NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
1. NATURE OF BUSINESS, ORGANIZATION AND GOING CONCERN
Cellectar Biosciences, Inc. (the Company) is a clinical stage
biopharmaceutical company focused on the discovery, development and commercialization of drugs for the treatment of cancer leveraging
our proprietary phospholipid drug conjugate™ (PDCs™) delivery platform that are designed to specifically target
cancer cells and deliver improved efficacy and better safety as a result of fewer off-target effects. The COVID-19 pandemic
has created uncertainties in the expected timelines for clinical stage biopharmaceutical companies such as us, and because of such
uncertainties, it is difficult for us to accurately predict expected outcomes at this time. We have continued to enroll patients
in our clinical trials. However, COVID-19 may impact our ability to recruit patients for clinical trials, obtain adequate supply
of CLR 131 and obtain additional financing.
The accompanying financial statements have been prepared on
a basis that assumes that the Company will continue as a going concern and that contemplates the continuity of operations, realization
of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has incurred losses
since inception in devoting substantially all of its efforts toward research and development and has an accumulated deficit of
approximately $115,639,000 at March 31, 2020. The Company has devoted substantially all its efforts toward research and development
and has, during the three months ended March 31, 2020, generated an operating loss of approximately $3,959,000. The Company expects
that it will continue to generate operating losses for the foreseeable future. These conditions raise substantial doubt about the
Company’s ability to continue as a going concern.
The Company believes that its cash balance at March 31, 2020
is adequate to fund operations at budgeted levels into the first quarter 2021. The Company’s ability to execute its operating
plan beyond that time depends on its ability to obtain additional funding via the sale of equity and/or debt securities, a strategic
transaction or otherwise. The Company plans to continue to actively pursue financing alternatives, but there can be no assurance
that it will obtain the necessary funding, raising substantial doubt about the Company’s ability to continue as a going concern
within one year of the date these financial statements are issued. The accompanying financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
The accompanying Condensed Consolidated Balance Sheet as of
December 31, 2019 has been derived from audited financial statements. The accompanying unaudited Condensed Consolidated Balance
Sheet as of March 31, 2020, the Condensed Consolidated Statements of Operations and the Condensed Statements of Stockholders’
Equity for the three months ended March 31, 2020 and 2019, the Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2020 and 2019 and the related interim information contained within the notes to the Condensed Consolidated Financial
Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”) for interim financial information and with the instructions, rules and regulations of the Securities and Exchange
Commission (“SEC”) for interim financial information. Accordingly, they do not include all the information and the
notes required by U.S. GAAP for complete financial statements. In the opinion of management, the unaudited interim condensed consolidated
financial statements reflect all adjustments which are of a nature necessary for the fair presentation of the Company’s consolidated
financial position at March 31, 2020 and consolidated results of its operations, stockholders’ equity and cash flows for
the three months ended March 31, 2020 and 2019. The results for the three months ended March 31, 2020 are not necessarily indicative
of future results.
These unaudited condensed consolidated financial statements
should be read in conjunction with the audited financial statements and related notes thereto included in the Company’s Form
10-K for the fiscal year ended December 31, 2019, which was filed with the SEC on March 9, 2020.
Principles of Consolidation — The consolidated
financial statements include the accounts of the Company and the accounts of its wholly-owned subsidiary. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Fixed Assets — Property and equipment are
stated at cost. Depreciation on property and equipment is provided using the straight-line method over the estimated useful lives
of the assets (3 to 10 years). Because of the significant value of leasehold improvements purchased, leasehold improvements are
depreciated over 64 months (their estimated useful life), which represents the full term of the lease. Our only long-lived assets
are property and equipment. The Company periodically evaluates long-lived assets for potential impairment. Whenever events or circumstances
change, an assessment is made as to whether there has been impairment to the value of long-lived assets by determining whether
projected undiscounted cash flows generated by the applicable asset exceed its net book value as of the assessment date. There
were no long-lived fixed asset impairment charges recorded during the three months ended March 31, 2020 or year ended December
31, 2019.
Right-of-Use Asset and Lease Liabilities
— In February 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standard Update (“ASU”)
2016-02, Leases (ASC 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 required
lessees to recognize Right-Of-Use (“ROU”) Asset and Lease Liability for virtually all of their leases (other than leases
that meet the definition of a short-term lease). On January 1, 2019, the Company adopted FASB Accounting Standards Codification
(“ASC”) Topic 842 using the modified retrospective method for all material leases that existed at or commenced after
January 1, 2019. ROU Assets are amortized over their estimated useful life, which represents the full term of the lease.
