NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2017
1.
Organization, Business
EyeGate Pharmaceuticals, Inc. (“EyeGate”
or the “Company”) a Delaware corporation, began operations in December 2004 and is a clinical-stage specialty pharmaceutical
company that is focused on developing and commercializing products for treating diseases and disorders of the eye. EyeGate’s
first product in clinical trials incorporates a reformulated topically active corticosteroid, dexamethasone phosphate, EGP-437,
that is delivered into the ocular tissues though its proprietary iontophoresis drug delivery system, the EyeGate® II Delivery
System. The Company is developing the EyeGate® II Delivery System and EGP-437 combination product (together, the “EGP-437
Product”) for the treatment of various inflammatory conditions of the eye, including anterior uveitis, a debilitating form
of intraocular inflammation of the anterior portion of the uvea, such as the iris and/or ciliary body, post-cataract surgery for
inflammation and pain, and macular edema, an abnormal thickening of the macula associated with the accumulation of excess fluids
in the retina. Effective March 7, 2016, the Company acquired all of the capital stock of Jade Therapeutics, Inc. (“Jade”),
a privately-held company developing locally-administered, polymer-based products designed to treat poorly-served ophthalmic indications
(the “Jade Acquisition”). EyeGate and Jade are an integrated line of business developing ophthalmic solutions for a
variety of ocular diseases and disorders.
On June 30, 2016, the Company completed
a registered direct offering of 441,000 shares of Common Stock and 2,776.5 shares of Series A Preferred Stock (convertible into
1,234,000 shares of Common Stock), along with a concurrent private placement of warrants to purchase Common Stock. The total net
proceeds to the Company from this offering, after deducting the placement agent fees and offering expenses, were approximately
$3.4 million. The warrants were initially exercisable on December 30, 2016, and expire on December 30, 2021. On February 21, 2017,
the Company authorized the restart of sales under the At The Market Offering Agreement between the Company and H.C. Wainwright
& Co., LLC (the “ATM Agreement”) and subsequently sold 642,150 shares of Common Stock during the first quarter
of 2017. No shares of Common Stock were sold pursuant to the ATM Agreement during the second or third quarters of 2017. The total
net proceeds to the Company from this offering, after deducting the placement agent fees and offering expenses, were approximately
$1.8 million. On June 14, 2017, the Company completed a public offering of 5,336,667 shares of Common Stock and 1,995 shares of
Series B Preferred Stock (convertible into 1,330,000 shares of Common Stock), along with warrants to purchase 6,666,667 shares
of Common Stock. The total net proceeds to the Company from the offering, after deducting the placement agent fees and offering
expenses, were approximately $8.8 million. The warrants became exercisable upon issuance, and expire on June 14, 2022.
See
Note 5, “Capital Stock”.
Effective July 31, 2015, the Company’s
Common Stock began trading on The Nasdaq Capital Market under the symbol “EYEG”.
Since its inception, EyeGate has devoted
substantially all of its efforts to business planning, research and development, and raising capital.
The accompanying Condensed Consolidated
Financial Statements have been prepared assuming that EyeGate will continue as a going concern, which contemplates the realization
of assets and satisfaction of liabilities in the normal course of business. At September 30, 2017, EyeGate had Cash and Cash Equivalents
of $9,244,570, and an Accumulated Deficit of $88,985,623. EyeGate has incurred losses and negative cash flows since inception,
and future losses are anticipated. The Company anticipates having sufficient cash to fund planned operations for approximately
eight months, however, the acceleration or reduction of cash outflows by Company management can significantly impact the timing
for raising additional capital to complete development of its products. To continue development, EyeGate will need to raise additional
capital through equity financing, license agreements, and/or additional U.S. government grants. Although the Company successfully
completed its IPO, a follow-on offering, a registered direct offering, a public offering, and sales under the ATM Agreement, additional
capital may not be available on terms favorable to EyeGate, if at all. On May 6, 2016, the SEC declared effective EyeGate’s
registration statement on Form S-3, registering a total of $100,000,000 of its securities for sale to the public from time to time
in what is known as a “shelf offering”. The Company does not know if any future offerings pursuant to its shelf registration
statement will succeed. Accordingly, no assurances can be given that Company management will succeed in these endeavors. The Company’s
recurring losses from operations have caused management to determine there is substantial doubt about the Company’s ability
to continue as a going concern. The Condensed Consolidated Financial Statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts and classification of liabilities or any other
adjustments that might be necessary should the Company be unable to continue as a going concern.
EYEGATE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2017
2.
Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying Condensed Consolidated
Financial Statements include the accounts of the Company and its subsidiaries, EyeGate Pharma S.A.S. and Jade, collectively referred
to as “the Company”. All inter-company balances and transactions have been eliminated in consolidation. These Condensed
Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United
States (“U.S. GAAP”) for interim financial information. Certain information and disclosures normally included in Condensed
Consolidated Financial Statements prepared in accordance with U.S. GAAP have been condensed or eliminated. Accordingly, these unaudited
Condensed Consolidated Financial Statements should be read in conjunction with the annual financial statements of the Company as
of and for the year ended December 31, 2016.
