Notes to Consolidated Financial Statements
1. Organization and Nature of Operations
and Basis of Presentation
Description of Business
Synthetic Biologics, Inc. (the “Company”
or “Synthetic Biologics”) is a late-stage clinical company developing therapeutics designed to preserve the microbiome
to protect and restore the health of patients. The Company’s lead candidates poised for Phase 3 development are: (1) SYN-004
(ribaxamase) which is designed to protect the gut microbiome (gastrointestinal (GI) microflora) from the effects of certain commonly
used intravenous (IV) antibiotics for the prevention of
C. difficile
infection (CDI), overgrowth of pathogenic organisms
and the emergence of antimicrobial resistance (AMR), and (2) SYN-010 which is intended 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). The Company’s
preclinical pursuits include an oral formulation of the enzyme intestinal alkaline phosphatase (IAP) to treat both local GI and
systemic diseases and, in collaboration with Intrexon Corporation (NYSE: XON), to develop preclinical stage monoclonal antibody
therapies for the prevention and treatment of pertussis, and novel discovery stage biotherapeutics for the treatment of phenylketonuria
(PKU).
Basis of Presentation and Corporate
Structure
As of December 31, 2017, the Company had
eight subsidiaries, Pipex Therapeutics, Inc. (“Pipex Therapeutics”), Effective Pharmaceuticals, Inc. (“EPI”),
Solovax, Inc. (“Solovax”), CD4 Biosciences, Inc. (“CD4”), Epitope Pharmaceuticals, Inc. (“Epitope”),
Healthmine, Inc. (“Healthmine”), Putney Drug Corp. (“Putney”) and Synthetic Biomics, Inc. (“SYN
Biomics”). Pipex Therapeutics, EPI, Healthmine and Putney are wholly owned, and Solovax, CD4, Epitope and SYN Biomics are
majority-owned.
For financial reporting purposes, the outstanding
common stock of the Company is that of Synthetic Biologics, Inc. All statements of operations, (deficit) equity and cash flows
for each of the entities are presented as consolidated. All subsidiaries were formed under the laws of the State of Delaware on
January 8, 2001, except for EPI, which was incorporated in Delaware on December 12, 2000, Epitope which was incorporated in Delaware
in January of 2002, Putney which was incorporated in Delaware in November of 2006, Healthmine which was incorporated in Delaware
in December of 2007 and SYN Biomics which was incorporated in Nevada in December of 2013.
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 December 31, 2017, the Company had an accumulated deficit
of approximately $194.2 million. Since inception, the Company has financed its activities principally from the proceeds from the
issuance of equity securities.
The Company’s ability to continue
as a going concern is dependent upon the Company’s ability to raise additional debt and equity capital. There can be no
assurance that such capital will be available in sufficient amounts or on terms acceptable to the Company. These factors 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.
The Company does not have sufficient capital
to fund our plan of operations over the next twelve months. In order to address our capital needs, including our planned Phase
2b/3 clinical trials, the Company is actively pursuing additional equity or debt financing, in the form of either a private placement
or a public offering. The Company has been in ongoing discussions with strategic institutional investors and investment banks with
respect to such possible offerings. Such additional financing opportunities might not be available to the Company when and if needed,
on acceptable terms or at all. 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.
Synthetic Biologics,
Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. Going Concern – (continued)
At December 31, 2017, the Company had
cash and cash equivalents of approximately $17.1 million. Based upon the Company’s current business plans, management does
not believe that the Company’s current cash on hand will be sufficient to execute its near term plans. Commencement of planned
clinical trials 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 within the anticipated time
periods (including initiation of its planned clinical trials), if at all, 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. Potential
sources of financing include strategic relationships, public or private sales of equity (including through the “at-the-market”
Issuance Sales Agreement (the “FBR Sales Agreement”) that the Company entered into with FBR Capital Markets &
Co. in August 2016) or debt and other sources. The Company cannot assure that it will meet the requirements for use of the FBR
Sales Agreement or that additional funding will be available on favorable terms, or at all. Current cash is expected to cover
overhead costs, manufacturing costs for clinical supply, commercial scale up costs and limited research efforts. If the Company
fails to obtain additional funding for its clinical trials in the next few months, whether through the sale of securities or a
partner or collaborator, and otherwise when needed, it will not be able to execute its business plan as planned and will be forced
to cease certain development activities (including initiation of planned clinical trials) until funding is received and its business
will suffer, which would have a material adverse effect on its financial position, results of operations and cash flows. Clinical
development will resume once sufficient funding is available.
The actual amount of funds we will need
to operate is subject to many factors, some of which are beyond our control. These factors include the following:
|
·
|
the
progress of our research activities;
|
|
·
|
the
number and scope of our research programs;
|
|
·
|
the
progress of our preclinical and clinical development activities;
|
|
·
|
the
progress of the development efforts of parties with whom we have entered into research
and development agreements and amount of funding received from partners and collaborators;
|
|
·
|
our
ability to maintain current research and development licensing arrangements and
to establish new research and development and licensing arrangements;
|
|
·
|
our
ability to achieve our milestones under licensing arrangements;
|
|
·
|
the
costs associated with manufacturing-related services to produce material for use in our
clinical trials;
|
|
·
|
the
costs involved in prosecuting and enforcing patent claims and other intellectual property
rights; and
|
|
·
|
the
costs and timing of regulatory approvals
.
|
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 Consolidated Financial Statements
3. Summary of Significant Accounting
Policies
Principles of Consolidation
All intercompany transactions and accounts
have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes. Such estimates and assumptions impact, among others, the following:
the estimated useful lives for property and equipment, fair value of warrants, preferred stock and stock options granted for services
or compensation, respectively, estimates of the probability and potential magnitude of contingent liabilities, and the valuation
allowance for deferred tax assets due to continuing and expected future operating losses.
Making estimates requires management to
exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or
set of consolidated financial statements, which management considered in formulating its estimate could change in the near term
due to one or more future confirming events. Accordingly, actual results could differ from those estimates.
Non-controlling Interest
The Company’s non-controlling interest
represents the minority shareholder’s ownership interest related to the Company’s subsidiary, SYN Biomics. 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. The Company’s equity interest in SYN Biomics is 88.5% and the non-controlling
stockholder’s interest is 11.5%. This is reflected in the Consolidated Statements of (Deficit) Equity.
Revenue Recognition
The Company records revenue when all of
the following have occurred: (1) persuasive evidence of an arrangement exists, (2) the service is completed without further obligation,
(3) the sales price to the customer is fixed or determinable, and (4) collectability is reasonably assured. The Company recognizes
milestone payments or upfront payments that have no contingencies as revenue when payment is received. For the years ended December
31, 2017, 2016 and 2015 the Company did not report any revenues.
Grants
Grants received
from research collaboration agreements with third parties are recognized as a reduction in the related research and development
expense in the Consolidated Statements of Operations
.
Risks and Uncertainties
The Company’s operations could be
subject to significant risks and uncertainties including financial, operational and regulatory risks and the potential risk of
business failure. The global economic crisis has caused a general tightening in the credit markets, lower levels of liquidity,
increases in the rates of default and bankruptcy, and extreme volatility in credit, equity and fixed income markets. These three
conditions may not only limit the Company’s access to capital, but also make it difficult for its customers, its vendors
and its ability to accurately forecast and plan future business activities.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
3. Summary of Significant Accounting
Policies – (continued)
Cash and Cash Equivalents
Cash and cash equivalents include cash
and highly liquid short-term investments with original maturities of three months or less.
Property and Equipment
Property and equipment is recorded at
cost and depreciated or amortized using the straight-line method over the estimated useful life of the asset or the underlying
lease term for leasehold improvements, whichever is shorter. The estimated useful life by asset description is noted in the following
table.
Asset
Description
|
|
Estimated
Useful Life
|
Office
equipment and furniture
|
|
3 – 5
years
|
Manufacturing
equipment
|
|
10
years
|
Leasehold
improvements and fixtures
|
|
Lesser
of estimated useful life or lease term
|
Depreciation and amortization expense was
approximately $245,000, $157,000 and $72,000 for the years ended December 31, 2017, 2016 and 2015, respectively. When assets are
disposed of, the cost and accumulated depreciation are removed from the accounts with any gain or loss reported in the consolidated
statement of operations. Repairs and maintenance are charged to expense as incurred.
The Company reviews property and equipment
for impairment to determine if assets are impaired due to obsolescence. As a result of this review, there was no impairment recognized
for the years ended December 31, 2017, 2016 and 2015.
Long-Lived Assets
The Company reviews its long-lived assets
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
If such an event or change in circumstances occurs and potential impairment is indicated because the carrying values exceed the
estimated future undiscounted cash flows of the asset, the Company will measure the impairment loss as the amount by which the
carrying value of the asset exceeds its fair value.
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. For the year ended December 31, 2017 net loss attributable to common
stock holders included preferred stock dividends of $6.9 million. The number of options and warrants for the purchase of common
stock that were excluded from the computations of net loss per common share for the year ended December 31, 2017 were 12,564,098
and 32,029,808, respectively, for the year ended December 31, 2016 were 11,636,227 and 57,341,642, respectively, and for the year
ended December 31, 2015 were 8,941,930 and 7,908,899, respectively.