Stock-Based Compensation — The Company uses
the Black-Scholes option-pricing model to calculate the grant-date fair value of stock option awards. The resulting compensation
expense, net of expected forfeitures, for awards that are not performance-based is recognized on a straight-line basis over the
service period of the award, which for grants issued in 2020 and 2019 ranged from one year to three years for stock options. For
stock options with performance-based vesting provisions, recognition of compensation expense, net of expected forfeitures, commences
if and when the achievement of the performance criteria is deemed probable. The compensation expense, net of expected forfeitures,
for performance-based stock options is recognized over the relevant performance period. Non-employee stock-based compensation is
accounted for in accordance with the guidance of FASB ASC Topic 505, Equity. As such, the Company recognizes expense based
on the estimated fair value of options granted to non-employees over their vesting period, which is generally the period during
which services are rendered and deemed completed by such non-employees.
Research and Development — Research and
development costs are expensed as incurred. To the extent that such costs are reimbursed by the federal government on a fixed price,
best efforts basis and the federal government is the sole customer for such research and development, the funding is recognized
as a reduction of research and development expenses.
Income Taxes — Income taxes are accounted
for using the liability method of accounting. Under this method, deferred tax assets and liabilities are determined based on temporary
differences between the financial statement basis and tax basis of assets and liabilities and net operating loss and credit carryforwards
using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances
are established when it is more likely than not that some portion of the deferred tax assets will not be realized. Management has
provided a full valuation allowance against the Company’s gross deferred tax asset. Tax positions taken or expected to be
taken in the course of preparing tax returns are required to be evaluated to determine whether the tax positions are “more
likely than not” to be sustained by the applicable tax authority. Tax positions deemed not to meet a more-likely-than-not
threshold would be recorded as tax expense in the current year. There were no uncertain tax positions that require accrual to or
disclosure in the financial statements as of March 31, 2020 and December 31, 2019.
Fair Value of Financial Instruments — The
guidance under FASB ASC Topic 825, Financial Instruments, requires disclosure of the fair value of certain financial instruments.
Financial instruments in the accompanying financial statements consist of cash equivalents, prepaid expenses and other assets,
accounts payable and long-term obligations. The carrying amount of cash equivalents and accounts payable approximate their fair
value as a result of their short-term nature. The carrying value of long-term obligations, including the current portion, approximates
fair value because the fixed interest rate approximates current market rates of interest available in the market.
Derivative Instruments — The Company generally
does not use derivative instruments to hedge exposures to cash flow or market risks; however, certain warrants to purchase common
stock that do not meet the requirements for classification as equity, in accordance with the Derivatives and Hedging Topic of the
FASB ASC, are classified as liabilities. In such instances, net-cash settlement is assumed for financial reporting purposes, even
when the terms of the underlying contracts do not provide for a net-cash settlement. These warrants are considered derivative instruments
because the agreements contain a certain type of cash settlement feature, contain “down-round” provisions whereby the
number of shares for which the warrants are exercisable, and/or the exercise price of the warrants are subject to change in the
event of certain issuances of stock at prices below the then-effective exercise price of the warrants. The number of shares issuable
under such warrants was 49,425 at March 31, 2019. The primary underlying risk exposures pertaining to the warrants and their related
fair value is the change in fair value of the underlying common stock, the market price of traded warrants, and estimated timing
and probability of future financings. Such financial instruments are initially recorded at fair value with subsequent changes in
fair value recorded as a component of gain or loss on derivatives on the consolidated statements of operations in each reporting
period. If these instruments subsequently meet the requirements for equity classification, the Company reclassifies the fair value
to equity. At March 31, 2019, these warrants represented the only outstanding derivative instruments issued or held by the Company
and expired on August 20, 2019.
Concentration of Credit Risk — Financial
instruments that subject the Company to credit risk consist of cash and equivalents on deposit with financial institutions. The
Company’s excess cash as of March 31, 2020 and December 31, 2019 is on deposit in interest-bearing transaction accounts with
well-established financial institutions. At times, such amounts may exceed the FDIC insurance limits. As of March 31, 2020, and
December 31, 2019, uninsured cash balances totaled approximately $6,600,000 and $10,100,000, respectively.
