Notes
to Unaudited Condensed Consolidated Financial Statements
(Tabular
dollars and shares in thousands, except per share data)
NOTE
A – Nature of Business
Matinas
BioPharma Holdings Inc. (“Holdings”) is a Delaware corporation formed in 2013. Holdings is the parent company of Matinas
BioPharma, Inc. (“BioPharma”), and Matinas BioPharma Nanotechnologies, Inc. (“Nanotechnologies,” formerly
known as Aquarius Biotechnologies, Inc.), its operating subsidiaries (“Nanotechnologies”, and together with “Holdings”
and “BioPharma”, “the Company” or “we” or “our” or “us”). The Company
is a development stage biopharmaceutical company with a focus on identifying and developing novel pharmaceutical products.
On
January 29, 2015, we completed the acquisition of Nanotechnologies (the “2015 Merger”), a New Jersey-based, early-stage
pharmaceutical company focused on the development of differentiated and orally delivered therapeutics based on a proprietary,
lipid-based, drug delivery platform called “cochleate delivery technology.” Following the 2015 Merger, we are a clinical-stage
biopharmaceutical company focused on identifying and developing safe and effective broad spectrum antifungal and anti-bacterial
therapeutics for the treatment of serious and life-threatening infections, using our innovative lipid-crystal nano-encapsulation
drug delivery platform.
On
September 13, 2016, the Company completed the closing of an $8.0 million private placement equity financing. The Company sold
to accredited investors an aggregate of 1,600,000 Series A Preferred Shares at a purchase price of $5.00 per share resulting in
net proceeds of approximately $6.9 million. Each Series A Preferred Share is convertible into ten shares of common stock based
on the current conversion price. For a detailed discussion of this transaction see Note F.
On
January 13, 2017, the Company completed its tender offer to amend and exercise certain categories of existing warrants. Pursuant
to the Offer to Amend and Exercise, an aggregate of 30,966,350 warrants were tendered by their holders and were amended and exercised
in connection herewith. The gross cash proceeds from such exercises were approximately $13.5 million and the net cash proceeds
after deducting warrant solicitation agent fees and other estimated offering expenses were approximately $12.7 million. For a
detailed discussion of this transaction see Note D.
NOTE
B – Liquidity, Plan of Operations and Going Concern
The
accompanying financial statements have been prepared in conformity with generally accepted accounting principles.
The
Company has experienced net losses and negative cash flows from operations each period since its inception. Through September
30, 2017, the Company had an accumulated deficit of approximately $47.6 million. The Company’s operations have been financed
primarily through the sale of equity securities. The Company’s net loss for the nine months ended September 30, 2017 and
2016 was approximately $11.9 million and $5.7 million, respectively.
The
Company has been engaged in developing a pipeline of product candidates since 2011. To date, the Company has not obtained regulatory
approval for any of its product candidates nor generated any revenue from products and the Company expects to incur significant
expenses to complete development of its product candidates. The Company may never be able to obtain regulatory approval for the
marketing of any of its product candidates in any indication in the United States or internationally and there can be no assurance
that the Company will generate revenues or ever achieve profitability.
Assuming
the Company obtains FDA approval for one or more of its product candidates, which the Company does not expect to receive until
2022 at the earliest, the Company expects that its expenses will continue to increase once the Company reaches commercial launch.
The Company also expects that its research and development expenses will continue to increase as it moves forward with additional
clinical studies for its current product candidates and developing additional product candidates. As a result, the Company expects
to continue to incur substantial losses for the foreseeable future, and that these losses will be increasing.
To
continue to fund its continued losses, on January 13, 2017, the Company completed a warrant tender offer, with gross cash proceeds
of $13.5 million and net proceeds of approximately $12.7 million (see Footnote E for additional details). Additionally, the Company
has entered into a Controlled Equity Offering
SM
Sales Agreement with Cantor Fitzgerald & Co. “Cantor”
( see Footnote C), which allows the Company, subject to certain limited restrictions and daily sales limits, to sell shares of
common stock having an offering price of up to $30 million. Through October 19, 2017, the Company has sold approximately 871 thousand
shares of common stock pursuant to the Controlled Equity Offering
SM
Sales Agreement with Cantor raising over $1.1 million
(see footnote C).
As
of September 30, 2017, the Company had cash and cash equivalents of approximately $ 9.0 million. We believe the cash and cash
equivalents on hand are sufficient to fund planned operations through May 2018.
The
ability of the Company to continue as a going concern is dependent upon securing additional financing. While the Company believes
in the viability of its strategy to raise additional funds, and believes that the actions presently being taken by the Company
provide the opportunity for it to continue as a going concern, there can be no assurance that any financing will be available
on acceptable terms, or at all. These consolidated financial statements do not include any adjustments related to the recoverability
and classification of asset amounts or the amounts and classification of liabilities that might be necessary if the Company is
unable to continue as a going concern.
NOTE
C – Controlled Equity Offering
On
April 28, 2017, the Company entered into a Controlled Equity Offering
SM
Sales Agreement, or sales agreement, with Cantor
Fitzgerald & Co., or “Cantor”, pursuant to which the Company may issue and sell, from time to time, shares of
our common stock having an aggregate offering price of up to $30.0 million. Cantor Fitzgerald will be acting as sales agent and
be paid a 3% commission on each sale.