Research and Development Costs
The Company expenses research and
development costs associated with developmental products not yet approved by the FDA to research and development expense as
incurred. Research and development costs consist primarily of license fees (including upfront payments), milestone payments,
manufacturing costs, salaries, stock-based compensation and related employee costs, fees paid to consultants and outside
service providers for laboratory development, legal expenses resulting from intellectual property prosecution and other
expenses relating to the design, development, testing and enhancement of our product candidates. Research and development
expenses include external contract research organization (“CRO”) services. The Company makes payments to the CROs
based on agreed upon terms and may include payments in advance of study services. The Company reviews and accrues CRO
expenses based on services performed and relies on estimates of those costs applicable to the stage of completion of a study
as provided by the CRO. Accrued CRO costs are subject to revisions as such studies progress to completion. The Company has
accrued CRO expenses of $700,000 and $2.2 million that are included in accounts payable and accrued expenses at December 31,
2017 and 2016, respectively. The Company has prepaid CRO costs of $46,000 and $1.7 million at December 31, 2017 and 2016, respectively.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
3. Summary of Significant Accounting
Policies – (continued)
Fair Value of Financial Instruments
Accounting Standards Codification (ASC)
820,
Fair Value Measurement
, define fair values 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, included in Level 1 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 $98,000 and $1.7 million as of December 31, 2017 and 2016, respectively, that are measured using
Level 1 inputs.
The Company uses Monte Carlo simulations to estimate the fair value of the warrants. In using this model,
the fair value is determined by applying Level 3 inputs for which there is little or no observable market data, requiring the Company
to develop its own assumptions. The assumptions used in calculating the estimated fair value of the warrants represent the Company’s
best estimates; however, these estimates involve inherent uncertainties and the application of management judgment. As a result,
if factors change and different assumptions are used, the warrant liability and the change in estimated fair value could be materially
different.
Stock-Based Payment Arrangements
Generally, all forms of stock-based payments,
including stock option grants, warrants, restricted stock grants and stock appreciation rights are measured at their fair value
on the awards’ grant date typically using the Black-Scholes option pricing model, based on the estimated number of awards
that are ultimately expected to vest. Stock-based compensation awards issued to non-employees for services rendered are recorded
at either the fair value of the services rendered or the fair value of the stock-based payment, whichever is more readily determinable
and are remeasured over the corresponding vesting period. The expense resulting from stock-based payments is recorded in research
and development expense or general and administrative expense in the Consolidated Statement of Operations, depending on the nature
of the services provided.
Derivative Instruments
The warrants issued in conjunction with the registered direct offering in October 2014 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 at a premium. The warrants issued in conjunction with the public offering of the Company’s securities in November
2016 include a provision, that if the Company were to enter into a certain transaction, as defined in the warrant agreement, the
warrants would be purchased from the holder for cash. The provisions of these warrants preclude equity accounting treatment under
ASC 815,
Derivatives and Hedging,
Accordingly, the Company is required to record the warrants as liabilities at their fair
value upon issuance and re-measure the fair value at each period end with the change in fair value recorded in the Consolidated
Statement of Operations. When the warrants are exercised or cancelled, they are reclassified to equity. The Company uses Monte
Carlo simulations to estimate the fair value of the warrants.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
3. Summary of Significant Accounting
Policies – (continued)
Income Taxes
The Company recognizes deferred tax liabilities
and assets based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities,
using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense)
results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when it is more
likely than not that some or all deferred tax assets will not be realized.
Management assesses the need to accrue
or disclose uncertain tax positions for proposed potential adjustments from various federal and state authorities who regularly
audit the Company in the normal course of business. In making these assessments, management must often analyze complex tax laws
of multiple jurisdictions. The Company records the related interest expense and penalties, if any, as tax expense in the tax provision.
At December 31, 2017 and 2016, the Company did not record any liabilities for uncertain tax positions.
Recent Accounting Pronouncements
and Developments
In May 2017, the Financial Accounting Standards
Board, (“FASB”) issued Accounting Standards Update (“ASU”) 2017-09,
Scope of Modification Accounting,
clarifies Topic 718, Compensation – Stock Compensation
, which requires a company to apply modification accounting to
changes in the terms or conditions of a share-based payment award unless all of the following criteria are met: (1)
the fair value of the modified award is the same as the fair value of the original award immediately before the modification. The
ASU indicates that if the modification does not affect any of the inputs to the valuation technique used to value the award, the
entity is not required to estimate the value immediately before and after the modification; (2) the vesting conditions of the modified
award are the same as the vesting conditions of the original award immediately before the modification; and (3) the classification
of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award
immediately before the modification. The ASU is effective for all entities for fiscal years beginning after December
15, 2017, including interim periods within those years. Early adoption is permitted, including adoption in an interim
period. The Company currently does not have any modifications to existing stock compensation agreements and will be able to
calculate the impact of ASU 2017-09 once modifications arise.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments
, to clarify whether the following
items should be categorized as operating, investing or financing activities in the statement of cash flows: (i) debt prepayments
and extinguishment costs, (ii) settlement of zero-coupon debt, (iii) settlement of contingent consideration, (iv) insurance proceeds,
(v) settlement of corporate-owned life insurance (COLI) and bank-owned life insurance (BOLI) policies, (vi) distributions from
equity method investees, (vii) beneficial interests in securitization transactions, and (viii) receipts and payments with aspects
of more than one class of cash flows. Accordingly, ASU 2016-15 is effective for public business entities for fiscal years beginning
after December 15, 2017
,
with early adoption permitted. The Company does not anticipate any
impact from the adoption of this standard on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718)
, which
is part of the FASB’s Simplification Initiative. The updated guidance simplifies the accounting for share-based payment transactions.
The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016,
with early adoption permitted. The Company adopted this standard beginning January 1, 2017. The adoption did not result in significant
changes to the recognition and disclosure of stock-based compensation for the year ended December 31, 2017. The Company recognizes
actual forfeitures in the period in which they occur.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842
), which establishes a new lease accounting model for lessees. The updated guidance requires an entity
to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative
and quantitative disclosures. The amended guidance is effective for fiscal years, and interim periods within those years, beginning
after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this
standard on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
, to
provide guidance on revenue recognition. ASU 2014-09 requires a company to recognize revenue when it transfers promised goods
or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange
for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s
guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration
to include in the transaction price and allocating the transaction price to each separate performance obligation.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
3. Summary of Significant Accounting
Policies – (continued)
In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral
of the Effective Date
, which provided for the adoption of the new standard for fiscal years beginning after December 15, 2017.
Accordingly, ASU 2014-09 is effective for the Company in the first quarter of 2018 and early adoption up to the first quarter of
2017 is permitted. Upon adoption, ASU 2014-09 can be applied retrospectively to all periods presented or only to the most current
period presented with the cumulative effect of changes reflected in the opening balance of retained earnings in the most current
period presented. The FASB has also issued the following standards which clarify ASU No. 2014-09 and have the same effective date
as the original standard:
|
·
|
ASU 2016-10,
Identifying Performance Obligations and Licensing
(Topic 606);
|
|
·
|
ASU 2016-11,
Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting
;
|
|
·
|
ASU 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
;
|
|
·
|
ASU 2016-20,
Technical Correction and Improvements; and
|
|
·
|
ASU 2016-20,
Technical correction and improvements to Topic 606, Revenue from Contracts with Customers
.
|
The Company does not have any revenues
or contracts with customers and will need to evaluate the impact of Topic 606 on its results of operations, cash flows and financial
position should a revenue generating transaction arise in the future. While the Company will adopt Topic 606 on January 1, 2018
(and will do so on a modified retrospective basis), the adoption will have no impact on the Company’s consolidated financial
statements.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. Selected Balance Sheet Information
Prepaid expenses and other current
assets (in thousands):
|
|
December
31,
2017
|
|
|
December
31,
2016
|
|
Prepaid insurance
|
|
$
|
351
|
|
|
$
|
358
|
|
Other prepaid expenses
|
|
|
290
|
|
|
|
185
|
|
Prepaid conferences, travel and other expenses
|
|
|
94
|
|
|
|
295
|
|
Clinical consulting services refund receivable
|
|
|
46
|
|
|
|
-
|
|
Prepaid clinical research organizations
|
|
|
46
|
|
|
|
1,677
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
827
|
|
|
$
|
2,515
|
|
Prepaid clinical research organization
expense is classified as a current asset. The Company makes payments to the clinical research organizations based on agreed upon
terms that include payments in advance of study services. The Company anticipates that the majority of the prepaid clinical research
organization expenses will be applied to research and development expenses during 2018.
Property and equipment (in thousands):
|
|
December
31,
2017
|
|
|
December
31,
2016
|
|
Computer and office equipment
|
|
$
|
851
|
|
|
$
|
641
|
|
Leasehold improvements
|
|
|
439
|
|
|
|
439
|
|
Software
|
|
|
11
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,301
|
|
|
|
1,091
|
|
Less accumulated depreciation and amortization
|
|
|
(429
|
)
|
|
|
(186
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
872
|
|
|
$
|
905
|
|
ACCRUED EXPENSES
Accrued expenses (in thousands):
|
|
December
31,
2017
|
|
|
December
31,
2016
|
|
Accrued manufacturing costs
|
|
$
|
661
|
|
|
$
|
14
|
|
Accrued clinical consulting services
|
|
|
658
|
|
|
|
2,211
|
|
Accrued vendor payments
|
|
|
193
|
|
|
|
400
|
|
Other accrued expenses
|
|
|
14
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,526
|
|
|
$
|
2,627
|
|
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. Selected Balance Sheet Information – (continued)
Accrued employee benefits (in thousands)
|
|
December
31,
2017
|
|
|
December
31,
2016
|
|
Accrued bonus expense
|
|
$
|
1,283
|
|
|
$
|
-
|
|
Accrued severance expense
|
|
|
590
|
|
|
|
52
|
|
Accrued vacation expense
|
|
|
201
|
|
|
|
261
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,074
|
|
|
$
|
313
|
|
5. Stock-Based Compensation and Warrants
Stock Incentive Plan
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 2,500,000
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. 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 250,000. Options become exercisable
over various periods from the date of grant, and generally expire ten years after the grant date. As of December 31, 2017, there
were 712,258 options issued and outstanding under the 2007 Stock Plan.
