
September 7, 2017, the stockholders approved and adopted an amendment to the 2010 Stock Plan to increase the number of shares of
the Company’s Common Stock reserved for issuance under the 2010 Stock Plan from 400,000 to 500,000. On September 24, 2018,
the stockholders approved and adopted an amendment to the 2010 Stock Plan to increase the number of shares of the Company’s
Common Stock reserved for issuance under the 2010 Stock Plan from 500,000 to 1,000,000. On September 5, 2019, the stockholders
approved and adopted an amendment to the 2010 Stock Plan to increase the number of shares of the Common Stock reserved for issuance
under the 2010 Stock Plan from 1,000,000 to 4,000,000. The exercise price of stock options under the 2010 Stock Plan is determined
by the compensation committee of the Board of Directors and may be equal to or greater than the fair market value of the Company’s
Common Stock on the date the option is granted. Options become exercisable over various periods from the date of grant, and expire
between five and ten years after the grant date. As of September 30, 2020, there were 2,453,273 options issued and outstanding
under the 2010 Stock Plan.
On September 17, 2020, the stockholders
approved and adopted the 2020 Stock Incentive Plan (“2020 Stock Plan”) for the issuance of up to 4,000,000 shares of
Common Stock to be granted through incentive stock options, nonqualified stock options, stock appreciation rights, dividend equivalent
rights, restricted stock, restricted stock units and other stock-based awards to officers, other employees, directors and consultants
of the Company and its subsidiaries. As of September 30, 2020, there were no options issued and outstanding under the 2020 Stock
Plan.
In the event of an employee’s termination,
the Company will cease to recognize compensation expense for that employee. Stock forfeitures are recognized as incurred. There
is no deferred compensation recorded upon initial grant date. Instead, the fair value of the stock-based payment is recognized
as compensation expense over the stated vesting period.
The Company has applied fair value accounting
for all stock-based payment awards since inception. The fair value of each option is estimated on the date of grant using the Black-Scholes
option pricing model. There were no options granted during the three and nine months ended September 30, 2020 and 2019.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
5. Stock-Based Compensation – (continued)
The Company records stock-based compensation
based upon the stated vesting provisions in the related agreements. The vesting provisions for these agreements have various terms
as follows:
|
·
|
in full on the six-month anniversary of grant date;
|
|
·
|
in full on one-year anniversary of grant date;
|
|
·
|
quarterly over three years;
|
|
·
|
annually over three years;
|
|
·
|
one-third immediate vesting and remaining annually over two
years; and
|
|
·
|
monthly over three years.
|
Synthetic Biologics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
5. Stock-Based Compensation – (continued)
A summary of stock option activity for
the nine months ended September 30, 2020 and the year ended December 31, 2019 is as follows:
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic
Value
|
|
Balance - December 31, 2018
|
|
|
938,982
|
|
|
$
|
15.18
|
|
|
6.19 years
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,725,000
|
|
|
|
0.42
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Expired
|
|
|
(94,738
|
)
|
|
|
58.25
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(67,232
|
)
|
|
|
5.95
|
|
|
|
|
|
|
|
Balance - December 31, 2019
|
|
|
2,502,012
|
|
|
|
3.62
|
|
|
6.51 years
|
|
|
153,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Expired
|
|
|
(12,037
|
)
|
|
|
10.89
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(29,650
|
)
|
|
|
0.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance – September 30, 2020 - outstanding
|
|
|
2,460,325
|
|
|
$
|
3.62
|
|
|
5.79 years
|
|
$
|
96,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance – September 30, 2020 - exercisable
|
|
|
747,781
|
|
|
$
|
10.80
|
|
|
5.14 years
|
|
$
|
13,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant date fair value of options granted – nine months ended September 30, 2020
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value – nine months ended September 30, 2020
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant date fair value of options granted – year ended December 31, 2019
|
|
|
|
|
|
$
|
470,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value – year ended December 31, 2019
|
|
|
|
|
|
$
|
0.27
|
|
|
|
|
|
|
|
Stock-based compensation expense included
in general and administrative expenses relating to stock options issued to employees for the three and nine months ended September
30, 2020 was $41,000 and $120,000, respectively, and $59,000 and $165,000 for the three and nine months ended September 30, 2019,
respectively. Stock-based compensation expense included in research and development expenses relating to stock options issued to
employees for the three and nine months ended September 30, 2020 was $14,000 and $45,000, respectively, and $22,000 and $52,000
for the three and nine months ended September 30, 2019, respectively.