As
of September 30, 2017, the Company has sold approximately 506 thousand shares raising over $.6 million. From September 30, 2017
to filing approximately 365 thousand shares have been sold raising approximately $.5 million.
Through
an internal Pricing Committee, the Company at various times, will establish selling criteria with Cantor based on minimum pricing
and share volume. This criteria is based on the judgement of the Pricing Committee, there are no contractual minimums with regards
to price or volume in the Sales Agreement.
NOTE
D – Summary of Significant Accounting Policies
[1]
|
Basis
of Presentation
|
The
accompanying unaudited condensed consolidated financial statements include the consolidated accounts of Holdings and its wholly
owned subsidiaries, BioPharma and Nanotechnologies, the operational subsidiaries of Holdings. The accompanying unaudited condensed
consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”) and reflect the operations of the Company and its wholly-owned subsidiaries.
All intercompany transactions have been eliminated in consolidation.
These
interim unaudited financial statements do not include all the information and footnotes required by U.S. GAAP for annual financial
statements and should be read in conjunction with the audited financial statements for the year ended December 31, 2016, which
are included in the Form 10-K filed with the SEC on March 31, 2017. In the opinion of management, the interim unaudited financial
statements reflect all normal recurring adjustments necessary to fairly state the Company’s financial position and results
of operations for the interim periods presented. The year-end condensed consolidated balance sheet data presented for comparative
purposes was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.
Operating
results for the nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for any
future interim periods or for the year ending December 31, 2017. For further information, refer to the consolidated financial
statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2016.
For
a detailed discussion about the Company’s significant accounting policies, see Note C to the consolidated financial statements
in the 2016 Form 10-K. During the nine months ended September 30, 2017, there were no significant updates made to the Company’s
significant accounting policies.
[2]
|
Concentration
of Credit Risk
|
The
Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash. Cash balances
are maintained principally at two major U.S. financial institutions and are insured by the Federal Deposit Insurance Corporation
(“FDIC”) up to regulatory limits. At all times throughout the nine months ended September 30, 2017, the Company’s
cash balances exceeded the FDIC insurance limit. The Company has not experienced any losses in such accounts.
Deferred
taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating
loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences
are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates.
The
Company adopted the provisions of ASC 740-10 and has analyzed its filing positions in jurisdictions where it may be obligated
to file returns. The Company believes that its income tax filing position and deductions will be sustained on an audit and does
not anticipate any adjustments that will result in a material change to its financial position. Therefore, no reserves for uncertain
income tax positions have been recorded. The Company’s policy is to recognize interest and/or penalties related to income
tax matters in income tax expense. The Company had no accrual for interest or penalties as of September 30, 2017.
[4]
|
Basic
Net Loss per Common Share
|
Basic
and diluted net loss per share is computed by dividing net loss available to common shareholders by the weighted average number
of shares outstanding during the period. Diluted earnings per common share is the same as basic earnings per common share because
the Company incurred a net loss during each period presented, the potentially dilutive securities from the assumed exercise of
all outstanding stock options, preferred stock and warrants would have an anti-dilutive effect. The following schedule details
the number of shares issuable upon the exercise of stock options, warrants and conversion of preferred stock, which have been
excluded from the diluted loss per share calculation as the inclusion would be anti-dilutive for the three and nine month periods
ended September 30, 2017 and 2016:
|
|
Three
Month period
Ended September 30,
|
|
|
Nine
Month period
Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Stock options
|
|
|
11,526
|
|
|
|
8,321
|
|
|
|
11,526
|
|
|
|
8,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock issuable upon conversion
|
|
|
15,078
|
|
|
|
16,000
|
|
|
|
15,078
|
|
|
|
16,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
5,961
|
|
|
|
40,518
|
|
|
|
5,961
|
|
|
|
40,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
32,565
|
|
|
|
64,839
|
|
|
|
32,565
|
|
|
|
64,839
|
|
[5]
|
Goodwill
and Other Intangible Assets
|
Goodwill
is assessed for impairment at least annually on a reporting unit basis, or more frequently when events and circumstances occur
indicating that the recorded goodwill may be impaired. In accordance with the authoritative accounting guidance we have the option
to perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is
less than its carrying amount. If we determine this is the case, we are required to perform the two-step goodwill impairment test
to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized, if any. If we determine
that it is more-likely-than-not that the fair value of the reporting unit is greater than its carrying amounts, the two-step goodwill
impairment test is not required.
As
defined in the authoritative guidance, a reporting unit is an operating segment, or one level below an operating segment. Historically,
we conducted our business in a single operating segment and reporting unit. In the period ended September 30, 2017, we assessed
goodwill impairment by performing a qualitative test for our reporting unit. During our qualitative review, we considered the
Company’s cash position and our ability to obtain additional financing in the near term to meet our operational and strategic
goals and substantiate the value of our business. Based on the results of our assessment, it was determined that it is more-likely-
than-not that the fair value of the reporting units are greater than their carrying amounts. There was no impairment of goodwill
for the period ended September 30, 2017.