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 3,000,000 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. On October 22, 2013, the stockholders approved and adopted an amendment to
the Company’s 2010 Incentive Stock Plan to increase the number of shares of Company’s common stock reserved for issuance
under the Plan from 3,000,000 to 6,000,000. On May 15, 2015, the stockholders approved and adopted an amendment to the Company’s
2010 Incentive Stock Plan to increase the number of shares of the Company’s common stock reserved for issuance under the
Plan from 6,000,000 to 8,000,000. 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 8,000,000
to 14,000,000. 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 8,000,000 to 17,500,000.
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 period from the date of grant, and expire between five and ten years after the grant date.
As of December 31, 2017, there were 11,851,840 options issued and outstanding under the 2010 Stock Plan.
In the event of an employee’s termination,
the Company will cease to recognize compensation expense for that employee. There is no deferred compensation recorded upon initial
grant date. Instead, the fair value of the stock-based payment is recognized 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 or warrant granted is estimated on the date of grant using the Black-Scholes option pricing model. The
assumptions used for the years ended December 31, 2017, 2016 and 2015 are as follows:
|
|
Year
ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Exercise
price
|
|
$
|
0.52 – $0.87
|
|
|
$
|
0.80 – $2.66
|
|
|
$
|
1.54 – $2.76
|
|
Expected
dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected
volatility
|
|
|
83% – 96
|
%
|
|
|
96% – 123
|
%
|
|
|
88% – 131
|
%
|
Risk
free interest rate
|
|
|
1.67% – 2.28
|
%
|
|
|
1.40% – 2.13
|
%
|
|
|
1.32% – 2.19
|
%
|
Expected
life of option
|
|
|
4 – 7 years
|
|
|
|
7
years
|
|
|
|
5
years – 10 years
|
|
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Stock-Based Compensation and Warrants
– (continued)
The Company records stock-based compensation
based upon the stated vested provisions in the related agreements. The vesting provisions for these agreements have various terms
as follows:
|
·
|
in
full on one-year anniversary date of grant date,
|
|
·
|
half
vesting immediately and remaining over three years,
|
|
·
|
quarterly
over three years,
|
|
·
|
annually
over three years,
|
|
·
|
one-third
immediate vesting and remaining annually over two years,
|
|
·
|
one-half
immediate vesting and remaining over nine months,
|
|
·
|
one-quarter
immediate vesting and remaining over three years,
|
|
·
|
one-quarter
immediate vesting and remaining over 33 months; and
|
|
·
|
monthly
over three years.
|
During the years ended December 31, 2017,
2016 and 2015, the Company granted 3,159,177, 3,861,425 and 3,781,666 options to employees and directors having an approximate
fair value of $1.8 million, $3.1 million and $8.0 million based upon the Black-Scholes options pricing model, respectively.
Stock-based compensation expense included
in general and administrative expenses and research and development expenses relating to stock options issued to employees for
the years ended December 31, 2017, 2016 and 2015 was $3.0 million, $3.4 million and $2.3 million, respectively. Stock-based compensation
expense included in general and administrative expenses and research and development expenses relating to stock options issued
to consultants for the years ended December 31, 2017, 2016 and 2015 were $434,000, $603,000 and $888,000, respectively.
A summary of stock option activities for
the years ended December 31, 2017, 2016 and 2015, is as follows:
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5.
Stock-Based Compensation and Warrants – (continued)
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2014
|
|
|
5,981,106
|
|
|
$
|
2.01
|
|
|
|
5.80
years
|
|
|
$
|
685,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,781,666
|
|
|
|
2.37
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(35,008
|
)
|
|
|
1.16
|
|
|
|
|
|
|
$
|
44,000
|
|
Expired
|
|
|
(483,332
|
)
|
|
|
2.48
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(302,502
|
)
|
|
|
1.91
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2015
|
|
|
8,941,930
|
|
|
|
2.14
|
|
|
|
5.67
years
|
|
|
$
|
2,900,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,861,425
|
|
|
|
0.98
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(445,334
|
)
|
|
|
1.83
|
|
|
|
|
|
|
$
|
137,488
|
|
Expired
|
|
|
(338,529
|
)
|
|
|
1.96
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(383,265
|
)
|
|
|
2.26
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2016
|
|
|
11,636,227
|
|
|
|
1.77
|
|
|
|
5.49
years
|
|
|
$
|
194,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,159,177
|
|
|
|
0.59
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(418,773
|
)
|
|
|
0.40
|
|
|
|
|
|
|
$
|
163,050
|
|
Expired
|
|
|
(667,628
|
)
|
|
|
2.21
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,144,905
|
)
|
|
|
1.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance -December 31, 2017 - outstanding
|
|
|
12,564,098
|
|
|
$
|
1.55
|
|
|
|
4.60
years
|
|
|
$
|
1,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2017 - exercisable
|
|
|
7,805,796
|
|
|
$
|
1.96
|
|
|
|
3.43
years
|
|
|
$
|
1,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant date fair value of options granted - December 31, 2017
|
|
|
|
|
|
$
|
1,164,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value - December 31, 2017
|
|
|
|
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant date fair value of options granted - December 31, 2016
|
|
|
|
|
|
$
|
3,091,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value - December 31, 2016
|
|
|
|
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Stock-Based Compensation and Warrants – (continued)
The options outstanding and exercisable
at December 31, 2017 are as follows:
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of
Exercise
Price
|
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
$
|
0.09 – $2.00
|
|
|
|
7,244,099
|
|
|
$
|
.85
|
|
|
|
5.28
years
|
|
|
|
3,082,751
|
|
|
$
|
1.13
|
|
|
|
3.41
years
|
|
$
|
2.01 – $3.00
|
|
|
|
5,319,999
|
|
|
|
2.49
|
|
|
|
3.66
years
|
|
|
|
4,723,045
|
|
|
|
2.50
|
|
|
|
3.44
years
|
|
$
|
0.09 – $3.00
|
|
|
|
12,564,098
|
|
|
$
|
1.55
|
|
|
|
4.60
years
|
|
|
|
7,805,796
|
|
|
$
|
1.96
|
|
|
|
3.43
years
|
|
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Stock-Based Compensation and Warrants – (continued)
As of December 31, 2017, total unrecognized
stock-based compensation expense related to stock options was $2.9 million, which is expected to be expensed through August 2019.
FASB’s guidance for stock-based
payments requires cash flows from excess tax benefits to be classified as a part of cash flows from financing 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 in 2017, 2016 or 2015. Cash received
from option exercises under the Company’s stock-based compensation plans for the years ended December 31, 2017, 2016 and
2015 was $166,000, $814,000 and $41,000, respectively.
Stock Warrants
On November 18, 2016, the Company
completed a public offering of 25 million shares of common stock in combination with accompanying warrants to purchase an
aggregate of 50,000,000 shares of the 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 $1.00. 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 $1.43 and the per share exercise price of the Series B warrants is $1.72, 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 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 will be recorded as non-cash income or expense in the Company’s
Statement of Operations at each subsequent period. At December 31, 2017, the fair value of the warrant liability was $3.7
million, which resulted in non-cash income of $9.0 million in 2017. At December 31, 2016, the fair value of the warrant
liability was $12.7 million, which resulted in non-cash income of $3.0 million in 2016. The warrants were valued on the date
of grant using Monte Carlo Simulations.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Stock-Based Compensation and Warrants
– (continued)
The assumptions used by the Company are
summarized in the following table:
|
|
Series A
|
|
|
Series B
|
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
Issuance
Date
|
|
|
December 31,
2016
|
|
|
Issuance
Date
|
|
Closing stock price
|
|
$
|
0.51
|
|
|
$
|
0.76
|
|
|
$
|
0.89
|
|
|
$
|
0.76
|
|
|
$
|
0.89
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
80
|
%
|
|
|
85
|
%
|
|
|
85
|
%
|
|
|
90
|
%
|
|
|
85
|
%
|
Risk free interest rate
|
|
|
1.97
|
%
|
|
|
1.67
|
%
|
|
|
1.58
|
%
|
|
|
0.85
|
%
|
|
|
0.81
|
%
|
Expected life of warrant
|
|
|
2.9 years
|
|
|
|
3.9 years
|
|
|
|
4.0 years
|
|
|
|
1.0 years
|
|
|
|
1.1 years
|
|
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
0.5 shares of common stock. The warrants, exercisable for an aggregate of 7,029,808 shares of common stock, have an exercise price
of $1.75 per share and a life of five years. The warrants vested immediately and expire on October 10, 2019.
The warrants issued in conjunction with the registered direct offering in October 2014 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 at a premium. Accordingly, the Company recorded the warrants as a liability at their estimated fair value on the issuance
date, which was $7.4 million, and changes in estimated fair value will be recorded as non-cash income or expense in the Company’s
Consolidated Statements of Operations at each subsequent period. At December 31, 2017, the fair value of the warrant liability
was $416,000, which resulted in non-cash income of $1.7 million in 2017. At December 31, 2016, the fair value of the warrant liability
was $2.1 million, which resulted in non-cash income of $8.5 million in 2016. The warrants were valued on the date of grant using
the Black-Scholes valuation model which approximates the value derived using Monte Carlo simulations. The assumptions used by the
Company are summarized in the following table:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
Issuance
Date
|
|
Closing stock price
|
|
$
|
0.51
|
|
|
$
|
0.76
|
|
|
$
|
1.75
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
80
|
%
|
|
|
95
|
%
|
|
|
95
|
%
|
Risk free interest rate
|
|
|
1.86
|
%
|
|
|
1.41
|
%
|
|
|
1.39
|
%
|
Expected life of warrant
|
|
|
1.79
years
|
|
|
|
2.79
years
|
|
|
|
5.0
years
|
|
The following table summarizes the estimated
fair value of the warrant liability
(in thousands)
:
Balance at December 31, 2015
|
|
$
|
10,566
|
|
Issuance of warrants
|
|
|
15,667
|
|
Change in fair value of warrant liability
|
|
|
(11,412
|
)
|
Balance at December 31, 2016
|
|
|
14,821
|
|
Change in fair value of warrant liability
|
|
|
(10,738
|
)
|
Balance at December 31, 2017
|
|
$
|
4,083
|
|
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated
Financial Statements
5. Stock-Based Compensation and Warrants – (continued)
On October 25, 2012, the Company entered
into a Common Stock Purchase Agreement with certain accredited investors. As part of this agreement, the Company issued warrants
to purchase 635,855 shares of common stock to the placement agent, or its permitted assigns. The warrants have an exercise price
of $1.60 and a life of five years. The warrants vested immediately and expired October 25, 2017. Since these warrants were granted
as part of an equity raise, the Company treated them as a direct offering cost. The result of the transaction has no affect to
equity. As of December 31, 2017, none of these warrants remained outstanding.