Stock-based compensation expense included
in general and administrative expenses relating to stock options issued to consultants for the three and nine months ended September
30, 2020 was $26,000 and $79,000, respectively, and $9,000 and $28,000 for the three and nine months ended September 30, 2019,
respectively. Stock-based compensation expense included in research and development expenses relating to stock options issued
to consultants for the three and nine months ended September 30, 2020 was $1,000 and $7,000, respectively, and $1,000 for the three
and nine months ended September 30, 2019.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
5. Stock-Based Compensation – (continued)
As of September 30, 2020, total unrecognized
stock-based compensation expense related to stock options was $406,000, which is expected to be expensed through August 2022.
The FASB’s guidance for stock-based
payments requires cash flows from excess tax benefits to be classified as a part of cash flows from operating activities. Excess
tax benefits are realized tax benefits from tax deductions for exercised options in excess of the deferred tax asset attributable
to stock compensation costs for such options. The Company did not record any excess tax benefits during the three and nine months
ended September 30, 2020 and 2019.
6. Stock Warrants
On October 15, 2018, the Company closed
its underwritten public offering pursuant to which it received gross proceeds of approximately $18.6 million before deducting underwriting
discounts, commissions and other offering expenses payable by the Company and sold an aggregate of (i) 2,520,000 Class A Units
(the “Class A Units”), with each Class A Unit consisting of one share of Common Stock, and one five-year warrant to
purchase one share of Common Stock at an exercise price of $1.38 per share (each a “Warrant” and collectively, the
“Warrants”), with each Class A Unit to be offered to the public at a public offering price of $1.15, and (ii) 15,723
Class B Units (the “Class B Units”, and together with the Class A Units, the “Units”), with each Class
B Unit offered to the public at a public offering price of $1,000 per Class B Unit and consisting of one share of the Company’s
Series B Convertible Preferred Stock (the “Series B Preferred Stock”), with a stated value of $1,000 and convertible
into shares of Common Stock at the stated value divided by a conversion price of $1.15 per share, with all shares of Series B Preferred
Stock convertible into an aggregate of 13,672,173 shares of Common Stock, and issued with an aggregate of 13,672,173 Warrants.
In addition, pursuant to the underwriting agreement that the Company had entered into with A.G.P./Alliance Global Partners (the
“Underwriters”), as representative of the underwriters, the Company granted the Underwriters a 45 day option (the “Over-allotment
Option”) to purchase up to an additional 2,428,825 shares of Common Stock and/or additional Warrants to purchase an additional
2,428,825 shares of Common Stock. The Underwriters partially exercised the Over-allotment Option by electing to purchase from the
Company additional Warrants to purchase 1,807,826 shares of Common Stock.
The Warrants are immediately exercisable
at a price of $1.38 per share of Common Stock (which is 120% of the public offering price of the Class A Units) and expire on October
15, 2023. If, at the time of exercise, there is no effective registration statement registering, or no current prospectus available
for, the issuance of the shares of Common Stock to the holder, then the Warrants may only be exercised through a cashless exercise.
No fractional shares of Common Stock will be issued in connection with the exercise of a Warrant. In lieu of fractional shares,
the holder will receive an amount in cash equal to the fractional amount multiplied by the fair market value of any such fractional
shares. The Company has concluded that the Warrants are required to be equity classified. The Warrants were valued on the date
of grant using Monte Carlo simulations.