Leases — In February 2016, the FASB issued
ASU 2016-02, Leases (ASC 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 required
lessees to recognize Right-Of-Use Asset and Lease Liability for virtually all of their leases (other than leases that meet the
definition of a short-term lease). Lessor accounting remains largely unchanged except for changes in the definition and classification
of leases. Because of the immaterial financial impact, the Company will not apply ASC 842 to leases that individually have total
lease payments of less than $100,000 over their life of service to the Company.
2. FAIR VALUE
In accordance with Fair Value Measurements and Disclosures Topic
of the FASB ASC 820, the Company groups its financial assets and financial liabilities generally measured at fair value in three
levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine
fair value:
|
·
|
Level 1: Input prices quoted in an active market for identical financial assets or liabilities.
|
|
·
|
Level 2: Inputs other than prices quoted in Level 1, such as prices quoted for similar financial assets and liabilities in active markets, prices for identical assets, and liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data.
|
|
·
|
Level 3: Input prices quoted that are significant to the fair value of the financial assets or liabilities which are not observable or supported by an active market.
|
To the extent that the valuation is based on models or inputs
that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the
degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial
instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair
value measurement.
3. STOCKHOLDERS’ EQUITY
May 2019 Public Offering
On May 20, 2019, the Company issued and sold 1,982,000 shares
of common stock at an offering price of $2.50 per share. In a concurrent private placement, we issued to the purchasers of our
common stock, Series F warrants to purchase an aggregate of 1,982,000 shares of common stock. The Series F warrants were immediately
exercisable, expire five years after the date of issuance, and have an exercise price of $2.40.
In a separate concurrent private placement transaction, the
Company sold 2,018,000 shares of common stock together with Series G warrants to purchase an aggregate of up to 2,018,000 shares
of common stock. The shares of common stock and Series G warrants were priced at $2.50 per fixed combination. The warrants sold
in the private placement were immediately exercisable, expire five years after the date of issuance, and have an exercise price
of $2.40.
In accordance with the concept of ASC 820 regarding the May
2019 public offering, the Company allocated value to the proceeds to the common stock and warrants utilizing a relative fair value
basis. Using the Nasdaq closing trading price for our stock on May 20, 2019, the Company computed the fair value of the shares
sold. The fair value of the warrants was estimated using the Black-Scholes option-pricing model at that same date. This valuation
did not impact total Stockholders’ Equity of $10.0 million, but is an internal proportionate calculation allocating the gross
proceeds of approximately $6 million to common stock and $4.0 million to warrants.
Gross offering proceeds to the Company were $10.0 million, with
net proceeds to the Company of approximately $9.0 million after deducting placement agent fees and related offering expenses. The
Company intends to use the net proceeds from the offering for research and development, funding clinical studies, working capital
and general corporate purposes.
The registered direct offering described above was made pursuant
to a registration statement on Form S-3 previously filed with and subsequently declared effective by the SEC. The unregistered
common shares and warrants were offered pursuant to the exemption from registration afforded by Section 4(a)(2) under the Securities
Act of 1933, as amended (the “Act”), and Regulation D promulgated thereunder. The offerings’ unregistered common
shares and warrants were ultimately registered through our May 31, 2019 filing of Form S-1 and acceptance of this Registration
Statement by the SEC.
Common Stock Warrants
The following table summarizes information with regard to outstanding
warrants to purchase common stock as of March 31, 2020.