Unaudited Interim Financial Information
The accompanying interim financial statements
and related disclosures are unaudited, have been prepared on the same basis as the annual financial statements and, in the opinion
of management, reflect all adjustments, which include normal recurring adjustments, necessary for a fair presentation of the results
of operations for the periods presented. The year-end balance sheet was derived from audited financial statements, but does not
include all disclosures required by U.S. GAAP. The results of operations for an interim period are not necessarily indicative of
the results to be expected for the full year or for any other future year or interim period.
Use of Estimates
The preparation of financial statements
in conformity with U.S. GAAP requires management to make significant estimates and assumptions that affect the reported amounts
of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements, and the
reported amounts of expenses during the reporting periods. The Company makes significant estimates and assumptions in recording
the accruals for its clinical trial and research activities, establishing the useful lives of intangible assets and property and
equipment, and conducting impairment reviews of long-lived assets. The Company bases its estimates on historical experience and
various other assumptions that it believes to be reasonable under the circumstances. Although the Company monitors and regularly
assesses these estimates, actual results could differ significantly from these estimates. The Company records changes in estimates
in the period that it becomes aware of the change.
Research and Development Expenses
The Company expenses research and development
(“R&D”) expenditures as incurred. R&D expenses are comprised of costs incurred in performing R&D activities,
including salaries, benefits, facilities, research-related overhead, sponsored research costs, contracted services, license fees,
expenses related to generating, filing, and maintaining intellectual property and other external costs. Because the Company believes
that, under its current process for developing its products, the viability of the products is essentially concurrent with the establishment
of technological feasibility, no costs have been capitalized to date.
In-process Research and Development
The Company records in-process R&D
projects acquired in business combinations that have not reached technological feasibility and which have no alternative future
use. For in-process R&D projects acquired in business combinations, the Company capitalizes the in-process R&D project
and annually evaluates this asset for impairment until the R&D process has been completed or abandoned. Once the R&D process
is complete, the Company amortizes the R&D asset over its remaining useful life. At September 30, 2017, the Company had recorded
$3,912,314 as in-process R&D in connection with the Jade Acquisition on the balance sheet. As of September 30, 2017, the Company
determined that there were no indications of impairment.
EYEGATE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2017
2.
Summary of Significant Accounting Policies - (continued)
Accrued Clinical Expenses
As part of the Company’s process
of preparing the Condensed Consolidated Financial Statements, the Company is required to estimate its accrued expenses. This process
includes reviewing open contracts and purchase orders, communicating with its applicable personnel to identify services that have
been performed on its behalf and estimating the level of service performed and the associated costs incurred for the service when
the Company has not yet been invoiced or otherwise notified of actual costs. The majority of the Company’s service providers
invoice monthly in arrears for services performed. The Company makes estimates of its accrued expenses as of each balance sheet
date in the financial statements based on facts and circumstances known at the time. The Company periodically confirms the accuracy
of these estimates with the service providers and makes adjustments if necessary.
Related Party Transactions
The Company has entered into certain related-party
transactions, making payments for services to one vendor, eight consultants and a public university, all of whom also are stockholders
of the Company. These transactions generally are ones that involve a stockholder or option holder of the Company to whom we also
make payments during the year, typically as a consultant or a service provider. The amounts recorded or paid are not material to
the accompanying Condensed Consolidated Financial Statements.
Net Loss per Share
The computation of Net Loss per Common
Share - Basic and Diluted, is based on the weighted-average number of shares outstanding of Common Stock. In computing diluted
loss per share, no effect has been given to the shares of common stock issuable upon the conversion or exercise of the following
dilutive securities, as the Company’s net loss would make the effect anti-dilutive.
|
|
September 30,
2017
(unaudited)
|
|
|
September 30,
2016
(unaudited)
|
|
Common Stock Warrants
|
|
|
9,519,403
|
|
|
|
2,852,736
|
|
Employee Stock Options
|
|
|
1,858,300
|
|
|
|
1,533,311
|
|
Preferred Stock
|
|
|
400,000
|
|
|
|
545,000
|
|
Total Shares of Common Stock Issuable
|
|
|
11,777,703
|
|
|
|
4,931,047
|
|
Fair Value of Financial Instruments
The carrying amounts of Accounts Receivable
and Accounts Payable approximate their fair values due to the short-term nature of these financial instruments. As of September
30, 2017, and December 31, 2016, the fair value of the Company’s money market funds and contingent consideration was $750,946
and $1,210,000, and $1,500,882 and $1,210,000, respectively.
At September 30, 2017 and December 31,
2016, the Company had no other assets or liabilities that are subject to fair value methodology and estimation in accordance with
FASB Accounting Standards Codification (“ASC”) Topic 820,
Fair Value Measurement
.
EYEGATE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2017
2.
Summary of Significant Accounting Policies - (continued)
Revenue Recognition
The Company follows Accounting Standards
Update (“ASU”) 2009-13,
Multiple-Deliverable Revenue Arrangements,
and ASU 2010-17,
Revenue Recognition-Milestone
Method
in connection with its accounting for collaboration arrangements. The Company’s revenues are generated primarily
through arrangements which generally contain multiple elements, or deliverables, including licenses and R&D activities to be
performed by the Company on behalf of the licensor or grantor. Payments to EyeGate under these arrangements typically include one
or more of the following: (1) nonrefundable, upfront license fees, (2) funding of discovery research efforts on a full-time
equivalent basis, (3) reimbursement of research, development and intellectual property costs, (4) milestone payments,
and (5) royalties on future product sales.