On November 18, 2016, the Company completed
a public offering of 714,286 shares of Common Stock in combination with accompanying warrants to purchase an aggregate of 1,428,571
shares of Common Stock. The stock and warrants were sold in combination, with two warrants for each share of Common Stock sold,
a Series A warrant and a Series B warrant, each representing the right to purchase one share of Common Stock. The purchase price
for each share of common stock and accompanying warrants was $35.00. The shares of Common Stock were immediately separable from
the warrants and were issued separately. The initial per share exercise price of the Series A warrants is $50.05 and the per share
exercise price of the Series B warrants is $60.20, each subject to adjustment as specified in the warrant agreements. The Series
A and Series B warrants may be exercised at any time on or after the date of issuance. The Series A warrants are exercisable until
the four-year anniversary of the issuance date. The Series B warrants expired on December 31, 2017 and none were exercised prior
to expiration. The warrants include a provision that if the Company were to enter into a certain transaction, as defined in the
agreement, the warrants would be purchased from the holder for cash. Accordingly, the Company recorded the warrants as a liability
at their estimated fair value on the issuance date of $15.7 million and changes in estimated fair value are being recorded as non-cash
income or expense in the Company’s Condensed Consolidated Statements of Operations at each subsequent period. At September
30, 2020 and September 30, 2019, the fair value of the warrant liability was nominal. In 2020 and 2019, the Monte Carlo simulations
were not used as the value of the warrants were deemed to be minimal based on the historical fair value of the warrants and the
Company’s current stock price.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
6. Stock Warrants – (continued)
On October 10, 2014, the Company raised
net proceeds of $19.1 million through the sale of 14,059,616 units at a price of $1.47 per unit to certain institutional investors
in a registered direct offering. Each unit consisted of one share of the Company’s Common Stock and a warrant to purchase
0.50 shares of Common Stock. The warrants, exercisable for an aggregate of 200,852 shares of Common Stock, had an exercise price
of $61.25 per share and a life of five years. The warrants vested immediately and expired on October 10, 2019.
A summary of all warrant activity for the
Company for the nine months ended September 30, 2020 and the year ended December 31, 2019 is as follows:
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
Balance at December 31, 2018
|
|
|
18,915,851
|
|
|
$
|
3.85
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(200,852
|
)
|
|
|
61.25
|
|
Balance at December 31, 2019
|
|
|
18,714,999
|
|
|
|
3.24
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Balance at September 30, 2020
|
|
|
18,714,999
|
|
|
$
|
3.24
|
|
On December 26, 2017, the Company entered
into a consulting agreement for advisory services for a period of six months. As compensation for such services, the consultant
was paid an upfront payment, was paid a monthly fee, and on January 24, 2018 was issued a warrant exercisable for 714 shares of
the Company’s Common Stock on the date of issuance. The warrant is equity classified and the fair value of the warrant approximated
$9,000 on the date of grant and was measured using the Black-Scholes option pricing model. This entire expense was recorded in
the quarter ended March 31, 2018.
A summary of all outstanding and exercisable
warrants as of September 30, 2020 is as follows:
Exercise Price
|
|
|
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
|
|
Weighted Average
Remaining
Contractual Life
|
$
|
1.38
|
|
|
|
17,999,999
|
|
|
|
17,999,999
|
|
|
3.03 years
|
|
18.20
|
|
|
|
714
|
|
|
|
714
|
|
|
2.24 years
|
|
50.05
|
|
|
|
714,286
|
|
|
|
714,286
|
|
|
0.13 years
|
$
|
3.24
|
|
|
|
18,714,999
|
|
|
|
18,714,999
|
|
|
2.92 years
|
Synthetic Biologics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
7. Net Loss per Share
Basic net loss per share is computed by
dividing net loss by the weighted average number of common shares outstanding. Diluted net loss per share is computed by dividing
net loss by the weighted average number of common shares outstanding including the effect of common share equivalents. Diluted
net loss per share assumes the issuance of potential dilutive common shares outstanding for the period and adjusts for any changes
in income and the repurchase of common shares that would have occurred from the assumed issuance, unless such effect is anti-dilutive.
Net loss attributable to common stockholders for the three and nine months ended September 30, 2020 excludes net loss attributable
to non-controlling interest of $0.1 million and includes the accretion of Series B preferred discount of $0.5 million and $1.3
million, respectively, on converted shares and Series A preferred stock accrued dividends of $0.1 million and $0.2 million, respectively.
Net loss attributable to common stockholders for the three and nine months ended September 30, 2019 excludes net loss attributable
to non-controlling interest of $0.1 million and includes the accretion of Series B preferred discount of $0.1 million and $0.6
million, respectively, on converted shares and Series A preferred stock accrued dividends of $0.1 million and $0.2 million, respectively.
