Notes to Consolidated Financial Statements
1. Organization and Nature of Operations
and Basis of Presentation
Description of Business
Synthetic Biologics, Inc. (the
“Company” or “Synthetic Biologics”) is a clinical-stage company focused on developing therapeutics
designed to preserve the microbiome to protect and restore the health of patients. The Company’s lead candidates are:
(1) SYN-004 (ribaxamase) which is designed to degrade certain commonly used intravenous (IV) beta-lactam antibiotics within
the gastrointestinal (GI) tract to prevent microbiome damage,
Clostridium difficile
infection (CDI), overgrowth of
pathogenic organisms, the emergence of antimicrobial resistance (AMR) and acute graft-versus-host-disease (aGVHD) in allogeneic hematopoietic cell transplant (HCT) recipients, and (2) SYN-010 which is intended to reduce the
impact of methane-producing organisms in the gut microbiome to treat an underlying cause of irritable bowel syndrome with
constipation (IBS-C). The Company’s preclinical pursuits include SYN-020, an oral formulation of the enzyme intestinal alkaline
phosphatase (IAP) to treat both local GI and systemic diseases to develop preclinical stage monoclonal antibody therapies for
the prevention and treatment of pertussis.
Basis of Presentation and Corporate
Structure
As of December 31, 2018, the Company had
eight subsidiaries, Pipex Therapeutics, Inc. (“Pipex Therapeutics”), Effective Pharmaceuticals, Inc. (“EPI”),
Solovax, Inc. (“Solovax”), CD4 Biosciences, Inc. (“CD4”), Epitope Pharmaceuticals, Inc. (“Epitope”),
Healthmine, Inc. (“Healthmine”), Putney Drug Corp. (“Putney”) and Synthetic Biomics, Inc. (“SYN
Biomics”). Pipex Therapeutics, EPI, Healthmine and Putney are wholly owned, and Solovax, CD4, Epitope and SYN Biomics are
majority-owned.
For financial reporting purposes, the
outstanding common stock of the Company is that of Synthetic Biologics, Inc. All statements of operations, (deficit) equity and
cash flows for each of the entities are presented as consolidated. All subsidiaries were formed under the laws of the State of
Delaware on January 8, 2001, except for EPI, which was incorporated in Delaware in December 12, 2000, Epitope which was incorporated
in Delaware in January of 2002, Putney which was incorporated in Delaware in November of 2006, Healthmine which was incorporated
in Delaware in December of 2007 and SYN Biomics which was incorporated in Nevada in December of 2013.
Liquidity
As of December 31, 2018, the Company has
a significant accumulated deficit and with the exception of the three months ended September 30, 2010 and December 31, 2017, the
Company has experienced significant losses and incurred negative cash flows since inception. The Company expects to continue incurring
losses for the foreseeable future, with the recognition of revenue being contingent on successful phase 3 clinical trials and requisite
approvals by the FDA. Historically, the Company has financed its operations primarily through public and private sales of its common
stock and a private placement of its preferred stock, and it expects to continue to seek to obtain required capital in a similar
manner. The Company has spent, and expects to continue to spend, a substantial amount of funds in connection with implementing
its business strategy, including, planned product development efforts, clinical trials and research and discovery efforts.
Cash and cash equivalents totaled approximately
$26.0 million as of February 2019, which includes the net proceeds of approximately $16.7 million from the sale of securities in
October 2018 (the Offering) and net proceeds of approximately $12.2 million from sales of its Common Stock in “at-the-market”
(ATM) equity offerings during 2018. With the cash available at February 2019, the Company believes these resources will be sufficient
to fund its operations through at least the end of the first quarter of 2020. Management believes its plan, which includes the
further development of SYN-020 and additional testing of SYN-004 (ribaxamase) and SYN-010, will allow the Company to meet its financial
obligations, further advance key products, and maintain the Company’s planned operations for at least one year from the issuance
date of these consolidated financial statements, while not sacrificing the strategic direction of the Company. The Company’s
plan also considers the restructuring events of December 2018, described further in note 8. If necessary, the Company may attempt
to utilize the ATM or seek to raise additional capital on the open market, neither of which is guaranteed. Use of the ATM is limited
by certain restrictions and management’s plan does not rely on additional capital from either of these sources. If the Company
is not able to obtain additional capital (which is not assured at this time), our long term business plan may not be accomplished
and we may be forced to cease certain development activities. More specifically, the completion of a Phase 3 clinical trial will
require significant financing or a significant partnership.
Reverse Stock Split
On August 10, 2018, we effected a one
for thirty five reverse stock split (the “Reverse Stock Split”) of our authorized, issued and outstanding common stock.
Unless otherwise noted, all references to share amounts in these financial statements, reflect the Reverse Stock Split.
Every thirty five shares of issued and
outstanding Common Stock were automatically combined into one issued and outstanding share of Common Stock, without any change
in the par value per share of Common Stock.
All share and per share amounts in the financial
statements have been retroactively adjusted for all periods presented to give effect to the reverse split, including reclassifying
an amount equal to the reduction in par value to additional paid-in capital.
The Reverse Split affected all issued and outstanding shares of Common Stock, as well as Common Stock
underlying stock options, warrants and convertible instruments outstanding immediately prior to the effectiveness of the Reverse
Split. The Reverse Split reduced the total number of shares of Common Stock outstanding from approximately 128.5 million to approximately
3.7 million.
2. Summary of Significant Accounting
Policies
Principles of Consolidation
All intercompany transactions and accounts
have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.
Such estimates and assumptions impact, among others, the following: the estimated useful lives for property and equipment, fair
value of warrants, preferred stock and stock options granted for services or compensation, respectively, estimates of the probability
and potential magnitude of contingent liabilities, and the valuation allowance for deferred tax assets due to continuing and expected
future operating losses.
Making estimates requires management to
exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or
set of consolidated financial statements, which management considered in formulating its estimate could change in the near term
due to one or more future confirming events. Accordingly, actual results could differ from those estimates.
Non-controlling Interest
The Company’s non-controlling interest
represents the minority shareholder’s ownership interest related to the Company’s subsidiary, SYN Biomics. The Company
reports its non-controlling interest in subsidiaries as a separate component of equity in the Consolidated Balance Sheets and reports
both net loss attributable to the non-controlling interest and net loss attributable to the Company’s common stockholders
on the face of the Consolidated Statements of Operations. On September 5, 2018, the Company entered into an agreement with the
minority shareholder for an investigator-sponsored Phase 2 clinical study of SYN-010. Prior to this agreement and IRB approval
in December 2018, the Company’s equity interest in SYN Biomics was 88.5% and the non-controlling stockholder’s interest
was 11.5%. In consideration of the support, the Company issued additional shares of stock to the minority shareholder. he Company’s
equity interest in SYN Biomics is now 83.0% and the non-controlling stockholder’s interest is 17.0%. This is reflected in
the Consolidated Statements of Equity (Deficit).
Revenue Recognition
The Company records revenue when as it
transfers control 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. This may include identifying performance obligations in the contract,
estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each
separate performance obligation. We recognize milestone payments or upfront payments that have no contingencies as revenue when
payment is received.
