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 diversified clinical-stage company developing therapeutics designed to prevent and treat
gastrointestinal (GI) diseases in areas of high unmet need. The Company’s lead clinical development candidates are: (1) SYN-004
(ribaxamase) which is designed to degrade certain commonly used intravenous (IV) beta-lactam antibiotics within the gastrointestinal
(GI) tract to prevent (a) microbiome damage, (b) Clostridioides difficile infection (CDI), (c) overgrowth
of pathogenic organisms, (d) the emergence of antimicrobial resistance (AMR) and (e) acute graft-versus-host-disease
(aGVHD) in allogeneic hematopoietic cell transplant (HCT) recipients, and (2) SYN-020, a recombinant oral formulation of the
enzyme intestinal alkaline phosphatase (IAP) produced under Current Good Manufacturing Practice (cGMP) conditions and intended
to treat both local GI and systemic diseases.
The Company was also developing SYN-010
to reduce the impact of methane-producing organisms in the gut microbiome to treat an underlying cause of irritable bowel syndrome
with constipation (IBS-C). On September 30, 2020, Cedars Sinai Medical Center’s (CSMC) (the Company’s SYN-010
clinical development partner) informed the Company that it agreed to discontinue the ongoing Phase 2b investigator-sponsored clinical
study of SYN-010 IBS-C patients. Based on the results of a planned interim futility analysis, it was concluded that although SYN-010
was well tolerated, it was unlikely to meet its primary endpoint by the time enrollment is completed.
Corporate Structure and Basis of
Presentation
As of December 31, 2020, 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.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Organization and Nature of Operations
and Basis of Presentation – (continued)
Liquidity
As of December 31, 2020, the
Company has a significant accumulated deficit, and with the exception of the three months ended June 30, 2010 and the
three months ended December 31, 2017, the Company has experienced significant losses and incurred negative cash flows
since inception. The Company expects to continue incurring losses for the foreseeable future, with the recognition of revenue
being contingent on successful phase 3 clinical trials and requisite approvals by the FDA. Historically, the Company has
financed its operations primarily through public and private sales of its common stock and a private placement of its
preferred stock, and it expects to continue to seek to obtain required capital in a similar manner. The Company has spent,
and expects to continue to spend, a substantial amount of funds in connection with implementing its business strategy,
including planned product development efforts, clinical trials and research and discovery efforts.
Cash and cash equivalents totaled approximately
$6.2 million as of December 31, 2020, which includes the net proceeds of approximately $3.4 million from sales of its Common Stock
in “at-the-market” (ATM) equity offerings during 2020. Subsequent to year end through March 3, 2021, the Company received
cash proceeds of approximately $8.0 million through the exercise of a portion of the October 2018 warrants and approximately $63.8
million from sales of its Common Stock in “at-the-market” (ATM) equity offerings, see Note 10. With these additional
sources of liquidity, the Company believes it will be able to fund
its operations through the next twelve months from the issuance date of these financial statements. Management believes its plan,
which includes the further development of SYN-020 and additional testing of SYN-004 (ribaxamase), will allow the Company to meet
its financial obligations, further advance key products, and maintain the Company’s planned operations for at least one year
from the issuance date of these consolidated financial statements. If necessary, the Company may attempt to utilize the ATM or
seek to raise additional capital on the open market, neither of which is guaranteed. Use of the ATM is limited by certain restrictions
and management’s plan does not rely on additional capital from either of these sources. If the Company is not able to obtain
additional capital (which is not assured at this time), our long-term business plan may not be accomplished and we may be forced
to cease certain development activities. More specifically, the completion of any later stage clinical trial will require significant
financing or a significant partnership.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting
Policies
Principles of Consolidation
All intercompany transactions and accounts
have been eliminated in consolidation.
Immaterial Revision
In 2020, the Company completed an Internal Revenue Code Section
382 analysis of its historical net operating loss carry-forward amount. As a result, the prior year net operating loss carry-forward
was determined to be limited. See Note 8 for further details.
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, 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 stockholder’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. On September 5, 2018, the Company entered into an agreement with
the minority stockholder for an investigator-sponsored Phase 2 clinical study of SYN-010. Prior to this agreement and IRB approval
in December 2018, the Company’s equity interest in SYN Biomics was 88.5% and the non-controlling stockholder’s
interest was 11.5%. In consideration of the support, the Company issued additional shares of stock to the minority stockholder.
The Company’s equity interest in SYN Biomics is now 83.0% and the non-controlling stockholder’s interest is 17.0%.
This is reflected in the Consolidated Statements of Equity (Deficit).
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. These 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
2. 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
|
Leasehold improvements and fixtures
|
|
Lesser of estimated useful life or lease term
|
Depreciation and amortization expense was
approximately $201,000 and $240,000 for the years ended December 31, 2020 and 2019, 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, 2020 and 2019.
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.
Net loss attributable to common stockholders for the year ended December 31, 2020 excludes net loss attributable to non-controlling
interest of $0.1 million and includes the accretion of Series B preferred discount of $1.4 million on converted shares and
Series A preferred stock accrued dividends of $0.3 million. Net loss attributable to common stockholders for the year ended
December 31, 2019 excludes net loss attributable to non-controlling interest of $0.1 million and includes the accretion of
Series B preferred discount of $0.5 million on converted shares and Series A preferred stock accrued dividends of $0.2
million. The number of shares of common stock underlying Series A Preferred shares convertible to common stock that were excluded
from the computations of net loss per common share for the years ended December 31, 2020 and 2019 were 678,258 and 664,798,
respectively. The number of shares of common stock underlying Series B Preferred shares convertible to common stock that were
excluded from the computations of net loss per common share and for the years ended December 31, 2020 and 2019 were 3,454,783
and 6,641,736, respectively. The number of options and warrants for the purchase of common stock that were excluded from the computations
of net loss per common share for the year ended December 31, 2020 were 3,997,418 and 18,000,713, respectively, and for the
year ended December 31, 2019 were 2,502,012 and 18,714,999, respectively, because their effect is anti-dilutive.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting
Policies – (continued)
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. At December 31, 2020 and 2019, the Company has accrued CRO expenses of “$0.7 million and $0.7
million”, that are included in accrued expenses. The Company has prepaid CRO costs at December 31, 2020 and 2019 of
$470,000 and $48,000, respectively.
Fair Value of Financial Instruments
Accounting Standards Codification (“ASC”)
820, Fair Value Measurement, defines fair value as the amount that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants. As such, fair value is determined based upon assumptions that
market participants would use in pricing an asset or liability. Fair value measurements are classified on a three-tier hierarchy
as follows:
|
·
|
Level 1 inputs: Quoted prices (unadjusted) for identical assets or liabilities in active markets;
|
|
·
|
Level 2 inputs: Inputs, other than quoted prices, that are observable either directly or indirectly; and
|
|
·
|
Level 3 inputs: Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
In many cases, a valuation technique used
to measure fair value includes inputs from multiple levels of the fair value hierarchy described above. The lowest level of significant
input determines the placement of the entire fair value measurement in the hierarchy.
The carrying amounts of the Company’s
short-term financial instruments, including cash and cash equivalents, accounts payable and accrued liabilities approximate fair
value due to the relatively short period to maturity for these instruments.
Cash and cash equivalents include money
market accounts of $114,000 and $98,000 as of December 31, 2020 and 2019, 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. In 2020 and 2019, the Monte Carlo simulations
were not used as the value of the warrants were deemed to be minimal based on the historical fair value of the warrants and the
Company’s current stock price.
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.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting
Policies – (continued)
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. The expense
resulting from stock-based payments is recorded in research and development expense or general and administrative expense in the
Consolidated Statements of Operations, depending on the nature of the services provided.