We
review other intangible assets for impairment whenever events or changes in business circumstances indicate that the carrying
amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. The authoritative
accounting guidance allows a qualitative approach for testing indefinite-lived intangible assets for impairment, similar to the
impairment testing guidance for goodwill. It allows the option to first assess qualitative factors (events and circumstances)
that could have affected the significant inputs used in determining the fair value of the indefinite-lived intangible asset. The
qualitative factors assist in determining whether it is more-likely-than-not (i.e. > 50% chance) that the indefinite-lived
intangible asset is impaired. An organization may choose to bypass the qualitative assessment for any indefinite-lived intangible
asset in any period and proceed directly to calculating its fair value. Our indefinite-lived intangible assets are IPR&D intangible
assets. In all other instances, we used the qualitative test and concluded that it was more-likely-than-not that all other indefinite-lived
assets were not impaired and therefore, there were no impairments in period ended September 30, 2017.
[6]
|
Preferred
Stock Dividends
|
Pursuant
to the Certificate of Designations, the Series A Preferred Shares earn dividends at a rate of 8.0% once per year on the anniversary
of the Initial Closing, payable to the holders of such Series A Preferred Shares in shares of common stock upon conversion. Dividends
do not require declaration by the Board of Directors. Dividends are accrued annually as of the date the dividend is earned in
an amount equal to the contractual rate of 8% of the stated value.
The
Company records rent on a straight line basis. Differences between monthly rent expenses and rent payments are known as
deferred
rents
. Deferred rents are recorded in either an asset account (e.g., other current or noncurrent assets) when the cumulative
difference between rent expenses and rent payments as of a balance sheet date is negative or a liability account (e.g., other
current or noncurrent liabilities) when the cumulative difference is positive. Due to our escalating rents, the Company is currently
recording a deferred rent liability.
[8]
|
Recent
Accounting Pronouncements
|
In
January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (“ASU”) No. 2017-04,
“Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”.
The Board
is issuing the amendments in this update to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill
impairment test. Instead an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit
with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds
the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to
that reporting unit. We are required to apply the amendments in this for its annual or any interim goodwill impairment tests in
fiscal years beginning after December 15, 2019. We have evaluated this standard and believe it will not have a material impact
on our consolidated financial position or results of operation.
In
August 2016, the FASB issued ASU No. 2016-15, “
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments”
, which amended the existing accounting standards for the statement of cash flows. The amendments
provide guidance on eight classification issues related to the statement of cash flows. The Company is required to adopt the guidance
in the first quarter of 2018 and early adoption is permitted. The amendments should be applied retrospectively to all periods
presented. For issues that are impracticable to apply retrospectively, the amendments may be applied prospectively as of the earliest
date practicable. The Company does not believe the adoption will have a material impact on the Company’s consolidated statements
of cash flows.
In
May 2014, the FASB issued ASU No. 2014-09, “
Revenue from Contracts with Customers”
. ASU 2014-09 represents
a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the Partnership expects to be entitled to
receive in exchange for those goods or services. This ASU sets forth a new five-step revenue recognition model which replaces
the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue
recognition guidance that have historically existed. In August 2015, the FASB issued ASU No. 2015-14, “
Revenue from Contracts
with Customers (Topic 606): Deferral of the Effective Date”,
which defers the effective date of ASU 2014-09 by one year,
but permits companies to adopt one year earlier if they choose (i.e., the original effective date). As such, this ASU is effective
for annual reporting periods beginning after December 15, 2017 for public companies and 2018 for private companies. Companies
may use either a full retrospective or a modified retrospective approach to adopt this ASU. We do not believe that adoption of
the standard for contract research revenue will have a material impact on our consolidated financial position or results of operation.
We will continue our evaluation of ASU 2014-09, including how it may impact new arrangements we enter into as well as new or emerging
interpretations of the standard, through the date of adoption. The Company will adopt the guidance in ASU 2014-09 as of January
1, 2018 and apply the modified retrospective approach.
In
March 2016, the FASB issued ASU No. 2016-09, “Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting.” This ASU simplifies several aspects of the accounting for share–based payment award transactions. The
ASU is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted. The Company
has adopted this standard with an effective date January 1, 2017 which had an immaterial impact on our consolidated financial
position or results of operation.
In
February 2016, the FASB issued ASU No. 2016-02, “
Leases
”. The new standard will require most leases to be recognized
on the balance sheet which will increase reported assets and liabilities. Lessor accounting remains substantially similar to current
guidance. The new standard is effective for annual and interim periods in fiscal years beginning after December 15, 2018, which
for us is the first quarter of 2019 and mandates a modified retrospective transition method. We do not intend to early adopt and
are currently assessing the impact of this update, but preliminarily believe that its adoption will not have a material impact
on our consolidated financial statements.
