Notes to the Financial Statements
(Unaudited)
1. Nature of Business and Liquidity
The terms “MBI” or the “Company”, “we”, “our” and “us” are used herein to refer to Moleculin Biotech, Inc. MBI is a clinical stage pharmaceutical company organized as a Delaware corporation in July 2015 to focus on the development of anti-cancer drug candidates, some of which are based on license agreements with The University of Texas System on behalf of the M.D. Anderson Cancer Center, which we refer to as MD Anderson.
We currently have
four
drug candidates representing three substantially different approaches to treating cancer. Liposomal Annamycin, which we refer to as Annamycin, is a chemotherapy designed to inhibit the replication of DNA of rapidly dividing cells. WP1122 is an inhibitor of glycolysis intended to cut of the fuel supply of tumor cells, which are often overly dependent on glycolysis as compared to healthy cells. And, finally, WP1066 and WP1220, have shown capability, in
in vivo
testing, of altering the cell signaling associated with tumors.
Annamycin is an anthracycline being studied for the treatment of relapsed or refractory acute myeloid leukemia, or AML. In August 2015, the Company acquired the rights and prior development data regarding Annamycin and the prior Annamycin investigative new drug application (“IND”) with the U.S. Food and Drug Administration (“FDA”), including all trade secrets, know-how, confidential information and other intellectual property rights. Annamycin had been in clinical trials pursuant to an IND filed with the FDA by a prior drug developer, which was terminated when that developer ceased activity for financial reasons. Our review of that prior clinical data leads us to believe that Annamycin may have greater potential for efficacy and safety in relapsed or refractory AML patients than currently available therapies.
Because the prior developer of Annamycin allowed their IND to lapse, we were required to submit a new IND for continued clinical trials with Annamycin, which the FDA was allowed to proceed on September 22, 2017. The Company announced on October 3, 2017 that it had signed an agreement with a hospital in Poland to participate in this trial, which will be our first clinical site, assuming the receipt of regulatory approval in Poland. The data presented in our successful IND submission to FDA were submitted to Polish regulatory authorities on October 23, 2017, in support of our request for Clinical Trial Authorization (“CTA”) in that country. Depending on the timing of the CTA approval, we could begin treating patients in a Phase I/II clinical trial, as early as late December of 2017. The Phase I dose-ranging portion of this trial is designed to establish a new Recommended Phase 2 Dosage, or RP2D, which we believe was not adequately explored in previous trials.
The Annamycin drug substance is no longer covered by any existing patent protection. On July 18, 2017, the Company announced that it had signed a new technology license agreement with MD Anderson Cancer Center based on new patent applications that the Company intends to file relating to Annamycin. These patent applications are related to the formulation, synthetic process and reconstitution related to our Annamycin drug product candidate, although there is no assurance that we will be successful in obtaining such patent protection.
On March 21, 2017, we received notice that the FDA had granted us Orphan Drug designation for Annamycin for the treatment of AML. Orphan Drug status could entitle us to market exclusivity of up to
7
and
10
years from the date of approval of a New Drug Application (“NDA”) in the United States. If we obtain similar designation in the European Union (“EU”), we could be entitled to 10 years of market exclusivity there from the date of approval of a Marketing Authorization Application (“MAA”) in the United States and the European Union (“EU”), respectively. Separately, the FDA may also grant market exclusivity of up to
5
years with the approval of an active moiety (a “new chemical entity,” which we anticipate Annamycin would be), but there can be no assurance that such exclusivity will be granted.
Our other drug development projects relate to two distinct portfolios of small molecules, which we refer to as the WP1066 Portfolio, focused on the modulation of key oncogenic transcription factors involved in the progression of cancer, and the WP1122 Portfolio, a suite of molecules targeting the metabolic processes involved in cancer in general, and glioblastoma (the most common form of brain tumor) and pancreatic cancer in particular. We have been granted royalty-bearing, worldwide, exclusive licenses for the patent and technology rights related to our WP1066 Portfolio and WP1122 Portfolio drug technologies, as these patent rights are owned by MD Anderson.
During 2017, the Company announced the following progress on these two portfolios: 1) that it engaged a contract research organization (“CRO”) to prepare for a proof-of-concept trial in Poland to study the Company's drug candidate WP1220 (part of the WP1066 portfolio described above) for the treatment of cutaneous T-cell lymphoma; 2) the Company entered into collaborative agreements with the University of Bergen in Norway to test WP1122 in combination with another drug in the treatment
of brain tumors and separately to conduct further analysis on the capability of WP1066 to stimulate anti-tumor immune response: 3) the Company entered into an agreement with the Mayo Clinic to study WP1066 for the treatment of rare pediatric brain tumors: and 4) the Company agreed to assist MD Anderson in submitting an IND for the study of WP1066 in glioblastoma and melanoma that has metastasized to the brain, which MD Anderson filed on November 1, 2017.