Derivative Instruments
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. In November 2020, all liability-classified warrants expired. In 2019, the Monte
Carlo simulations were not used as the value of the warrants was deemed to be minimal based on the historical fair value of
the warrants and the Company’s current stock price.
Income Taxes
The Company recognizes deferred tax assets
and liabilities 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, 2020 and 2019, the Company did not record any liabilities for uncertain tax positions.
Recent Accounting Pronouncements
and Developments
In August 2020, the FASB issued Accounting
Standards Update (ASU) 2020-06 Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging
– Contracts in Entity’s Own Equity (subtopic 815-40): Accounting for Convertible Instruments and Contracts in
an Entity’s Own Equity. This ASU amends the guidance on convertible instruments and the derivatives scope exception for
contracts in an entity’s own equity and improves and amends the related EPS guidance for both Subtopics. The ASU will be
effective for annual reporting periods after December 15, 2023 and interim periods within those annual periods and early adoption
is permitted in annual reporting periods ending after December 15, 2020. The Company is currently assessing the impact of
ASU 2020-06 on its consolidated financial statements.
On January 30, 2020, the World Health
Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan,
China (the COVID-19 outbreak or “COVID-19”) and the risks to the international community as the virus spreads globally
beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase
in exposure globally.
On March 27, 2020, the Coronavirus
Aid, Relief and Economic Security Act (“CARES Act”) was enacted. The CARES Act is an emergency economic stimulus package
that includes spending and tax breaks to strengthen the United States’ economy and fund a nationwide effort to curtail the
effect of COVID-19. While the CARES Act provides sweeping tax changes in response to the COVID-19 pandemic, some of the more significant
provisions include removal of certain limitations on utilization of net operating losses, increasing the loss carryback period
for certain losses to five years, and increasing the ability to deduct interest expense, as well as amending certain provisions
of the previously enacted Tax Cuts and Jobs Act. The Company has assessed the impact of the CARES Act and, based upon our initial
assessment, the Company does not believe that it will have a significant effect on our financial position, results of operations
or cash flows. The Company continues to evaluate its impact as new information becomes available.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
3. Selected Balance Sheet Information
PREPAID EXPENSES AND OTHER CURRENT ASSETS (in thousands):
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Prepaid insurances
|
|
$
|
639
|
|
|
$
|
549
|
|
Prepaid clinical research organizations
|
|
|
470
|
|
|
|
48
|
|
Stock sales receivable
|
|
|
469
|
|
|
|
3
|
|
Prepaid consulting, subscriptions and other expenses
|
|
|
90
|
|
|
|
134
|
|
Prepaid manufacturing expenses
|
|
|
39
|
|
|
|
622
|
|
Prepaid conferences and travel
|
|
|
-
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,707
|
|
|
$
|
1,381
|
|
Prepaid CRO expense is classified as a
current asset. The Company makes payments to the CROs based on agreed upon terms that include payments in advance of study services.
PROPERTY AND EQUIPMENT (in thousands)
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Computers and office equipment
|
|
$
|
813
|
|
|
$
|
804
|
|
Leasehold improvements
|
|
|
439
|
|
|
|
439
|
|
Software
|
|
|
11
|
|
|
|
11
|
|
|
|
|
1,263
|
|
|
|
1,254
|
|
Less: accumulated depreciation and amortization
|
|
|
(1,089
|
)
|
|
|
(887
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
174
|
|
|
$
|
367
|
|
ACCRUED EXPENSES (in thousands)
|
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Accrued clinical consulting services
|
|
$
|
700
|
|
|
$
|
684
|
|
Accrued vendor payments
|
|
|
225
|
|
|
|
456
|
|
Accrued manufacturing costs
|
|
|
-
|
|
|
|
636
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
925
|
|
|
$
|
1,776
|
|
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
3. Selected Balance Sheet Information – (continued)
ACCRUED EMPLOYEE BENEFITS (in thousands)
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Accrued bonus expense
|
|
$
|
724
|
|
|
$
|
858
|
|
Accrued vacation expense
|
|
|
144
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
868
|
|
|
$
|
935
|
|
4. 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 71,429
shares of common stock to be granted through incentive stock options, nonqualified stock options, stock appreciation rights, dividend
equivalent rights, restricted stock, restricted stock units and other stock-based awards to officers, other employees, directors
and consultants of the Company and its subsidiaries. This plan was approved by the stockholders on November 2, 2007. The exercise
price of stock options under the 2007 Stock Plan was determined by the compensation committee of the Board of Directors and may
be equal to or greater than the fair market value of the Company’s common stock on the date the option is granted. The total
number of shares of stock with respect to which stock options and stock appreciation rights may be granted to any one employee
of the Company or a subsidiary during any one-year period under the 2007 plan shall not exceed 7,143. Options become exercisable
over various periods from the date of grant, and generally expire ten years after the grant date. As of December 31, 2020,
there were 5,145 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 85,714
shares of common stock to be granted through incentive stock options, nonqualified stock options, stock appreciation rights, dividend
equivalent rights, restricted stock, restricted stock units and other stock-based awards to officers, other employees, directors
and consultants of the Company and its subsidiaries. On October 22, 2013, the stockholders approved and adopted an amendment
to the Company’s 2010 Incentive Stock Plan to increase the number of shares of Company’s common stock reserved for
issuance under the Plan from 85,714 to 171,429; on May 15, 2015, increased the number of shares from 171,429 to 228,572; on
August 25, 2016, increased the number of shares from 228,572 to 400,000; on September 7, 2017, increased the number of
shares from 400,000 to 500,000; on September 24, 2018 increased the number of shares from 500,000 to 1,000,000; and on September 5,
2019, increased the number of shares from 1,000,000 to 4,000,000. The exercise price of stock options under the 2010 Stock Plan
is determined by the compensation committee of the Board of Directors and may be equal to or greater than the fair market value
of the Company’s common stock on the date the option is granted. Options become exercisable over various period from the
date of grant, and expire between five and ten years after the grant date. As of December 31, 2020, there were 2,452,273 options
issued and outstanding under the 2010 Stock Plan.
On September 17, 2020, the stockholders
approved and adopted the 2020 Stock Incentive Plan (“2020 Stock Plan”) for the issuance of up to 4,000,000 shares
of Common Stock to be granted through incentive stock options, nonqualified stock options, stock appreciation rights, dividend
equivalent rights, restricted stock, restricted stock units and other stock-based awards to officers, other employees, directors
and consultants of the Company and its subsidiaries. As of December 31, 2020, there were 1,540,000 options issued and outstanding
under the 2010 Stock Plan.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. Stock-Based Compensation and Warrants – (continued)
In the event of an employee’s termination,
the Company will cease to recognize compensation expense for that employee. Stock forfeitures are recognized as incurred. There
is no deferred compensation recorded upon initial grant date. Instead, the fair value of the stock-based payment is recognized
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, 2020 and 2019 are
as follows:
|
|
Year ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Exercise price
|
|
$
|
0.42
|
|
|
$
|
0.42
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
88
|
%
|
|
|
84
|
%
|
Risk free interest rate
|
|
|
0.31
|
%
|
|
|
1.61
|
%
|
Expected life of option (years)
|
|
|
4.3
|
|
|
|
4.5
|
|
Expected
dividends —The Company has never declared or paid dividends on its common stock and has no plans to do so in the
foreseeable future.
Expected volatility—Volatility is a measure of
the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate
(expected volatility) during a period. The expected volatility assumption is derived from the historical volatility of the Company’s
common stock over a period approximately equal to the expected term.
Risk-free
interest rate—The assumed risk free rate used is a zero coupon U.S. Treasury security with a maturity that approximates
the expected term of the option.