When evaluating multiple element
arrangements, Company management considers whether the deliverables under the arrangement represent separate units of
accounting. This evaluation requires subjective determinations and requires Company management to make judgments about
individual deliverables, including whether such deliverable is separable from the other aspects of the contractual
relationship. In determining a unit of accounting, Company management evaluates certain criteria, including whether the
deliverable has standalone value, based on the consideration of the relevant facts and circumstances for each arrangement.
The consideration received is allocated among each separate unit of accounting using the relative selling price method, and
the applicable revenue recognition criteria is applied to each separate unit.
The Company generally expects to
recognize revenue attributable to a future license obtained on a straight-line basis over the Company’s contractual or
estimated performance period, which is typically the term of the Company’s R&D obligation. If Company management
cannot reasonably estimate when the Company’s performance obligation ends, then revenue is deferred until Company
management can reasonably estimate when the performance obligation ends. The periods over which revenue should be recognized
are subject to estimates by management and may change over the course of the R&D agreement. Such a change could have a
material impact on the amount of revenue the Company records in future periods. At the inception of arrangements that include
milestone payments, Company management evaluates whether each milestone is substantive and at risk to both parties on the
basis of the contingent nature of the milestone. This evaluation includes an assessment of whether (a) the consideration
is commensurate with either (1) the entity’s performance to achieve the milestone, or (2) the enhancement of the value
of the delivered item(s) as a result of a specific outcome resulting from the entity’s performance to achieve the
milestone, (b) the consideration relates solely to past performance, and (c) the consideration is reasonable relative to all
of the deliverables and payment terms within the arrangement.
Company management evaluates factors such
as the scientific, regulatory, commercial and other risks that must be overcome to achieve the respective milestone, the level
of effort and investment required to achieve the respective milestone and whether the milestone consideration is reasonable relative
to all deliverables and payment terms in the arrangement in making this assessment. The Company has concluded that the clinical
and development milestones pursuant to its R&D arrangements are substantive.
The Company aggregates its milestones into
four categories: (i) clinical and development milestones, (ii) the chemistry, manufacturing and controls (“CMC”) validation,
(iii) regulatory milestones, and (iv) commercial milestones. Clinical and development milestones are typically achieved when a
product candidate advances into a defined phase of clinical research or completes such phase or when a contractually specified
clinical trial enrollment target is attained. CMC validation milestones are typically achieved when the validation paperwork is
finalized. Regulatory milestones are typically achieved upon acceptance of the submission for marketing approval of a product candidate
or upon approval to market the product candidate by the FDA or other global regulatory authorities. For example, a milestone payment
may be due to the Company upon the FDA’s acceptance of an NDA. Commercial milestones are typically achieved when an approved
pharmaceutical product reaches certain defined levels of net sales by the licensee, such as when a product first achieves global
sales or annual sales of a specified amount.
Revenues from clinical and development,
CMC and regulatory milestone payments (if the milestones are deemed substantive and the milestone payments are nonrefundable) are
recognized upon successful accomplishment of the milestones. Revenue from commercial milestone payments are accounted for as royalties
and are recorded as Revenue upon achievement of the milestone, assuming all other revenue recognition criteria are met.
EYEGATE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2017
2.
Summary of Significant Accounting Policies - (continued)
Payments or reimbursements resulting from
the Company’s R&D activities are recognized as the services are performed and are presented on a gross basis so long
as there is persuasive evidence of an arrangement, the fee is fixed or determinable, and collection of the related receivable is
reasonably assured. Amounts received prior to satisfying the above revenue recognition criteria are recorded as Deferred Revenue
on the Condensed Consolidated Balance Sheet.
On July 9, 2015, the Company entered into
an exclusive, worldwide licensing agreement with a subsidiary of Valeant Pharmaceuticals International, Inc. (“Valeant”),
through which the Company granted to Valeant an exclusive, worldwide commercial and manufacturing right to the Company’s
EGP-437 Product in the field of anterior uveitis, as well as a right of last negotiation to license its EGP-437 Product for indications
other than anterior uveitis (the “Valeant Agreement”). There are four principal R&D milestones under the Valeant
Agreement: (i) the Phase 3 Clinical Trial, (ii) the Endothelial Cell Count Safety Trial (a trial to determine that treatment has
not adversely affected a patient’s corneal endothelial cell density), (iii) the CMC Validation, and (iv) the New Drug
Application, or “NDA”, filing with the FDA (collectively, the “Four Milestones”, and each individually,
a “Milestone”). Under the Valeant Agreement, Valeant paid to the Company an initial upfront payment, and the Company
is eligible to receive certain other payments, upon and subject to the achievement of certain specified development and commercial
progress of the EGP-437 Product for the treatment of anterior uveitis. The Company received the initial up-front payment in 2015,
which it recorded as Deferred Revenue on its Condensed Consolidated Balance Sheet, and later in 2015 began receiving certain additional
payments, based on R&D progress, to continue over several years. The Company receives payments both when it crosses certain
thresholds on the way to each Milestone (each, a “Progress Payment”), as well as once it achieves each Milestone. The
Company is entitled to retain all of these payments. The Company defers each Progress Payment, capitalizes each payment on its
Condensed Consolidated Balance Sheet as Deferred Revenue, and recognizes these payments in the aggregate as Revenue once it achieves
the Milestone to which the Progress Payment relates. The Company recognizes the initial upfront payment as Revenue ratably as it
completes each of the Four Milestones, the amount recognized being the total upfront payment times the percentage represented by
the proportionate share of fair value of each Milestone relative to the total fair value of all Milestones. Accordingly, the Deferred
Revenue account on the Condensed Consolidated Balance Sheet is reduced as Revenue is recognized in the Condensed Consolidated Statement
of Operations and Comprehensive Loss. Due to longer enrollment time, the Company expects to begin recognizing Revenue with respect
to the Valeant Agreement Progress Payments in the second quarter of 2018.