[9]
|
Beneficial
Conversion Feature of Convertible Preferred Stock
|
The
Company accounts for the beneficial conversion feature on its convertible preferred stock in accordance with ASC 470-20,
Debt
with Conversion and Other Options
. The Beneficial Conversion Feature (“BCF”) of convertible preferred stock is
normally characterized as the convertible portion or feature that provides a rate of conversion that is below market value or
in-the-money when issued. We record a BCF related to the issuance of convertible preferred stock when issued. Beneficial conversion
features that are contingent upon the occurrence of a future event are recorded when the contingency is resolved.
To
determine the effective conversion price, we first allocate the proceeds received to the convertible preferred stock and then
use those allocated proceeds to determine the effective conversion price. If the convertible instrument is issued in a basket
transaction (i.e., issued along with other freestanding financial instruments), the proceeds should first be allocated to the
various instruments in the basket. Any amounts paid to the investor when the transaction is consummated (e.g., origination fees,
due diligence costs) represent a reduction in the proceeds received by the issuer. The intrinsic value of the conversion option
should be measured using the effective conversion price for the convertible preferred stock on the proceeds allocated to that
instrument. The effective conversion price represents proceeds allocable to the convertible preferred stock divided by the number
of shares into which it is convertible. The effective conversion price is then compared to the per share fair value of the underlying
shares on the commitment date.
The
accounting for a BCF requires that the BCF be recognized by allocating the intrinsic value of the conversion option to additional
paid-in capital, resulting in a discount on the convertible preferred stock. This discount should be accreted from the date on
which the BCF is first recognized through the earliest conversion date for instruments that do not have a stated redemption date.
The intrinsic value of the BCF is recognized as a deemed dividend on convertible preferred stock over a period specified in the
guidance.
NOTE
E – 2017 Warrant Tender Offer
On
January 13, 2017, the Company completed its tender offer to amend and exercise certain categories of existing warrants.
Pursuant
to the Offer to Amend and Exercise, an aggregate of 30,966,350 Warrants were tendered by their holders and were amended and exercised
in connection therewith for an aggregate exercise price of approximately $15.5 million, including the following: 3,750,000 Formation
Warrants; 754,000 Merger Warrants; 7,243,750 2013 Investor Warrants; 500,000 Private Placement Warrants; 14,750,831 2015 Investor
Warrants; 722,925 $2.00 Placement Agent (PA) Warrants (of which 721,987 were exercised on a cashless basis); 1,426,687 $1.00 PA
Warrants (of which 1,424,812 were exercised on a cashless basis); and 1,818,157 $0.75 PA Warrants (of which 1,774,017 were exercised
on a cashless basis). The gross cash proceeds from such exercises were approximately $13.5 million and the net cash proceeds after
deducting warrant solicitation agent fees and other estimated offering expenses were approximately $12.7 million. Prior to the
Offer to Amend and Exercise, the Company had 58,159,495 shares of common stock outstanding and warrants to purchase an aggregate
of 40,255,234 shares of common stock. Immediately following the Offer to Amend and Exercise (after the effect of certain cash
and cashless exercises), the Company issued in exchange for the warrants 29,666,782 common shares.
The
Company considers the warrant amendment to be of an equity nature as the amendment allowed the warrant holder to exercise a warrant
and receive a common share which represents an equity for equity exchange. Therefore, the change in the fair value before and
after the modification of approximately $16.7 million will be treated as a change in additional paid in capital (APIC) as an inducement
charge. The cash received upon exercise in excess of par is also accounted through APIC.
The
Company retained Aegis Capital Corp. (“Aegis Capital”) to act as its Warrant Agent for the Offer to Amend and Exercise
pursuant to a Warrant Agent Agreement. Aegis Capital received a fee equal to 5% of the cash exercise prices paid by holders of
the warrants (excluding the placement agent warrants) who participated in the Offer to Amend and Exercise. In addition, the Company
agreed to reimburse Aegis Capital for its reasonable out-of-pocket expenses and attorney’s fees, including a $35,000 non-
accountable expense allowance.
NOTE
F – Leasehold improvements and equipment
Leasehold
improvements and equipment, summarized by major category, consist of the following ($ in thousands) for the nine months ended
September 30, 2017 and year ended December 31, 2016:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Lab equipment
|
|
$
|
472
|
|
|
|
438
|
|
Furniture and fixtures
|
|
|
20
|
|
|
|
20
|
|
Equipment under capital lease
|
|
|
81
|
|
|
|
31
|
|
Leasehold improvements
|
|
|
1,084
|
|
|
|
7
|
|
Total
|
|
|
1,657
|
|
|
|
496
|
|
Less: accumulated
depreciation and amortization
|
|
|
196
|
|
|
|
140
|
|
Leasehold
improvements and equipment, net
|
|
$
|
1,461
|
|
|
$
|
356
|
|
Depreciation
and amortization expense for the three and nine months ended September 30, 2017 was approximately $31 thousand and $56 thousand,
respectively. Depreciation and amortization expense for the three and nine months ended September 30, 2016 was approximately $15
thousand and $40 thousand, respectively.