Expected
life of the option—The period of time that the options granted are expected to remain unexercised. Options granted
during the year have a maximum term of seven years. The Company estimates the expected life of the option term based on the weighted
average life between the dates that options become fully vested and the maximum life of options granted.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. Stock-Based Compensation and Warrants
– (continued)
The Company records stock-based compensation
based upon the stated vesting provisions in the related agreements. The vesting provisions for these agreements have various terms
as follows:
|
·
|
in full on 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,
|
|
·
|
monthly over one year, and
|
|
·
|
monthly over three years.
|
During the years ended December 31,
2020 and 2019, the Company granted 1,540,000 and 1,725,000 options to employees and directors having an approximate fair value
of $0.4 million and $0.5 million based upon the Black-Scholes option 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, 2020 and 2019 was $213,000 and $295,000, 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, 2020 and 2019 were $137,000 and $45,000, respectively.
A summary of stock option activity for
the years ended December 31, 2020 and 2019 is as follows:
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. Stock-Based Compensation and Warrants – (continued)
|
|
Options
|
|
|
Weighted
Average Exercise
Price
|
|
|
Weighted Average
Remaining
Contractual Life
|
|
|
Aggregate
Intrinsic
Value
|
|
Balance - December 31, 2018
|
|
|
938,982
|
|
|
$
|
15.18
|
|
|
|
6.19 years
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,725,000
|
|
|
|
0.42
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(94,738
|
)
|
|
|
58.25
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(67,232
|
)
|
|
|
5.95
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2019
|
|
|
2,502,012
|
|
|
|
3.62
|
|
|
|
6.51 years
|
|
|
|
153,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,540,000
|
|
|
|
0.42
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(14,944
|
)
|
|
|
17.57
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(29,650
|
)
|
|
|
0.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance -December 31, 2020 - outstanding
|
|
|
3,997,418
|
|
|
$
|
2.35
|
|
|
|
6.09 years
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2020 - exercisable
|
|
|
1,319,412
|
|
|
$
|
6.25
|
|
|
|
4.35 years
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant date fair value of options granted - December 31, 2020
|
|
|
|
|
|
$
|
412,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value - December 31, 2020
|
|
|
|
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant date fair value of options granted - December 31, 2019
|
|
|
|
|
|
$
|
470,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value - December 31, 2019
|
|
|
|
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. Stock-Based Compensation and Warrants – (continued)
The options outstanding and exercisable
at December 31, 2020 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
|
$
|
0.00 – $40.00
|
|
|
|
3,929,257
|
|
|
$
|
0.99
|
|
|
4.42 years
|
|
|
1,251,251
|
|
|
$
|
2.18
|
|
|
4.42 years
|
|
41.00 – $70.00
|
|
|
|
8,364
|
|
|
|
50.29
|
|
|
2.53 years
|
|
|
8,364
|
|
|
|
50.29
|
|
|
2.53 years
|
$
|
71.00 – $102.00
|
|
|
|
59,797
|
|
|
$
|
85.19
|
|
|
3.13 years
|
|
|
59,797
|
|
|
$
|
85.19
|
|
|
3.13 years
|
As of December 31, 2020, total unrecognized
stock-based compensation expense related to stock options was $686,000, which is expected to be expensed through February 2023.
The FASB’s guidance for stock-based
payments requires cash flows from excess tax benefits to be classified as a part of cash flows from operating activities. Excess
tax benefits are realized tax benefits from tax deductions for exercised options in excess of the deferred tax asset attributable
to stock compensation costs for such options. The Company did not record any excess tax benefits in 2020 or 2019. Cash received
from option exercises under the Company’s stock-based compensation plans for the years ended December 31, 2020 and 2019
was zero.
Also, during the years ended December 31, 2020 and 2019, the Company did not issue any shares of common stock in connection with the exercise
of stock options.
Stock Warrants
On October 15, 2018, the Company closed
its underwritten public offering pursuant to which it received gross proceeds of approximately $18.6 million before deducting underwriting
discounts, commissions and other offering expenses payable by the Company and sold an aggregate of (i) 2,520,000 Class A
Units (the “Class A Units”), with each Class A Unit consisting of one share of the Common Stock, and one
five-year warrant to purchase one share of Common Stock at an initial exercise price of $1.38 per share, which subsequently was
reduced to $0.69 per share (each a “Warrant” and collectively, the “Warrants”), with each Class A
Unit to be offered to the public at a public offering price of $1.15, and (ii) 15,723 Class B Units (the “Class B
Units”, and together with the Class A Units, the “Units”), with each Class B Unit offered to the public
at a public offering price of $1,000 per Class B Unit and consisting of one share of the Company’s Series B Convertible
Preferred Stock (the “Series B Preferred Stock”), with a stated value of $1,000 and convertible into shares of
Common Stock at the stated value divided by a conversion price of $1.15 per share, with all shares of Series B Preferred Stock
convertible into an aggregate of 13,672,173 shares of Common Stock, and issued with an aggregate of 13,672,173 Warrants. On November 16,
2020, the exercise price of the Warrants was reduced from $1.38 per Warrant per full share of the Company’s common stock,
$0.001 par value per share (the “Common Stock”), to $0.69 per Warrant per full share of Common Stock in accordance
with the anti-dilution terms of the Warrant. The reduction was the result of the issuance of shares of Common Stock by the Company
through its “at the market offering” facility. The effect of the change in the exercise price of the warrants as a
result of the triggering of the down round protection clause in the Warrants was recorded as a deemed dividend of $880,000, which
reduces the income available to common stockholders. In addition, pursuant to the underwriting agreement that the Company had entered
into with A.G.P./Alliance Global Partners (the “Underwriters”), as representative of the underwriters, the Company
granted the Underwriters a 45 day option (the “Over-allotment Option”) to purchase up to an additional 2,428,825 shares
of Common Stock and/or additional Warrants to purchase an additional 2,428,825 shares of Common Stock. The Underwriters partially
exercised the Over-allotment Option by electing to purchase from the Company additional Warrants to purchase 1,807,826 shares of
Common Stock.
The Warrants are immediately exercisable
at a price of $1.38 ($0.69 effective November 16, 2020) per share of Common Stock (which was 120% of the public offering
price of the Class A Units) and expire on October 15, 2023. If, at the time of exercise, there is no effective registration
statement registering, or no current prospectus available for, the issuance of the shares of Common Stock to the holder, then
the Warrants may only be exercised through a cashless exercise. No fractional shares of Common Stock will be issued in connection
with the exercise of a Warrant. In lieu of fractional shares, the holder will receive an amount in cash equal to the fractional
amount multiplied by the fair market value of any such fractional shares. The Company has concluded that the Warrants are required
to be equity classified. The Warrants were valued on the date of grant using Monte Carlo simulations. During January and February
2021, 11,655,747 warrants were exercised for cash proceeds of $8.0 million, see note 10.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. Stock-Based Compensation and Warrants – (continued)
On November 18, 2016, the Company
completed a public offering of 714,286 shares of common stock in combination with accompanying warrants to purchase an aggregate
of 1,428,571 shares of 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 $35.00. The shares of common stock were immediately
separable from the warrants and were issued separately. The initial per share exercise price of the Series A warrants is $50.05
and the per share exercise price of the Series B warrants is $60.20, each subject to adjustment as specified in the warrant
agreements. The Series A and Series B warrants may be exercised at any time on or after the date of issuance. The Series A
warrants are exercisable until the four-year anniversary of the issuance date. The Series B warrants expired 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,
2019, the fair value of the warrant liability was $100. The warrants were valued on the date of grant and on each remeasurement
period. The Series A warrants expired November 18, 2020 and none were exercised prior to expiration.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. Stock-Based Compensation and Warrants
– (continued)
On October 10, 2014, the Company raised
net proceeds of $19.1 million through the sale of 14,059,616 units at a price of $1.47 per unit to certain institutional investors
in a registered direct offering. Each unit consisted of one share of the Company’s common stock and a warrant to purchase
0.50 shares of common stock. The warrants, exercisable for an aggregate of 200,852 shares of common stock, have an exercise price
of $61.25 per share and a life of five years. The warrants vested immediately and expired on October 10, 2019.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. Stock-Based Compensation and Warrants – (continued)
A summary of all warrant activity for the Company for the years
ended December 31, 2020 and 2019 is as follows:
|
|
Number of
Warrants
|
|
|
Weighted Average
Exercise Price
|
|
Balance at December 31, 2018
|
|
|
18,915,851
|
|
|
$
|
3.85
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(200,852
|
)
|
|
|
61.25
|
|
Balance at December 31, 2019
|
|
|
18,714,999
|
|
|
|
3.24
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(714,286
|
)
|
|
|
50.05
|
|
Balance at December 31, 2020
|
|
|
18,000,713
|
|
|
$
|
0.69
|
|
On December 26, 2017, the Company
entered into a consulting agreement for advisory services for a period of six months. As compensation for such services, the consultant
was paid an upfront payment, is paid a monthly fee and on January 24, 2018 was issued a warrant exercisable for 714 shares
of the Company’s common stock on the date of issue. The warrant is equity classified and the fair value of the warrant approximated
$9,000 and was measured using the Black-Scholes option pricing model.