On February 21, 2017, the Company entered
into another exclusive, worldwide licensing agreement with a subsidiary of Valeant (the “New Valeant Agreement”), through
which the Company granted Valeant exclusive, worldwide commercial and manufacturing rights to its EGP-437 Product in the field
of ocular iontophoretic treatment for post-operative ocular inflammation and pain in ocular surgery patients (the “New Field”).
Under the New Valeant Agreement, Valeant paid the Company an initial upfront payment of $4.0 million, and the Company is eligible
to receive milestone payments totaling up to approximately $99.0 million, upon and subject to the achievement of certain specified
developmental and commercial progress of the EGP-437 Product for the New Field. The Company has received milestone payments totaling
$1.428 million through the third quarter of 2017. In accordance with its revenue recognition policy, the initial upfront payment
and milestone payments have been recorded as Deferred Revenue. The Company expects to begin recognizing Revenue with respect to
the New Valeant Agreement Progress Payments in the first quarter of 2018. In addition, the Company is eligible under the New Valeant
Agreement to receive royalties based on a specified percent of net sales of its EGP-437 Product for the New Field throughout the
world, subject to adjustment in certain circumstances.
EYEGATE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2017
2.
Summary of Significant Accounting Policies - (continued)
The Company receives government grant funds
from two sources: the U.S. Department of Defense (“DoD”) and the National Science Foundation (“NSF”). The
Company is paid by the DoD after it performs specified, agreed-upon research, and it records these grant funds as Revenue as it
performs the research. The Company is generally paid by the NSF before it performs specified, agreed-upon research. The Company
records these NSF funds on our Condensed Consolidated Balance Sheet as Deferred Revenue when invoiced, and recognize these amounts
as Revenue ratably as the research is performed, typically over a six-month period.
The DoD and NSF have each committed to
grant funds to Jade for specified ocular therapeutic research activities (together, the “U.S. Government Grants”) to
be conducted through 2017, which have been fully funded as of September 30, 2017. The Company recognizes grant funds as Revenue
when it performs the activities specified by the terms of the grant and is entitled to the funds.
Recent Accounting Pronouncements
In November 2016, FASB issued ASU No. 2016-18,
Restricted Cash
, which clarifies guidance and presentation related to restricted cash in the statement of cash flows, including
stating that restricted cash should be included within cash and cash equivalents on the statement of cash flows. The standard is
effective for fiscal years beginning after December 15, 2017, with early adoption permitted, and is to be applied retrospectively.
The Company did not elect to adopt this standard early and is currently evaluating the effect that the new guidance will have on
its financial statements and related disclosures.
In February 2016, the FASB issued ASU No.
2016-02,
Leases
(“ASU 2016-02”), which is effective for fiscal years, and interim periods within those years,
beginning after December 15, 2018, with early adoption permitted. Under ASU 2016-02, lessees will be required to recognize for
all leases at the commencement date a lease liability, which is a lessee’s obligation to make lease payments arising from
a lease measured on a discounted basis, and the right-to-use assets, which are asset that represents the lessee’s right to
use or control the use of a specified asset for the lease term. The Company does not expect to early adopt this standard and currently
has leases (
see
Note 9) that will be in place at the effective date. The Company is currently evaluating the effect that
the new guidance will have on its financial statements and related disclosures.
In May 2014, the FASB issued ASU No.