The number of shares of common stock underlying Series B Preferred shares convertible to common stock that were excluded from the
computations of net loss per common share for the three and nine months ended September 30, 2020 and 2019 were 3,605,217 and 6,641,739,
respectively. The number of options and warrants for the purchase of common stock that were excluded from the computations of net
loss per common share and for the three and nine months ended September 30, 2020 were 2,460,325 and 18,714,999, respectively, and
for the three and nine months ended September 30, 2019 were 803,577 and 18,915,851, respectively, because their effect is anti-dilutive.
8. Non-controlling Interest
The Company’s non-controlling interest
is accounted for under ASC 810, Consolidation (“ASC 810”), and represents the minority shareholder’s ownership
interest related to the Company’s subsidiary, Synthetic Biomics, Inc. (“SYN Biomics”). In accordance with ASC
810, the Company reports its non-controlling interest in subsidiaries as a separate component of equity in the Consolidated Balance
Sheets and reports both net loss attributable to the non-controlling interest and net loss attributable to the Company’s
common stockholders on the face of the Consolidated Statements of Operations. On September 5, 2018, the Company entered into an
agreement with Cedars-Sinai Medical Center (CSMC) for an investigator-sponsored Phase 2b clinical study of SYN-010 to be co-funded
by the Company and CSMC (the “Study”). The Study was to provide further evaluation of the efficacy and safety of SYN-010,
the Company’s modified-release reformulation of lovastatin lactone, which is exclusively licensed to the Company by CSMC.
SYN-010 was designed to reduce methane production by certain microorganisms (M. smithii) in the gut to treat an underlying
cause of irritable bowel syndrome with constipation (IBS-C). After the 2018 transaction with CSMC, the Company’s equity interest
in SYN Biomics was 83% and the non-controlling stockholder’s interest is 17%. As of September 30, 2020, the accumulated net
loss attributable to the non-controlling interest is $2.8 million.
In consideration of the support provided
by CSMC for the Study, the Company agreed to pay $441,000 to support the Study and the Company entered into a Stock Purchase Agreement
with CSMC pursuant to which the Company, upon the approval of the Study protocol by the Institutional Review Board (IRB): (i) issued
to CSMC fifty thousand (50,000) shares of common stock of the Company; and (ii) transferred to CSMC an additional two million four
hundred twenty thousand (2,420,000) shares of common stock of its subsidiary SYN Biomics, Inc. (“Synbiomics”) owned
by the Company, such that after such issuance CSMC owns an aggregate of seven million four hundred eighty thousand (7,480,000)
shares of common stock of SYN Biomics, representing seventeen percent (17%) of the issued and outstanding shares of SYN Biomics’
common stock. The services rendered are recorded to research and development expense in proportion with the progress of the
study and based overall on the fair value of the shares ($285,000) as determined at the date of IRB approval. During the three
and nine months ended September 30, 2020, research and development expense recorded related to this transaction approximated $134,000
and $225,000, respectively. During the three and nine months ended September 30, 2019, research and development expense recorded
related to this transaction approximated $108,000 and $318,000, respectively. On September
30, 2020, CSMC MAST formally agreed to discontinue the ongoing Phase 2b investigator-sponsored clinical study of SYN-010 following
the results of a planned interim futility analysis. Although it was concluded that SYN-010 was well tolerated, it was also concluded
that SYN-010 is unlikely to meet its primary endpoint by the time enrollment is completed. As a result, the Company anticipates
additional reductions in clinical development expense during the remainder of 2020 resulting from the discontinuation of this clinical
program.