In accordance with FASB ASC Topic 280, Segment Reporting, we view our operations and manage our business as principally
one
segment. As a result, the financial information disclosed herein represents all the material financial information related to our principal operating segment.
2. Summary of Significant Accounting Policies
Basis of Presentation – Unaudited Interim Financial Information -
The accompanying unaudited interim financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for financial information, and in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) with respect to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim financial statements furnished reflect all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary for a fair statement of results for the interim periods presented. Interim results are not necessarily indicative of the results for the full year. These interim unaudited financial statements should be read in conjunction with the audited financial statements of the Company as of
December 31, 2016
and for the period from July 28, 2015 (inception) to
December 31, 2015
and notes thereto contained in the Form 10-K filed with the SEC on April 3, 2017.
Use of Estimates in Financial Statement Presentation -
The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Going Concern -
These financial statements have been prepared on a going concern basis, which assumes the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The continuation of the Company as a going concern is dependent upon the ability of the Company to obtain necessary equity financing to continue operations and the attainment of profitable operations. As of
September 30, 2017
, the Company has incurred an accumulated deficit of
$11.3 million
since inception, and had not yet generated any revenue from operations. Additionally, management anticipates that its cash on hand as of
September 30, 2017
is sufficient to fund its planned operations into but not beyond the near term. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company may seek additional funding through a combination of equity offerings, debt financings, government or other third-party funding, commercialization, marketing and distribution arrangements, other collaborations, strategic alliances and licensing arrangements and delay planned cash outlays or a combination thereof. Management cannot be certain that such events or a combination thereof can be achieved.
Fair Value of Financial Instruments -
Our financial instruments consist primarily of account payables, accrued expenses, and a warrant liability. The carrying amount of accounts payables and accrued expenses approximates their fair value because of the short-term maturity of such.
We have categorized our assets and liabilities that are valued at fair value on a recurring basis into three-level fair value hierarchy in accordance with GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and lowest priority to unobservable inputs (Level 3).
Assets and liabilities recorded in the balance sheets at fair value are categorized based on a hierarchy of inputs as follows:
Level 1 – Unadjusted quoted prices in active markets of identical assets or liabilities.
Level 2 – Quoted prices for similar assets or liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
Level 3 – Unobservable inputs for the asset or liability.
The Company’s financial assets and liabilities recorded at fair value on a recurring basis include the fair value of our warrant liability discussed in Note 4. The fair value of this warrant liability is included in current liabilities on the accompanying financial statements as of
September 30, 2017
, as warrants are currently being exercised.
The following table provides the financial assets and liabilities reported at fair value and measured on a recurring basis at September 30, 2017:
In thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Liabilities
Measured at Fair
Value
|
|
Quoted Prices
in Active
Markets for
Identical
Assets (Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant Other
Unobservable Inputs
(Level 3)
|
Fair value of warrant liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
$
|
743
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
743
|
|
The following table provides a summary of changes in fair value associated with the Level 3 liabilities for the quarter ended
September 30, 2017
:
In thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
Liability –
Current
|
|
Warrant
Liability –
Long-Term
|
|
Warrant
Liability –
Total
|
Balance, June 30, 2017
|
$
|
1,185
|
|
|
$
|
—
|
|
|
$
|
1,185
|
|
Reclass of liability from long-term to current
|
—
|
|
|
—
|
|
|
—
|
|
Change in fair value - net
|
470
|
|
|
—
|
|
|
470
|
|
Expiration of warrants
|
—
|
|
|
—
|
|
|
—
|
|
Transfer in and out (exercise of warrants)
|
(912
|
)
|
|
—
|
|
|
(912
|
)
|
|
|
|
|
|
|
Balance, September 30, 2017
|
$
|
743
|
|
|
$
|
—
|
|
|
$
|
743
|
|
The following table provides a summary of changes in fair value associated with the Level 3 liabilities for the
nine
months ended
September 30, 2017
:
In thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
Liability –
Current
|
|
Warrant
Liability –
Long-Term
|
|
Warrant
Liability –
Total
|
Balance, beginning of period December 31, 2016
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Issuances of warrants
|
2,453
|
|
|
1,690
|
|
|
4,143
|
|
Reclass of liability from long-term to current
|
1,846
|
|
|
(1,846
|
)
|
|
—
|
|
Change in fair value - net
|
2,848
|
|
|
(95
|
)
|
|
2,753
|
|
Transfers in and out (exercise of warrants)
|
(5,166
|
)
|
|
251
|
|
|
(4,915
|
)
|
Expiration of warrants
|
(1,238
|
)
|
|
—
|
|
|
(1,238
|
)
|
|
|
|
|
|
|
Balance, September 30, 2017
|
$
|
743
|
|
|
$
|
—
|
|
|
$
|
743
|
|
The above table of Level 3 liabilities begins with the initial valuation given the issuances occurred in the first quarter of
2017
and adjusts the balances for changes that occurred during the current quarter and prior quarter. The ending balance of the Level 3 financial instrument presented above represent our best estimates and may not be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments.