2014-09,
Revenue from Contracts with Customers (Topic 606)
(”ASU 2014-09”), as subsequently amended, that
outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and
supersedes most recent current revenue recognition guidance, including industry-specific guidance. The core principle of the
revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The guidance also specifies the accounting for certain incremental costs of obtaining a contract, and costs to fulfill a
contract with a customer. Entities have the option of applying either a full retrospective approach to all periods presented,
or a modified approach that reflects differences prior to the date of adoption as an adjustment to equity. In April 2015, the
FASB deferred the effective date of this guidance until January 1, 2018. The Company is not early adopting this standard. The
Company’s sole revenue activities currently relate to the Valeant Agreements and its U.S. Government Grants. The
Company has commenced its implementation analysis, including identification of revenue streams and reviews of customer
contracts under ASU 2014-09’s framework. The analysis includes reviewing current accounting policies and practices to
identify potential differences that would result from applying the requirements under this new standard. The Company has
reviewed its contracts with Valeant. ASU 2014-09 requires increased disclosure, which in turn is expected to require certain
new processes. The determination of the impact of adoption of ASU 2014-09 on the Company’s financial condition, results
of operations, cash flows and disclosures, is ongoing, and, as such, the Company is not able to reasonably estimate the
effect that the adoption of the new standard will have on its financial statements. Based on a preliminary assessment of this
ASU, the Company anticipates that the adoption of the new standard will have a material effect. The Company has
determined that it will elect the modified retrospective transition method, meaning the cumulative effect of applying the new
guidance is recognized at the date of initial application as an adjustment to the opening accumulated deficit balance. The
Company continues to monitor additional changes, modifications, clarifications or interpretations being undertaken by the
FASB, which may impact the Company’s current conclusions.
EYEGATE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2017
3.
Property and Equipment
Property and equipment at September 30,
2017 (unaudited) and December 31, 2016 consists of the following:
|
|
Estimated
Useful Life
(Years)
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Laboratory Equipment
|
|
3
|
|
$
|
42,576
|
|
|
$
|
42,576
|
|
Less: Accumulated Depreciation
|
|
|
|
|
18,145
|
|
|
|
4,536
|
|
|
|
|
|
$
|
24,431
|
|
|
$
|
38,040
|
|
Depreciation expense was $4,536 and $404
for the three-month periods ended September 30, 2017 and 2016, respectively, and $13,608 and $649 for the nine-month periods ended
September 30, 2017 and 2016, respectively.
4.
Accrued Expenses
Accrued expenses consist of the following:
|
|
September 30,
2017
(unaudited)
|
|
|
December 31,
2016
|
|
Clinical Trials
|
|
$
|
977,882
|
|
|
$
|
770,158
|
|
Payroll and Benefits
|
|
|
564,525
|
|
|
|
668,802
|
|
Professional Fees
|
|
|
163,703
|
|
|
|
174,342
|
|
Short-Term Portion of Capital Lease Obligation
|
|
|
12,645
|
|
|
|
12,645
|
|
Consulting
|
|
|
5,517
|
|
|
|
44,983
|
|
Total Accrued Expenses
|
|
$
|
1,724,272
|
|
|
$
|
1,670,930
|
|
5.
Capital Stock
On May 24, 2016, the Company entered into
an At The Market Offering Agreement (the “ATM Agreement”) with H.C. Wainwright & Co., LLC (the “Sales Agent”),
to create an at the market equity program under which the Company can from time to time offer and sell up to 1,319,289 shares of
its Common Stock through the Sales Agent. Effective June 26, 2016, the Company halted indefinitely all future offers and sales
of its Common Stock pursuant to the ATM Agreement. On June 30, 2016, the Company closed on the sale of its equity securities in
connection with a registered direct offering, described below, and as a result, the Company was restricted from issuing any shares
pursuant to the ATM Agreement for a period of 90 days following the close of the ATM Agreement. This restriction lapsed on September
28, 2016. On February 21, 2017, the Company authorized the Sales Agent to restart sales under the ATM Agreement for maximum aggregate
gross proceeds of up to $3,285,798. During the first quarter of 2017, the Company sold 642,150 shares of Common Stock under this
agreement for total net proceeds to the Company from this offering, after deducting the placement agent fees and offering expenses,
of approximately $1.8 million. No shares of Common Stock were sold pursuant to the ATM Agreement during the second or third quarters
of 2017. On June 14, 2017, the Company closed on the sale of its equity securities in connection with a public offering, described
below, and as a result, the Company is restricted from issuing any shares pursuant to the ATM Agreement for a period of twenty-four
months following the closing date of the offering. However, this restriction is suspended for any sale of shares of Common Stock
under the ATM Agreement that is above $3.00 per share.
EYEGATE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2017
5.
Capital Stock - (continued)
On June 14, 2017, the Company completed
a public offering of 5,336,667 shares of Common Stock and 1,995 shares of Series B Preferred Stock (convertible into 1,330,000
shares of Common Stock), along with warrants to purchase 6,666,667 shares of Common Stock. Concurrently with the closing of the
public offering, a holder elected to convert 675 shares of Series B Preferred Stock into 450,000 shares of Common Stock. Subsequently,
on June 15, 2017, a holder converted 720 shares of Series B Preferred stock into 480,000 shares of Common Stock. The total net
proceeds to the Company from the offering, after deducting the placement agent fees and offering expenses, were approximately $8.8
million. Additionally, the investors received, for each share of Common Stock, or for each share of Common Stock issuable upon
conversion of a share of Series B Preferred Stock purchased in the public offering, warrants to purchase one share of Common Stock
at an exercise price of $1.50 per share, which totaled warrants to purchase an aggregate of 6,666,667 shares of Common Stock. The
warrants issued to investors became initially exercisable immediately upon issuance and terminate on June 14, 2022, five years
following the date of issuance.