The Agreement also provides CSMC with
a right, commencing on the six month anniversary of issuance of the stock under certain circumstances in the event that the
shares of stock of SYN Biomics are not then freely tradeable, and subject to NYSE American, LLC approval, to exchange its SYN
Biomics shares for unregistered shares of the Company’s common stock, with the rate of exchange based upon the relative
contribution of the valuation of SYN Biomics to the public market valuation of the Company at the time of each exchange. The
Stock Purchase Agreement also provides for tag-along rights in the event of the sale by the Company of its shares of SYN
Biomics.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
9. Common and Preferred Stock
Series B Preferred Stock
On October 15, 2018, the Company closed
its underwritten public offering pursuant to which it received gross proceeds of approximately $18.6 million before deducting underwriting
discounts, commissions and other offering expenses payable by the Company and sold an aggregate of (i) 2,520,000 Class A Units,
with each Class A Unit offered to the public at a public offering price of $1.15, and (ii) 15,723 Class B Units, with each Class
B Unit offered to the public at a public offering price of $1,000 per Class B Unit and consisting of one share of the Company’s
Series B Preferred Stock, with a stated value of $1,000 and convertible into shares of Common Stock at the stated value divided
by a conversion price of $1.15 per share, with all shares of Series B Preferred Stock convertible into an aggregate of 13,672,173
shares of Common Stock, and issued with an aggregate of 13,672,173 October 2018 Warrants. Since the above units are equity instruments,
the proceeds were allocated on a relative fair value basis which created the Series B Preferred Stock discount.
In addition, pursuant to the Underwriting
Agreement that the Company entered into with the Underwriters on October 10, 2018, the Company granted the Underwriters a 45 day
option (the “Over-allotment Option”) to purchase up to an additional 2,428,825 shares of Common Stock and/or additional
warrants to purchase an additional 2,428,825 shares of Common Stock. Each Warrant is exercisable for one share of common stock.
The Underwriters partially exercised the Over-allotment Option by electing to purchase from the Company additional Warrants to
purchase 1,807,826 shares of Common Stock.
The Units were offered by the Company pursuant
to a registration statement on Form S-1 (File No. 333-227400), as amended, filed with the SEC, which was declared effective
by the SEC on October 10, 2018.
The conversion price of the Series B
Preferred Stock and exercise price of the October 2018 Warrants are subject to appropriate adjustment in the event of recapitalization
events, stock dividends, stock splits, stock combinations, reclassifications, reorganizations or similar events affecting the Common
Stock. The exercise price of the Warrants is subject to adjustment in the event of certain dilutive issuances.
During the three and nine months ended
September 30, 2020, 1,379 and 3,492 Series B shares, respectively, have been converted into common stock resulting in the recognition
of $519,000 and $1,315,000, respectively, of unamortized discount from the conversion. During the three and nine months ended September
30, 2019, 185 and 1,523 Series B shares, respectively, have been converted into common stock resulting in the recognition of $71,000
and $585,000, respectively, of unamortized discount from the conversion. As of September 30, 2020, 11,577 shares have been converted
resulting in the recognition of $4.4 million of unamortized discount. This is recorded as a deemed dividend in accumulated deficit.
The October 2018 Warrants are immediately
exercisable at a price of $1.38 per share of common stock (which is 120% of the public offering price of the Class A Units) and
will expire on October 15, 2023. If, at the time of exercise, there is no effective registration statement registering, or no current
prospectus available for, the issuance of the shares of common stock to the holder, then the October 2018 warrants may only be
exercised through a cashless exercise. No fractional shares of common stock will be issued in connection with the exercise of any
October 2018 warrants. In lieu of fractional shares, the holder will receive an amount in cash equal to the fractional amount multiplied
by the fair market value of any such fractional shares.
The Company may not effect, and the holder
will not be entitled to, exercise any Warrants or conversion of the Series B Preferred Stock, which, upon giving effect to such
exercise, would cause (i) the aggregate number of shares of Common Stock beneficially owned by the holder (together with its affiliates)
to exceed 4.99% (or, at the election of the holder, 9.99%) of the number of shares of Common Stock outstanding immediately after
giving effect to the exercise, or (ii) the combined voting power of the Company’s securities beneficially owned by the holder
(together with its affiliates) to exceed 4.99% (or, at the election of the holder, 9.99%) of the combined voting power of all of
the Company’s securities then outstanding immediately after giving effect to the exercise or conversion, as such percentage
ownership is determined in accordance with the terms of the October 2018 Warrants or Series B Preferred Stock. However, any holder
may increase or decrease such percentage to any other percentage not in excess of 9.99% upon at least 61 days’ prior notice
from the holder to the Company. The holders of the Series B Preferred will participate, on an as-if-converted-to-common stock basis,
in any dividends to the holders of common stock. Upon a defined Fundamental Transaction, the holders of the Series B Preferred
Stock are entitled to the same consideration as are holders of Common Stock. The Series B Preferred Stock ranks junior to existing
Series A Preferred Stock but on parity with common stock. Liquidation preference is equal to an amount pari passu with the common
stock on an as converted basis (i.e., there is no preference to common stock).