A summary of warrant activity for the Company for the years
ended December 31, 2017 and 2016 is as follows:
|
|
Number of
Warrants
|
|
|
Weighted Average
Exercise Price
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
|
7,908,899
|
|
|
$
|
1.79
|
|
Granted
|
|
|
50,000,000
|
|
|
|
1.58
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(567,257
|
)
|
|
|
2.35
|
|
Balance at December 31, 2016
|
|
|
57,341,642
|
|
|
|
1.60
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(25,311,834
|
)
|
|
|
1.72
|
|
Balance at December 31, 2017
|
|
|
32,029,809
|
|
|
$
|
1.50
|
|
There was no stock-based compensation
expense included in general and administrative and research and development expenses relating to warrants issued to consultants
for the years ended December 31, 2017, 2016 and 2015.
A summary of all outstanding and exercisable
warrants as of December 31, 2017 is as follows:
Exercise Price
|
|
|
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
|
|
Weighted Average
Remaining
Contractual Life
|
|
$
|
1.43
|
|
|
|
25,000,000
|
|
|
|
25,000,000
|
|
|
|
2.88
years
|
|
$
|
1.75
|
|
|
|
7,029,809
|
|
|
|
7,029,809
|
|
|
|
1.78
years
|
|
$
|
1.50
|
|
|
|
32,029,809
|
|
|
|
32,029,809
|
|
|
|
2.64
years
|
|
Synthetic Biologics,
Inc. and Subsidiaries
Notes to Consolidated
Financial Statements
6. Stockholders’ Equity
Year Ended December 31, 2017
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 on 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 classifying the 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 $0.54 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.
The holder’s ability to convert
the Series A Preferred Stock into common stock is subject to (i) a 19.99% blocker provision to comply with NYSE American
Listing Rules, (ii) if so elected by the Investor, a 4.99% blocker provision that will prohibit beneficial ownership of more
than 4.99% of the outstanding shares of the Company’s common stock or voting power at any time, and (iii) applicable
regulatory restrictions.
In the event of any liquidation, dissolution
or winding-up of the Company, holders of the Series A Preferred Stock are entitled to a preference on liquidation equal to the
greater of (i) an amount per share equal to the stated value plus any accrued and unpaid dividends on such share of Series A Preferred
Stock (the “Accreted Value”), and (ii) the amount such holders would receive in such liquidation if they converted
their shares of Series A Preferred Stock (based on the Accreted Value and without regard to any conversion limitation) into shares
of the common stock immediately prior to any such liquidation, dissolution or winding-up (the greater of (i) and (ii), is referred
to as the “Liquidation Value”).
Except as otherwise required by law, the
holders of Series A Preferred Stock have no voting rights, other than customary protections against adverse amendments and issuance
of
pari passu
or senior preferred stock. Upon certain change of control events involving the Company, the Company
will be required to repurchase all of the Series A Preferred Stock at a redemption price equal to the greater of (i) the Accreted
Value and (ii) the amount that would be payable upon a change of control (as defined in the Certificate of Designation) in respect
of common stock issuable upon conversion of such share of Series A Preferred Stock if all outstanding shares of Series A Preferred
Stock were converted into common stock immediately prior to the change of control.
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 $2.00, 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 $225.00, 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 issue date, the Company shall have 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.
The Series A Preferred Stock is classified as temporary equity due to the shares being (i) redeemable
based on contingent events outside of the Company’s control, and (ii) convertible immediately and from time to time. 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 retained earnings 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 year ended December 31, 2017, the Company accrued dividends of $73,000. 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 Consolidated
Financial Statements
6. Stockholders’ Equity – (continued)
FBR Sales Agreement
For the year ended December 31, 2017,
the Company sold through the FBR Sales Agreement an aggregate of 11.0 million shares of the Company’s common stock and received
net proceeds of approximately $6.4 million before deducting issuance expenses.
Also, during the year ended December 31, 2017, the Company issued 418,773 shares of common stock in connection
with the exercise of stock options for proceeds of approximately $166,190.
Year Ended December 31, 2016
On November 18, 2016, the Company completed
a public offering of 25 million shares of common stock in combination with accompanying warrants to purchase an aggregate of 50,000,000
shares of the 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 $1.00. The shares of common stock are immediately separable from the
warrants and were issued separately. The initial per share exercise price of the Series A warrants was $1.43 and the per share
exercise price of the Series B warrants was $1.72, each subject to adjustment as specified in the warrants. 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 were exercisable until December 31, 2017 and none were exercised prior
to their expiration. Net proceeds, after deducting underwriting discounts and estimated expenses were approximately $23.3 million.
On August 5, 2016, the Company entered
into the FBR Sales Agreement with FBR Capital Markets & Co., 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 FBR Capital Markets & Co. as
the Company’s sales agent. Sales of common stock under the 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, as amended. FBR Capital Markets & Co. is entitled
to receive a commission rate of up 3.0% of gross sales in connection with the sale of the Company’s common stock sold on
the Company’s behalf. From August 11, 2016 through December 31, 2016, the Company had sold through the FBR Sales Agreement
an aggregate of 900,628 shares of the Company’s common stock, and received gross proceeds of approximately $1,550,197, before
deducting issuance expenses.
Also, during the year ended December 31,
2016, the Company issued 445,334 shares of common stock, in connection with the exercise of stock options and warrants, for proceeds
of approximately $814,000.
Year Ended December 31, 2015
On August 29, 2015, the Company, SYN Biomics,
a majority-owned subsidiary, and Mark Pimentel, M.D. entered into an amendment to the Stock Purchase Agreement dated December
3, 2013, which accelerated the date upon which Dr. Pimentel could exchange his shares of common stock in SYN Biomics for shares
of the Company’s common stock. On August 29, 2015, Dr. Pimentel notified the Company of his intent to exchange all of the
shares of common stock in SYN Biomics owned by him for 1,350,000 shares of the Company’s common stock in accordance with
the terms of the Stock Purchase Agreement, as amended. On August 31, 2015, the Company issued 1,350,000 shares of the Company’s
common stock to Dr. Pimentel in exchange for all of the shares of common stock of SYN Biomics held by Dr. Pimentel.
On August 10, 2015, the Company expanded
its relationship with Intrexon Corporation (“Intrexon”) and entered into an Exclusive Channel Collaboration Agreement
with Intrexon that governs a “channel collaboration” arrangement in which the Company will use Intrexon’s technology
relating to the development and commercialization of novel biotherapeutics for the treatment of patients with PKU. The Company
paid Intrexon a technology access fee by the issuance of 937,500 shares of common stock, having a value equal to $3.0 million,
which has been recorded as research and development expense.
Synthetic Biologics,
Inc. and Subsidiaries
Notes to Consolidated
Financial Statements
6. Stockholders’ Equity – (continued)
In July 2015, the Company completed a
public offering of 15,333,333 shares of common stock, including the fully exercised over-allotment option by the underwriters
covering 2.0 million shares, at an offering price of $3.00 per share. The total gross proceeds of the offering, including the
exercise in full of the over-allotment option, were approximately $46.0 million. Net proceeds to the Company, after deducting
the underwriters’ discount and other estimated expenses, were approximately $42.6 million. The Company paid direct offering
costs of $3.4 million.
In addition, during the year ended December
31, 2015, the Company issued 655,321 shares of common stock to Prev ABR LLC, with a fair value of $1,350,000 that was recorded
as research and development expense, in consideration for achieving the first three milestones as set forth in the Asset Purchase
Agreement dated November 28, 2012. In lieu of receiving any cash payment for achieving the first three milestones, Prev ABR LLC
exercised its option to receive the milestone payments in shares of the Company’s common stock. The number of shares of common
stock issued upon achievement of each milestone was based upon the average of the opening and closing prices of the Company’s
stock on the date each milestone was achieved as specified in the Asset Purchase Agreement.
Also, during the year ended December 31,
2015, the Company issued 35,006 shares of common stock, in connection with the exercise of stock options and warrants, for proceeds
of approximately $41,000.
7. Non-controlling Interest
On August 29, 2015, the Company, SYN Biomics
and Mark Pimentel, M.D. entered into an amendment to the Pimentel Stock Purchase Agreement dated December 3, 2013, which accelerated
the date upon which Dr. Pimentel could exchange his shares of common stock in SYN Biomics for shares of the Company’s common
stock. On August 29, 2015, Dr. Pimentel notified the Company of his intent to exchange all of the shares of common stock in SYN
Biomics, 8.5%, owned by him for 1,350,000 shares of the Company’s common stock in accordance with the terms of the Stock
Purchase Agreement, as amended. On August 31, 2015, the Company issued 1,350,000 shares of the Company’s common stock to
Dr. Pimentel in exchange for all of the shares of common stock of SYN Biomics held by Dr. Pimentel.