A summary of all outstanding and exercisable
warrants as of December 31, 2020 is as follows:
Exercise Price
|
|
|
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
|
|
Weighted Average
Remaining
Contractual Life
|
$
|
0.69
|
|
|
|
17,999,999
|
|
|
|
17,999,999
|
|
|
2.78 years
|
|
18.20
|
|
|
|
714
|
|
|
|
714
|
|
|
1.99 years
|
$
|
0.69
|
|
|
|
18,000,713
|
|
|
|
18,000,713
|
|
|
2.78 years
|
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Stockholders’ Equity
Series B Preferred Stock
On October 15, 2018, the Company closed
its underwritten public offering pursuant to which it received gross proceeds of approximately $18.6 million before deducting underwriting
discounts, commissions and other offering expenses payable by the Company and sold an aggregate of (i) 2,520,000 Class A
Units, with each Class A Unit offered to the public at a public offering price of $1.15, and (ii) 15,723 Class B
Units, with each Class B Unit offered to the public at a public offering price of $1,000 per Class B Unit and consisting
of one share of the Company’s Series B Preferred Stock, with a stated value of $1,000 and convertible into shares of
Common Stock at the stated value divided by a conversion price of $1.15 per share, with all shares of Series B Preferred Stock
convertible into an aggregate of 13,672,173 shares of Common Stock, and issued with an aggregate of 13,672,173 October 2018
Warrants. Since the above units are equity instruments, the proceeds were allocated on a relative fair value basis which created
the Series B Preferred Stock discount.
In addition, pursuant to the Underwriting
Agreement that the Company entered into with the Underwriters on October 10, 2018, the Company granted the Underwriters a
45 day option (the “Over-allotment Option”) to purchase up to an additional 2,428,825 shares of Common Stock and/or
additional warrants to purchase an additional 2,428,825 shares of Common Stock. Each Warrant is exercisable for one share of common
stock. The Underwriters partially exercised the Over-allotment Option by electing to purchase from the Company additional Warrants
to purchase 1,807,826 shares of Common Stock.
The Units were offered by the Company pursuant
to a registration statement on Form S-1 (File No. 333-227400), as amended, filed with the SEC, which was declared effective
by the SEC on October 10, 2018.
The conversion price of the Series B Preferred
Stock and exercise price of the October 2018 Warrants is subject to appropriate adjustment in the event of recapitalization events,
stock dividends, stock splits, stock combinations, reclassifications, reorganizations or similar events affecting the Common Stock.
The exercise price of the Warrants is subject to adjustment in the event of certain dilutive issuances. On November 16, 2020, the
exercise price of the Warrants was reduced from $1.38 per Warrant per full share of common stock to $0.69 per Warrant per full
share of common stock. The reduction was the result of the issuance of shares of Common Stock by the Company through its “at
the market offering” facility. The effect of the change in the exercise price of the warrants as a result of the triggering
of the down round protection clause in the Warrants was recorded as a deemed dividend of $880,000, which reduces the income available
to common stockholders. During the years ended December 31, 2020 and 2019, 3,665 and 1,523, respectively, shares were converted
resulting in the recognition of deemed dividends of $1.4 million and $525,000, respectively, for the amortization of the Series
B Preferred Stock discount upon conversion. This is recorded as a deemed dividend in accumulated deficit.
The October 2018 Warrants are immediately
exercisable at a price of $1.38 ($0.69 effective November 16, 2020) per share of common stock (which was 120% of the public
offering price of the Class A Units) and will expire on October 15, 2023. If, at the time of exercise, there is no effective
registration statement registering, or no current prospectus available for, the issuance of the shares of common stock to the holder,
then the October 2018 warrants may only be exercised through a cashless exercise. No fractional shares of common stock will
be issued in connection with the exercise of any October 2018 warrants. In lieu of fractional shares, the holder will receive
an amount in cash equal to the fractional amount multiplied by the fair market value of any such fractional shares.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Stockholders’ Equity – (continued)
The Company may not effect, and holder
will not be entitled to, exercise any Warrants or conversion of the Series B Preferred Stock, which, upon giving effect to
such exercise, would cause (i) the aggregate number of shares of common stock beneficially owned by the holder (together with
its affiliates) to exceed 4.99% (or, at the election of the holder, 9.99%) of the number of shares of common stock outstanding
immediately after giving effect to the exercise, or (ii) the combined voting power of the Company’s securities beneficially
owned by the holder (together with its affiliates) to exceed 4.99% (or, at the election of the holder, 9.99%) of the combined voting
power of all of the Company’s securities then outstanding immediately after giving effect to the exercise or conversion,
as such percentage ownership is determined in accordance with the terms of the October 2018 Warrants or Series B Preferred
Stock. However, any holder may increase or decrease such percentage to any other percentage not in excess of 9.99% upon at least
61 days’ prior notice from the holder to the Company. The holders of the Series B Preferred will participate, on an
as-if-converted-to-common stock basis, in any dividends to the holders of common stock. Upon a defined Fundamental Transaction,
the holders of the Series B Preferred Stock are entitled to the same consideration as are holders of common stock. The Series B
Preferred Stock ranks junior to existing Series A preferred stock but on parity with common stock. Liquidation preference
is equal to an amount pari passu with the common stock on an as converted basis (i.e., there is no preference to common stock).
Since the effective conversion price of
the Series B 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 B Preferred Stock has no stated
maturity or redemption date and is immediately convertible at the option of the holder, the discount created by the BCF is immediately
charged to accumulated deficit as a “deemed dividend” and impacts earnings per share.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Stockholders’ Equity – (continued)
Series A Preferred Stock
On September 11, 2017, the Company entered
into a share purchase agreement (the “Purchase Agreement”) with an investor (the “Investor”), pursuant
to which the Company offered and sold in a private placement 120,000 shares of its Series A Convertible Preferred Stock, par value
$0.001 per share (the “Series A Preferred Stock”) for an aggregate purchase price of $12 million, or $100 per share.
The Series A Preferred Stock ranks senior
to the shares of the Company’s common stock, and any other class or series of stock issued by the Company with respect to
dividend rights, redemption rights and rights on the distribution of assets 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 which was increased to $18.90 after taking into account
the Reverse Stock Split, subject to certain customary anti-dilution adjustments On January 27, 2021, the Company filed a Certificate
of Amendment to the Certificate of Designation for its Series A Convertible Preferred Stock (the “Certificate of Amendment”)
with the Secretary of State of the State of Nevada that adjusted the conversion price from $18.90 per share to $1.50 per share
and removed the redemption upon change of control see Note 10.