Grants
Grants received from research collaboration
agreements with third parties are recognized as a reduction in the related research and development expense in the Consolidated
Statements of Operations.
Risks and Uncertainties
The Company’s operations could be subject to significant risks and uncertainties including financial,
operational and regulatory risks and the potential risk of business failure. These conditions may not only limit the Company’s
access to capital, but also make it difficult for its customers, its vendors and its ability to accurately forecast and plan future
business activities.
Cash and Cash Equivalents
Cash and cash equivalents include cash
and highly liquid short-term investments with original maturities of three months or less.
Property and Equipment
Property and equipment is recorded at
cost and depreciated or amortized using the straight-line method over the estimated useful life of the asset or the underlying
lease term for leasehold improvements, whichever is shorter. The estimated useful life by asset description is noted in the following
table.
Asset Description
|
|
Estimated Useful
Life
|
Office equipment and
furniture
|
|
3 – 5 years
|
Leasehold improvements
and fixtures
|
|
Lesser of estimated useful life or lease
term
|
Depreciation and amortization expense
was approximately $272,000 and $245,000 for the years ended December 31, 2018 and 2017, respectively. When assets are disposed
of, the cost and accumulated depreciation are removed from the accounts with any gain or loss reported in the consolidated statement
of operations. Repairs and maintenance are charged to expense as incurred.
The Company reviews property and equipment
for impairment to determine if assets are impaired due to obsolescence. As a result of this review, there was no impairment recognized
for the years ended December 31, 2018 and 2017.
Long-Lived Assets
The Company reviews its long-lived assets
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
If such an event or change in circumstances occurs and potential impairment is indicated because the carrying values exceed the
estimated future undiscounted cash flows of the asset, the Company will measure the impairment loss as the amount by which the
carrying value of the asset exceeds its fair value.
Loss per Share
Basic net loss per share is computed by
dividing net loss by the weighted average number of common shares outstanding. Diluted net loss per share is computed by dividing
net loss by the weighted average number of common shares outstanding including the effect of common share equivalents. Diluted
net loss per share assumes the issuance of potential dilutive common shares outstanding for the period and adjusts for any changes
in income and the repurchase of common shares that would have occurred from the assumed issuance, unless such effect is anti-dilutive.
For the years ended December 31, 2018 and 2017 net loss attributable to common stockholders included preferred stock dividends
of $9.4 million and $6.9 million respectively, related to the deemed dividends for the accretion of the beneficial conversion of Series B and Series A Preferred Shares
and accrued dividends for Series A Preferred Shares. Net loss attributable to common stockholders for the year ended December 31, 2018
also includes $2.5 million preferred stock deemed dividends for the recognition of the unamortized discount resulting from the
conversion of the 6,562 Series B Preferred Shares. The number of Series B Preferred shares convertible to common stock that were
excluded from the computations of net loss per common share and for the year ended December 31, 2018 were 7,966,057. The number
of options and warrants for the purchase of common stock that were excluded from the computations of net loss per common share
and for the year ended December 31, 2018 were 938,982 and 18,915,850, respectively, for the year ended December 31, 2017 were 358,975
and 915,138, respectively because their effect is anti-dilutive.
2. Summary of Significant Accounting
Policies – (continued)
Research and Development Costs
The Company expenses research and
development costs associated with developmental products not yet approved by the FDA to research and development expense as
incurred. Research and development costs consist primarily of license fees (including upfront payments), milestone payments,
manufacturing costs, salaries, stock-based compensation and related employee costs, fees paid to consultants and outside
service providers for laboratory development, legal expenses resulting from intellectual property prosecution and other
expenses relating to the design, development, testing and enhancement of our product candidates. Research and development
expenses include external contract research organization (“CRO”) services. The Company makes payments to the CROs
based on agreed upon terms and may include payments in advance of study services. The Company reviews and accrues CRO
expenses based on services performed and relies on estimates of those costs applicable to the stage of completion of a study
as provided by the CRO. Accrued CRO costs are subject to revisions as such studies progress to completion. At December 31,
2018 and 2017 the Company has accrued CRO expenses of $700,000 that are included in accrued expenses. The Company did not
have prepaid CRO costs at December 31, 2018 and had $46,000 in prepaid CRO cost at December 31, 2017.
Fair Value of Financial Instruments
Accounting Standards Codification (ASC)
820,
Fair Value Measurement
, define fair values as the amount that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants. As such, fair value is determined based upon assumptions that
market participants would use in pricing an asset or liability. Fair value measurements are rated on a three-tier hierarchy as
follows:
|
·
|
Level 1 inputs: Quoted prices (unadjusted) for identical assets
or liabilities in active markets;
|
|
·
|
Level 2 inputs: Inputs, other than quoted prices, included in
Level 1 that are observable either directly or indirectly; and
|
|
·
|
Level 3 inputs: Unobservable inputs for which there is little
or no market data, which require the reporting entity to develop its own assumptions.
|
In many cases, a valuation technique used
to measure fair value includes inputs from multiple levels of the fair value hierarchy described above. The lowest level of significant
input determines the placement of the entire fair value measurement in the hierarchy.
The carrying amounts of the Company’s
short-term financial instruments, including cash and cash equivalents, other current assets, accounts payable and accrued liabilities
approximate fair value due to the relatively short period to maturity for these instruments.
Cash and cash equivalents include money
market accounts of $98,000 as of December 31, 2018 and 2017, that are measured using Level 1 inputs.
The Company uses Monte Carlo simulations
to estimate the fair value of the warrants. In using this model, the fair value is determined by applying Level 3 inputs for which
there is little or no observable market data, requiring the Company to develop its own assumptions. The assumptions used in calculating
the estimated fair value of the warrants represent the Company’s best estimates; however, these estimates involve inherent
uncertainties and the application of management judgment. As a result, if factors change and different assumptions are used, the
warrant liability and the change in estimated fair value could be materially different.
Stock-Based Payment Arrangements
Generally, all forms of stock-based payments,
including stock option grants, warrants, restricted stock grants and stock appreciation rights are measured at their fair value
on the awards’ grant date typically using the Black-Scholes option pricing model, based on the estimated number of awards
that are ultimately expected to vest. Stock-based compensation awards issued to non-employees for services rendered are recorded
at either the fair value of the services rendered or the fair value of the stock-based payment, whichever is more readily determinable
and are remeasured over the corresponding vesting period. The expense resulting from stock-based payments is recorded in research
and development expense or general and administrative expense in the Consolidated Statement of Operations, depending on the nature
of the services provided.
Derivative Instruments
The warrants issued in conjunction with
the registered direct offering in October 2014 include a provision that if the Company were to enter into a certain transaction,
as defined in the agreement, the warrants would be purchased from the holder at a premium. The warrants issued in conjunction
with the public offering of the Company’s securities in November 2016 include a provision, that if the Company were to enter
into a certain transaction, as defined in the warrant agreement, the warrants would be purchased from the holder for cash. The
provisions of these warrants preclude equity accounting treatment under ASC 815,
Derivatives and Hedging,
Accordingly,
the Company is required to record the warrants as liabilities at their fair value upon issuance and re-measure the fair value
at each period end with the change in fair value recorded in the Consolidated Statement of Operations. When the warrants are exercised
or cancelled, they are reclassified to equity. The Company uses Monte Carlo simulations to estimate the fair value of the warrants.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting
Policies – (continued)
Income Taxes
The Company recognizes deferred tax liabilities
and assets based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities,
using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense)
results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when it is more
likely than not that some or all deferred tax assets will not be realized.