Loss Per Common Share
- Basic net loss per common share is computed by dividing net loss available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive. For the
three and nine
months ended
September 30, 2017
, the Company’s potentially dilutive shares, which were not included in the calculation of net loss per share, included options to purchase
670,000
common shares and warrants to purchase
702,576
common shares as inclusion of these securities would have been anti-dilutive.
Reclassifications –
A reclassification was made to the
December 31, 2016
financial statements to conform to the
2017
presentation. Such reclassification did not affect net loss as previously reported. Historically, accrued interest associated with “convertible notes payable” was included in the line item “accounts payable and accrued expense”. Management believes that these costs are best shown included in the amounts shown for “convertible notes payable” and, as such, a reclassification was made to the balance sheet for the year ended
December 31, 2016
by reducing “accounts payable and accrued expenses” and increasing “convertible notes payable” by
$0.02 million
.
Research and Development Costs -
Research and development costs are expensed as incurred.
Subsequent Events -
The Company’s management reviewed all material events through the date these financial statements were issued for subsequent events disclosure consideration and has noted events in Note 8 below.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standard Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606), which will replace numerous requirements in U.S. GAAP, including industry-specific requirements, and provide companies with a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In August 2015, the FASB approved a proposal to defer the effective date of the guidance until annual and interim reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact that this standard will have on its financial statements at the time the Company starts to generate revenue or enters into other contractual arrangements, which the Company does not expect in the near term.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Under the new guidance, management will be required to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. The provisions of this ASU are effective for annual periods ending after December 15, 2016, and for annual and interim periods thereafter; early adoption is permitted. This disclosure is effective within these financial statements for the year ended
December 31, 2016
and thereafter. Such disclosure did not impact the financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact that this standard will have on its financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). Under ASU 2016-02, an entity will be required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public companies, ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company is currently evaluating the impact that this standard will have on its financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718). The new guidance changes the accounting and simplifies various aspects of the accounting for share-based payments to employees. The guidance allows for a policy election to account for forfeitures as they occur or based on an estimated number of awards that are expected to vest. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, with early adoption permitted. The adoption of this standard on January 1, 2017, did not have a significant impact on the Company’s financial statements.
In August 2016, the FASB issued ASU, Statement of Cash Flows (Topic 230). This ASU applies to all entities that are required to present a statement of cash flows under Topic 230. The amendments provide guidance on eight specific cash flow issues and includes clarification on how these items should be classified in the statement of cash flows and is designed to help eliminate diversity in practice as to where items are classified in the cash flow statement. Furthermore, in November 2016, the FASB issued additional guidance on this Topic that requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with earlier application permitted for all entities. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2018 and are currently evaluating the impact the adoption of this new accounting standard will have on our financial statements.
In January 2017, the FASB issued ASU 2017-01 "Business Combinations (Topic 805)," which provides a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in this update (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The amendments in this update also narrow the definition of the term "output" so that the term is consistent with how outputs are described in Topic 606. Public business entities are required to apply the amendments in this update to annual periods beginning after December 15, 2017, including interim periods within those periods. Early application is permitted. The Company will evaluate the effect of the update at the time of any future acquisition or disposal.
In May 2017, the FASB issued ASU 2017-09 "Compensation—Stock Compensation (Topic 718)." This update clarifies the existing definition of the term "modification," which is currently defined as "a change in any of the terms or conditions of a share-based payment award." The update requires entities to account for modifications of share-based payment awards unless the (1) fair value, (2) vesting conditions and (3) classification as an equity instrument or a liability instrument of the modified award are the same as of the original award before modification. Public business entities are required to adopt the amendments in this update for fiscal years and interim periods beginning after December 15, 2017, with early adoption permitted. The Company will adopt the update when it becomes effective. The Company is in the process of determining the impact, if any, this adoption will have on its financial statements.
The Company does not believe that any other recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the accompanying financial statements.
3. Convertible Notes Payable
On various dates from August 31, 2015 through January 19, 2016, each as amended on March 10, 2016, the Company entered into
seven
unsecured promissory notes with
three
separate third party investors. Each note bore interest at
8.0%
per annum and was to mature on the earlier of
September 30, 2016
or the completion of an IPO of the Company’s securities.