Synthetic Biologics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
9. Common and Preferred Stock – (continued)
Since the effective conversion price of
the Series B Preferred Stock was less than the fair value of the underlying common stock at the date of issuance, there was a
beneficial conversion feature (“BCF”) at the issuance date. Because the Series B Preferred Stock had no stated maturity
or redemption date and was immediately convertible at the option of the holder, the discount created by the BCF is immediately
charged to accumulated deficit as a “deemed dividend” and impacts earnings per share. During the year ended December
31, 2018, the Company recorded a discount of $9.1 million and immediately amortized the discount to record the deemed dividend.
Series A Preferred Stock
On September 11, 2017, the Company entered
into a share purchase agreement (the “Purchase Agreement”) with an investor (the “Investor”), pursuant
to which the Company offered and sold in a private placement 120,000 shares of its Series A Convertible Preferred Stock, par value
$0.001 per share (the “Series A Preferred Stock”) for an aggregate purchase price of $12 million, or $100 per share.
The Series A Preferred Stock ranks senior
to the shares of the Company’s common stock, and any other class or series of stock issued by the Company with respect to
dividend rights, redemption rights and rights on the distribution of assets upon any voluntary or involuntary liquidation, dissolution
or winding up of the affairs of the Company. Holders of Series A Preferred Stock are entitled to a cumulative dividend at the rate
of 2.0% per annum, payable quarterly in arrears, as set forth in the Certificate of Designation of Series A Preferred Stock.
The Series A Preferred Stock is convertible at the option of the holders at any time into shares of common stock at an initial
conversion price of $18.90 per share, subject to certain customary anti-dilution adjustments.
Any conversion of Series A Preferred Stock
may be settled by the Company in shares of common stock only.
On or at any time after (i) the VWAP (as
defined in the Certificate of Designation) for at least 20 trading days in any 30 trading day period is greater than $70.00, subject
to adjustment in the case of stock split, stock dividends or the like the Company has the right, after providing notice not less
than 6 months prior to the redemption date, to redeem, in whole or in part, on a pro rata basis from all holders thereof based
on the number of shares of Series A Preferred Stock then held, the outstanding Series A Preferred Stock, for cash, at a redemption
price per share of Series A Preferred Stock of $7,875, subject to appropriate adjustment in the event of any stock dividend,
stock split, combination or other similar recapitalization with respect to the Series A Convertible Preferred Stock, or (ii) the
five year anniversary of the issuance date, the Company has the right to redeem, in whole or in part, on a pro rata basis from
all holders thereof based on the number of shares of Series A Convertible Preferred Stock then held, the outstanding Series A Preferred
Stock, for cash, at a redemption price per share equal to the Liquidation Value (as defined in the Certificate of Designations).
The Series A Preferred Stock is classified
as temporary equity due to the shares being redeemable based on contingent events outside of the Company’s control. Since
the effective conversion price of the Series A Preferred Stock is less than the fair value of the underlying common stock at the
date of issuance, there is a beneficial conversion feature (“BCF”) at the issuance date. Because the Series A Preferred
Stock has no stated maturity or redemption date and is immediately convertible at the option of the holder, the discount created
by the BCF is immediately charged to accumulated deficit as a “deemed dividend” and impacts earnings per share. During
the year ended December 31, 2017, the Company recorded a discount of $6.9 million. Because the Series A Preferred Stock is not
currently redeemable, the discount arising from issuance costs was allocated to temporary equity and will not be accreted until
such time that redemption becomes probable. The stated dividend rate of 2% per annum is cumulative and the Company accrues the
dividend on a quarterly basis (in effect accreting the dividend regardless of declaration because the dividend is cumulative).
During the three and nine months ended September 30, 2020, the Company accrued dividends of $64,000 and $189,000, respectively.
During the three and nine months ended September 30, 2019, the Company accrued dividends of $63,000 and $185,000, respectively.
Once the dividend is declared, the Company will reclassify the declared amount from temporary equity to a dividends payable liability.