Management assesses the need to accrue
or disclose uncertain tax positions for proposed potential adjustments from various federal and state authorities who regularly
audit the Company in the normal course of business. In making these assessments, management must often analyze complex tax laws
of multiple jurisdictions. The Company records the related interest expense and penalties, if any, as tax expense in the tax provision.
At December 31, 2018 and 2017, the Company did not record any liabilities for uncertain tax positions.
Recent Accounting Pronouncements
and Developments
In February 2016, the FASB issued ASU No.
2016-02,
Leases
(ASU 2016-02) that provides principles for the recognition, measurement, presentation and disclosure
of leases for both lessees and lessors. ASU 2016-02 requires a lessee to recognize assets and liabilities on the balance sheet
for operating leases and changes many key definitions, including the definition of a lease. ASU 2016-02 includes a short-term lease
exception for leases with an original term of 12 months or less, in which a lessee can make an accounting policy election not to
recognize lease assets and lease liabilities. Lessees will continue to differentiate between finance leases (previously referred
to as capital leases) and operating leases, using classification criteria that are substantially similar to the previous guidance. Originally,
entities were required to adopt ASU 2016-02 using a modified retrospective transition approach for all leases existing at, or entered
into after, the date of initial application. However, in July 2018, the FASB issued ASU 2018-11,
Leases (Topic 842):
Targeted Improvements,
which now allows entities the option of recognizing the cumulative effect of applying the new standard
as an adjustment to the opening balance of retained earnings in the year of adoption while continuing to present all prior periods
under previous lease accounting guidance. In July 2018, the FASB also issued ASU 2018-10,
Codification Improvements to
Topic 842, Leases,
which clarifies how to apply certain aspects of ASU 2016-02. ASU 2016-02, ASU 2018-10 and ASU 2018-11 (now
commonly referred to as ASC Topic 842 (ASC 842)) is effective for the Company’s fiscal year beginning January 1, 2019. Although
early adoption is permitted, the Company has not elected to do so. The Company plans to elect the transition option provided
under ASU 2018-11, which will not require adjustments to comparative periods nor require modified disclosures in those comparative
periods. Upon adoption, the Company expects to elect the transition package of practical expedients permitted within the new standard,
which among other things, allows the carryforward of the historical lease classification. The Company continues to evaluate
the impact adoption of this guidance will have on the consolidated financial statements. The Company currently has one material
operating lease, which is disclosed in note 7 and has minimum future lease payments of approximately $1.1 million. While the Company
has not completed its evaluation of other contracts that may contain lease elements, so far none have been identified. The adoption
of ASC 2016-02 will require recording a right-of-use asset and lease liability in the consolidated balance sheet for leases. The
right-of-use asset and lease liability are required to be discounted using an appropriate interest rate using either the rate implicit
in the lease or the Company’s incremental borrowing rate. The Company is currently finalizing the calculation of the right
of use asset and related liability. Beginning in 2019, the Company expects significant changes to its disclosed lease recognition
policies and practices, as well as to other related financial statement disclosures due to the adoption of this standard. These
revised disclosures will be made in the Company’s first quarterly report in 2019.
In July 2017, the FASB issued ASU
2017-11,
Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging
(Topic 815)
, which changes the classification analysis of certain equity-linked financial instruments (or embedded
features) with down round features. When determining whether certain financial instruments should be classified as
liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the
instrument is indexed to an entity's own stock. ASU 2017-11 also clarifies existing disclosure requirements
for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion
option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round
feature. For freestanding equity classified financial instruments, ASU 2017-11 requires entities that present
earnings per share ("EPS") in accordance with ASC Topic 260 to recognize the effect of the down round feature when
it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic
EPS. The new standard would have become effective for us on January 1, 2019. We early adopted the proposed guidance under
ASU 2017-11 for the year ended December 31, 2018, and recognized warrants issued in the fourth quarter of 2018 with a down
round feature as equity. No adjustments were required for the retrospective application of this standard.
In June 2018, FASB issued ASU 2018-07,
Improvements to Nonemployee Share-Based Payment Accounting
, which expands the scope of Topic 718 to include share-based
payments issued to nonemployees, and generally aligns the accounting for nonemployee awards with the accounting for employee awards. The ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated
financial statements.
The Tax Cuts and Jobs Act (the “Tax
Act”) was signed into law on December 22, 2017. The Tax Act changed many aspects of U.S. corporate income taxation and included
reduction of the corporate income tax rate from 35% to 21%, implementation of a territorial tax system and imposition of a tax
on deemed repatriated earnings of foreign subsidiaries. The Company recognized the tax effects of the Tax Act in the year ended
December 31, 2017 and recorded $21.6 million in tax expense which relates almost entirely to the remeasurement of deferred tax
assets to the 21% tax rate. The balance recorded is reduced by the Company’s valuation allowance recorded. Accounting Standards
Codification (“ASC”) No. 740,
Income Taxes,
requires the Company to record the effects of a tax law change in
the period of enactment. However, shortly after the enactment of the Tax Act, the SEC staff issued Staff Accounting Bulletin (“SAB”)
118, which allows the Company to record a provisional amount when it does not have the necessary information available, prepared,
or analyzed in reasonable detail to complete its accounting for the change in the tax law. The measurement period ends when the
Company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one
year.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
, to provide guidance on revenue recognition. ASU 2014-09 requires a company
to recognize revenue when it transfers 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 doing so, companies will need to use more
judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the
contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price
to each separate performance obligation.
In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
, which provided for the adoption of the
new standard for fiscal years beginning after December 15, 2017. Accordingly, ASU 2014-09 is effective for the Company in the first
quarter of 2018 and early adoption up to the first quarter of 2017 is permitted. Upon adoption, ASU 2014-09 can be applied retrospectively
to all periods presented or only to the most current period presented with the cumulative effect of changes reflected in the opening
balance of retained earnings in the most current period presented. The FASB has also issued the following standards which clarify
ASU No. 2014-09 and have the same effective date as the original standard:
|
·
|
ASU 2016-10,
Identifying
Performance Obligations and Licensing
(Topic 606);
|
|
·
|
ASU 2016-11,
Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting
;
|
|
·
|
ASU 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
;
|
|
·
|
ASU 2016-20,
Technical Correction and Improvements; and
|
|
·
|
ASU 2016-20,
Technical correction and improvements to Topic 606, Revenue from Contracts with Customers
.
|
The Company does not have any revenues or contracts
with customers and will need to record revenue in accordance Topic 606 should a revenue generating transaction arise in the future.