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 $70.00, subject
to adjustment in the case of stock split, stock dividends or the like the Company has the right, after providing notice not less
than 6 months prior to the redemption date, to redeem, in whole or in part, on a pro rata basis from all holders thereof based
on the number of shares of Series A Preferred Stock then held, the outstanding Series A Preferred Stock, for cash, at a redemption
price per share of Series A Preferred Stock of $7,875.00, 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.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Stockholders’ Equity – (continued)
The Series A Preferred Stock is classified
as temporary equity due to the shares being redeemable based on contingent events outside of the Company’s control. Since
the effective conversion price of the Series A Preferred Stock is less than the fair value of the underlying common stock
at the date of issuance, there is a beneficial conversion feature (“BCF”) at the issuance date. Because the Series A
Preferred Stock has no stated maturity or redemption date and is immediately convertible at the option of the holder, the discount
created by the BCF is immediately charged to accumulated deficit as a “deemed dividend” and impacts earnings per share.
During the year ended December 31, 2017, the Company recorded a discount of $6.9 million. Because the Series A Preferred
Stock is not currently redeemable, the discount arising from issuance costs was allocated to temporary equity and will not be accreted
until such time that redemption becomes probable. The stated dividend rate of 2% per annum is cumulative and the Company accrues
the dividend on a quarterly basis (in effect accreting the dividend regardless of declaration because the dividend is cumulative).
During the years ended December 31, 2020 and 2019, the Company accrued dividends of $254,000 and $248,000, respectively. Once
the dividend is declared, the Company will reclassify the declared amount from temporary equity to a dividends payable liability.
When the redemption of the Series A Preferred Stock becomes probable, the temporary equity will be accreted to redemption
value as a deemed dividend.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Stockholders’ Equity – (continued)
B. Riley Securities Sales Agreement
On August 5, 2016, the Company entered
into the B. Riley FBR Sales Agreement with FBR Capital Markets & Co. (now known as B. Riley Securities), which enables
the Company to offer and sell shares of the Common Stock from time to time through B. Riley Securities, Inc. as the Company’s
sales agent. Sales of common stock under the B. Riley Securities Sales Agreement are made in sales deemed to be “at-the-market”
equity offerings as defined in Rule 415 promulgated under the Securities Act. B. Riley Securities, Inc. is entitled to
receive a commission rate of up to 3.0% of gross sales in connection with the sale of the Common Stock sold on the Company’s
behalf. For the year ended December 31, 2020, the Company sold through the B. Riley Securities Sales Agreement an aggregate
of 9.3 million shares of Common Stock and received net proceeds of approximately $ 3.4 million. The Company did not sell any shares
of common stock during 2019 through the B. Riley Securities Sales Agreement. Subsequent to year end through March 3, 2021, the
Company sold approximately 76.3 million shares of the Company’s common stock and received net proceeds of approximately $63.8
million.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
6. Non-controlling Interest
On September 5, 2018, the Company
entered into an agreement (the ‘Stock Purchase Agreement”) with Cedars-Sinai Medical Center (CSMC) for an investigator-sponsored
Phase 2b clinical study of SYN-010 to be co-funded by the Company and CSMC (the “Study”). The Study will provide further
evaluation of the efficacy and safety of SYN-010, the Company’s modified-release reformulation of lovastatin lactone, which
is exclusively licensed to the Company by CSMC. SYN-010 is designed to reduce methane production by certain microorganisms (M.
smithii) in the gut to treat an underlying cause of irritable bowel syndrome with constipation (IBS-C).
In consideration of the support provided
by CSMC for the Study, the Company paid $328,000 to support the Study and the Company entered into a Stock Purchase Agreement
with CSMC pursuant to which the Company, upon the approval of the Study protocol by the Institutional Review Board (“IRB”)
: (i) issued to CSMC 50,000 shares of Common Stock of the Company; and (ii) transferred to CSMC an additional 2,420,000
shares of common stock of its subsidiary SYN Biomics, Inc. (“SYN Biomics”) owned by the Company, such that after
such issuance CSMC owns an aggregate of 7,480,000 shares of common stock of SYN Biomics, representing 17% of the issued and outstanding
shares of SYN Biomics’ common stock. The services rendered are recorded to research and development expense in
proportion with the progress of the study and are based overall on the fair value of the shares ($285,000) as determined at the
date of IRB approval. During the years ended December 31, 2020 and 2019, research and development expense recorded related
to this transaction approximated $225,000 and $198,000,
respectively.
The Stock Purchase Agreement also provides
CSMC with a right, commencing on the six month anniversary of issuance of the stock under certain circumstances in the event that
the shares of stock of SYN Biomics are not then freely tradeable, and subject to NYSE American, LLC approval, to exchange its SYN
Biomics shares for unregistered shares of Common Stock, with the rate of exchange based upon the relative contribution of the valuation
of SYN Biomics to the public market valuation of the Company at the time of each exchange. The Stock Purchase Agreement also provides
for tag-along rights in the event of the sale by the Company of its shares of SYN Biomics.
On September 30, 2020, CSMC MAST formally
agreed to discontinue the ongoing Phase 2b investigator-sponsored clinical study of SYN-010 following the results of a planned
interim futility analysis. Although it was concluded that SYN-010 was well tolerated, SYN-010 was unlikely to meet its primary
endpoint by the time enrollment is completed.
On November 9, 2020, the Company and
its subsidiary, Synthetic Biomics, Inc. and CSMC mutually agreed to terminate the exclusive license agreement dated December 5,
2013 and all amendments thereto and the clinical trial agreement relating to SYN-010. The determination to terminate the SYN-010
license agreement was agreed following the completion of a planned interim futility analysis of the Phase 2b investigator-sponsored
clinical trial of SYN-010. On September 30, 2020, CSMC (the Company’s SYN-010 clinical development partner) informed
the Company that it discontinued the ongoing Phase 2b investigator-sponsored clinical study of SYN-010 IBS-C patients.
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 38,572 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 38,572 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.
In December 2013, through the Company’s
subsidiary, Synthetic Biomics, Inc., the Company entered into a worldwide exclusive license agreement with CSMC and acquired
the rights to develop products for therapeutic and prophylactic treatments of acute and chronic diseases, including the development
of SYN-010 to target IBS-C. The Company licensed from CSMC a portfolio of intellectual property comprised of several U.S. and foreign
patents and pending patent applications for various fields of use, including IBS-C, obesity and diabetes. During the years ended
December 31, 2020 and 2019, the Company did not owe and did not pay CSMC for milestone payments related this license agreement.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
6. Non-controlling Interest – (continued)
The Company’s
non-controlling interest is accounted for under ASC 810, Consolidation (“ASC 810”) and represents the minority
stockholder’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 the 2018 transaction with CSMC, the Company’s
equity interest in SYN Biomics is 83% and the non-controlling stockholder’s interest is 17%. As of December 31, 2020,
the accumulated net loss attributable to the non-controlling interest was $2.8 million. As of December 31, 2019, the accumulated
net loss attributable to the non-controlling interest was $2.9 million and includes $77,000 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.
7. 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.
Washington University School of Medicine
in St. Louis Clinical Trial Agreement
In August 7, 2019, the Company entered
into a clinical trial agreement (“CTA”) with Washington University School of Medicine in St. Louis (“Washington
University”) to conduct a Phase 1b/2a single-center, randomized, double-blinded, placebo-controlled clinical trial designed
to evaluate the safety, tolerability and pharmacokinetics of oral SYN-004 (ribaxamase) in up to 36 adult allogeneic hematopoietic
cell transplant (HCT) recipients (the “Study”). Under the terms of the CTA, the Company will serve as the sponsor of
the Study and supply SYN-004 (ribaxamase), as well as compensate Washington University for all research services to be provided
in connection with the Study which is estimated to cost approximately $3,200,000.