Since the completion of the IPO occurred prior to
September 30, 2016
, these notes were to be automatically converted according to their terms into shares of the Company’s common stock at applicable conversion price upon the Company’s IPO to the extent and provided that no holder of these notes was permitted to convert such notes to the extent that the holder or any of its affiliates would beneficially own in excess of
4.99%
of our common stock after such conversion. Due to this
4.99%
limitation, a portion of these notes was not converted at the time of the IPO and the remaining unconverted principal and accrued interest amounts of the effected notes remained outstanding and was converted into shares of our common stock at such time as the
4.99%
limitation was met. Until such time as the notes were converted into shares of common stock, the maturity date of the notes was automatically extended and we were not required to repay the notes or the accrued interest relating to the notes in cash.
The IPO was completed on May 31, 2016. On May 31, 2016, pursuant to the conversion feature of the foregoing notes and with restriction of the
4.99%
beneficially owned condition limitation, discussed above, the Company issued
1,166,503
common shares in total, reducing convertible debt principal by
$0.18 million
and accrued interest by
$0.02 million
. Subsequent to these transactions and through June 30, 2017, an additional
2,920,738
common shares were issued due to the number of common shares outstanding allowing for conversion of additional shares under the
4.99%
beneficially owned condition limitation. This reduced the convertible debt principal by
$0.3 million
and accrued interest by
$0.03 million
.
On June 22, 2017, pursuant to the conversion feature of the foregoing notes and with restriction of the
4.99%
beneficially owned condition limitation discussed above, the Company issued
804,098
common shares in total, which effectively converted all remaining outstanding convertible debt and accrued interest outstanding as of that date. This conversion converted the remaining amount of debt and accrued interest at June 22, 2017 of
$0.1 million
.
4. Warrant Liability
On February 9, 2017, the Company entered into an Underwriting Agreement (the “Underwriting Agreement”) with Roth Capital Partners, LLC, as representative of the several underwriters identified therein (collectively, the “Underwriters”), pursuant to which we sold in a registered public offering (the “Offering”),
3,710,000
units, priced at a public offering price of
$1.35
per unit (the closing price that day was
$1.50
), with each unit consisting of: (i)
one
share of common stock, (ii) a
five
-year Series A warrant to purchase
0.50
of a share of common stock, (iii) a
90
-day Series B warrant to purchase
one
share of common stock, and (iv) a
five
-year Series C warrant to purchase
0.50
of a share of common stock. The Series C warrants in a unit could only be exercised to the extent and in proportion to a holder of the Series C warrants exercising its Series B warrants included in the unit. The Series A and Series C warrant have an exercise price of
$1.50
per share of common stock. The Series B warrant had an exercise price of
$1.35
per share of common stock.
Under the terms of the Underwriting Agreement, we granted the Underwriters a
45
-day option to purchase an additional
556,500
shares of common stock and/or an additional
556,500
warrant combination (comprised of an aggregate of
278,250
Series A warrants,
556,500
Series B warrants and
278,250
Series C warrants), in any combinations thereof, from us to cover over-allotments at the public offering price per share of
$1.349
and public offering price per warrant combination of
$.001
, respectively, less the underwriting discounts and commissions. Upon the closing of the Offering, the Underwriters exercised the over-allotment option with respect to
$278,100
warrant combinations. We received approximately
$4.5 million
in net proceeds from the Offering, after deducting underwriting discounts and commissions and estimated offering expenses.
The basis of value is fair value, which is defined pursuant to Accounting Standards Codification (“ASC”) 820 to be “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”. The Company estimated the fair value of the Warrants under ASC 820 as of February 14, 2017 for financial reporting purposes. We used the Black-Scholes option pricing model (“BSM”) to determine the fair value of the Series A and Series B Warrants and a Monte Carlo simulation (“MCM”) with regard to the Series C Warrants in consideration of path dependent vesting terms of the contract. Both the BSM and MCM models are acceptable in accordance with GAAP. The BSM requires the use of a number of assumptions including volatility of the stock price, the weighted average risk-free interest rate, and the weighted average term of the Warrant. The MCM simulates the Company’s common stock price from the valuation date through the Series B Warrant and the unvested Series C Warrant expiration dates using Geometric Browman Motion on a risk-neutral basis – thereby impacting the likelihood that the Series B Warrants would have been exercised and, subsequently, the Series C Warrants would then vest. As disclosed, all Series B and unvested Series C warrants expired on May 15, 2017.
The risk-free interest rate assumption is based upon observed interest rates on
zero
coupon U.S. Treasury bonds whose maturity period is appropriate for the term of the Warrants and is calculated by using the average daily historical stock prices through the day preceding the grant date.
Estimated volatility is a measure of the amount by which our stock price is expected to fluctuate each year during the expected life of the Warrants. Where appropriate, we used the historical volatility of peer entities due to the lack of sufficient historical data of our stock price during
2016
-
2017
.