On
February 12, 2016, the Company entered in a new 36-month capital lease for lab equipment. On May 15, 2017, the Company entered
into a second 36-month capital lease for lab equipment. The payments under the leases are accounted for as interest and payments
under capital lease using 3-year amortization. During the three and nine months ended September 30, 2017 the Company recognized
interest expense of approximately $823 and $2,873, respectively, associated with the lease payments.
NOTE
G – Stock Holders Equity
Preferred
Stock
In
accordance with the Certificate of Incorporation, there are 10,000,000 authorized preferred shares at a par value of $ 0.001.
In connection with the 2016 Private Placement, on July 26, 2016, the Company filed a Certificate of Designation (the “Certificate
of Designations”) with the Secretary of the State of Delaware to designate the preferences, rights and limitations of the
Series A Preferred Shares. Pursuant to the Certificate of Designations, the Company designated 1,600,000 shares of the Company’s
previously undesignated preferred stock as Series A Preferred Stock. As of September 30, 2017, the Company had 1,507,858 shares
of Series A Preferred Stock outstanding.
Conversion:
Each
Series A Preferred Share is convertible at the option of the holder into such number of shares of the Company’s common stock
equal to the number of Series A Preferred Shares to be converted, multiplied by the stated value of $5.00 (the “Stated Value”),
divided by the Conversion Price in effect at the time of the conversion (the initial conversion price will be $0.50, subject to
adjustment in the event of stock splits, stock dividends, and fundamental transactions). Based on the current conversion price,
each share of the Series A Preferred Stock is convertible into ten shares of common stock. A fundamental transaction means: (i)
our merger or consolidation with or into another entity, (ii) any sale of all or substantially all of our assets in one transaction
or a series of related transactions, or (iii) any reclassification of our Common Stock or any compulsory share exchange by which
Common Stock is effectively converted into or exchanged for other securities, cash or property. Each Series A Preferred Share
will automatically convert into common stock upon the earlier of (i) notice by the Company to the holders that the Company has
elected to convert all outstanding Series A Preferred Shares; provided however that in the event the Company elects to force automatic
conversion pursuant to this clause (i), the conversion date for purposes of calculating the accrued Dividend (as defined below)
is deemed to be July 29, 2019, which is the third anniversary of the Initial Closing, (ii) three years from the Initial Closing,
(iii) the approval of the Company’s MAT2203 product candidate by the U.S. Food and Drug Administration or the European Medicines
Agency (the “Regulatory Approval”) or (iv) the Regulatory Approval of the Company’s MAT2501 product candidate.
Beneficial
Conversion Feature - Series A Preferred Stock (deemed dividend):
Each
share of Series A Preferred Stock is convertible into shares of common stock, at any time at the option of the holder at a conversion
price of $0.50 per share. On July 29, 2016, August 16, 2016, and September 12, 2016, the date of issuances of the Series A, the
publicly traded common stock prices were $0.67, $0.70, and $1.00 per share, respectively.
Based
on the guidance in ASC 470-20-20, the Company determined that a beneficial conversion feature exists, as the effective conversion
price for the Series A preferred shares at issuance was less than the fair value of the common stock into which the preferred
shares are convertible. A beneficial conversion feature based on the intrinsic value of the date of issuances for the Series A
was approximately $4.4 million. The beneficial conversion amount of approximately $4.4 million was then accreted back to the preferred
stock as a deemed dividend and charged to accumulated deficit as the conversion rights were 100% effective at the time of issuance
in the third quarter of 2016.
Liquidity
Value and Dividends:
Pursuant
to the Certificate of Designations, the Series A Preferred Shares accrue dividends at a rate of 8.0% once per year on the anniversary
date of the Initial Closing, payable and only payable to the holders of such Series A Preferred Shares in shares of common stock
upon conversion. Dividends of approximately $608 thousand have been accrued as paid-in-kind through September 30, 2017 and approximately
$ 5 thousand has been earned and converted into common stock at the election of the holders. The Series A Preferred Shares vote
on an as converted basis with the Company’s common stock. Upon any dissolution, liquidation or winding up, whether voluntary
or involuntary, holders of Series A Preferred Shares are entitled to (i) first receive distributions out of our assets in an amount
per share equal to the Stated Value plus all accrued and unpaid dividends, whether capital or surplus before any distributions
shall be made on any shares of common stock and (ii) second, on an as-converted basis alongside the common stock.
Pursuant
to the Certificate of Designations, the liquidation value of a Series A Preferred Share is equal to the stated value of $5.00
per share (as adjusted for stock splits, stock dividends, combinations or other recapitalizations of the Series A Preferred Stock)
plus any earned but unpaid dividends.