The CTA continues in effect until completion
of all obligations under the CTA. Either party may terminate the CTA prior to completion of its obligations (i) if authorization
of the study is withdrawn by the FDA; (ii) if the emergence of any adverse reaction or side effect with SYN-004 (ribaxamase)
administered in the Study is of such magnitude or incidence in the opinion of either party to support termination; or (iii) upon
a breach of the terms of the CTA if the breaching party fails to cure the breach within 30 days after receipt of notice. The Company
has the right to terminate the CTA (i) effective immediately if Washington University fails to perform the study in accordance
with the terms of the protocol, the CTA or applicable laws or regulations or if Washington University or the principal investigator
become debarred or (ii) upon 14 days written notice and Washington University has the right to terminate the CTA upon 14 days
notice if the principal investigator becomes unable to perform or complete the Study and the parties have not, prior to the expiration
of such fourteen (14) day period, agreed to an alternative principal investigator.
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 9,569 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
7. License, Collaborative and Employment
Agreements and Commitments – (continued)
The License Agreement provided for termination:
(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 shares of the Company’s common stock, with the rate of
exchange based upon the relative contribution of the valuation of SYN Biomics to the public market valuation of the Company at
the time of each exchange. The Stock Purchase 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 38,572 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 38,572 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.
As of and during the years ended December 31,
2020 and 2019, the Company did not owe and did not pay CSMC for milestone payments related to this license agreement.
On September 5, 2018, the Company
entered into an agreement with CSMC for an investigator-sponsored Phase 2 clinical study of SYN-010 to be co-funded by the Company
and CSMC (the “Study”). The Study was to provide further evaluation of the efficacy and safety of SYN-010, the Company’s
modified-release reformulation of lovastatin lactone, which is exclusively licensed to the Company by CSMC. SYN-010 is designed
to reduce methane production by certain microorganisms (M. smithii) in the gut to treat an underlying cause of irritable
bowel syndrome with constipation (IBS-C).
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. License, Collaborative and Employment
Agreements and Commitments – (continued)
In consideration of the support provided
by CSMC for the Study, the Company paid $441,000 and the Company entered into a Stock Purchase Agreement with CSMC pursuant to
which the Company, upon the approval of the Study protocol by the Institutional Review Board, (IRB) to: (i) issued to CSMC
fifty thousand (50,000) shares of common stock of the Company; and (ii) transferred to CSMC an additional two million four
hundred twenty thousand (2,420,000) shares of common stock of its subsidiary SYN Biomics, Inc. (“Synbiomics”)
owned by the Company, such that after such issuance CSMC owned an aggregate of seven million four hundred eighty thousand (7,480,000)
shares of common stock of SYN Biomics, representing seventeen percent (17%) of the issued and outstanding shares of SYN Biomics’
common stock. The services rendered are recorded to research and development expense in proportion with the progress of the
study and based overall on the fair value of the shares ($285,000) as determined at the date of IRB approval. During the years
ended December 31, 2020 and 2019, research and development expense related to this transaction approximated
$225,000 and $198,000, respectively.
The Agreement also provides CSMC with a
right, commencing on the six month anniversary of issuance of the stock under certain circumstances in the event that the shares
of stock of Synbiomics are not then freely tradeable, and subject to NYSE American, LLC approval, to exchange its Synbiomics shares
for unregistered shares of the Company’s common stock, with the rate of exchange based upon the relative contribution of
the valuation of Synbiomics to the public market valuation of the Company at the time of each exchange. The Stock Purchase Agreement
also provides for tag-along rights in the event of the sale by the Company of its shares of Synbiomics.
On September 30, 2020, CSMC MAST formally
agreed to discontinue the ongoing Phase 2b investigator-sponsored clinical study of SYN-010 following the results of a planned
interim futility analysis. Although it was concluded that SYN-010 was well tolerated, SYN-010 is unlikely to meet its primary endpoint
by the time enrollment is completed.
On November 9, 2020, the Company and
its subsidiary, SYN Biomics, Inc. and CSMC mutually agreed to terminate the exclusive license agreement dated December 5,
2013 and all amendments thereto and the clinical trial agreement relating to SYN-010. The determination to terminate the SYN-010
license agreement was agreed following the completion of a planned interim futility analysis of the Phase 2b investigator-sponsored
clinical trial of SYN-010. On September 30, 2020, CSMC (the Company’s SYN-010 clinical development partner) informed
the Company that it discontinued the ongoing Phase 2b investigator-sponsored clinical study of SYN-010 IBS-C patients. The patent
rights previously licensed to the Company covering the use of SYN-010 will remain the property of CSMC.
University of Texas Austin Agreement
On December 19, 2012, the Company
entered into a License Agreement with UT Austin 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 UT Austin 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, UT Austin
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 UT Austin for a
breach of the License Agreement by the Company.
In connection with the License Agreement,
the Company and UT Austin also entered into a Sponsored Research Agreement pursuant to which UT Austin 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 expires January 17, 2023; 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
7. License, Collaborative and Employment
Agreements and Commitments – (continued)
On October 22, 2015, the Company and
UT Austin amended the Sponsored Research Agreement to extend the termination date from the initial termination date of December 31,
2015 to January 15, 2017, on September 2, 2016 to extend the agreement until January 15, 2018, on August 22,
2017 to extend the agreement until January 17, 2019, on August 24, 2018 to extend the agreement until January 17,
2021 and again on August 8, 2020 until January 17, 2023. All other terms and conditions of the Sponsored Research Agreement
remain unchanged. No further or additional payments will be made to UT Austin 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 17,858 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. As of December 31, 2015, the first three milestones have been met, and at
Prev’s option, Prev elected to receive 18,724 shares of the Company’s common stock. No milestones were achieved or
such payments were made during the years ended December 31, 2020 and 2019.
Intrexon Exclusive Channel Collaboration
On August 6, 2012, the Company entered
into an Exclusive Channel Collaboration (“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 101,492 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. 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 years ended December 31, 2020 and 2019.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. License, Collaborative and Employment
Agreements and Commitments – (continued)
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
7. License, Collaborative and Employment
Agreements and Commitments – (continued)
On August 10, 2015, the Company entered
into an Exclusive Channel Collaboration Agreement (the “PKU ECC”) with Intrexon that governs a “channel collaboration”
arrangement in which the Company was granted a worldwide exclusive license to use the patents and other intellectual property of
Intrexon in connection with the research, development, use, importing, manufacture, sale, and offer for sale of biotherapeutic
products for the treatment of PKU in humans by direct administration of a viral construct containing a gene to alter genetic expression
of phenyalanine hydroxylase and/or administration of genetically modified bacteria that express an effector directed to the metabolic
conversion of phenyalanine. The license was exclusive to both parties within the Field. On September 2, 2015, in accordance
with the terms of the Intrexon Stock Issuance Agreement that the Company entered into in connection with the PKU ECC, the Company
paid Intrexon a technology access fee by the issuance of 26,786 shares of common stock, having a value equal to $3.0 million as
of August 7, 2015. 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.
On November 30, 2018, the Company
received written notice from Intrexon stating that Intrexon and the Company had terminated by mutual agreement the PKU Exclusive
Channel Collaboration Agreement. As a result of the mutually agreed upon November 30, 2018 termination, each party retains
its own respective confidential information and intellectual property and all licenses between the parties granted under the ECC
are terminated. The Company had also entered into the Exclusive Channel Collaboration Agreement, dated August 6, 2012 with
Intrexon that governs a “channel collaboration” arrangement in which the Company intends to 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 Pertussis, remains in effect.