At each of September 30, 2017 and December
31, 2016, the Company had 100,000,000 authorized shares of Common Stock, $0.01 par value, of which 17,204,778 and 10,130,883 shares,
respectively, were outstanding. At each of September 30, 2017 and December 31, 2016, the Company had 9,995,828 and 9,997,223 authorized
shares of Preferred Stock, $0.01 par value, respectively, of which 3,750 shares were designated as Series A Preferred Stock and
0 shares are issued and outstanding, and 10,000 shares were designated as Series B Preferred Stock, and 600 and 0 shares, respectively,
are issued and outstanding. The reduction in shares of authorized Preferred Stock is a result of 1,395 shares of Series B Preferred
Stock, which were converted to Common Stock and retired during the nine months ended September 30, 2017. At each of September 30,
2017 and December 31, 2016, there were 0 shares of Common Stock underlying the outstanding shares of Series A Preferred Stock,
and 400,000 and 0 shares of Common Stock underlying the outstanding shares of Series B Preferred Stock, respectively
.
6.
Warrants
At September 30, 2017, the following warrants
were outstanding:
|
|
Number of
Awards
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Term in Years
|
|
Outstanding at December 31, 2016
|
|
|
2,852,736
|
|
|
$
|
7.45
|
|
|
|
4.26
|
|
Issued
|
|
|
6,666,667
|
1
|
|
|
1.50
|
2
|
|
|
4.71
|
|
Outstanding at September 30, 2017
|
|
|
9,519,403
|
|
|
$
|
3.28
|
|
|
|
4.50
|
|
|
1
|
Consists of 6,666,667 warrants to purchase 6,666,667 shares
of Common Stock issued in connection with the Company’s public offering on June 14, 2017.
|
|
2
|
Warrant exercise price for a full share of Common Stock.
|
All of the warrant agreements provide for
a cashless exercise in the event a registration statement covering the issuance of the shares of common stock underlying the warrants
is not effective, whereby the number of warrants to be issued will be reduced by the number of shares which could be purchased
from the proceeds of the exercise of the respective warrant. The outstanding warrants expire from 2020 through 2025.
7.
Stockholder Notes Receivable
In 2007, a Stockholder of the Company was issued various promissory
notes totaling $58,824 for the sale of Common Stock. The notes were full recourse and collateralized by the shares of Common Stock
sold. The amended notes bore compound interest at 0.93% effective October 1, 2012, and as of October 1, 2016 these notes had matured.
On September 5, 2017, these notes were forgiven by the Company
in the amount of $91,054, which included accrued interest of $32,230. These amounts are recorded in General and Administrative
on the Condensed Consolidated Statements of Operations and Comprehensive Loss.
EYEGATE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2017
8.
Equity Incentive Plan
In 2005, the Company approved the 2005
Equity Incentive Plan (the “2005 Plan”). The 2005 Plan provides for the granting of options, restricted stock or other
stock-based awards to employees, officers, directors, consultants and advisors. During 2010, the maximum number of shares of Common
Stock that may be issued pursuant to the 2005 Plan was increased to 891,222 shares. The Board of Directors (the “Board”)
is responsible for administration of the 2005 Plan. The Company’s Board determines the term of each option, the option exercise
price, the number of shares for which each option is granted and the rate at which each option is exercisable. Incentive stock
options may be granted to any officer or employee at an exercise price per share of not less than the fair value per common share
on the date of the grant (not less than 110% of fair value in the case of holders of more than 10% of the Company’s voting
stock) and with a term not to exceed ten years from the date of the grant (five years for incentive stock options granted to holders
of more than 10% of the Company’s voting stock). Nonqualified stock options may be granted to any officer, employee, consultant
or director at an exercise price per share of not less than the par value per share. Following adoption of the 2014
Equity Incentive Plan (the “2014 Plan”), no further grants were made under the 2005 Plan.
The Company’s Board adopted the 2014
Plan and the Employee Stock Purchase Plan (the “ESPP”), and the Company’s Stockholders approved the 2014 Plan
and the ESPP Plan in February 2015. As of September 30, 2017, the maximum number of shares of Common Stock that may be issued pursuant
to the 2014 Plan and the ESPP is 1,690,123 and 170,567 shares, respectively.
In January 2017, the number of shares of
common stock issuable under the 2014 Plan automatically increased by 405,235 shares pursuant to the terms of the 2014 Plan. Additionally,
in June 2017, the number of shares of common stock issuable under the 2014 Plan was increased by 250,000 shares and issuable under
the ESPP was increased by 100,000 shares, as approved by the Company’s Stockholders. These additional shares are included
in the total of 1,690,123 shares issuable under the 2014 Plan and 170,567 shares issuable under the ESPP.