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, 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. After Dr. Pimentel’s
transaction, the Company’s equity interest in SYN Biomics is 88.5% and the non-controlling stockholder’s interest is
11.5%. As of December 31, 2017, the accumulated net loss attributable to the non-controlling interest is $1.9 million. As of December
31, 2016, the accumulated net loss attributable to the non-controlling interest is $1.6 million and includes $1 million of prior
year losses attributable to minority stockholders including the reversal of Dr. Pimentel’s 2015 losses of $505,000 associated
with the exchange of his shares of common stock in SYN Biomics for shares of the Company’s common stock, and current year
losses of $548,000 attributable to minority stockholders. Management considers the amounts which should have been recorded in prior
years to be immaterial.
8. License,
Collaborative and Employment Agreements and Commitments
License and Collaborative Agreements
As described below, the Company has entered
into several license and collaborative agreements for the right to use research, technology and patents. Some of these license
and collaborative agreements may contain milestones. The specific timing of such milestones cannot be predicted and are dependent
on future developments as well as regulatory actions which cannot be predicted with certainty (including actions which may never
occur). Further, under the terms of certain licensing agreements, the Company may have the obligation to pay certain milestones
contingent upon the achievement of specific levels of sales. Due to the long-range nature of such commercial milestone amounts,
they are neither probable at this time nor predictable and consequently are not included in this disclosure.
Cedars-Sinai Medical Center (“CSMC”)
Agreement
On December 5, 2013, the Company, through its newly formed, majority owned subsidiary, SYN Biomics entered
into a worldwide exclusive License Agreement with CSMC for the development of new treatment approaches to target non-bacterial
intestinal microorganism life forms known as archaea that are associated with intestinal methane production and chronic diseases
such as irritable bowel syndrome (IBS), obesity and type 2 diabetes. As part of the terms of the License Agreement the Company
issued 334,911 unregistered shares of the Company’s common stock to CSMC, paid $150,000 for the initial license fee and $220,000
for patent reimbursement fees. The License Agreement also provides that, commencing on the second anniversary of the License Agreement,
SYN Biomics will pay an annual maintenance fee, which payment shall be creditable against annual royalty payments owed under the
License Agreement. In addition to royalty payments which are a percentage of net sales of licensed and technology products, SYN
Biomics is obligated to pay CSMC a percentage of any non-royalty sublicense revenues, as well as additional consideration upon
the achievement of milestones (the first two of which are payable in cash or unregistered shares of Company stock at the Company’s
option). On December 5, 2013, the Company also entered into an option agreement with CSMC, which expired unexercised on December
31, 2014.
Synthetic Biologics,
Inc. and Subsidiaries
Notes to Consolidated
Financial Statements
8. License, Collaborative and Employment
Agreements and Commitments – (continued)
The License Agreement terminates: (i) automatically if SYN Biomics enters into a liquidating bankruptcy
or other specified bankruptcy event or if the performance of any term, covenant, condition or provision of the License Agreement
will jeopardize the licensure of CSMC, its participation in certain reimbursement programs, its full accreditation by the Joint
Commission of Accreditation of Healthcare Organizations or any similar state organizations, its tax exempt status or is deemed
illegal; (ii) upon 30 days notice from CSMC if SYN Biomics fails to make a payment or use commercially reasonable efforts to exploit
the patent rights; (iii) upon 60 days notice from CSMC if SYN Biomics fails to cure any breach or default of any material obligations
under the License Agreement; or (iv) upon 90 days notice from SYN Biomics if CSMC fails to cure any breach or default of any material
obligations under the License Agreement. SYN Biomics also has the right to terminate the License Agreement without cause upon six
months notice to CSMC; however, upon such termination, SYN Biomics is obligated to pay a termination fee with the amount of such
fee reduced: (i) if such termination occurs after an Investigational New Drug submission to the FDA but prior to completion of
a Phase 2 clinical trial, (ii) reduced further if such termination occurs after completion of Phase 2 clinical trial but prior
to completion of a Phase 3 clinical trial; and (iii) reduced to zero if such termination occurs after completion of a Phase 3 clinical
trial.
Prior to the execution of the CSMC License Agreement, SYN Biomics issued shares of common stock of SYN
Biomics to each of CSMC and Mark Pimentel, M.D. (the primary inventor of the intellectual property), representing 11.5% and 8.5%,
respectively, of the outstanding shares of SYN Biomics (the “SYN Biomics Shares”). The Stock Purchase Agreements for
the SYN Biomics shares provide for certain anti-dilution protection until such time as an aggregate of $3.0 million in proceeds
from equity financings are received by SYN Biomics as well as a right, under certain circumstances in the event that the SYN Biomics
shares are not then freely tradable, and subject to NYSE American approval, as of the 18 and 36 month anniversary date of the effective
date of the Stock Purchase Agreements, for each of CSMC and the Dr. Pimentel to exchange up to 50% of their SYN Biomics shares
for unregistered share 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 us at the time of each exchange. The Stock Purchase Agreements also
provide for tag-along rights in the event of the sale by the Company of its shares of SYN Biomics.
On August 29, 2015, the Company, SYN Biomics
and Mark Pimentel, M.D. entered into an amendment to the Pimentel Stock Purchase Agreement, which accelerated the date upon which
Dr. Pimentel can exchange his shares of common stock in SYN Biomics for shares of the Company’s common stock. On August
29, 2015, Dr. Pimentel notified the Company of his intent to exchange all of the shares of common stock in SYN Biomics owned by
him for 1,350,000 shares of the Company’s common stock in accordance with the terms of the Pimentel Stock Purchase Agreement,
as amended. On August 31, 2015, the Company issued 1,350,000 shares of the Company’s common stock to Dr. Pimentel in exchange
for all of the shares of common stock of SYN Biomics held by Dr. Pimentel.
University of Texas Austin Agreement
On December 19, 2012, the Company entered
into a License Agreement with The University of Texas at Austin (the “University”) for the exclusive license of the
right to use, develop, manufacture, market and commercialize certain research and patents related to pertussis antibodies. The
License Agreement provides that the University is entitled to payment of past patent expenses, an annual payment of $50,000 per
year commencing on the effective date through December 31, 2014, a $25,000 payment on December 31, 2015 and milestone payments
of $50,000 upon commencement of Phase 1 clinical trials, $100,000 upon commencement of Phase 3 clinical trials, $250,000 upon NDA
submission in the U.S., $100,000 upon European Medicines Agency approval and $100,000 upon regulatory approval in an Asian country.
In addition, the University is entitled to a running royalty upon net sales. The License Agreement terminates upon the expiration
of the patent rights; provided, however that the License Agreement is subject to early termination by the Company in its discretion
and by the University for a breach of the License Agreement by the Company.
In connection with the License Agreement, the Company and the University also entered into a Sponsored
Research Agreement pursuant to which the University will perform certain research work related to pertussis. The Sponsored Research
Agreement may be renewed annually, in the sole discretion of the Company, after the first year for two additional one year terms
with a fixed fee for the first year of $303,287. The Sponsored Research Agreement was renewed for the second and third years for
a fixed fee of $316,438 and $328,758 respectively, all payable in quarterly installments. The Sponsored Research Agreement was
to expire on December 31, 2015; provided, however, the Sponsored Research Agreement is subject to early termination upon the written
agreement of the parties, a default in the material obligations under the Research Agreement which remain uncured for 60 days after
receipt of notice, automatically upon the Company’s bankruptcy or insolvency and by the Company in its sole discretion at
any time after the one year anniversary of the date of execution thereof upon no less than 90 days notice.
Synthetic Biologics,
Inc. and Subsidiaries
Notes to Consolidated
Financial Statements
8. License, Collaborative and Employment
Agreements and Commitments – (continued)
On October
22, 2015, the Company and the University amended the Sponsored Research Agreement to extend the termination date to January 15,
2017, on September 2, 2016 to extend the agreement until January 15, 2018 and again on August 22, 2017 to extend the agreement
until January 17, 2019. All other terms and conditions of the Sponsored Research Agreement remain unchanged. No further or additional
payments will be made to the University as a result of this amendment.
Prev ABR LLC (“Prev”) Agreement
On November 28, 2012, the Company entered
into an agreement (“Prev Agreement”) to acquire the C. diff program assets of Prev, including pre-Investigational New
Drug (IND) package, Phase 1 and Phase 2 clinical data, manufacturing process data and all issued and pending U.S. and international
patents. Upon execution and closing of the Prev Agreement, the Company paid Prev cash payments of $235,000 and issued 625,000 unregistered
shares of its common stock to Prev. As set forth in the Prev Agreement, Prev may be entitled to receive additional consideration
upon the achievement of certain milestones including: (i) commencement of an IND; (ii) commencement of a Phase 1 clinical trial;
(iii) commencement of a Phase 2 clinical trial; (iv) commencement of a Phase 3 clinical trial; (v) filing a Biologic License Application
(BLA) in the U.S. and for territories outside of the U.S. (as defined in the Prev Agreement); and (vi) approval of a BLA in the
U.S. and for territories outside the U.S. With exception of the first milestone payment, the remaining milestones are payable 50%
in cash and 50% in our stock, however, at Prev’s option the entire milestone may be payable in shares of the Company’s
stock. Under the Prev Agreement, the Company may be required to the return all of assets acquired from Prev if (i) the Company
has not initiated toxicology studies in non-rodent models within 30 months of the Prev Agreement execution date, or (ii) within
36 months of the Prev Agreement execution date the Company has not filed a C. Diff program IND and such failure is not due to action
or inaction of Prev or breach of its representations or warranties or covenants or if there is a change of control as defined in
the Prev Agreement and after such change of control the assets are not further developed; provided however that such 30 and 36
month periods can be extended by the Company for an additional 12 months upon payment of a cash milestone payment. As of December
31, 2015, the first three milestones have been met, and at Prev’s option, Prev elected to receive 655,321 shares of the Company’s
common stock. No milestones were achieved or such payments were made during the years ended December 31, 2016 and 2017.