The Company adopted Topic 606 on January 1, 2018 on modified retrospective basis.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
3. Selected Balance Sheet Information
PREPAID EXPENSES AND OTHER CURRENT ASSETS:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Prepaid insurances
|
|
$
|
419
|
|
|
$
|
351
|
|
Prepaid consulting, subscriptions and other expenses
|
|
|
132
|
|
|
|
290
|
|
Prepaid conferences, travel
|
|
|
42
|
|
|
|
94
|
|
Prepaid clinical research organizations
|
|
|
-
|
|
|
|
46
|
|
Clinical consulting services refund receivable
|
|
|
-
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
593
|
|
|
$
|
827
|
|
Prepaid CRO expense is classified as a current asset. The Company makes payments to the clinical research
organizations based on agreed upon terms that include payments in advance of study services.
PROPERTY AND EQUIPMENT
|
|
December 31,
2018
|
|
|
December 31
2017
|
|
Computers and office equipment
|
|
$
|
852
|
|
|
$
|
851
|
|
Leasehold improvements
|
|
|
439
|
|
|
|
439
|
|
Software
|
|
|
11
|
|
|
|
11
|
|
|
|
|
1,302
|
|
|
|
1,301
|
|
Less: accumulated depreciation and amortization
|
|
|
(695
|
)
|
|
|
(429
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
607
|
|
|
$
|
872
|
|
|
|
|
December
31,
2018
|
|
|
|
December
31,
2017
|
|
Accrued clinical consulting services
|
|
$
|
674
|
|
|
$
|
658
|
|
Accrued vendor payments
|
|
|
150
|
|
|
|
193
|
|
Accrued manufacturing costs
|
|
|
83
|
|
|
|
661
|
|
Other accrued expenses
|
|
|
12
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
919
|
|
|
$
|
1,526
|
|
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
3. Selected Balance Sheet Information – (continued)
ACCRUED EMPLOYEE BENEFITS
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Accrued bonus expense
|
|
$
|
907
|
|
|
$
|
1,283
|
|
Accrued severance
|
|
|
307
|
|
|
|
590
|
|
Accrued vacation expense
|
|
|
118
|
|
|
|
201
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,332
|
|
|
$
|
2,074
|
|
4. Stock-Based Compensation and Warrants
Stock Incentive Plan
On March 20, 2007, the Company’s
Board of Directors approved the 2007 Stock Incentive Plan (the “2007 Stock Plan”) for the issuance of up to 71,429
shares of common stock to be granted through incentive stock options, nonqualified stock options, stock appreciation rights, dividend
equivalent rights, restricted stock, restricted stock units and other stock-based awards to officers, other employees, directors
and consultants of the Company and its subsidiaries. This plan was approved by the stockholders on November 2, 2007. The exercise
price of stock options under the 2007 Stock Plan was determined by the compensation committee of the Board of Directors and may
be equal to or greater than the fair market value of the Company’s common stock on the date the option is granted. The total
number of shares of stock with respect to which stock options and stock appreciation rights may be granted to any one employee
of the Company or a subsidiary during any one-year period under the 2007 plan shall not exceed 7,143. Options become exercisable
over various periods from the date of grant, and generally expire ten years after the grant date. As of December 31, 2018, there
were 18,645 options issued and outstanding under the 2007 Stock Plan.
On November 2, 2010, the Board of Directors
and stockholders adopted the 2010 Stock Incentive Plan (“2010 Stock Plan”) for the issuance of up to 85,714 shares
of common stock to be granted through incentive stock options, nonqualified stock options, stock appreciation rights, dividend
equivalent rights, restricted stock, restricted stock units and other stock-based awards to officers, other employees, directors
and consultants of the Company and its subsidiaries. On October 22, 2013, the stockholders approved and adopted an amendment to
the Company’s 2010 Incentive Stock Plan to increase the number of shares of Company’s common stock reserved for issuance
under the Plan from 85,714 to 171,429. On May 15, 2015, the stockholders approved and adopted an amendment to the Company’s
2010 Incentive Stock Plan to increase the number of shares of the Company’s common stock reserved for issuance under the
Plan from 171,429 to 228,572. On August 25, 2016, the stockholders approved and adopted an amendment to the 2010 Stock Plan to
increase the number of shares of the Company’s common stock reserved for issuance under the 2010 Stock Plan from 228,572
to 400,000. On September 7, 2017, the stockholders approved and adopted an amendment to the 2010 Stock Plan to increase the number
of shares of the Company’s common stock reserved for issuance under the 2010 Stock Plan from 400,000 to 500,000. On September
24, 2018, the stockholders approved and adopted an amendment to the 2010 Stock Plan to increase the number of shares of the Company’s
common stock reserved for issuance under the 2010 Stock Plan from 500,000 to 1,000,000. The exercise price of stock options under
the 2010 Stock Plan is determined by the compensation committee of the Board of Directors and may be equal to or greater than
the fair market value of the Company’s common stock on the date the option is granted. Options become exercisable over various
period from the date of grant, and expire between five and ten years after the grant date. As of December 31, 2018, there were
920,337 options issued and outstanding under the 2010 Stock Plan.
In the event of an employee’s
termination, the Company will cease to recognize compensation expense for that employee. Stock forfeitures are recognized as
incurred. There is no deferred compensation recorded upon initial grant date. Instead, the fair value of the stock-based
payment is recognized over the stated vesting period.
The Company has applied fair value
accounting for all stock-based payment awards since inception. The fair value of each option or warrant granted is estimated
on the date of grant using the Black-Scholes option pricing model. The assumptions used for the years ended December 31, 2018
and 2017 are as follows:
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Exercise price
|
|
$
|
0.69
|
|
|
|
$ 18.2 – $30.45
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
86
|
%
|
|
|
83% – 96
|
%
|
Risk free interest rate
|
|
|
2.75
|
%
|
|
|
1.67% – 2.28
|
%
|
Expected life of option
|
|
|
4 years
|
|
|
|
4-7 years
|
|
Expected dividends
—
The Company has never declared or paid dividends on its common stock and has no plans to do so in the foreseeable future.
Expected volatility
—Volatility
is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected
to fluctuate (expected volatility) during a period.
Risk-free interest
rate
—The assumed risk free rate used is a zero coupon U.S. Treasury security with a maturity that approximates the expected
term of the option.
Expected life
of the option
—The period of time that the options granted are expected to remain unexercised. Options granted during
the year have a maximum term of seven years. The Company estimates the expected life of the option term based on the weighted
average life between the dates that options become fully vested and the maximum life of options granted.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. Stock-Based Compensation and Warrants
– (continued)
The Company records stock-based compensation
based upon the stated vested provisions in the related agreements. The vesting provisions for these agreements have various terms
as follows:
|
·
|
in
full on one-year anniversary date of grant date,
|
|
·
|
half
vesting immediately and remaining over three years,
|
|
·
|
quarterly
over three years,
|
|
·
|
annually
over three years,
|
|
·
|
one-third
immediate vesting and remaining annually over two years,
|
|
·
|
one-half
immediate vesting and remaining over nine months,
|
|
·
|
one-quarter
immediate vesting and remaining over three years,
|
|
·
|
one-quarter
immediate vesting and remaining over 33 months; and
|
|
·
|
monthly
over three years.
|
During the years ended December 31, 2018
and 2017, the Company granted 671,500 and 90,262 options to employees and directors having an approximate fair value of $0.3
million and $1.8 million based upon the Black-Scholes options pricing model, respectively.