Offering
|
|
Number of Shares
Issuable Upon
Exercise of
Outstanding
Warrants
|
|
|
Exercise
Price
|
|
|
Expiration Date
|
May 2019 Series G Warrants
|
|
|
2,018,000
|
|
|
$
|
2.40
|
|
|
May 20, 2024
|
May 2019 Series F Warrants
|
|
|
1,982,000
|
|
|
$
|
2.40
|
|
|
May 20, 2024
|
July 2018 Series E Warrants
|
|
|
4,140,000
|
|
|
$
|
4.00
|
|
|
July 31, 2023
|
October 2017 Series D Warrants
|
|
|
310,856
|
|
|
$
|
17.80
|
|
|
October 14, 2024
|
November 2016 Public Offering Series C
|
|
|
415,785
|
|
|
$
|
15.00
|
|
|
November 29, 2021
|
April 2016 Underwritten Registered Series A
|
|
|
362,694
|
|
|
$
|
30.40
|
|
|
April 20,2021
|
October 2015 Incremental Series A
|
|
|
30,006
|
|
|
$
|
21.30
|
|
|
October 20,2021
|
October 2015 Private Placement Series A
|
|
|
8,636
|
|
|
$
|
21.30
|
|
|
April 1, 2021
|
October 2015 Offering – Placement Agent
|
|
|
375
|
|
|
$
|
283.00
|
|
|
October 1, 2020
|
Total
|
|
|
9,268,352
|
|
|
|
|
|
|
|
4. STOCK-BASED COMPENSATION
Accounting for Stock-Based Compensation
During the three-month periods ended March 31, 2020 and 2019
options granted were 273,750 and none, respectively. The following table summarizes amounts charged to expense for stock-based
compensation related to employee and director stock option grants and recorded in connection with stock options granted to non-employee
consultants:
|
|
Three Months Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Employee and director stock option grants:
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
23,735
|
|
|
$
|
27,120
|
|
General and administrative
|
|
|
120,411
|
|
|
|
180,534
|
|
Total stock-based compensation
|
|
$
|
144,146
|
|
|
$
|
207,654
|
|
Assumptions Used in Determining Fair Value
Valuation and amortization method. The fair value of
each stock award is estimated on the grant date using the Black-Scholes option-pricing model. The estimated fair value of employee
stock options is amortized to expense using the straight-line method over the required service period which is generally the vesting
period. The estimated fair value of the non-employee options is amortized to expense over the period during which a non-employee
is required to provide services for the award (usually the vesting period).
Volatility. The Company estimates volatility based on
an average of (1) the Company’s historical volatility since its common stock has been publicly traded and (2) review of volatility
estimates of publicly held drug development companies with similar market capitalizations.
Risk-free interest rate. The risk-free interest rate
is based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected term assumption.
Expected term. The expected term of stock options granted
is based on an estimate of when options will be exercised in the future. The Company applied the simplified method of estimating
the expected term of the options, as described in the SEC’s Staff Accounting Bulletins 107 and 110, as the historical experience
is not indicative of the expected behavior in the future. The expected term, calculated under the simplified method, is applied
to groups of stock options that have similar contractual terms. Using this method, the expected term is determined using the average
of the vesting period and the contractual life of the stock options granted. The Company applied the simplified method to non-employees
who have a truncation of term based on termination of service and utilizes the contractual life of the stock options granted for
those non-employee grants which do not have a truncation of service.
Forfeitures. The Company records stock-based compensation
expense only for those awards that are expected to vest. A forfeiture rate is estimated at the time of grant and revised, if necessary,
in subsequent periods if actual forfeitures differ from initial estimates. An annual forfeiture rate of 2% was applied to all unvested
options for employees and directors, respectively, for the three months ended March 31, 2020 and for the year ended December 31,
2019. Ultimately, the actual expense recognized over the vesting period will be for only those shares that vest.
Dividends. The Company has not historically recorded
dividends related to stock options.
Exercise prices for all grants made during the three months
ended March 31, 2020 were equal to the market value of the Company’s common stock on the date of grant.
Stock Option Activity
A summary of stock option activity is as follows:
|
|
Number of
Shares Issuable
Upon Exercise
of Outstanding
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contracted
Term in
Years
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2019
|
|
|
610,714
|
|
|
$
|
6.78
|
|
|
|
8.83
|
|
|
$
|
34,750
|
|
Granted
|
|
|
273,750
|
|
|
$
|
2.58
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2020
|
|
|
884,464
|
|
|
$
|
5.48
|
|
|
|
8.97
|
|
|
$
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, March 31, 2020
|
|
|
311,799
|
|
|
$
|
10.95
|
|
|
|
8.23
|
|
|
$
|
—
|
|
Unvested, March 31, 2020
|
|
|
572,665
|
|
|
$
|
2.50
|
|
|
|
9.37
|
|
|
$
|
500
|
|
The aggregate intrinsic value of options outstanding is calculated
based on the positive difference between the estimated per-share fair value of common stock at the end of the respective period
and the exercise price of the underlying options. There have been no option exercises to date. Shares of common stock issued upon
the exercise of options are from authorized but unissued shares.