Intrexon Exclusive Channel Collaboration
On August 6, 2012, the Company expanded
its relationship with Intrexon and entered into an Exclusive Channel Collaboration (“ECC”) (“Infectious Disease
ECC”) with Intrexon that governs an “exclusive channel collaboration” arrangement in which the Company will
use Intrexon’s technology relating to the identification, design and production of human antibodies and DNA vectors for
the development and commercialization of a series of monoclonal antibody therapies for the treatment of certain serious infectious
diseases. Pursuant to the terms of the Second Stock Issuance Agreement with Intrexon, which was approved by the Company’s
stockholders on October 5, 2012, the Company issued 3,552,210 shares of its common stock, $0.001 par value, which issuance is
also deemed paid in consideration for the execution and delivery of the Infectious Disease ECC, dated August 6, 2012, between
the Company and Intrexon. The fair value of this transaction was $7.8 million and was charged to research and development expense
for the year ended December 31, 2012, in accordance with the Company’s accounting policy. In connection with the transactions
contemplated by the Second Stock Issuance Agreement, and pursuant to the First Amendment to Registration Rights Agreement (the
“First Amendment to Registration Rights Agreement”) executed and delivered by the parties at the closing, which was
declared effective on May 5, 2013. The Company filed a “resale” registration statement registering the resale of the
shares issued under the Second Stock Issuance Agreement.
Subject to certain expense allocations
and other offsets provided in the Infectious Disease ECC, the Company will pay Intrexon royalties on annual net sales of the Synthetic
Products, calculated on a Synthetic Product-by-Synthetic Product basis. The Company has likewise agreed to pay Intrexon a percentage
of quarterly revenue obtained from a sublicensor in the event of a sublicensing arrangement. No such payments were made during
the year ended December 31, 2016 and 2017.
The Company also agreed upon the filing
of an IND application with the FDA for a Synthetic Product, or alternatively the filing of the first equivalent regulatory filing
with a foreign regulatory agency (both as applicable, the “IND Milestone Event”), to pay Intrexon either (i) $2.0
million in cash, or (ii) that number of shares of Common Stock (the “IND Milestone Shares”) having a fair market value
equaling $2.0 million where such fair market value is determined using published market data of the share price for Common Stock
at the close of market on the business day immediately preceding the date of public announcement of attainment of the IND Milestone
Event.
Upon the first to occur of either first
commercial sale of a Synthetic Product in a country or the granting of the regulatory approval of that Synthetic Product (both
as applicable, the “Approval Milestone Event”), the Company agreed to pay to Intrexon either (i) $3.0 million in cash,
or (ii) that number of shares of Common Stock (the “Approval Milestone Shares”) having a fair market value equaling
$3.0 million where such fair market value is determined using published market data of the share price for Common Stock at the
close of market on the business day immediately preceding the date of public announcement of attainment of the Approval Milestone
Event.
Synthetic Biologics,
Inc. and Subsidiaries
Notes to Consolidated
Financial Statements
8. License, Collaborative and Employment
Agreements and Commitments – (continued)
The Company also agreed that it will pay
an optional and varying fee whereby the Company remits a payment, in cash or equity at its sole discretion, to Intrexon calculated
as a multiple of the number of targets in excess of three total that the Company desires to elect (the “Field Expansion Fee”).
The Field Expansion Fee must be paid completely in either Common Stock or cash, and will comprise either (i) $2.0 million in cash
for each target in excess of three total that the Company elects, or (ii) that number of shares of Common Stock (the “Field
Expansion Fee Shares”) having a fair market value equaling $2.0 million for each such target that the Company elects in excess
of three where such fair market value is determined using published market data establishing the volume-weighted average price
for a share of Common Stock over the 30 day period immediately preceding the date of the Field Expansion Fee Closing. No milestones
were achieved or such payments were made during the year ended December 31, 2016 and 2017.
On August 10, 2015, the Company expanded our relationship with Intrexon and entered into an Exclusive
Channel Collaboration Agreement (the “Channel Agreement”) with Intrexon that governs a “channel collaboration”
arrangement in which the Company will use Intrexon’s technology relating to the development and commercialization of novel
biotherapeutics (a “Collaboration Product”) for the treatment of patients with PKU. On September 2, 2015, in accordance
with the terms of the Intrexon Stock Issuance Agreement that that the Company entered into in connection with the Channel Agreement,
the Company paid Intrexon a technology access fee by the issuance of 937,500 shares of common stock, having a value equal to $3.0
million as of August 7, 2015.
In addition, upon the achievement of certain
milestones, the Company agreed to pay Intrexon milestone payments of up to $27 million for each product developed as follows: (i)
$2 million upon first dosing of a patient in a Phase 1 clinical trial upon commencement of an IND, payable in stock or cash at
the Company’s option; (ii) a payment 30 days after achievement of the first commercial sale of a Collaboration Product in
the United States or approval of a New Drug Application and/or Biologics License Application for a Collaboration Product by the
U.S. Food and Drug Administration; and (iii) a payment 30 days after achievement of the first commercial sale of a Collaboration
Product in a nation subject to the authority of the European Medicines Agency (EMA) or approval of a Marketing Authorization Application
for a Collaboration Product by the EMA. The Company will pay Intrexon royalties on annual net sales of Collaboration Products,
calculated on a product-by-product basis, equal to a percent of net sales (ranging from mid-single digits on the first $100 million
of net sales to mid-teen digits on net sales in excess of $750 million). The Company likewise agreed to pay Intrexon a percentage
of quarterly revenue obtained from a sublicensor in the event of a sublicensing arrangement. Pursuant to the Second Amendment to
Registration Rights Agreement, the Company filed a “resale” registration statement to register the shares issued under
the Intrexon Stock Issuance Agreement, which was declared effective by the SEC on October 15, 2015.
During December 2012, the Company paid
Intrexon a prepayment of research and development expenses of $2.5 million for research and development goods and services to
be provided in the future and was recorded on the Company’s Consolidated Balance Sheets in prepaid expenses and other current
assets. Related research and development expenses of $643,000 and $424,000 were recorded against this prepayment for the years
ended December 31, 2016 and 2015, respectively. At December 31, 2017, there is no remaining balance of the Intrexon prepayment
of research and development expenses.
Employment Agreements
On April 28, 2015, the Company entered into a two-year employment agreement with Steven A. Shallcross
(the “Shallcross Employment Agreement”), who was appointed to serve as the Company’s Chief Financial Officer,
Treasurer and Secretary, effective June 1, 2015. Pursuant to the Shallcross Employment agreement, Mr. Shallcross is entitled to
an annual base salary of $315,000. Additionally, Mr. Shallcross was granted options to purchase 900,000 shares of the Company’s
common stock with an exercise price equal to the per share market price on the date of issue. These options vest pro rata, on
a monthly basis, over 36 months. The Company measured the fair value of the stock options at approximately $1.9 million using
the Black-Scholes option pricing model. In 2015 and for each full calendar year thereafter, Mr. Shallcross will be eligible for
an annual performance bonus of up to seventy-five percent (75%) of his base salary. The annual bonus is to be based upon
the Board’s assessment of Mr. Shallcross’ performance. The Shallcross Employment Agreement also includes confidentiality
obligations and inventions assignments by Mr. Shallcross and non-solicitation and non-competition provisions.
Effective November 30, 2016, the Company
entered into an amendment to the Shallcross Employment Agreement to increase Mr. Shallcross’ annual base salary to $346,500.
The Company entered into another amendment to the Shallcross Employment Agreement, dated as of May 31, 2017, to, among other things,
extend the term of the agreement two years, or until May 30, 2019 (unless earlier terminated pursuant to the terms of the agreement).
On December 5, 2017, Mr. Shallcross was appointed as the Company’s Interim Chief Executive Officer.
Effective December 20, 2017, the Company entered into an amendment to the Shallcross Employment Agreement to increase Mr. Shallcross’
annual base salary to $381,150 and for the period that Mr. Shallcross serves as Interim Chief Executive Officer, he shall receive
a cash payment from the Company of Eight Thousand Dollars ($8,000) per calendar month; pro-rated for any partial months that Mr.
Shallcross serves as Interim Chief Executive Officer, payable in accordance with the regular payroll practices of the Company.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. License, Collaborative and Employment
Agreements and Commitments – (continued)
On January 17, 2017, the Company entered
into a two-year employment agreement with Dr. Joseph Sliman (the “Sliman Employment Agreement”), who was promoted at
the Company from the position of Senior Vice President–Clinical & Regulatory Affairs to the position of Chief Medical
Officer. The terms of the Employment Agreement are set forth below. Pursuant to the terms of the Employment Agreement, Dr.
Sliman is entitled to an annual base salary of $385,000 and an annual performance bonus of up to seventy five percent (75%) of
his annual base salary. The annual bonus will be based upon the assessment of the Board of Dr. Sliman’s performance. Dr.
Sliman was also granted a seven (7) year incentive stock option to purchase at an exercise price equal to the per share market
price on the date of issue, 188,927 shares of the Company’s common stock, vesting pro rata on a monthly basis over a three
year period. The Employment Agreement also includes confidentiality obligations and inventions assignments by Dr. Sliman and non-solicitation
and non-competition provisions.