When the redemption of the Series A Preferred Stock becomes probable, the temporary equity will be accreted to redemption value
as a deemed dividend.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
9. Common and Preferred Stock – (continued)
B. Riley FBR Sales Agreement
On August 5, 2016, the Company entered
into the B. Riley FBR Sales Agreement with FBR Capital Markets & Co. (now known as B. Riley Securities), which enables the
Company to offer and sell shares of the Company’s common stock with an aggregate sales price of up to $40.0 million from
time to time through B. Riley FBR, Inc. as the Company’s sales agent. Sales of common stock under the B. Riley FBR Sales
Agreement are made in sales deemed to be “at-the-market” equity offerings as defined in Rule 415 promulgated under
the Securities Act. B. Riley FBR, Inc. is entitled to receive a commission rate of up to 3.0% of gross sales in connection with
the sale of the Company’s common stock sold on the Company’s behalf. The Company has not sold any shares during 2020
and 2019 through the B. Riley FBR Sales Agreement.
10. Related Party Transactions
On September 5, 2018, the Company entered
into an agreement with CSMC for an investigator-sponsored Phase 2b clinical study of SYN-010 to be co-funded by the Company and
CSMC (the “Study”). The Study was intended to provide further evaluation of the efficacy and safety of SYN-010, the
Company’s modified-release reformulation of lovastatin lactone, which is exclusively licensed to the Company by CSMC. SYN-010
was designed to reduce methane production by certain microorganisms (M. smithii) in the gut to treat an underlying cause
of irritable bowel syndrome with constipation (IBS-C).
In consideration of the support provided
by CSMC for the Study, the Company entered into a Stock Purchase Agreement with CSMC pursuant to which the Company, upon the approval
of the Study protocol by the Institutional Review Board (IRB) to: (i) issued to CSMC fifty thousand (50,000) shares of common stock
of the Company; and (ii) transferred to CSMC an additional two million four hundred twenty thousand (2,420,000) shares of common
stock of its subsidiary Synthetic Biomics, Inc. (“SYN Biomics”) owned by the Company, such that after such issuance
CSMC owns an aggregate of seven million four hundred eighty thousand (7,480,000) shares of common stock of SYN Biomics, representing
seventeen percent (17%) of the issued and outstanding shares of SYN Biomics’ common stock.
The Agreement also provides CSMC with a
right, commencing on the six month anniversary of issuance of the stock under certain circumstances in the event that the shares
of stock of SYN Biomics are not then freely tradeable, and subject to NYSE American, LLC approval, to exchange its SYN Biomics
shares for unregistered shares of the Company’s common stock, with the rate of exchange based upon the relative contribution
of the valuation of SYN Biomics to the public market valuation of the Company at the time of each exchange. The Stock Purchase
Agreement also provides for tag-along rights in the event of the sale by the Company of its shares of SYN Biomics.
On September 30, 2020, CSMC MAST formally
agreed to discontinue the ongoing Phase 2b investigator-sponsored clinical study of SYN-010 following the results of a planned
interim futility analysis. Although it was concluded that SYN-010 was well tolerated, SYN-010 is unlikely to meet its primary endpoint
by the time enrollment is completed. The Company anticipates additional reductions in clinical development expense during the remainder
of 2020 and an acceleration of expense recognition of $141,000 as a result of the discontinuation of this clinical program.
In December 2013, through the Company’s
subsidiary, Synthetic Biomics, Inc., the Company entered into a worldwide exclusive license agreement with CSMC and acquired the
rights to develop products for therapeutic and prophylactic treatments of acute and chronic diseases, including the development
of SYN-010 to target IBS-C. The Company licensed from CSMC a portfolio of intellectual property comprised of several U.S. and foreign
patents and pending patent applications for various fields of use, including IBS-C, obesity and diabetes. An investigational team
led by Mark Pimentel, M.D. at CSMC discovered that these products may reduce the production of methane gas by certain GI microorganisms.