Stock-based compensation expense
included in general and administrative expenses and research and development expenses relating to stock options issued to
employees for the years ended December 31, 2018 and 2017 was $1.8 million and $3.0 million, respectively. Stock-based
compensation expense included in general and administrative expenses and research and development expenses relating to stock
options issued to consultants for the years ended December 31, 2018 and 2017 were $297,000 and $434,000, respectively.
A summary of stock option activities for
the years ended December 31, 2018 and 2017, is as follows:
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. Stock-Based Compensation and Warrants – (continued)
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted Average
Remaining
Contractual Life
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2016
|
|
|
332,561
|
|
|
$
|
61.87
|
|
|
|
5.49
years
|
|
|
$
|
194,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
90,286
|
|
|
$
|
20.12
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(11,966
|
)
|
|
$
|
13.89
|
|
|
|
|
|
|
$
|
163,050
|
|
Expired
|
|
|
(19,091
|
)
|
|
$
|
77.46
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(32,714
|
)
|
|
$
|
42.21
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2017
|
|
|
359,076
|
|
|
$
|
53.93
|
|
|
|
4.60
years
|
|
|
$
|
1,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
671,500
|
|
|
$
|
0.69
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
$
|
-
|
|
Expired
|
|
|
(78,667
|
)
|
|
$
|
67.02
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(12,927
|
)
|
|
$
|
23.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance -December 31, 2018 - outstanding
|
|
|
938,982
|
|
|
$
|
15.18
|
|
|
|
6.19
years
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2018 - exercisable
|
|
|
221,068
|
|
|
$
|
57.61
|
|
|
|
4.01
years
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant date fair value of options granted - December 31, 2018
|
|
|
|
|
|
$
|
301,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value - December 31, 2018
|
|
|
|
|
|
$
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant date fair value of options granted - December 31, 2017
|
|
|
|
|
|
$
|
1,164,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value - December 31, 2017
|
|
|
|
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. Stock-Based Compensation and Warrants – (continued)
The options outstanding and exercisable
at December 31, 2018 are as follows:
Options Outstanding
|
|
Options Exercisable
|
|
Range of
Exercise
Price
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
$
|
|
|
0.00 – $40.00
|
|
|
|
811,214
|
|
|
$
|
4.63
|
|
|
|
6.62
years
|
|
|
|
94,094
|
|
|
$
|
24.55
|
|
|
|
4.83
years
|
|
|
|
|
41.00 – $70.00
|
|
|
|
22,370
|
|
|
|
55.10
|
|
|
|
2.30
years
|
|
|
|
22,291
|
|
|
|
55.13
|
|
|
|
2.30
years
|
|
$
|
|
|
71.00 – $102.00
|
|
|
|
105,398
|
|
|
$
|
87.84
|
|
|
|
3.65
years
|
|
|
|
104,683
|
|
|
$
|
87.86
|
|
|
|
3.65
years
|
|
As of December 31, 2018, total unrecognized
stock-based compensation expense related to stock options was $824,000, which is expected to be expensed through December 2020.
The FASB’s guidance for stock-based
payments requires cash flows from excess tax benefits to be classified as a part of cash flows from operating activities. Excess
tax benefits are realized tax benefits from tax deductions for exercised options in excess of the deferred tax asset attributable
to stock compensation costs for such options. The Company did not record any excess tax benefits in 2018 or 2017. Cash received
from option exercises under the Company’s stock-based compensation plans for the years ended December 31, 2018 and 2017 was
$0 and $166,000, respectively.
Stock Warrants
On October 10, 2018, the Company entered into an underwriting agreement with A.G.P./Alliance Global Partners
(the “Underwriters”), as representative of the underwriters, pursuant to which the Company agreed to issue and sell
to the Underwriters in a firm commitment underwritten public offering an aggregate of (i) 2,520,000 Class A Units (the “Class
A Units”), with each Class A Unit consisting of one share of the Company’s common stock, par value $0.001 per share
(the “Common Stock”), and one five-year warrant to purchase one share of Common Stock at an exercise price of $1.38
per share (each a “Warrant” and collectively, the “Warrants”), with each Class A Unit to be offered to
the public at a public offering price of $1.15, and (ii) 15,723 Class B Units (the “Class B Units”, and together with
the Class A Units, the “Units”), with each Class B Unit offered to the public at a public offering price of $1,000
per Class B Unit and consisting of one share of the Company’s Series B Convertible Preferred Stock (the “Series B Preferred
Stock”), with a stated value of $1,000 and convertible into shares of Common Stock at the stated value divided by a conversion
price of $1.15 per share, with all shares of Series B Preferred Stock convertible into an aggregate of 13,672,173 shares of Common
Stock, and issued with an aggregate of 13,672,173 Warrants .
In
addition, pursuant to the Underwriting Agreement, the Company granted the Underwriters a 45 day option (the “Over-allotment
Option”) to purchase up to an additional 2,428,825 shares of Common Stock and/or additional Warrants to purchase an additional
2,428,825 shares of Common Stock. The Underwriters partially exercised the Over-allotment Option by electing to purchase from the
Company additional Warrants to purchase 1,807,826 shares of Common Stock.
The Warrants are immediately exercisable
at a price of $1.38 per share of Common Stock (which is 120% of the public offering price of the Class A Units) and will expire
on October 15, 2023. If at the time of exercise, there is no effective registration statement registering, or no current prospectus
available for, the issuance of the shares of Common Stock to the holder, then the Warrants may only be exercised through a cashless
exercise. No fractional shares of Common Stock will be issued in connection with the exercise of a Warrant. In lieu of fractional
shares, the holder will receive an amount in cash equal to the fractional amount multiplied by the fair market value of any such
fractional shares. The Company has concluded that the Warrants are required to be equity classified. The Warrants were valued on
the date of grant using Monte Carlo simulations.