As of March 31, 2020, there was approximately $880,767 of total
unrecognized compensation cost related to unvested stock-based compensation arrangements. Of this total amount, the Company expects
to recognize approximately $302,003, $349,122, $216,457, and $13,185 during 2020, 2021, 2022, and 2023 respectively. The Company’s
expense estimates are based upon the expectation that all unvested options will vest in the future, less the forfeiture rate discussed
above. The weighted-average grant-date fair value of vested and unvested options outstanding at March 31, 2020 was $8.82 and $1.91,
respectively.
Restricted Stock Grants. During 2017, the Company issued
46,000 shares under the 2015 Plan of restricted common stock with a weighted average grant date fair value of $20.96. The shares
vest annually over a three year period. The following table summarizes the restricted stock grants:
|
|
Number of
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
Per Share
|
|
|
Total Grant
Date Fair
Value
|
|
Outstanding at December 31, 2019
|
|
|
9,334
|
|
|
$
|
21.00
|
|
|
$
|
196,000
|
|
Vested
|
|
|
(9,334
|
)
|
|
$
|
21.00
|
|
|
$
|
(196,000
|
)
|
Outstanding at March 31, 2020
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
5. INCOME TAXES
The Company accounts for income taxes in accordance with the
liability method of accounting. Deferred tax assets or liabilities are computed based on the difference between the financial statement
and income tax basis of assets and liabilities, and net operating loss carryforwards, (“NOLs”) using the enacted tax
rates. Deferred income tax expense or benefit is based on changes in the asset or liability from period to period. The Company
did not record a provision or benefit for federal, state or foreign income taxes for the three months ended March 31, 2020 or 2019
because the Company has experienced losses on a tax basis since inception. Because of the limited operating history, continuing
losses and uncertainty associated with the utilization of the NOLs in the future, management has provided a full allowance against
the value of its gross deferred tax assets.
The Company also accounts for the uncertainty in income taxes
related to the recognition and measurement of a tax position taken or expected to be taken in an income tax return. The Company
follows the applicable accounting guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure and transition related to the uncertainty in income tax positions. No uncertain tax positions have been identified.
6. NET LOSS PER SHARE
Basic net income (loss) per share is computed by dividing net
income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share
for the three months ended March 31, 2020 and March 31, 2019 is computed by dividing net income/(loss) by the sum of the weighted
average number of shares of common stock and the dilutive potential common stock equivalents then outstanding. Potential common
stock equivalents consist of stock options, non-vested restricted stock, preferred shares convertible into common stock and warrants.
Since there is a net loss attributable to common stockholders for the three months ended March 31, 2020 and March 31, 2019, the
inclusion of common stock equivalents in the computation for that period would be antidilutive.
The following potentially dilutive securities have been excluded
from the computation of diluted net income (loss) per share since their inclusion would be antidilutive:
|
|
Three Months Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Warrants
|
|
|
9,268,352
|
|
|
|
5,318,747
|
|
Preferred shares as convertible into common stock
|
|
|
537,500
|
|
|
|
837,500
|
|
Stock options
|
|
|
884,464
|
|
|
|
198,784
|
|
Non-vested restricted stock
|
|
|
—
|
|
|
|
9,334
|
|
Total potentially dilutive shares
|
|
|
10,690,316
|
|
|
|
6,364,365
|
|
7. COMMITMENTS AND CONTINGENCIES
Real Property Leases
Florham Park, New Jersey
On June 4, 2018, the Company entered in an Agreement of Lease
for 3,893 square feet for its new corporate headquarters in Florham Park, New Jersey. The lease commencement date was October 2018
and terminates in February 2024. The Company has an option to extend the term of the lease for one additional 60-month period.
Under the terms of the lease, the Company paid a security deposit
of $75,000 and the aggregate rent due over the term of the lease is approximately $828,000, which will be reduced to approximately
$783,000 after certain rent abatements. The Company is required to pay its proportionate share of certain operating expenses and
real estate taxes applicable to the leased premises. After certain rent abatements the rent is approximately $12,500 per month
for the first year and then escalates thereafter by 2% per year for the duration of the term.
Madison, Wisconsin
The Company presently rents office space in Madison and is rented
for approximately $3,300 per month under an agreement that expires on August 31, 2020.
Legal
From time to time, the Company may become engaged in litigation
or other legal proceedings as part of our ordinary course of business but are not currently party to any litigation or legal proceedings
that, in the opinion of management, are likely to have a material adverse effect on its business.