The following is a summary of stock option
activity for the nine months ended September 30, 2017 and 2016:
|
|
Number of
Options
|
|
|
Weighted- Average
Exercise Price
|
|
|
Weighted-Average
Contractual Life
(In Years)
|
|
Outstanding at December 31, 2016
|
|
|
1,509,711
|
|
|
$
|
2.85
|
|
|
|
5.04
|
|
Granted
|
|
|
482,950
|
|
|
|
1.44
|
|
|
|
9.60
|
|
Exercised
|
|
|
(61,078
|
)
|
|
|
0.67
|
|
|
|
|
|
Expired
|
|
|
(73,283
|
)
|
|
|
2.19
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
1,858,300
|
|
|
$
|
2.62
|
|
|
|
5.61
|
|
Exercisable at September 30, 2017
|
|
|
1,188,317
|
|
|
$
|
2.68
|
|
|
|
4.56
|
|
Vested and Expected to Vest at September 30, 2017
|
|
|
1,188,317
|
|
|
$
|
2.68
|
|
|
|
4.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
1,277,367
|
|
|
$
|
2.75
|
|
|
|
4.94
|
|
Granted
|
|
|
355,071
|
|
|
|
2.81
|
|
|
|
9.50
|
|
Exercised
|
|
|
(86,765
|
)
|
|
|
0.65
|
|
|
|
|
|
Forfeited
|
|
|
(12,362
|
)
|
|
|
3.93
|
|
|
|
|
|
Outstanding at September 30, 2016
|
|
|
1,533,311
|
|
|
$
|
2.91
|
|
|
|
6.44
|
|
Exercisable at September 30, 2016
|
|
|
907,445
|
|
|
$
|
2.84
|
|
|
|
4.09
|
|
Vested and Expected to Vest at September 30, 2016
|
|
|
907,445
|
|
|
$
|
2.84
|
|
|
|
4.09
|
|
On January 31, 2017, the Board approved
the grant of options to purchase 36,000 shares of its Common Stock to three consultants of the Company. On February 6, 2017, the
Board approved the grant of options to purchase 15,450 shares of its Common Stock to three employees. On May 18, 2017, the Board
approved the grant of options to purchase 63,000 shares of its Common Stock to two employees and four consultants of the Company.
On June 21, 2017, the Board approved the grant of options to purchase 350,000 shares of its Common Stock to six members of the
Board, six employees, and one consultant of the Company. On June 30, 2017, the Board approved the grant of options to purchase
1,500 shares of its Common Stock to three employees of the Company. On September 28, 2017, the Board approved the grant of options
to purchase 17,000 shares of its Common Stock to two employees of the Company.
EYEGATE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2017
8.
Equity Incentive Plan - (continued)
On February 6, 2017, the Board approved
the grant of 104,000 shares of restricted stock to eight employees. These vest 33.33% on the one-year anniversary of the grant
date, and the remainder ratably over the 24-month period following the one-year anniversary. As of September 30, 2017, none of
these shares were vested.
On January 25, 2016, the Board approved
the grant of options to purchase 48,300 shares of its Common Stock to two executives and seven members of the Board. On March 7,
2016, in connection with the Jade Acquisition, the Board approved the grant of options to purchase 47,786 shares of its Common
Stock to two executives. On March 29, 2016, the Board approved the grant of options to purchase 114,438 shares of its Common Stock.
On April 25, 2016, the Board approved the grant of options to purchase 41,732 shares of its Common Stock. In the third quarter
of 2016, the Board approved the grant of options to purchase 102,815 shares of its Common Stock.
All grants were issued pursuant to the
2014 Plan. In general, grants under the 2014 Plan vest 33.33% on the one-year anniversary of the grant date, and the remainder
ratably over the 24-month period following the one-year anniversary.
For the nine months ended September 30,
2017 and 2016, the fair value of each option grant has been estimated on the date of grant using the Black-Scholes Option Pricing
Model with the following weighted-average assumptions:
|
|
2017
|
|
2016
|
Risk-Free Interest Rate
|
|
1.82%
|
|
1.82%
|
Expected Life
|
|
7.28 years
|
|
7.00 years
|
Expected Volatility
|
|
171%
|
|
65%
|
Expected Dividend Yield
|
|
0%
|
|
0%
|
Using the Black-Scholes Option Pricing
Model, the estimated weighted average fair value of an option to purchase one share of common stock granted during the nine months
ended September 30, 2017 and 2016 was $1.46 and $2.94, respectively.
The total stock-based compensation expense
for employees and non-employees is included in the accompanying Condensed Consolidated Statements of Operations and as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Research and Development
|
|
$
|
57,544
|
|
|
$
|
17,092
|
|
|
$
|
165,538
|
|
|
$
|
35,692
|
|
General and Administrative
|
|
|
131,148
|
|
|
|
135,973
|
|
|
|
535,295
|
|
|
|
354,777
|
|
|
|
$
|
188,692
|
|
|
$
|
153,065
|
|
|
$
|
700,833
|
|
|
$
|
390,469
|
|
The fair value of options granted for the
nine months ended September 30, 2017 and September 30, 2016 was approximately $550,000 and $720,000, respectively. The fair value
of restricted stock granted for the nine months ended September 30, 2017 and September 30, 2016 was approximately $158,000 and
$0, respectively. As of September 30, 2017 and September 30, 2016, there is approximately $1,113,000 and $1,209,000 of total unrecognized
compensation expense related to unvested stock-based compensation arrangements granted, which cost is expected to be recognized
over a weighted-average period of 2.12 and 2.35 years, respectively. The aggregate intrinsic value of stock options outstanding
and exercisable at September 30, 2017 and September 30, 2016 is approximately $242,000 and $597,000, respectively. The intrinsic
value of stock options exercised during the nine months ended September 30, 2017 and September 30, 2016 was approximately $78,000
and $207,000, respectively.