The assumptions used by the Company are
summarized in the following table:
|
|
Issuance
Date
|
|
Closing stock price
|
|
$
|
0.88
|
|
Expected dividends
|
|
|
0
|
%
|
Expected volatility
|
|
|
90
|
%
|
Risk free interest rate
|
|
|
3.01
|
%
|
Expected life of warrant (years)
|
|
|
5.00
|
|
On November 18, 2016, the Company completed
a public offering of 714,286 shares of common stock in combination with accompanying warrants to purchase an aggregate of 1,428,571
shares of the common stock. The stock and warrants were sold in combination, with two warrants for each share of common stock sold,
a Series A warrant and a Series B warrant, each representing the right to purchase one share of common stock. The purchase price
for each share of common stock and accompanying warrants was $35.00. The shares of common stock were immediately separable from
the warrants and were issued separately. The initial per share exercise price of the Series A warrants is $50.05 and the per share
exercise price of the Series B warrants is $60.20, each subject to adjustment as specified in the warrant agreements. The Series
A and Series B warrants may be exercised at any time on or after the date of issuance. The Series A warrants are exercisable until
the four-year anniversary of the issuance date. The Series B warrants expired December 31, 2017 and none were exercised prior to
expiration. The warrants include a provision, that if the Company were to enter into a certain transaction, as defined in the agreement,
the warrants would be purchased from the holder for cash. Accordingly, the Company recorded the warrants as a liability at their
estimated fair value on the issuance date of $15.7 million and changes in estimated fair value will be recorded as non-cash income
or expense in the Company’s Statement of Operations at each subsequent period. At December 31, 2018, the fair value of the
warrant liability was $100 which resulted in non-cash income of $3.7 million in 2018. At December 31, 2017, the fair value of the
warrant liability was $3.7 million, which resulted in non-cash income of $9.0 million in 2017. The warrants were valued on the
date of grant and on each remeasurement period using Monte Carlo simulations.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. Stock-Based Compensation and Warrants
– (continued)
The assumptions used by the Company are
summarized in the following table:
|
|
Series A
|
|
|
Series B
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
November 18,
2016
|
|
|
November 18,
2016
|
|
Closing stock price
|
|
$
|
0.56
|
|
|
$
|
17.85
|
|
|
$
|
31.15
|
|
|
$
|
31.15
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
92.5
|
%
|
|
|
80
|
%
|
|
|
85
|
%
|
|
|
85
|
%
|
Risk free interest rate
|
|
|
2.50
|
%
|
|
|
1.97
|
%
|
|
|
1.58
|
%
|
|
|
0.81
|
%
|
Expected life of warrant
|
|
|
1.9 years
|
|
|
|
2.9 years
|
|
|
|
4.0 years
|
|
|
|
1.1 years
|
|
On October 10, 2014, the Company raised
net proceeds of $19.1 million through the sale of 14,059,616 units at a price of $1.47 per unit to certain institutional investors
in a registered direct offering. Each unit consisted of one share of the Company’s common stock and a warrant to purchase
0.50 shares of common stock. The warrants, exercisable for an aggregate of 200,852 shares of common stock, have an exercise price
of $61.25 per share and a life of five years. The warrants vested immediately and expire on October 10, 2019.
The warrants issued in conjunction with
the registered direct offering in October 2014 include a provision that if the Company were to enter into a certain transaction,
as defined in the agreement, the warrants would be purchased from the holder at a premium. Accordingly, the Company recorded the
warrants as a liability at their estimated fair value on the issuance date, which was $7.4 million, and changes in estimated fair
value being recorded as non-cash income or expense in the Company’s Consolidated Statements of Operations at each subsequent
period. At December 31, 2018, the fair value of the warrant liability was zero, which resulted in non-cash income of $416,000
in 2018. At December 31, 2017, the fair value of the warrant liability was $416,000, which resulted in non-cash income of $1.7
million in 2017. The warrants were valued on the date of grant using the Black-Scholes valuation model which approximates the
value derived using Monte Carlo simulations. The assumptions used by the Company are summarized in the following table:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
October 10,
2014
|
|
Closing stock price
|
|
$
|
0.56
|
|
|
$
|
17.85
|
|
|
$
|
61.25
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
110
|
%
|
|
|
80
|
%
|
|
|
95
|
%
|
Risk free interest rate
|
|
|
2.60
|
%
|
|
|
1.86
|
%
|
|
|
1.39
|
%
|
Expected life of warrant
|
|
|
.79 years
|
|
|
|
1.79 years
|
|
|
|
5.0 years
|
|
The following table summarizes the estimated
fair value of the warrant liability
(in thousands)
:
Balance at December 31, 2016
|
|
$
|
14,821
|
|
Change in fair value of warrant liability
|
|
|
(10,738
|
)
|
Balance at December 31, 2017
|
|
|
4,083
|
|
Change in fair value of warrant liability
|
|
|
(4,083
|
)
|
Balance at December 31, 2018
|
|
$
|
0
|
|
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. Stock-Based Compensation and Warrants – (continued)
A summary of all warrant activity for the Company for the
years ended December 31, 2018 and 2017 is as follows:
|
|
Number of
Warrants
|
|
|
Weighted Average
Exercise Price
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
|
1,638,333
|
|
|
$
|
56.00
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(723,195
|
)
|
|
|
60.20
|
|
Balance at December 31, 2017
|
|
|
915,138
|
|
|
|
52.50
|
|
Granted
|
|
|
18,000,713
|
|
|
|
1.38
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Balance at December 31, 2018
|
|
|
18,915,851
|
|
|
$
|
3.85
|
|
There was no stock-based compensation
expense included in general and administrative and research and development expenses relating to warrants issued to consultants
for the years ended December 31, 2018 and 2017.
On December 26, 2017, the Company entered
into a consulting agreement for advisory services for a period of six months. As compensation for such services, the consultant
was paid an upfront payment, is paid a monthly fee and on January 24, 2018, was issued a warrant exercisable for 714 shares of
the Company’s common stock on the date of issue. The warrant is equity classified and the fair value of the warrant approximated
$9,000 and was measured using the Black-Scholes option pricing model. This entire expense was recorded in the quarter ended March
31, 2018. The assumptions used by the Company are summarized in the following table:
Closing stock price
|
|
$
|
18.55
|
|
Expected dividends
|
|
|
0
|
%
|
Expected volatility
|
|
|
85
|
%
|
Risk free interest rate
|
|
|
2.42
|
%
|
Expected life of warrant (years)
|
|
|
4.92
|
|
A summary of all outstanding and exercisable
warrants as of December 31, 2018 is as follows:
Exercise Price
|
|
|
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
|
|
Weighted Average
Remaining
Contractual Life
|
|
$
|
1.38
|
|
|
|
17,999,999
|
|
|
|
17,999,999
|
|
|
|
4.78 years
|
|
|
18.20
|
|
|
|
714
|
|
|
|
714
|
|
|
|
3.99 years
|
|
|
50.05
|
|
|
|
714,286
|
|
|
|
714,286
|
|
|
|
1.88 years
|
|
|
61.25
|
|
|
|
200,852
|
|
|
|
200,852
|
|
|
|
0.78 years
|
|
$
|
52.48
|
|
|
|
18,915,851
|
|
|
|
18,915,851
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4.63 years
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Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Stockholders’ Equity
Year Ended December 31, 2018
On October 15, 2018, the Company closed
its underwritten public offering pursuant to which it received gross proceeds of approximately $18.6 million before deducting
underwriting discounts, commissions and other offering expenses payable by the Company and sold an aggregate of (i) 2,520,000
Class A Units , with each Class A Unit offered to the public at a public offering price of $1.15, and (ii) 15,723 Class B Units,
with each Class B Unit offered to the public at a public offering price of $1,000 per Class B Unit and consisting of one share
of the Company’s Series B Preferred Stock, with a stated value of $1,000 and convertible into shares of Common Stock at
the stated value divided by a conversion price of $1.15 per share, with all shares of Series B Preferred Stock convertible into
an aggregate of 13,672,173 shares of Common Stock, and issued with an aggregate of 13,672,173 October 2018 Warrants. Since the above units are equity instruments, the proceeds were allocated on a relative fair value
basis which created the Series B Preferred Stock discount.