The Shallcross Employment Agreement and the Sliman Employment Agreement each have a stated term of two
years but may be terminated earlier pursuant to their terms. If either Mr. Shallcross’ or Dr. Sliman’s (each an “Executive”)
employment is terminated for any reason, he or his estate as the case may be, will be entitled to receive the accrued base salary,
vacation pay, expense reimbursement and any other entitlements accrued by him to the extent not previously paid (the “Accrued
Obligations”);
provided
,
however
, that if his employment is terminated (1) by the Company without Cause
or by the Executive for Good Reason (as each is defined below) then in addition to paying the Accrued Obligations, (x) the Company
will continue to pay his then current base salary and continue to provide benefits at least equal to those which were provided
at the time of termination for a period of twelve (12) months and (y) he shall have the right to exercise any vested equity awards
until the earlier of six (6) months after termination or the remaining term of the awards, or (2) by reason of his death or Disability
(as defined in the Shallcross Employment Agreement and the Sliman Employment Agreement), then in addition to paying the Accrued
Obligations, he would have the right to exercise any vested options until the earlier of six (6) months after termination or the
remaining term of the awards. In such event, if the Executive commenced employment with another employer and becomes eligible
to receive medical or other welfare benefits under another employer-provided plan, the medical and other welfare benefits to be
provided by the Company as described herein will terminate.
The Shallcross Employment Agreement and
the Sliman Employment Agreement each provide that upon the closing of a “Change in Control” (as defined below), the
time period that the Executive will have to exercise all vested stock options and other awards that the Executive may have will
be equal to the shorter of: (i) six (6) months after termination, or (ii) the remaining term of the award(s). Upon the closing
of a Change in Control, all of Mr. Shallcross’ and Dr. Sliman’s unvested options shall immediately vest. If within
one year after the occurrence of a Change in Control, the Executive terminates his employment for “Good Reason” or
the Company terminates the Executive’s employment for any reason other than death, Disability or Cause, the Executive will
be entitled to receive: (i) the portion of his base salary for periods prior to the effective date of termination accrued but
unpaid (if any); (ii) all unreimbursed expenses (if any); (iii) an aggregate amount (the “Change in Control Severance Amount”)
equal to two times the sum of the base salary plus an amount equal to the bonus that would be payable if the “target”
level performance were achieved under the Company’s annual bonus plan (if any) in respect of the fiscal year during which
the termination occurs (or the prior fiscal year if bonus levels have not yet been established for the year of termination); and
(iv) the payment or provision of any other benefits. The Change in Control Severance Amount is to be paid in a lump sum, if the
Change in Control event constitutes a “change in the ownership” or a “change in the effective control”
of the Company or a “change in the ownership of a substantial portion of a corporation’s assets” (each within
the meaning of Section 409A of the Internal Revenue Code), or in 48 substantially equal payments, if the Change in Control event
does not so comply with Section 409A. Upon the termination of employment for Good Reason by the Executive or upon the involuntary
termination of employment of Executive for any reason other than death, Disability or Cause, in either case within two years commencing
after the occurrence of a Change in Control, the Executive will be entitled to receive for a period of two years commencing on
the date of such termination medical, dental, life and disability coverage for himself and his family members which is not less
favorable than the coverage carried by the Company at the time of termination.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. License, Collaborative and Employment
Agreements and Commitments – (continued)
For the purposes of the Shallcross Employment
Agreement and the Sliman Employment Agreement “Change in Control” is defined as: (i) any person or entity becoming
the beneficial owner, directly or indirectly, of the Company’s securities representing fifty (50%) percent of the total voting
power of all its then outstanding voting securities; (ii) a merger or consolidation of the Company in which its voting securities
immediately prior to the merger or consolidation do not represent, or are not converted into securities that represent, a majority
of the voting power of all voting securities of the surviving entity immediately after the merger or consolidation; or (iii) a
sale of substantially all of the Company’s assets or its liquidation or dissolution.
For purpose of the Shallcross Employment
Agreement and the Sliman Employment Agreement, “Good Reason” is defined as the occurrence of any of the following
events without the respective Executive’s consent: (i) a material reduction in the Executive’s base salary (other
than an across-the-board decrease in base salary applicable to all executive officers of the Company); (ii) a material breach
of the employment agreement by the Company; (iii) a material reduction in the Executive’s duties, authority and responsibilities
relative to the Executive’s duties, authority, and responsibilities in effect immediately prior to such reduction; or (iv)
the relocation of the Executive’s principal place of employment, without the Executive’s consent, in a manner that
lengthens his one-way commute distance by fifty (50) or more miles from his then-current principal place of employment immediately
prior to such relocation.
For purposes of the Shallcross Employment
Agreement and the Sliman Employment Agreement, “Cause” is defined as that the Executive shall have engaged in any of
the following acts or that any of the following events shall have occurred, all as determined by the Board of Directors of the
Company in its sole and absolute discretion: (i) gross insubordination, acts of embezzlement or misappropriation of funds, fraud,
dereliction of fiduciary obligations; (ii) conviction of a felony or other crime involving moral turpitude, dishonesty or theft
(including entry of a
nolo contendere
plea); (iii) willful unauthorized disclosure of confidential information belonging
to the Company or entrusted to the Company by a client; (iv) material violation of any provision of the Executive’s employment
agreement, of any Company policy, and/or of a confidentiality agreement, which, to the extent it is curable by the Executive, is
not cured by the Executive within 30 days of receiving written notice of such violation by the Company; (v) being under the influence
of drugs (other than prescription medicine or other medically related drugs to the extent that they are taken in accordance with
their directions) during the performance of the Executive’s duties; (vi) engaging in behavior that would constitute grounds
for liability for harassment (as proscribed by the U.S. Equal Employment Opportunity Commission Guidelines or any other applicable
state or local regulatory body) or other egregious conduct that violates laws governing the workplace; or (vii) willful failure
to perform his written assigned tasks, where such failure is attributable to the fault of the Executive which, to the extent it
is curable by the Executive, is not cured by the Executive within 30 days of receiving written notice of such violation by the
Company.
Effective February 3, 2012, Jeffrey Riley
was appointed to serve as the Company’s Chief Executive Officer and President. In connection with his appointment, Mr. Riley
entered into a three-year employment agreement with the Company (the “Original Riley Agreement”). Pursuant to the Original
Riley Employment Agreement, Mr. Riley was entitled to an annual base salary of $348,000, which was increased to $385,000 on April
17, 2014 and was eligible for discretionary performance and transactional bonus payments. Additionally, Mr. Riley was granted options
to purchase 750,000 shares of the Company’s common stock with an exercise price equal to the per share market price on the
date of issue. These options vested pro rata, on a monthly basis, over 36 months. The Company measured the fair value of the stock
options at approximately $1.7 million using a Black-Scholes valuation model.
Effective March 18, 2015, the Company entered into a new two-year employment agreement with Mr. Riley
(the “2015 Riley Employment Agreement”). Pursuant to the 2015 Riley Employment Agreement, Mr. Riley’s annual
base salary remained at $385,000. Beginning in 2015 and for each full calendar year thereafter, Mr. Riley was eligible for an
annual performance bonus of up to seventy-five percent (75%) of his base salary. The annual bonus was to be based upon the Board’s
assessment of Mr. Riley’s performance. The 2015 Employment Agreement also included employment termination provisions similar
to those in the Shallcross Employment Agreement and the Sliman Employment Agreement as well as confidentiality obligations, inventions
assignments by Mr. Riley as well as change in control, non-solicitation and non-competition provisions.
Effective December 4, 2015, the Company
entered into an amendment to the Riley Employment Agreement dated March 18, 2015, to increase Mr. Riley’s annual base salary
to $550,000. Effective February 2, 2017, the Company entered into a new two-year employment agreement with Mr. Riley (the “2017
Riley Employment Agreement”). Pursuant to the 2017 Riley Employment Agreement, Mr. Riley’s annual base salary remained
at $550,000. The 2017 Riley Employment Agreement provided that Mr. Riley was eligible for an annual performance bonus of up to
seventy-five percent (75%) of his base salary. The 2017 Employment Agreement also included employment termination provisions similar
to those in the Shallcross Employment Agreement and the Sliman Employment Agreement as well as confidentiality obligations, inventions
assignments by Mr. Riley as well as change in control, non-solicitation and non-competition provisions.
Synthetic Biologics,
Inc. and Subsidiaries
Notes to Consolidated
Financial Statements
8. License, Collaborative and Employment
Agreements and Commitments – (continued)
Effective December 4, 2017, Mr. Riley resigned
his position as President and Chief Executive Officer of the Company. Pursuant to his resignation, the Company entered into a Separation
Agreement effective December 4, 2017 (the “Separation Agreement”) with Mr. Riley. The Separation Agreement provides
that in addition to receiving all accrued obligations, including salary and earned and unused vacation days, Mr. Riley will receive
the following separation benefits: (i) twelve months’ payment of Mr. Riley’s current base salary, subject to payroll
withholdings and deductions, paid on the Company’s regular payroll dates; (ii) a cash bonus for 2017 of $200,000; and (iii)
the right to exercise vested stock options for one year following December 5, 2017. Mr. Riley is also entitled to COBRA continuation
coverage and the Company shall pay the COBRA premium for Mr. Riley for a maximum period of twelve months after his separation from
the Company. The Separation Agreement also contains additional provisions that are customary for agreements of this type. These
include confidentiality and non-solicitation provisions. All costs associated with the Separation Agreement were recorded during
the year ended December 31, 2017.
Operating Lease
During 2012, the Company entered into a twelve-month operating lease for office space in Ann Arbor, Michigan.
In September 2015, this lease was amended to extend the term of the lease to December 31, 2016, for annual lease payments of $40,000.
This lease was not renewed. In August 2015, the Company also entered into a 66 month operating lease that may be renewed for one
additional term of five years, for office space in Rockville, Maryland, for annual lease payments of $142,172. The Company’s
lease provides for fixed monthly rent for the term of the lease, with monthly rent increasing annually. In March 2016, the Company
amended the Rockville, Maryland lease to increase the leased space and extend the lease term of the August 2015 lease conterminous
with the lease amendment to 69 months for annual lease payments of $285,843.