At September 30, 2017, there were 170,416
options available under the 2014 Plan.
EYEGATE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2017
9.
Commitments and Contingencies
Leases
The Company is a party to a real property
operating lease for the rental of office space in Waltham, Massachusetts of up to 4,516 square feet, that is used for its corporate
headquarters. This lease terminates in December 2017. On October 4, 2017, the Company entered into an amendment to extend the terms
of this lease through December 2019. On July 6, 2016, the Company entered into a real property operating lease for office and laboratory
space of approximately 2,300 square feet in Salt Lake City, Utah. This lease terminates in June 2019.
The Company is a party to two nominal equipment
capital lease agreements, one for a three-year term and one for a two-year term, for the use of scientific instruments in its Salt
Lake City laboratory.
License Agreements
The Company is a party to six license agreements
as described below. Four of the six license agreements require the Company to pay royalties or fees to the licensor based on Revenue
related to the licensed technology, and the agreements with Valeant require Valeant to pay royalties to the Company based on revenue
related to the licensed technology.
On February 15, 1999, the Company
entered in to an exclusive worldwide license agreement with the University of Miami School of Medicine to license technology
relating to the Company’s EyeGate® II Delivery System. This agreement, which was amended in December 2005, requires
the Company to pay to the University of Miami an annual license fee of $12,500. This license also requires payments to the
University of Miami upon the Company’s achievement of certain milestones. Unless terminated pursuant to the license
agreement, this license will expire 12 years after the date of the first commercial sale of a product containing the licensed
technology.
On July 23, 1999, the Company entered into
a perpetual Transaction Protocol agreement with Francine Behar-Cohen to acknowledge the Company’s right to use certain patents
that Ms. Behar-Cohen had certain ownership rights with respect to and which are used in the Company’s EGP-437 Combination
Product. The agreement also provides for the Company to pay Ms. Behar-Cohen a fee based on a percentage of the pre-tax turnover
generated from sales of the Company’s EGP-437 Combination Product relating to its inclusion of the EyeGate® II Delivery
System. The fees due under the agreement are required to be paid until January 2018.
On September 12, 2013, Jade entered into
an agreement with BioTime, Inc. granting to it the exclusive worldwide right to commercialize cross-linked thiolated carboxymethyl
hyaluronic acid (“CMHA-S”) for ophthalmic treatments in humans. The agreement calls for a license issue fee paid
to BioTime of $50,000, and requires the Company (through its Jade subsidiary) to pay royalties to BioTime based on revenue relating
to any product incorporating the CMHA-S technology. The agreement expires when patent protection for the CMHA-S technology lapses.
On July 9, 2015, the Company entered into
an exclusive worldwide licensing agreement with a subsidiary of Valeant through which EyeGate has granted Valeant exclusive, worldwide
commercial and manufacturing rights to its EGP-437 Product in the field of anterior uveitis, as well as a right of last negotiation
to license the EGP-437 Product for other indications. Under the agreement, Valeant paid the Company an upfront payment of $1.0
million. The Company is eligible to receive milestone payments totaling up to $32.5 million, upon and subject to the achievement
of certain specified developmental and commercial milestones. In addition, the Company is eligible to receive royalties based on
a specified percent of net sales of the Product throughout the world, subject to adjustment in certain circumstances.
On June 17, 2016, the Company entered into
an exclusive worldwide license agreement with the University of Utah Research Foundation to further the commercial development
of the NASH technology, together with alkylated HA. The agreement calls for payments due to the University of Utah, consisting
of a license grant fee of $15,000 due within 30 days of signing, and an annual licensing fee, initially $5,000, and escalating
ratably up to $20,000 in 2021.
EYEGATE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2017
9.
Commitments and Contingencies - (continued)
On February 21, 2017, the Company entered
into an exclusive, worldwide licensing agreement with a subsidiary of Valeant (the “New Valeant Agreement”), through
which the Company granted Valeant exclusive, worldwide commercial and manufacturing rights to its EGP-437 Product in the field
of ocular iontophoretic treatment for post-operative ocular inflammation and pain in ocular surgery patients (the “New Field”).
Under the New Valeant Agreement, Valeant paid the Company an initial upfront payment of $4.0 million, and the Company is eligible
to receive milestone payments totaling up to approximately $99.0 million, upon and subject to the achievement of certain specified
developmental and commercial progress of the EGP-437 Product for the New Field. In addition, the Company is eligible under the
New Valeant Agreement to receive royalties based on a specified percent of net sales of its EGP-437 Product for the New Field throughout
the world, subject to adjustment in certain circumstances.
10.
Employee Benefit Plans
The Company has an employee benefit plan
for its United States-based employees under Section 401(k) of the Internal Revenue Code. The Plan allows all eligible employees
to make contributions up to a specified percentage of their compensation. Under the Plan, the Company may, but is not obligated
to, match a portion of the employee contribution up to a defined maximum. The Company made no matching contribution for the nine
months ended September 30, 2017 and 2016.