The assumptions used in the BSM and MCM models for the Warrants are as follows:
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017
|
|
Year Ended December 31,
2016
|
Risk-free interest rate
|
|
1.68%-1.86%
|
|
—
|
Volatility
|
|
80.00%-160.11%
|
|
—
|
Expected life (years)
|
|
0.5-5.0
|
|
—
|
Dividend yield
|
|
—%
|
|
—
|
A summary of our Warrant activity and related information follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Number of
Shares Under
Warrant
|
|
Range of
Warrant Price
per Share
|
|
Weighted
Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Life (Years)
|
Balance at January 1, 2017
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Granted
|
|
8,235,923
|
|
|
$1.35-$1.50
|
|
|
$
|
1.43
|
|
|
1.6
|
|
Exercised
|
|
(2,703,434
|
)
|
|
—
|
|
|
$
|
1.46
|
|
|
—
|
|
Expired
|
|
(5,087,717
|
)
|
|
—
|
|
|
$
|
1.40
|
|
|
—
|
|
Balance at September 30, 2017
|
|
444,772
|
|
|
—
|
|
|
$
|
1.46
|
|
|
4.63
|
|
Vested and Exercisable at September 30, 2017
|
|
444,772
|
|
|
$1.35-$1.50
|
|
|
$
|
1.46
|
|
|
4.63
|
|
Warrant Activity During 2017:
On February 14, 2017,
8,235,923
Warrants were granted, as discussed above.
On March 24, 2017,
596,300
Series B Warrants were exercised for an equivalent amount of common shares which vested
298,150
Series C Warrants.
On March 31, 2017, the Warrants were revalued with a fair value determination of
$3.08 million
which included a fair value adjustment of
$1.06 million
which was included as a gain from the change in fair value of warrant liability in “Other Income” in the accompanying financial statements.
On May 15, 2017, approximately
3.4 million
and
1.7 million
Series B and Series C Warrants, respectively, expired, which reduced our warrant liability by
$1.24 million
in the accompanying financial statements.
On June 28, 2017,
1,295,995
Series A Warrants were exercised. On the same date,
295,650
Series C Warrants were exercised.
On June 30, 2017,
12,250
Series A Warrants were exercised.
On June 30, 2017, the Warrants were revalued with a fair value determination of
$1.2 million
which included a fair value adjustment of
$3.3 million
which was included as loss from the change in fair value of warrant liability in “Other income (expense)” in the accompanying financial statements.
During the quarter ended September 30, 2017,
500,739
Series A warrants and
2,500
Series C warrants were exercised with cash proceeds of approximately
$0.8 million
.
Series B and Series C Warrants
The Series B Warrants and the unvested Series C Warrants expired May 15, 2017. Therefore, the associated warranty liability of
$1.24 million
was extinguished on May 15, 2017 as
no
other Series B Warrants were exercised prior to that date.
5. Equity
On May 2, 2016, the Company amended and restated its certificate of incorporation to increase the number of shares authorized to
80,000,000
of which
5,000,000
shares of preferred stock are authorized and
75,000,000
shares of common stock are authorized.
Preferred Stock
We are authorized to issue up to
5,000,000
shares of preferred stock. Our certificate of incorporation authorizes the board to issue these shares in one or more series, to determine the designations and the powers, preferences and relative, participating, optional or other special rights and the qualifications, limitations and restrictions thereof, including the dividend rights, conversion or exchange rights, voting rights (including the number of votes per share), redemption rights and terms, liquidation preferences, sinking fund provisions and the number of shares constituting the series. As of
September 30, 2017
, there was
no
issued preferred stock.
Common Stock
On January 13, 2017, the Company agreed to issue
79,167
shares of common stock to a consultant in full settlement for prior services rendered to the Company. Settlement occurred February 21, 2017 with the issuance of the shares, resulting in a gain on settlement of
$0.15 million
recorded in gain in settlement of liability on the Statement of Operations. The obligation of
$0.24 million
had been recorded by the Company in accounts payable and accrued expenses as of
December 31, 2016
.
On February 14, 2017, the Company completed a public offering and sold
3,923,923
shares of the Company’s common stock. The offering price per unit was
$1.35
. The Company received net cash proceeds of
$4.5 million
after deducting underwriting discounts, commissions and direct offering expenses payable by us. See Note 4 above regarding Warrant issuances related to our February public offering.
During September 2017, the Company sold
154,121
shares of common stock from
$2.52
to
$2.71
per share with net cash proceeds of
$0.4 million
.