Royalty:
The
Series A Preferred Shares include the right, as a group, to receive: (i) 4.5% of the net sales of MAT2203 and MAT2501, in each
case from and after the date, respectively, such candidate has received FDA or EMA approval, subject in all cases to a respective
to a cap of $ 25 million per calendar year, and (ii) 7.5% of the proceeds, if any, received by the Company in connection with
the licensing or other disposition by the Company of MAT2203 and/or MAT2501 (“Royalty Payment Rights”), subject in
all cases to a cap of $ 10 million per year. The royalty is payable so long as the Company has valid patents covering MAT2203
and MAT2501, as applicable. The Royalty Payment Rights are unsecured obligations of the Company. The royalty payment will be allocated
to the holders based on their pro rata ownership of vested Series A Preferred Shares. The royalty rights that are part of the
Series A Preferred Shares will vest, in equal thirds, upon each of the July 29, 2017, July 29, 2018, and July 29, 2019, which
are the first, second and third anniversary dates of the Initial Closing, (each a “Vesting Date”); provided however,
if the Series A Preferred Shares automatically convert into common stock prior to the 36 month anniversary of the initial closing,
then the royalty rights that are part of the outstanding Series A Preferred Shares shall be deemed to be fully vested as of the
date of conversion. Even if the Series A Preferred Shares are purchased after the initial closing, the vesting periods for the
royalty rights that are part of the Series A Preferred Shares shall still be based on the Vesting Dates. During the first 36 months
following the initial closing, the right to receive a royalty will follow the Series A Preferred Shares; after July 29, 2019,
the royalty payment rights may be transferred separately from the Series A Preferred Stock subject to available exemption from
registration under applicable securities laws. The Company believes that such rights are not separable free-standing instruments
requiring bifurcation at the date of transaction. The Company may recognize a deemed dividend for the estimated fair value of
the vested portion of the royalty rights in future periods. As of September 30, 2017, no accrual has been recorded for royalty
payments as it is not probable at this time that any amount will be paid.
Classification:
These
Series A Preferred Shares are classified within permanent equity on the Company’s condensed consolidated balance sheet as
they do not meet the criteria that would require presentation outside of permanent equity under ASC 480
Distinguishing Liabilities
from Equity
.
Warrants
As
of September 30, 2017, the Company had outstanding warrants to purchase an aggregate of 5,961,269 shares of common stock at exercise
prices ranging from $0.50 to $2.00 per share
The
Warrants were exercisable immediately upon issuance and have a five-year term. The Warrants may be exercised at any time in whole
or in part upon payment of the applicable exercise price until expiration of the Warrants. No fractional shares will be issued
upon the exercise of the Warrants. The exercise price and the number of warrant shares purchasable upon the exercise of the Investor
Warrants (as opposed to Placement Agent Warrants) are subject to adjustment upon the occurrence of certain events, which include
stock dividends, stock splits, combinations and reclassifications of the Company capital stock or similar “organic changes”
to the equity structure of the Company (see Warrant table below). Accordingly, pursuant to ASC 815, the warrants are classified
as equity.
The
Company may call the Warrants, other than the Placement Agent Warrants, at any time the common stock trades above $5.00 (for warrants
issued in 2013) or above $ 3.00 (for warrants issued in 2015) for twenty (20) consecutive days following the effectiveness of
the registration statement covering the resale of the shares of common stock underlying the Warrants, provided that the Warrants
can only be called if such registration statement is current and remains effective at the time of the call and provided further
that the Company can only call the Investor Warrants for redemption, if it also calls all other Warrants for redemption on the
terms described above. The Placement Agent Warrants do not have a redemption feature. The Placement Agent warrants may be exercised
on a “cashless” basis. Such term is a contingent feature and within the control of the Company, therefore does not
require liability classification.
A
summary of equity warrants outstanding as of September 30, 2017 is presented below, all of which are fully vested.
|
|
Shares
|
|
Total
Warrants Outstanding at December 31, 2016
|
|
|
40,255
|
|
Warrants
tendered on January 13, 2017
|
|
|
(30,966
|
)
|
Warrants
exercised first quarter, 2017 outside of tender offer
|
|
|
(2,916
|
)
|
Warrants
exercised second quarter, 2017
|
|
|
(412
|
)
|
Warrants
exercised third quarter, 2017
|
|
|
-
|
|
Total
Warrants Outstanding at September 30, 2017
|
|
|
5,961
|
|
After
the effect of certain cash and cashless exercises of warrants, the Company received net cash proceeds of approximately $12.7 million
from the warrants tendered on January 13, 2017 and approximately $2.1 million for warrants exercised outside the tender offer,
for a total of approximately $14.8 million of proceeds in the first quarter. All warrants tendered in the second quarter were
cashless warrants. No warrants were tendered in the third quarter.
NOTE
H – Stock Based Compensation
In
August 2013, the Company adopted the 2013 Equity Compensation Plan (the “Plan”), which provides for the granting of
incentive stock options, nonqualified stock options, restricted stock units, performance units, and stock purchase rights. Options
under the Plan may be granted at prices not less than 100% of the fair value of the shares on the date of grant as determined
by the Board Committee. The Board Committee determines the period over which the options become exercisable subject to certain
restrictions as defined in the Plan, with the current outstanding options generally vesting over three years. The term of the
options is no longer than ten years. The Company currently has available 1,397,606 shares of common stock for issuance under the
plan.
With
the approval of the Board of Directors and majority Shareholders, effective May 8, 2014, the Plan was amended and restated. The
amendment provides for an automatic increase in the number of shares of common stock available for issuance under the Plan each
January (with Board approval), commencing January 1, 2015 in an amount up to four percent (4%) of the total number of shares of
common stock outstanding on the preceding December 31st.