During the years ended December 31, 2017,
2016 and 2015, the Company recognized rent expense of $199,000, $145,000 and $108,000, respectively. The following table summarizes
the Company’s future minimum lease payments as of December 31, 2017
(in thousands)
:
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Lease
|
|
$
|
292
|
|
|
$
|
300
|
|
|
$
|
309
|
|
|
$
|
321
|
|
|
$
|
192
|
|
|
$
|
1,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
292
|
|
|
$
|
300
|
|
|
$
|
309
|
|
|
$
|
321
|
|
|
$
|
192
|
|
|
$
|
1,414
|
|
Consulting Fees
In November 2017, the Company engaged a
regulatory consultant to assist in the Company’s efforts to prepare, file and obtain FDA approval for ribaxamase. The
term of the engagement is on a monthly basis, provided that either party may terminate the agreement at any time by providing the
other party a six-month notice period. The Company is obligated to pay the consultant a monthly retainer in addition to the success
fee payments of up to an aggregate of $5,500,000 for attainment of certain regulatory milestones.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
9. Income Taxes
There was no income tax expense for the
years ended December 31, 2017 and 2016 due to the Company’s net losses. The Company’s tax expense differs from the
“expected” tax expense for the years ended December 31, 2017 and 2016 (computed by applying the Federal corporate
tax rate of 34% to loss before taxes and 3.96% for blended state income tax rate, the blended rate used was 37.96%), as follows
(in thousands)
:
|
|
2017
|
|
|
2016
|
|
Computed “expected” tax-benefit – Federal
|
|
$
|
(5,267
|
)
|
|
$
|
(9,453
|
)
|
Computed “expected” tax-benefit – State
|
|
|
(613
|
)
|
|
|
(1,101
|
)
|
Adjustment of “expected” tax-benefit to actual
|
|
|
(2
|
)
|
|
|
(431
|
)
|
Meals, entertainment and other
|
|
|
10
|
|
|
|
10
|
|
Non-deductible stock-based compensation
|
|
|
502
|
|
|
|
574
|
|
Fair Market Value Adjustment – Warrants
|
|
|
(4,076
|
)
|
|
|
(4,332
|
)
|
Impact of U.S. tax reform
|
|
|
21,555
|
|
|
|
-
|
|
Change in valuation allowance
|
|
|
(12,109
|
)
|
|
|
14,733
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The effects of temporary differences
that gave rise to significant portions of deferred tax assets at December 31, 2017 and 2016 are as follows (
in thousands
):
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Stock issued for services
|
|
$
|
1,730
|
|
|
$
|
1,861
|
|
Accrued compensation
|
|
|
164
|
|
|
|
119
|
|
Stock issued for acquisition of program
|
|
|
1,202
|
|
|
|
1,576
|
|
Stock issued for license agreement
|
|
|
1,947
|
|
|
|
3,147
|
|
Stock issued for milestone payment
|
|
|
301
|
|
|
|
478
|
|
Amortizable license fee
|
|
|
6
|
|
|
|
9
|
|
Net operating loss carry-forward
|
|
|
40,248
|
|
|
|
50,517
|
|
Total gross deferred tax assets
|
|
|
45,598
|
|
|
|
57,707
|
|
Less: valuation allowance
|
|
|
(45,598
|
)
|
|
|
(57,707
|
)
|
Total net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
The Tax Cuts and Jobs Act (the Tax Act)
was signed into law on December 22, 2017. The Tax Act changed many aspects of U.S. corporate income taxation and included reduction
of the corporate income tax rate from 35% to 21%, implementation of a territorial tax system and imposition of a tax on deemed
repatriated earnings of foreign subsidiaries. We recognized the tax effects of the Tax Act in the year ended December 31, 2017
and recorded $21.6 million in tax expense which relates almost entirely to the remeasurement of deferred tax assets to the 21%
tax rate. Upon completion of our 2017 U.S. income tax return in 2018 we may identify additional remeasurement adjustments to our
recorded deferred tax assets. We will continue to assess our provision for income taxes as future guidance is issued but do not
currently anticipate significant revisions will be necessary. ASC 740 requires the Company to record the effects of a tax law change in the period of enactment, however,
shortly after the enactment of the Tax Act, the SEC staff issued SAB 118, which allows the Company to record a provisional amount
when it does not have the necessary information available, prepared, or analyzed in reasonable detail to complete its accounting
for the change in the tax law. The measurement period ends when the Company has obtained, prepared and analyzed the information
necessary to finalize its accounting, but cannot extend beyond one year.
At December 31, 2017, the Company has a
net operating loss carry-forward of approximately $156.4 million available to offset future taxable income expiring through 2037.
However, utilization of these net operating losses may be limited due to potential ownership changes under Section 382 of the Internal
Revenue Code.
The valuation allowance at December 31,
2017 was approximately $45.6 million. The net change in valuation allowance during the year ended December 31, 2017 was a decrease
of approximately $12.1 million. In assessing the realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred
income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based on consideration of these items, management has determined that enough
uncertainty exists relative to the realization of the deferred income tax asset balances to warrant the application of a full
valuation allowance as of December 31, 2017.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
10. Related Party Transactions
On November 18, 2016, a member of the board of directors, Scott Tarriff acquired 300,000 shares of the
Company’s common stock together with a Series A warrant to purchase 300,000 shares of the Company’s common stock at
an exercise price of $1.43 and a Series B warrant to purchase 300,000 shares of the Company’s common stock at an exercise
price of $1.72 for an aggregate purchase price of $300,000. The shares of stock and warrants were acquired in the Company’s
public offering that was consummated on November 18, 2016. The Series A warrant may be exercised until the four year anniversary
of the date of its issuance and the Series B warrant expired December 31, 2017.
In August 2015, the Company expanded its
relationship with Intrexon and entered into an Exclusive Channel Collaboration Agreement with Intrexon. In connection with the
Channel Agreement, the Company paid Intrexon a technology access fee by the issuance of 937,500 shares of common stock having a
value equal to $3 million as of August 7, 2015. In August 2012, the Company entered into an Infectious Disease ECC with Intrexon
and issued 3,552,210 shares of common stock as consideration, having a fair value of $7.8 million ($2.20 per share), based on the
quoted closing trading price on October 5, 2012. In November 2011, the Company entered into its initial ECC with Intrexon and issued
3,123,558 shares of common stock as consideration, having a fair value of $1.7 million ($0.54 per share), based on the quoted closing
trading price on that date. In connection with the November 2011 and August 2012 ECCs, the Company paid Intrexon approximately $2.9
million during 2012, including a prepayment of research and development expenses of $2.5 million for research and development goods
and services to be provided in the future which has been recorded on the Company’s Consolidated Balance Sheet in prepaid
expenses and other current assets as described in Note 4. In October 2012, the Company consummated its October 2012 Private Placement
and entered into a stock purchase agreement with several investors, including NRM VII Holdings I, LLC, an entity affiliated with
Intrexon. Randal J. Kirk, directly and through certain affiliates, has voting and dispositive power over a majority of the outstanding
capital of Intrexon Corporation, and controls NRM VII Holdings I, LLC. Mr. Kirk disclaims beneficial ownership of the shares held
by Intrexon Corporation and NRM VII Holdings I, LLC, except to the extent of any pecuniary interest therein.
In December
2013, through the Company’s subsidiary, SYN Biomics, Inc., the Company entered into a worldwide exclusive license agreement
with Cedars-Sinai Medical Center “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 year ended December 31, 2016,
the Company paid Cedars-Sinai Medical Center $350,000 for milestone payments related this license agreement. There were no milestone
payments made during the years ended December 31, 2017.
11. Selected Quarterly Financial Data
(Unaudited)
(In thousands, except per share amounts)
|
|
Quarter Ended
|
|
|
|
March 31,
2017
|
|
|
June 30,
2017
|
|
|
September 30,
2017
|
|
|
December 31,
2017*
|
|
Loss from operations
|
|
$
|
(8,149
|
)
|
|
$
|
(6,475
|
)
|
|
$
|
(5,842
|
)
|
|
$
|
(5,783
|
)
|
Net (loss) income
|
|
$
|
(3,058
|
)
|
|
$
|
(4,315
|
)
|
|
$
|
(10,930
|
)
|
|
$
|
2,812
|
|
Net (loss) income per share – basic
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
0.02
|
|
Net (loss) income per share – dilutive
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
0.02
|
|
Weighted average common share – basic
|
|
|
117,447,260
|
|
|
|
123,005,220
|
|
|
|
128,279,674
|
|
|
|
128,566,883
|
|
Weighted average common share – dilutive
|
|
|
117,447,260
|
|
|
|
123,005,220
|
|
|
|
128,279,674
|
|
|
|
150,847,262
|
|
|
|
Quarter Ended
|
|
|
|
March 31,
2016
|
|
|
June 30,
2016
|
|
|
September 30,
2016
|
|
|
December 31,
2016
|
|
Loss from operations
|
|
$
|
(10,581
|
)
|
|
$
|
(9,311
|
)
|
|
$
|
(9,156
|
)
|
|
$
|
(10,204
|
)
|
Net (loss)
|
|
$
|
(11,078
|
)
|
|
$
|
(5,764
|
)
|
|
$
|
(8,489
|
)
|
|
$
|
(2,472
|
)
|
Net loss per share – basic
|
|
$
|
(0.12
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.02
|
)
|
Net loss per share – dilutive
|
|
$
|
(0.12
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.02
|
)
|
Weighted average common share – basic
|
|
|
90,826,752
|
|
|
|
91,015,733
|
|
|
|
91,441,687
|
|
|
|
103,804,308
|
|
Weighted average common share – dilutive
|
|
|
90,826,752
|
|
|
|
93,930,540
|
|
|
|
91,441,687
|
|
|
|
103,804,308
|
|
*Net Income due to gain on remeasurement of the warrant liabilities in excess of the quarter to date loss.