Synthetic Biologics, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
7. License, Collaborative and Employment
Agreements and Commitments – (continued)
Employment Agreements
On December 6, 2018, the Company
entered into a three-year employment agreement with Steven A. Shallcross, (the “Employment Agreement”), to serve as
the Chief Executive Officer and to continue to serve as the Chief Financial Officer of the Company.
The Employment Agreement has a stated term
of three years but may be terminated earlier pursuant to its terms. If Mr. Shallcross’ 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 (i) by the Company without Cause or by Mr. Shallcross for Good Reason (as
each is defined in the Employment Agreement) then in addition to paying the Accrued Obligations, (a) the Company will continue
to pay his then current base salary and continue to provide benefits at least equal to those that were provided at the time of
termination for a period of twelve (12) months and (b) 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 (ii) by reason of his death or
Disability (as defined in the Employment Agreement), then in addition to paying the Accrued Obligations, Mr. Shallcross 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 Mr. Shallcross 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 would terminate.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. License, Collaborative and Employment
Agreements and Commitments – (continued)
On December 30, 2020, the Board of
the Company awarded Steven A. Shallcross (i) a cash bonus equal to 62% of his prior base salary and (ii) an option to
purchase 450,000 shares of the Company’s common stock.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. License, Collaborative and Employment
Agreements and Commitments – (continued)
Operating Lease
All of the Company’s existing leases
as of December 31, 2020 are classified as operating leases. As of December 31, 2020, the Company has one material operating
lease for facilities with a remaining term expiring in 2022. The existing lease has fair value renewal options, none of which are
considered certain of being exercised or included in the minimum lease term. The discount rate used in the calculation of the lease
liability was 9.9%. The rates implicit within the Company's leases are generally not determinable, therefore, the Company's incremental
borrowing rate is used to determine the present value of lease payments. The determination of the Company’s incremental borrowing
rate requires judgment. Because the Company currently has no outstanding debt, the incremental borrowing rate for each lease is
primarily based on publicly-available information for companies within the same industry and with similar credit profiles. The
rate is then adjusted for the impact of collateralization, the lease term and other specific terms included in the Company’s
lease arrangements. The incremental borrowing rate is determined at lease commencement, or as of January 1, 2019 for operating
leases in existence upon adoption of ASC 842, Leases (“ASC
842”). The incremental borrowing rate is subsequently reassessed upon a modification to the lease arrangement. ROU assets
are subsequently assessed for impairment in accordance with the Company’s accounting policy for long-lived assets. Operating
lease costs are presented as part of general and administrative expenses in the consolidated statements of operations, and for
the years ended December 31, 2020 and 2019 approximated $209,000 and 201,000, respectively. For the years ended December 31,
2020 and 2019, operating cash flows used for operating leases approximated $309,000 and $300,000, respectively.
A maturity analysis of our operating leases
as of December 31, 2020 is as follows (amounts in thousands of dollars):
Future undiscounted cash flows:
|
|
|
|
|
2021
|
|
$
|
321
|
|
2022
|
|
|
192
|
|
Total
|
|
|
513
|
|
|
|
|
|
|
Discount factor
|
|
|
(40
|
)
|
Lease liability
|
|
|
473
|
|
Amount due within 12 months
|
|
|
(287
|
)
|
Lease liability – long term
|
|
$
|
186
|
|
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 $4,500,000 for attainment of certain regulatory milestones. The achievement of the milestones
is not probable at this time.
Risks and Uncertainties
On January 30, 2020, the World Health
Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan,
China (the “COVID-19” outbreak) and the risks to the international community as the virus spreads globally beyond its
point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure
globally.
As COVID-19 continued to spread around
the globe, the Company experienced disruptions that impacted its business and clinical trials, including halting the postponement
of clinical site initiation of the Phase 1b/2a clinical trial of SYN-004. The extent to which the COVID-19 pandemic impacts
the Company’s business, the clinical development of SYN-004 (ribaxamase) and SYN-020, the business of the Company’s
suppliers and other commercial partners, the Company’s corporate development objectives and the value of and market for the
Company’s common stock, will depend on future developments that are highly uncertain and cannot be predicted with confidence
at this time, such as the ultimate duration of the pandemic, travel restrictions, quarantines, social distancing and business closure
requirements in the United States, Europe and other countries, and the effectiveness of actions taken globally to contain and treat
the disease. The global economic slowdown, the overall disruption of global healthcare systems and the other risks and uncertainties
associated with the pandemic could have a material adverse effect on the Company’s business, financial condition, results
of operations and growth prospects. In addition, to the extent the ongoing COVID-19 pandemic adversely affects the Company’s
business and results of operations, it may also have the effect of heightening many of the other risks and uncertainties which
the Company faces.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Income Taxes
There was no income tax expense for the
years ended December 31, 2020 and 2019 due to the Company’s net losses. The Company’s tax expense differs from
the “expected” tax expense for the years ended December 31, 2020 and 2019. For 2020, the “expected”
tax expense is computed by applying the Federal corporate statutory tax rate of 21% and a net, after Federal benefit state tax
rate of 6.45% (state blended rate was 27.45%) to loss before taxes. For 2019, the “expected” tax expense is computed
by applying the Federal corporate statutory tax rate of 21% and a net, after Federal benefit state tax rate of 4.74% (state blended
rate was 24.74.%) to loss before taxes. These results are as follows (in thousands):
|
|
2020
|
|
|
2019
|
|
Computed “expected” tax-benefit – Federal
|
|
$
|
(2,124
|
)
|
|
$
|
(3,230
|
)
|
Computed “expected” tax-benefit – State
|
|
|
(616
|
)
|
|
|
(729
|
)
|
Non-deductible stock-based compensation
|
|
|
32
|
|
|
|
864
|
|
State tax rate adjustment
|
|
|
(1,221
|
)
|
|
|
-
|
|
Change in valuation allowance
|
|
|
3,929
|
|
|
|
3,095
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The effects of temporary differences that
gave rise to significant portions of deferred tax assets at December 31, 2020 and 2019 are as follows (in thousands):
|
|
2020
|
|
|
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Stock issued for services
|
|
$
|
1,428
|
|
|
$
|
1,223
|
|
Accrued compensation
|
|
|
42
|
|
|
|
20
|
|
Stock issued for acquisition of program
|
|
|
1,436
|
|
|
|
1,301
|
|
Stock issued for license agreement
|
|
|
1,574
|
|
|
|
1,574
|
|
Stock issued for milestone payment
|
|
|
262
|
|
|
|
255
|
|
Amortizable license fee
|
|
|
5
|
|
|
|
5
|
|
Net operating loss carry-forward
|
|
|
12,540
|
|
|
|
8,494
|
|
Total gross deferred tax assets
|
|
|
17,287
|
|
|
|
12,872
|
|
Less: valuation allowance
|
|
|
(17,287
|
)
|
|
|
(12,872
|
)
|
Total net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
At December 31, 2020, the Company has a
gross Federal net operating loss carry-forward of approximately $43.3 million available to offset future taxable income. The Company’s
pre-2018 net operating losses expire on various dates through 2037. In 2020, the Company completed an Internal Revenue Code Section
382 analysis of its historical net operating loss carry-forward amount. As a result, the prior year net operating loss carry-forward
of $188.6 million was determined to be limited by $155.6 million. The decrease in the prior year net operating loss carry-forward
is attributable to change of control ownership shifts which were determined for the years 2013 and 2018 which caused the reduction
in the value of the historical net operating loss carry-forward amounts. Since the limitation affected the prior period, the Company
has determined that its 2019 tax footnote presentation was incorrect by overstating the gross net operating loss deferred tax asset
and corresponding valuation allowance. However, there was no net impact to the net deferred tax asset and tax expense as the decrease
in the net operating loss carry-forward was offset completely by a corresponding adjustment to the Company’s overall valuation
allowance. For comparative purposes, the Company’s prior year tax footnote has been revised to reflect the adjustment to
the net operating losses and valuation allowance.