The
Company recognized stock-based compensation expense (options, and restricted share grants) in its condensed consolidated statements
of operations as follows ($ in thousands):
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and Development
|
|
$
|
280
|
|
|
$
|
212
|
|
|
$
|
785
|
|
|
$
|
483
|
|
General
and Administrative
|
|
|
271
|
|
|
|
268
|
|
|
|
1,454
|
|
|
|
791
|
|
Total
|
|
$
|
551
|
|
|
$
|
480
|
|
|
$
|
2,239
|
|
|
$
|
1,274
|
|
|
|
Reserved
|
|
|
|
|
|
Awards
|
|
|
|
for
|
|
|
Awards
|
|
|
Available
|
|
|
|
Issuance
|
|
|
Issued
|
|
|
for
Grant
|
|
2013
Equity Compensation Plan
|
|
|
14,155
|
|
|
|
12,757
|
*
|
|
|
1,398
|
|
*
includes both stock grants and option grants
The
following table summarizes the Company’ stock option activity and related information for the period from December 31, 2016
to September 30, 2017 (number of options in thousands):
|
|
|
|
|
Weighted
|
|
|
|
Number
of
|
|
|
average
|
|
|
|
Options
|
|
|
Exercise
Price
|
|
Outstanding
at December 31, 2016
|
|
|
8,290
|
|
|
$
|
0.93
|
|
Granted
|
|
|
3,235
|
|
|
|
2.91
|
|
Outstanding
at September 30, 2017
|
|
|
11,525
|
|
|
$
|
1.43
|
|
As
of September 30, 2017, the number of vested shares underlying outstanding options was 7,881,492 at a weighted average exercise
price of $2.22. The aggregate intrinsic value of in the-money options outstanding as of September 30, 2017 was approximately $4.0
million. The aggregate intrinsic value is calculated as the difference between the Company’s closing stock price of $1.32
on September 30, 2017, and the exercise price of options, multiplied by the number of options. As of September 30, 2017, there
was approximately $5.4 million of total unrecognized share-based compensation. Such costs are expected to be recognized over a
weighted average period of approximately 0.86 years.
All
options expire ten years from date of grant. Except for options granted to consultants, all remaining options vest entirely and
evenly over three years. A portion of options granted to consultants vests over four years, with the remaining vesting being based
upon the achievement of certain performance milestones, which are tied to either financing or drug development initiatives.
The
Company recognizes compensation expense for stock option awards on a straight-line basis over the applicable service period of
the award. The service period is generally the vesting period, with the exception of options granted subject to a consulting agreement,
whereby the option vesting period and the service period defined pursuant to the terms of the consulting agreement may be different.
Stock options issued to consultants are revalued quarterly until fully vested, with any change in fair value expensed. The following
weighted-average assumptions were used to calculate share based compensation for the three and nine months ended September 30,
2017 and 2016:
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Volatility
|
|
|
67.09%-70.7
|
%
|
|
|
44.72%
- 89.15
|
%
|
|
|
67.09%-82.26
|
%
|
|
|
44.72%-89.15
|
%
|
Risk-free
interest rate
|
|
|
2.015%-2.075
|
%
|
|
|
1.150%-1.280
|
%
|
|
|
1.89%-2.22
|
%
|
|
|
1.14%-1.42
|
%
|
Dividend
yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected
life
|
|
|
6.0
years
|
|
|
|
6.0
years
|
|
|
|
6.0
years
|
|
|
|
6.0
years
|
|
The
Company does not have sufficient historical information to develop reasonable expectations about future exercise patterns and
post-vesting employment termination behavior. The Company uses the “simplified method” described in Staff Accounting
Bulletin (SAB) 107 to estimate expected term of share option grants.
The
expected stock price volatility assumption was determined by examining the historical volatilities for industry peers, as the
Company has limited history for the Company’s common stock. The Company will continue to analyze the historical stock price
volatility and expected term assumptions as more historical data for the Company’s common stock becomes available.
The
risk-free interest rate assumption is based on the U.S treasury instruments whose term was consistent with the expected term of
the Company’s stock options.
The
expected dividend assumption is based on the Company’s history and expectation of dividend payouts. The Company has never
paid dividends on its common stock and does not anticipate paying dividends on its common stock in the foreseeable future. Accordingly,
the Company has assumed no dividend yield for purposes of estimating the fair value of the Company share-based compensation.
The
Company accounts for forfeitures as they occur.
NOTE
I – PREPAID EXPENSES
Prepaid
expenses, summarized by major category, consist of the following for the nine months ended September 30, 2017 and year ended December
31, 2016.
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Insurance Premium
|
|
$
|
423
|
|
|
$
|
162
|
|
Deposits
|
|
|
213
|
|
|
|
36
|
|
Vendor
Services
|
|
|
381
|
|
|
|
106
|
|
|
|
$
|
1,017
|
|
|
$
|
304
|
|
NOTE
J – NOTES PAYABLE
The
notes payable amount of $298 thousand ending in September 30, 2017 and $118 thousand ending on December 31, 2016, are the financing
amounts related to the Company’s insurance policies.