Adoption of 2015 Stock Plan
On December 5, 2015, the Board of Directors of the Company approved the Company’s 2015 Stock Plan, which was amended on April 22, 2016. The expiration date of the plan is December 5, 2025 and the total number of underlying shares of the Company’s common stock available for grant to employees, directors and consultants under the plan is
2,500,000
shares. The awards under the 2015 Stock Plan can be in the form of stock options, stock awards or stock unit awards. The following is a summary of option activities for the
nine
months ended
September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
Aggregate
Intrinsic
Value
|
Outstanding, December 31, 2016
|
|
510,000
|
|
|
$
|
3.40
|
|
|
$
|
5.28
|
|
|
9.29
|
|
$
|
275,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
160,000
|
|
|
$
|
1.52
|
|
|
$
|
2.14
|
|
|
|
|
|
|
Outstanding, September 30, 2017
|
|
670,000
|
|
|
$
|
2.12
|
|
|
$
|
1.78
|
|
|
8.85
|
|
$
|
144,900
|
|
Exercisable, September 30, 2017
|
|
85,000
|
|
|
$
|
1.66
|
|
|
$
|
1.79
|
|
|
7.15
|
|
$
|
117,300
|
|
In January 2017, the Company granted members of its science advisory board options in the aggregate to purchase
20,000
shares of the Company’s common stock with an exercise price of
$2.31
per share, a term of
10
years, and a vesting period of
4
years. The exercise price was based upon the closing price of the stock on the day of the grant. The options have an aggregated fair value of
$35,196
that was calculated using the Black-Scholes option-pricing model. In July and August 2017, the Company granted options to the Board and a management member to purchase
140,000
shares of the Company's common stock with exercise
prices of
$1.87
and
$2.88
, respectively, with a term of
10
years and a vesting period of
4
years. The options have an aggregated fair value of
$269,592
for the nine months ended September 30, 2017, calculated using the Black-Scholes option-pricing model.
Variables used in the Black-Scholes option-pricing model include ranges of: (1) discount of
1.30%
-
2.24%
, (2) expected lives of
5
to
6.25
years, (3) expected volatility of
70.18%
to
89.11%
, and (4)
zero
expected dividends. The Company, due to the limited number of participants in the plan and their positions within the Company, uses a
0%
estimated forfeiture rate. For the three and
nine
months ended
September 30, 2017
, the Company recorded
$0.2 million
and
$0.5 million
, respectively in stock-based compensation in relation to the options. As of
September 30, 2017
, there was
$1.6 million
of unrecognized compensation cost, net of estimated forfeitures, related to the Company’s non-vested equity awards, which is expected to be recognized over a weighted average period of
3.34
years.
The fair value of each stock option is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the above paragraph. The expected term of the options was computed using the “plain vanilla” method as prescribed by the Securities and Exchange Commission Staff Accounting Bulletin 107 because we do not have sufficient data regarding employee exercise behavior to estimate the expected term. The volatility was determined by referring to the average historical volatility of a peer group of public companies because we do not have sufficient trading history to determine our historical volatility. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
GSK Consulting Agreement
On July 29, 2017, the Company entered into a consulting agreement with GSK Strategies, LLC (“GSK”), for its investor relations operations. The consulting agreement covers for a period of
twelve
months from the date of July 29, 2017. In exchange for the consulting services, the Company agreed to issue
two
warrants (collectively, the “Warrants”) to purchase
100,000
and
50,000
shares of common stock at exercise prices of
$2.41
and
$3.00
per share, respectively, subject to approval by Nasdaq of a listing of additional shares application, which was received in August 2017.
Each of the Warrants vests over a
12
-month period in equal monthly installments starting July 29, 2017, provided that GSK is providing Services to the Company pursuant to the consulting agreement on each vesting date. The Warrants became initially exercisable on August 8, 2017, and expire
five
years from the initial exercise date. The Company recorded stock compensation expense for the non-employee consulting agreement of
$63,000
for the period ended September 30, 2017 based on the fair value of the warrants vested as of September 30, 2017.
At Market Issuance Sales Agreement
On September 15, 2017, the Company entered into an At Market Issuance Sales Agreement (the “Agreement”) with Roth Capital Partners, LLC and National Securities Corporation (collectively, the “Agents”). Pursuant to the terms of the Agreement, the Company may sell from time to time through the Agents shares of the Company’s common stock with an aggregate sales price of up to
$13.0 million
(the “Shares”).
Any sales of Shares pursuant to the Agreement will be made under the Company’s effective “shelf” registration statement on Form S-3 (File No. 333-219434) which became effective on August 21, 2017 and the related prospectus supplement and the accompanying prospectus, as filed with the Securities and Exchange Commission (the “SEC”) on September 15, 2017. Under the Agreement, the Company may sell Shares through an Agent by any method that is deemed an “at the market offering” as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”).