In addition, pursuant to the Underwriting
Agreement that the Company entered into with the Underwriters on October 10, 2018, the Company granted the Underwriters a 45 day
option (the “Over-allotment Option”) to purchase up to an additional 2,428,825 shares of Common Stock and/or additional
warrants to purchase an additional 2,428,825 shares of Common Stock. Each Warrant is exercisable for one share of common stock.
The Underwriters partially exercised the Over-allotment Option by electing to purchase from the Company additional Warrants to
purchase 1,807,826 shares of Common Stock.
The Units were offered by the Company
pursuant to a registration statement on Form S-1 (File No. 333-227400), as amended, filed with the SEC, which was declared
effective by the SEC on October 10, 2018.
The conversion price of the Series B
Preferred Stock and exercise price of the October 2018 Warrants is subject to appropriate adjustment in the event of recapitalization
events, stock dividends, stock splits, stock combinations, reclassifications, reorganizations or similar events affecting the Common
Stock. The exercise price of the Warrants is subject to adjustment in the event of certain dilutive issuances. As of December 31,
2018, 6,562 shares have been converted resulting in the recognition $2.5 million of unamortized discount from the conversion. This
is recorded as a deemed dividend in accumulated deficit.
The October 2018 Warrants are immediately
exercisable at a price of $1.38 per share of common stock (which is 120% of the public offering price of the Class A Units) and
will expire on October 15, 2023. If, at the time of exercise, there is no effective registration statement registering, or no current
prospectus available for, the issuance of the shares of common stock to the holder, then the October 2018 warrants may only be
exercised through a cashless exercise. No fractional shares of common stock will be issued in connection with the exercise of
any October 2018 warrants. In lieu of fractional shares, the holder will receive an amount in cash equal to the fractional amount
multiplied by the fair market value of any such fractional shares.
The Company may not effect, and holder
will not be entitled to, exercise any Warrants or conversion of the Series B Preferred Stock, which, upon giving effect to such
exercise, would cause (i) the aggregate number of shares of common stock beneficially owned by the holder (together with its affiliates)
to exceed 4.99% (or, at the election of the holder, 9.99%) of the number of shares of common stock outstanding immediately after
giving effect to the exercise, or (ii) the combined voting power of the Company’s securities beneficially owned by the holder
(together with its affiliates) to exceed 4.99% (or, at the election of the holder, 9.99%) of the combined voting power of all
of the Company’s securities then outstanding immediately after giving effect to the exercise or conversion, as such percentage
ownership is determined in accordance with the terms of the October 2018 Warrants or Series B Preferred Stock. However, any holder
may increase or decrease such percentage to any other percentage not in excess of 9.99% upon at least 61 days’ prior notice
from the holder to the Company. The holders of the Series B Preferred will participate, on an as-if-converted-to-common stock
basis, in any dividends to the holders of common stock. Upon a defined Fundamental Transaction, the holders of the Series B Preferred
Stock are entitled to the same consideration as are holders of common stock. The Series B Preferred Stock ranks junior to existing
Series A preferred stock but on parity with common stock. Liquidation preference is equal to an amount pari passu with the common
stock on an as converted basis (i.e., there is no preference to common stock)
Since the effective conversion price of
the Series B Preferred Stock is less than the fair value of the underlying common stock at the date of issuance, there is a beneficial
conversion feature (“BCF”) at the issuance date. Because the Series B Preferred Stock has no stated maturity or redemption
date and is immediately convertible at the option of the holder, the discount created by the BCF is immediately charged to accumulated
deficit as a “deemed dividend” and impacts earnings per share. During the year ended December 31, 2018, the Company
recorded a discount of $9.1 million and immediately amortized the discount to record the deemed dividend..
FBR Sales Agreement
For the year ended December 31, 2018,
the Company sold through the FBR Sales Agreement an aggregate of 3.5 million shares of the Company’s common stock and received
net proceeds of approximately $12.2 million before deducting issuance expenses.
Synthetic
Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Stockholders’ Equity – (continued)
Also, during the year ended December 31,
2018, the Company did not issue any shares of common stock in connection with the exercise of stock options.
Year Ended December 31, 2017
On September 11, 2017, the Company entered
into a share purchase agreement (the “Purchase Agreement”) with an investor (the “Investor”), pursuant
to which the Company offered and sold in a private placement 120,000 shares of its Series A Convertible Preferred Stock, par value
$0.001 per share (the “Series A Preferred Stock”) for an aggregate purchase price of $12 million, or $100 per share.
The Series A Preferred Stock ranks senior
to the shares of the Company’s common stock, and any other class or series of stock issued by the Company with respect to
dividend rights, redemption rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution
or winding up of the affairs of the Company. Holders of Series A Preferred Stock are entitled to a cumulative dividend at the
rate of 2.0% per annum, payable quarterly in arrears, as set forth in the Certificate of Designation of Series A Preferred
Stock classifying the Series A Preferred Stock. The Series A Preferred Stock is convertible at the option of the holders at any
time into shares of common stock at an initial conversion price of $0.54 per share which was increased to $18.90 after taking
into account the Reverse Stock Split, subject to certain customary anti-dilution adjustments.
Any conversion of Series A Preferred Stock
may be settled by the Company in shares of common stock only.
The holder’s ability to convert
the Series A Preferred Stock into common stock is subject to (i) a 19.99% blocker provision to comply with NYSE American
Listing Rules, (ii) if so elected by the Investor, a 4.99% blocker provision that will prohibit beneficial ownership of more
than 4.99% of the outstanding shares of the Company’s common stock or voting power at any time, and (iii) applicable
regulatory restrictions.
In the event of any liquidation, dissolution
or winding-up of the Company, holders of the Series A Preferred Stock are entitled to a preference on liquidation equal to the
greater of (i) an amount per share equal to the stated value plus any accrued and unpaid dividends on such share of Series A Preferred
Stock (the “Accreted Value”), and (ii) the amount such holders would receive in such liquidation if they converted
their shares of Series A Preferred Stock (based on the Accreted Value and without regard to any conversion limitation) into shares
of the common stock immediately prior to any such liquidation, dissolution or winding-up (the greater of (i) and (ii), is referred
to as the “Liquidation Value”).
Except as otherwise required by law, the
holders of Series A Preferred Stock have no voting rights, other than customary protections against adverse amendments and issuance
of
pari passu
or senior preferred stock. Upon certain change of control events involving the Company, the Company
will be required to repurchase all of the Series A Preferred Stock at a redemption price equal to the greater of (i) the Accreted
Value and (ii) the amount that would be payable upon a change of control (as defined in the Certificate of Designation) in respect
of common stock issuable upon conversion of such share of Series A Preferred Stock if all outstanding shares of Series A Preferred
Stock were converted into common stock immediately prior to the change of control.
On or at any time after (i) the VWAP (as
defined in the Certificate of Designation) for at least 20 trading days in any 30 trading day period is greater than $70.00, subject
to adjustment in the case of stock split, stock dividends or the like the Company has the right, after providing notice not less
than 6 months prior to the redemption date, to redeem, in whole or in part, on a pro rata basis from all holders thereof based
on the number of shares of Series A Preferred Stock then held, the outstanding Series A Preferred Stock, for cash, at a redemption
price per share of Series A Preferred Stock of $7,875.00, subject to appropriate adjustment in the event of any stock dividend,
stock split, combination or other similar recapitalization with respect to the Series A Convertible Preferred Stock or (ii) the
five year anniversary of the issue date, the Company shall have the right to redeem, in whole or in part, on a pro rata basis
from all holders thereof based on the number of shares of Series A Convertible Preferred Stock then held, the outstanding Series
A Preferred Stock, for cash, at a redemption price per share equal to the Liquidation Value.