After the change noted above to the Company’s
net operating loss carry-forward amounts, at December 31, 2020 the Company has a net operating loss carry-forward of approximately
$43.3 million available to offset future taxable income. The December 31, 2020 net operating loss carry-forward consists of $33.0
million of pre-2020 net operating loss carry-forward and $10.3 million of current year net operating loss carry-forward. The Company’s
pre-2018 net operating losses expire on various dates through 2037 while the net operating loss carry-forward originating in the
2018 year and later carry-forward indefinitely and are subject to additional limitations based on taxable income.
The Coronavirus Aid, Relief, and Economic
Security Act (the “CARES Act”) was enacted in March 2020. The CARES Act includes several U.S. income tax provisions
related to, among other things, net operating loss carrybacks, alternative minimum tax credits, modifications to the net interest
deduction limitations, and technical amendments regarding the income tax depreciation of qualified improvement property placed
in service after December 31, 2017. The CARES Act is not expected to have a material impact on the Company’s financial
results.
In December 2019, the FASB issued ASU 2019-12,
“Income Taxes Topic 740-Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which is intended
to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles
in Topic 740 and also clarifies and amends existing guidance to improve consistent application of Topic 740. This guidance is effective
for fiscal years beginning after December 15, 2020, including interim periods therein, and early adoption is permitted. Based on
the Company’s preliminary analysis, adoption of Topic 740 in 2021 is not expected to have a material effect on the Company’s
consolidated financial statements.
The valuation allowance at December 31,
2020 was approximately $17.3 million. The net change in valuation allowance during the year ended December 31, 2020 was an increase
of approximately $3.9 million primarily due to increases in gross federal and state deferred tax assets in 2020 and state tax rate
change from the previous period. 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, 2020.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
9. Related Party Transactions
On September 5, 2018, the Company
entered into an agreement with CSMC for an investigator-sponsored Phase 2b clinical study of SYN-010 to be co-funded by the Company
and CSMC (the “Study”). The Study was to provide further evaluation of the efficacy and safety of SYN-010, the Company’s
modified-release reformulation of lovastatin lactone, which was exclusively licensed to the Company by CSMC. SYN-010 is designed
to reduce methane production by certain microorganisms (M. smithii) in the gut to treat an underlying cause of irritable bowel
syndrome with constipation (IBS-C).
In consideration of the support provided
by CSMC for the Study, the Company entered into a Stock Purchase Agreement with CSMC pursuant to which the Company, upon the approval
of the Study protocol by the Institutional Review Board, (IRB): (i) issued to CSMC fifty thousand (50,000) shares of common
stock of the Company; and (ii) transferred to CSMC an additional two million four hundred twenty thousand (2,420,000) shares
of common stock of its subsidiary Synthetic Biomics, Inc. (“SYN Biomics”) owned by the Company, such that after
such issuance CSMC will own an aggregate of seven million four hundred eighty thousand (7,480,000) shares of common stock of Synbiomics,
representing seventeen percent (17%) of the issued and outstanding shares of SynBiomics’ common stock.
The Agreement also provides CSMC with a
right, commencing on the six month anniversary of issuance of the stock under certain circumstances in the event that the shares
of stock of SYN Biomics are not then freely tradeable, and subject to NYSE American, LLC approval, to exchange its SYN Biomics
shares for unregistered shares of the Company’s common stock, with the rate of exchange based upon the relative contribution
of the valuation of SYN Biomics to the public market valuation of the Company at the time of each exchange. The Stock Purchase
Agreement also provides for tag-along rights in the event of the sale by the Company of its shares of SYN Biomics.
On September 30, 2020, CSMC MAST formally
agreed to discontinue the ongoing Phase 2b investigator-sponsored clinical study of SYN-010 following the results of a planned
interim futility analysis. Although it was concluded that SYN-010 was well tolerated, SYN-010 is unlikely to meet its primary endpoint
by the time enrollment is completed.
In December 2013, through the Company’s
subsidiary, SYN Biomics, Inc. the Company entered into a worldwide exclusive license agreement with CSMC and acquired the
rights to develop products for therapeutic and prophylactic treatments of acute and chronic diseases, including the development
of SYN-010 to target IBS-C. The Company licensed from CSMC a portfolio of intellectual property comprised of several U.S. and foreign
patents and pending patent applications for various fields of use, including IBS-C, obesity and diabetes. During the year ended
December 31, 2016, the Company paid CSMC $350,000 for milestone payments related this license agreement. There were no milestone
payments made during the years ended December 31, 2020 and 2019.
On November 9, 2020, the Company and
its subsidiary, Synthetic Biomics, Inc. and CSMC mutually agreed to terminate the exclusive license agreement dated December 5,
2013 and all amendments thereto and the clinical trial agreement relating to SYN-010. The determination to terminate the SYN-010
license agreement was agreed following the completion of a planned interim futility analysis of the Phase 2b investigator-sponsored
clinical trial of SYN-010. The patent rights previously licensed to the Company covering the use of SYN-010 will remain the property
of CSMC.
10. Subsequent Events
At
December 31, 2020 there were 17,999,999 October 2018 Warrants outstanding. On November 16, 2020, the exercise price
of the October 2018 Warrants was reduced from $1.38 per October 2018 Warrant per full share of the Company’s common stock,
$0.001 par value per share (the “Common Stock”), to $0.69 per Warrant per full share of Common Stock in accordance
with the anti-dilution terms of the October 2018 Warrant. The reduction was the result of the automatic price adjustment provision
of the October 2018 Warrant triggered by the issuance of shares of Common Stock by the Company through its “at the market
offering” facility. During January and February 2021, 11,655,747 October 2018 Warrants were exercised for cash proceeds of
$8.0 million.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
10. Subsequent Events – (continued)
On January 27, 2021, the Company filed
a Certificate of Amendment to the Certificate of Designation for its Series A Convertible Preferred Stock (the “Certificate
of Amendment”) with the Secretary of State of the State of Nevada that adjusted the conversion price from $18.90 per share
to $1.50 per share and removed the redemption upon change of control. The Company received notice from the holder of the Series
A Preferred Stock that it was increasing the Maximum Percentage as defined in the “Certificate of Designation” from
4.99% to 9.99%, such increase to be effective 61 days from the date hereof. During January and February 2021, all outstanding shares
of Series A Convertible Preferred Stock were converted to approximately 9.0 million shares of the Company’s common stock.
There are no remaining shares of the Series A Convertible Preferred stock outstanding after these conversions. During January and
February 2021, the Company issued 8,996,768 shares of its common stock upon the conversion effected on such date by a holder of
120,000 shares of its Series A Convertible Preferred Stock.
On February 9, 2021, the Company entered
into an amended and restated the sales agreement with B. Riley Securities, Inc. (“B. Riley”) and A.G.P./Alliance
Global Partners (“AGP”) in order to include AGP as an additional sales agent for the Company’s “at the
market offering” program (the “Amended and Restated Sales Agreement”). The Sales Agreement amended and restated
the At Market Issuance Sales Agreement, dated August 5, 2016, with B. Riley Securities, Inc. (formerly known as B. Riley
FBR, Inc.), as amended by amendment no. 1, dated May 7, 2018, to the At Market Issuance Sales Agreement.
Subsequent to year end through March 3,
2021, the Company sold through the At Market Issuance Sales Agreement and the Amended and Restated Sales Agreement approximately
76.3 million shares of the Company’s common stock and received net proceeds of approximately $63.8 million.