NOTE
K – COMMITMENTS
On
November 1, 2013, the Company entered into a 7-year lease for office space in Bedminster, New Jersey which commenced in June 2014,
at a monthly rent of $12,723, increasing to approximately $14,200 per month toward the end of the term, May 2021.
On
December 15, 2016, the Company entered into a 10 year, 3-month lease to consolidate our locations while expanding our laboratory
and manufacturing facilities. The lease began in August 2017. The monthly rent started at approximately $43,000 and increases
to approximately $64,000 in the final year. The rental payments total approximately $6.4 million over the life of the lease which
is scheduled to end late 2027.
The
Company records rent expense on a straight-line basis. Rent expense for the three months ended September 30, 2017 and 2016 was
approximately $141,000 and $63,000, respectively. Rent expense for the nine months ended September 30, 2017 and 2016 was approximately
$317,000 and $188,000, respectively.
Listed
below is a summary of future minimum rental payments (including the remainder of 2017) as of September 30, 2017:
Year
Ending December 31,
|
|
Lease
Commitments
|
Remainder
of 2017
|
|
$
|
126
|
|
2018
|
|
|
683
|
|
2019
|
|
|
707
|
|
2020
|
|
|
732
|
|
2021
|
|
|
657
|
|
Future
minimum lease payments through 2021
|
|
$
|
2,905
|
|
The
Company was obligated to provide a security deposit of $300,000 to obtain the headquarter office lease space located in Bedminster,
New Jersey. This deposit was reduced by $100,000 in 2016 and 2015 and will be reduced to $50,000 by yearend, as long as the Company
makes timely rental payments.
To
obtain the laboratory and facility site located in Bridgewater, New Jersey, the Company was obligated to provide a security deposit
of $586,000. This security deposit can be reduced $100,000 on each of the first three anniversaries of the rent commencement date
which was August 1, 2017. On the fourth anniversary, it can be reduced another $86,000, with the balance over the remaining life
of the lease.
On
February 18, 2016, the Company entered into a Cooperative Research and Development Agreement (CRADA) with the National Institute
of Allergy and Infectious Diseases to support NIH investigators in the conduct of clinical research to investigate the safety,
efficacy, and pharmacokinetics of encochleated drug products in patients with fungal, bacterial, or viral infections at an annual
funding of $200,000 per year for 3 years.
On
November 10, 2016, the Company entered into a Cooperative Research and Development Agreement (CRADA) with the National Institute
of Allergy and Infectious Diseases to support NIH investigators to acquire technical, statistical and administrative support for
research activities as well as to pay for supplies and travel expenses for a total amount of $132,568 paid in 4 equal quarterly
installments beginning in the fourth quarter 2016 and each quarter during 2017.
Through
the 2015 Merger, we acquired a license from Rutgers University, The State University of New Jersey (successor in interest to the
University of Medicine and Dentistry of New Jersey) for the cochleate delivery technology. The Amended and Restated Exclusive
License Agreement between Nanotechnologies and Rutgers provides for, among other things, (1) royalties on a tiered basis between
low single digits and the mid-single digits of net sales of products using such licensed technology, (2) a one-time sales milestone
fee of $100,000 when and if sales of products using the licensed technology reach the specified sales threshold and (3) an annual
license fee of initially $10,000, increasing to $50,000 over the term of the license agreement.
On
September 12, 2016, the Company conducted a final closing of a private placement offering to accredited investors shares of the
Company’s Series A Preferred Stock. As part of this offer, the investors received royalty payment rights if and when the
Company generates sales of MAT2203 or MAT2501. Pursuant to the terms of the Certificate of Designations of Preferences, Rights
and Limitations (the “Certificate of Designations”) for our outstanding Series A Preferred Stock, we may be required
to pay royalties of up to $35 million per year. If and when we obtain FDA or EMA approval of MAT2203 and/or MAT2501, which we
do not expect to occur before 2021, if ever, and/or if we generate sales of such products, or we receive any proceeds from the
licensing or other disposition of MAT2203 or MAT2501, we are required to pay to the holders of our Series A Preferred Stock, subject
to certain vesting requirements, in aggregate, a royalty equal to (i) 4.5% of Net Sales (as defined in the Certificate of Designations),
subject in all cases to a cap of $25 million per calendar year, and (ii) 7.5% of Licensing Proceeds (as defined in the Certificate
of Designations), subject in all cases to a cap of $10 million per calendar year. The Royalty Payment Rights will expire when
the patents covering the applicable product expire, which is currently expected to be in 2033.
On
June 1, 2017, the Company entered into an agreement with Medpace, a clinical research organization, to provide services in a Phase
II clinical trial. The overall cost is estimated to be $1.4 million through August 2018.
The
Company has entered into two lab equipment leases. A 36 month lease ending June, 2019 with payments totaling $ 31 thousand. The
second is a 60 month lease ending in May, 2022 with payments totaling $ 49 thousand. Each lease allows for a dollar buy out of
the equipment.
The
Company also has employment agreements with certain employees which require the funding of a specific level of payments, if certain
events, such as a change in control, termination without cause or retirement, occur.