8. LEASES
Operating Lease Liability
In June 2018, the Company executed
an agreement for office space in the Borough of Florham Park, Morris County, New Jersey to be used as its headquarters (“HQ
Lease”). The HQ Lease commenced upon completion of certain improvements in October 2018 and terminates in February 2024 with
an option to extend the term of the lease for one additional 60-month period. During 2018, the landlord made certain improvements
to the facility. As of December 31, 2018, the Company recorded a deferred lease liability of approximately $176,000 for the improvements
funded by the landlord in deferred rent current and deferred rent, long-term on the consolidated balance sheet. The Company amortized
the deferred liability as a reduction to rent expense in the consolidated statement of operations over the term of the lease.
For fiscal year 2018, rent expense was recognized on a straight-line
basis and accordingly the difference between the recorded rent expense and the actual cash payments had been recorded as deferred
rent current and deferred rent, long-term of each balance sheet date on the consolidated balance sheet. As
of December 31, 2018, the Lease Liability was measured at the present value of the lease payments to be made over the lease term.
Lease payments comprise of fixed and variable payments to be made by the Company to the Lessor during the lease term minus any
incentives or rebates or abatements receivable by the Company from the Lessor or owner. Payments for non-lease components did not
form part of lease payments. The lease term calculation included renewal options only in the case if these options are specified
in the lease agreement and if failure to exercise the renewal option imposes a significant economic penalty. As there are no such
significant economic penalties in the HQ Lease and renewal cannot be reasonably assured, the valuation of the HQ Lease does not
include any renewal options. The Company has not entered into any leases with related parties.
Under the HQ Lease, the Company will pay monthly
fixed rent based on approximate rate per rentable square foot which ranges between approximately $12,400 to $13,600 over the lease
period. In addition, the Company received certain rent abatements and lease incentives subject to the limitations in the HQ Lease.
The HQ Lease’s net ROU asset and ROU lease liability are approximately $333,000 and ($502,000), respectively, as of March
31, 2020 and rental expense for the three months ended March 31, 2020 is approximately $28,000.
On January 1, 2019, the Company adopted ASC
842 using the modified retrospective method for all material leases that existed at or commenced after January 1, 2019 and elected
to apply the practical expedients in ASC 842-10-65-1 (f) and (gg) to the HQ Lease. The Company accounts for short-term leases (i.e.,
lease term of 12 months or less) by making the short-term lease policy election and will not apply the recognition and measurement
requirements of ASC 842. As a result of the immaterial financial impact, the Company will not apply ASC 842’s extensive calculation
and reporting requirement against the leases that individually have total lease payments of less than $100,000 over their life
of service to the Company. The adoption of ASC 842 did not have a material net impact on the Company’s Condensed Consolidated
Statements of Operations as of the effective date. See Note 1 for additional details.
Discount Rate
The Company has determined the interest rate
implicit in the lease considering factors such as Company’s credit rating, borrowing terms offered by the U.S. Small Business
Administration, amount of lease payments, quality of collateral and alignment of the borrowing term and lease term. The Company
considers 10% per annum as reasonable to use as the incremental borrowing rate for purposes of the calculation of lease liabilities.
Maturity Analysis of Short-Term and Operating
Leases
The following table approximates
the dollar maturity of the Company’s undiscounted payments for its short-term leases and operating
lease liabilities as of March 31, 2020:
Remainder of 2020
|
|
$
|
115,000
|
|
Years ending December 31,
|
|
|
|
|
2021
|
|
|
155,000
|
|
2022
|
|
|
158,000
|
|
2023
|
|
|
161,000
|
|
2024
|
|
|
14,000
|
|
Total undiscounted lease payments
|
|
|
603,000
|
|
Less: Imputed interest
|
|
|
(101,000
|
)
|
Present value of lease liabilities
|
|
$
|
502,000
|
|
9. SUBSEQUENT EVENT
On April 21, 2020, the Company received loan proceeds in the
amount of approximately $184,000 under the Paycheck Protection Program (“PPP”). The PPP, established as part
of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses
for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest
are forgivable after eight weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits,
rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates
employees or reduces salaries during the eight-week period.
The unforgiven portion of the PPP loan is payable over two years
at an interest rate of 1%, with a deferral of payments for the first six months. The Company intends to use the proceeds
for purposes consistent with the PPP requirements. While the Company currently believes that its use of the loan proceeds will
meet the conditions for forgiveness of the loan, we cannot assure you that we will not take actions that could cause the Company
to be ineligible for forgiveness of the loan, in whole or in part.