Sales of the Shares may be made at market prices prevailing at the time of sale, subject to such other terms as may be agreed upon at the time of sale, including a minimum sales price that may be stipulated by the Company’s Board of Directors or a duly authorized committee thereof. The Company or the Agents, under certain circumstances and upon notice to the other, may suspend the offering of the Shares under the Agreement. The offering of the Shares pursuant to the Agreement will terminate upon the sale of Shares in an aggregate offering amount equal to
$13.0 million
, or sooner if either the Company or the Agents terminate the Agreement pursuant to its terms.
The Company agreed to pay a commission to the Agents of
3.0%
of the gross proceeds of the sale of the Shares sold under the Agreement and to reimburse the Agents for certain expenses. The Company has also provided the Agents with customary indemnification rights. The Company is not obligated to make any sales of Common Stock under the Agreement.
As of September 30, 2017, the Company had sold
154,121
shares with gross proceeds of
$0.4 million
under this Agreement.
6. Income Taxes
Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We do not expect to pay any significant federal or state income tax for
2017
as a result of the losses recorded during the
nine
months ended
September 30, 2017
and the additional losses expected for the remainder of
2017
and net operating loss carry forwards from prior years. Accounting standards require the consideration of a valuation allowance for deferred tax assets if it is “more likely than not” that some component or all of the benefits of deferred tax assets will not be realized. As of
September 30, 2017
, we maintained a full valuation allowance for all deferred tax assets.
The Company recorded
no
income tax provision for the
nine
months ended
September 30, 2017
and
2016
. The effective tax rate for the
nine
months ended
September 30, 2017
and
2016
was
0%
. The income tax rates vary from the federal and state statutory rates primarily due to the valuation allowances on the Company’s deferred tax assets. The Company estimates its annual effective tax rate at the end of each quarterly period. Jurisdictions with a projected loss for the year where no tax benefit can be recognized due to the valuation exclusion could result in a higher or lower effective tax rate during a particular quarter depending on the mix and timing of actual earnings versus annual projections.
7. Commitments and Contingencies
WP1122 Portfolio
The rights and obligations to an April 2012 Patent and Technology License Agreement entered into by and between IntertechBio and MD Anderson (the “IntertechBio Agreement”) have been assigned to MBI. Therefore, MBI has obtained a royalty-bearing, worldwide, exclusive license to intellectual property, including patent rights, related to our WP1122 Portfolio and to our drug product candidate, WP1122. In consideration, MBI must make payments to MD Anderson including an up-front payment, license documentation fee, annual maintenance fee, milestone payments and minimum annual royalty payments for sales of products developed under the license agreement. Under the agreement, annual maintenance fees are
$10,000
on the first anniversary of the effective date of the agreement,
$20,000
on the second anniversary of the effective date of the agreement,
$40,000
on the third anniversary of the effective date of the agreement,
$60,000
on the fourth anniversary of the effective date of the agreement,
$80,000
on the fifth anniversary of the effective date of the agreement and
$100,000
on the sixth anniversary of the effective date of the agreement, except that such payments will no longer be due upon the first sale of a licensed product. Under the assignment, MBI agrees to make a minimum annual royalty payment in the amount of
$200,000
for the first anniversary following the first sale of a licensed product,
$400,000
for the second anniversary following the first sale of a licensed product, and
$600,000
for the third year following the first sale of a licensed product.
One-time milestone payments are due as follows: 1) Upon commencement of a Phase II study for a licensed product -
$200,000
; 2) Upon commencement of a Phase III study for a licensed product -
$250,000
; 3) Upon filing of a New Drug Application (“NDA”) for a licensed product -
$400,000
; and 4) Upon receipt of market approval for sale of a licensed product -
$500,000
. The rights we have obtained pursuant to the assignment of the IntertechBio Agreement are made subject to the rights of the U.S. government to the extent that the technology covered by the licensed intellectual property was developed under a funding agreement between MD Anderson and the U.S. government.
WP1066 Portfolio
The rights and obligations to a June 2010 Patent and Technology License Agreement entered into by and between Moleculin LLC and MD Anderson (the “Moleculin Agreement”) have been assigned to MBI. Therefore, MBI has obtained a royalty-bearing, worldwide, exclusive license to intellectual property rights, including patent rights, related to our WP1066 drug product candidate. In consideration, MBI must make payments to MD Anderson including an up-front payment, milestone payments and minimum annual royalty payments for sales of products developed under the license agreement. Annual Maintenance fee payments will no longer be due upon marketing approval in any country of a licensed product. One-time milestone payments are due upon commencement of the first Phase III study for a licensed product within the United States, Europe, China or Japan; upon submission of the first NDA for a licensed product in the United States; and upon receipt of the first marketing approval for sale of a licensed product in the United States. The rights we have obtained pursuant to the assignment of the Moleculin Agreement are made subject to the rights of the U.S. government to the extent that the technology covered by the licensed intellectual property was developed under a funding agreement between MD Anderson and the U.S.
government. The agreement, as amended, has the following the milestone payments: (i) commencement of Phase III Study for first licensed drug/product within the United States, Europe, China or Japan -
$150,000
; (ii) submission of the first NDA within the United States -
$500,000
; and (iii) receipt of first marketing approval for sale of a license product in the United States -
$600,000
.