During the three and nine months ended September 30, 2020 and 2019, the Company did not owe and did not pay CSMC for milestone
payments related this license agreement.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
11. Commitments and Contingencies
Leases
All of the Company’s existing leases
as of September 30, 2020 are classified as operating leases. As of September 30, 2020, the Company has one material operating lease
for facilities with a remaining term expiring in 2022. The existing lease has fair value renewal options, none of which are considered
certain of being exercised or included in the minimum lease term. The discount rate used in the calculation of the lease liability
was 9.9%. The rates implicit within the Company's leases are generally not determinable, therefore, the Company's incremental borrowing
rate is used to determine the present value of lease payments. The determination of the Company’s incremental borrowing rate
requires judgment. Because the Company currently has no outstanding debt, the incremental borrowing rate for each lease is primarily
based on publicly-available information for companies within the same industry and with similar credit profiles. The rate is then
adjusted for the impact of collateralization, the lease term and other specific terms included in the Company’s lease arrangements.
The incremental borrowing rate is determined at lease commencement, or as of January 1, 2019 for operating leases in existence
upon adoption of ASC 842, Leases (ASC 842). The incremental borrowing
rate is subsequently reassessed upon a modification to the lease arrangement. ROU assets are subsequently assessed for impairment
in accordance with the Company’s accounting policy for long-lived assets. Operating lease costs are presented as part of
general and administrative expenses in the condensed consolidated statements of operations, and for the three and nine months ended
September 30, 2020 approximated $50,000 and $151,000, respectively, and for three and nine months ended September 30, 2019 approximated
$50,000 and $151,000, respectively. For the three and nine months ended September 30, 2020, operating cash flows used for operating
leases approximated $77,000 and $231,000, respectively, and for three and nine months ended September 30, 2019 approximated $75,000
and $224,000, respectively.
A maturity analysis of our operating leases
as of September 30, 2020 is as follows (amounts in thousands of dollars):
Future undiscounted cash flow for the years ending December 31:
|
|
|
|
|
2020
|
|
$
|
79
|
|
2021
|
|
|
321
|
|
2022
|
|
|
192
|
|
Total
|
|
|
592
|
|
|
|
|
|
|
Discount factor
|
|
|
(53
|
)
|
Lease liability
|
|
|
539
|
|
Amount due within 12 months
|
|
|
(278
|
)
|
Lease liability – long term
|
|
$
|
261
|
|
Risks and Uncertainties
On January 30, 2020, the World Health Organization
(WHO) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the COVID-19 outbreak)
and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified
the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.
As the COVID-19 continued to spread
around the globe, the Company experienced disruptions that impact its business and clinical trials, including halting the
postponement of clinical site initiation of the Phase 1b/2a clinical trial of SYN-004. The extent to which the COVID-19
pandemic impacts the Company’s business, the clinical development of SYN-004 (ribaxamase) and SYN-020, the business of
the Company’s suppliers and other commercial partners, the Company’s corporate development objectives and the
value of and market for the Company’s common stock, will depend on future developments that are highly uncertain and
cannot be predicted with confidence at this time, such as the ultimate duration of the pandemic, travel restrictions,
quarantines, social distancing and business closure requirements in the United States, Europe and other countries, and the
effectiveness of actions taken globally to contain and treat the disease. The global economic slowdown, the overall
disruption of global healthcare systems and the other risks and uncertainties associated with the pandemic could have a
material adverse effect on the Company’s business, financial condition, results of operations and growth prospects. In
addition, to the extent the ongoing COVID-19 pandemic adversely affects the Company’s business and results of
operations, it may also have the effect of heightening many of the other risks and uncertainties which the Company faces.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
12. Subsequent Events
On November 9, 2020, the Company and its
subsidiary, Synthetic Biomics, Inc. and CSMC mutually agreed to terminate the exclusive license agreement dated December 5, 2013
and all amendments thereto and the clinical trial agreement relating to SYN-010. The determination to terminate the SYN-010 license
agreement was agreed following the completion of a planned interim futility analysis of the Phase 2b investigator-sponsored clinical
trial of SYN-010. On September 30, 2020, CSMC (the Company’s SYN-010 clinical development partner) informed the Company that
it discontinued the ongoing Phase 2b investigator-sponsored clinical study of SYN-010 IBS-C patients. Based on the results of a
planned interim futility analysis, it was concluded that although SYN-010 was well tolerated, it was unlikely to meet its primary
endpoint by the time enrollment is completed. The patent rights previously licensed to the Company covering the use of SYN-010
will remain the property of CSMC.