MBI entered into an out-licensing agreement with Houston Pharmaceuticals, Inc. (“HPI”), pursuant to which we have granted certain intellectual property rights to HPI, including rights covering the potential drug candidate, WP1066 (“HPI Out-Licensing Agreement”). Under the HPI Out-Licensing Agreement we must make quarterly payments totaling
$0.75 million
for the first twelve quarters following the effective date of May 2, 2016, of the HPI Out-Licensing Agreement in consideration for the right to development data related to the development of licensed products. Notwithstanding our obligation to make the foregoing payments, the HPI Out-Licensing Agreement does not obligate HPI to conduct any research or to meet any milestones. Upon payment in the amount of
$1.0 million
to HPI within
three
years of the effective date of the HPI Out-Licensing Agreement we will regain all rights to the licensed subject matter and rights to any and all development data and any regulatory submissions including any IND, NDA or ANDA related to the licensed subject matter and can end the license without any other obligation other than the aforementioned quarterly payments. In the event that we do not exercise our right to regain our rights to the licensed subject matter within
three
years of the effective date of the HPI Out-Licensing Agreement, the license granted to HPI shall convert to an exclusive license upon HPI’s written notice and we shall be obligated to transfer all existing data relating to licensed subject matter including any development data and any IND to HPI.
On January 9, 2017, the Company amended its Sponsored Laboratory Study Agreement with MD Anderson whereby the Company would pay
$302,500
in 2017, which had been fully paid as of July 31, 2017, and the agreement was extended to October 31, 2018.
Annamycin
As of August 2015, we obtained the rights and obligations of Annamed under a June 2012 Patent and Technology Development and License Agreement by and between Annamed and Dermin (the “Annamed Agreement”). Therefore, certain intellectual property rights, including rights, if any, covering the potential drug product, Annamycin have been licensed to Dermin and Dermin has been granted a royalty-bearing, exclusive license to manufacture, have manufactured, use, import, offer to sell and/or sell products in the field of human therapeutics under the licensed intellectual property in the countries of Poland, Ukraine, Czech Republic, Hungary, Romania, Slovakia, Belarus, Lithuania, Latvia, Estonia, Netherlands, Turkey, Belgium, Switzerland, Austria, Sweden, Greece, Portugal, Norway, Denmark, Ireland, Finland, Luxembourg, Iceland, Kazakhstan, Russian Federation, Uzbekistan, Georgia, Armenia, Azerbaijan and Germany (“Annamed licensed territories”). MBI is obligated to develop and provide a dossier containing data related to the licensed subject matter to Dermin. In consideration, Dermin will pay a royalty for the sale of any licensed product in the Annamed licensed territories and pay all out-of-pocket expenses incurred by MBI in filing, prosecuting and maintaining the licensed patents for which the license has been granted. Dermin also agrees to provide a percentage of certain consideration that Dermin receives pursuant to sublicense agreements.
8. Subsequent Events
Subsequent to September 30, 2017 and through the date of filing of these financial statements, approximately
25,000
additional Series A warrants related to our February 2017 public offering of common stock have been exercised, leaving approximately
420,000
Series A and Broker warrants outstanding. As a result of this exercise, the Company received approximately
$0.04 million
.
Additionally, under the At Market Issuance Sales Agreement mentioned in Note 5 and subsequent to September 30, 2017, the Company sold approximately
345,000
shares with gross proceeds of approximately
$0.8 million
.
On October 3, 2017, the Board of Directors, after researching comparable companies and using a leading industry survey, approved the issuance of
10
-year options, with
4
-year vesting, to purchase
590,000
shares, in the aggregate, of the Company’s common stock, under the Company’s 2015 Stock Plan, to its executive officers and other employees. The options had an exercise price of
$2.49
per share.
On October 31, 2017, the Company added Sandra Silberman, M.D., PH.D., as Chief Medical Officer - New Products. The Board of Directors approved the issuance of
10
-year options, with
4
-year vesting, to purchase
75,000
shares of the Company’s common stock, under the Company’s 2015 Stock Plan to Dr. Silberman. The options had an exercise price of
$1.92
per share.
On November 1, 2017, the Board of Directors approved the issuance of
10
-year options, with
4
-year vesting, to purchase
10,000
shares, each, of the Company’s common stock, under the Company’s 2015 Stock Plan to
two
potential new members of the Science Advisory Board, subject to the approval process of their respective institutions. The options had an exercise price of
$1.95
per share.