The Series A Preferred Stock is classified
as temporary equity due to the shares being (i) redeemable based on contingent events outside of the Company’s control, and
(ii) convertible immediately and from time to time. Since the effective conversion price of the Series A Preferred Stock is less
than the fair value of the underlying common stock at the date of issuance, there is a beneficial conversion feature (“BCF”)
at the issuance date. Because the Series A Preferred Stock has no stated maturity or redemption date and is immediately convertible
at the option of the holder, the discount created by the BCF is immediately charged to accumulated deficit as a “deemed dividend”
and impacts earnings per share. During the year ended December 31, 2017, the Company recorded a discount of $6.9 million. Because
the Series A Preferred Stock is not currently redeemable, the discount arising from issuance costs was allocated to temporary equity
and will not be accreted until such time that redemption becomes probable. The stated dividend rate of 2% per annum is cumulative
and the Company accrues the dividend on a quarterly basis (in effect accreting the dividend regardless of declaration because the
dividend is cumulative). During the year ended December 31, 2018 and 2017, the Company accrued dividends of $243,000 and $73,000,
respectively. Once the dividend is declared, the Company will reclassify the declared amount from temporary equity to a dividends
payable liability. When the redemption of the Series A Preferred Stock becomes probable, the temporary equity will be accreted
to redemption value as a deemed dividend.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Stockholders’ Equity – (continued)
FBR Sales Agreement
For the year ended December 31,
2017, the Company sold through the FBR Sales Agreement an aggregate of 314,000 shares of the Company’s common stock and
received net proceeds of approximately $6.4 million before deducting issuance expenses.
Also, during the year ended December 31,
2017, the Company issued 11,965 shares of common stock in connection with the exercise of stock options for proceeds of approximately
$166,190.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
6. Non-controlling Interest
On September 5, 2018, the Company entered
into an agreement with Cedars-Sinai Medical Center (CSMC) for an investigator-sponsored Phase 2b clinical study of SYN-010 to be
co-funded by the Company and CSMC (the “Study”). The Study will provide further evaluation of the efficacy and safety
of SYN-010, the Company’s modified-release reformulation of lovastatin lactone, which is exclusively licensed to the Company
by CSMC. SYN-010 is designed to reduce methane production by certain microorganisms (
M. smithii
) in the gut to treat an
underlying cause of irritable bowel syndrome with constipation (IBS-C).
In consideration of the support provided
by CSMC for the Study, the Company will pay $321,000 and the Company entered into a Stock Purchase Agreement with CSMC pursuant
to which the Company has agreed, upon the approval of the Study protocol by the Institutional Review Board, (IRB) to: (i) issue
to CSMC fifty thousand (50,000) shares of common stock of the Company; and (ii) transfer to CSMC an additional two million four
hundred twenty thousand (2,420,000) shares of common stock of its subsidiary SYN Biomics, Inc. (“Synbiomics”) owned
by the Company, such that after such issuance CSMC will own an aggregate of seven million four hundred eighty thousand (7,480,000)
shares of common stock of SYN Biomics, representing seventeen percent (17%) of the issued and outstanding shares of SYN Biomics’
common stock. The services rendered are recorded to research and development expense in proportion with the progress of the
study and based overall on the fair value of the shares ($285,000) as determined at the date of IRB approval. During 2018, research
and development expense recorded related to this transaction approximated $36,000. Including the issuance of common stock and the
proportion of the cash contribution recognized to expense in 2018, total research and development expense recognized in 2018 for
this transaction approximated $102,000.
The Agreement also provides CSMC with
a right, commencing on the six month anniversary of issuance of the stock under certain circumstances in the event that the shares
of stock of SYN Biomics are not then freely tradeable, and subject to NYSE American, LLC approval, to exchange its SYN Biomics shares
for unregistered shares of the Company’s common stock, with the rate of exchange based upon the relative contribution of
the valuation of SYN Biomics to the public market valuation of the Company at the time of each exchange. The Stock Purchase Agreement
also provides for tag-along rights in the event of the sale by the Company of its shares of SYN Biomics.
On August 29, 2015, the Company, SYN Biomics
and Mark Pimentel, M.D. entered into an amendment to the Pimentel Stock Purchase Agreement dated December 3, 2013, which accelerated
the date upon which Dr. Pimentel could exchange his shares of common stock in SYN Biomics for shares of the Company’s common
stock. On August 29, 2015, Dr. Pimentel notified the Company of his intent to exchange all of the shares of common stock in SYN
Biomics, 8.5%, owned by him for 38,572 shares of the Company’s common stock in accordance with the terms of the Stock Purchase
Agreement, as amended. On August 31, 2015, the Company issued 38,572 shares of the Company’s common stock to Dr. Pimentel
in exchange for all of the shares of common stock of SYN Biomics held by Dr. Pimentel.
In December 2013, through the Company’s
subsidiary, Synthetic Biomics, Inc., the Company entered into a worldwide exclusive license agreement with CSMC and acquired the
rights to develop products for therapeutic and prophylactic treatments of acute and chronic diseases, including the development
of SYN-010 to target IBS-C. The Company licensed from CSMC a portfolio of intellectual property comprised of several U.S. and
foreign patents and pending patent applications for various fields of use, including IBS-C, obesity and diabetes. An investigational
team led by Mark Pimentel, M.D. at CSMC discovered that these products may reduce the production of methane gas by certain GI
microorganisms. During the years ended December 31, 2018 and 2017, the Company did not owe and did not pay CSMC for milestone
payments related this license agreement.
The Company’s
non-controlling interest is accounted for under ASC 810,
Consolidation
(“ASC 810”) and represents the minority
shareholder’s ownership interest related to the Company’s subsidiary, SYN Biomics. In accordance with ASC 810, the
Company reports its non-controlling interest in subsidiaries as a separate component of equity in the Consolidated Balance Sheets
and reports both net loss attributable to the non-controlling interest and net loss attributable to the Company’s common
stockholders on the face of the Consolidated Statements of Operations. After the 2018 transaction with CSMC, the Company’s
equity interest in SYN Biomics is 83% and the non-controlling stockholder’s interest is 17%. As of December 31, 2018, the
accumulated net loss attributable to the non-controlling interest is $2.9 million. As of December 31, 2017, the accumulated net
loss attributable to the non-controlling interest is $1.9 million and includes $1.6 million of prior year losses attributable
to minority stockholders including the reversal of Dr. Pimentel’s 2015 losses of $505,000 associated with the exchange of
his shares of common stock in SYN Biomics for shares of the Company’s common stock, and current year losses of $54,000 attributable
to minority stockholders. Management considers the amounts which should have been recorded in prior years to be immaterial.
7. License,
Collaborative and Employment Agreements and Commitments
License and Collaborative Agreements
As described below, the Company has entered
into several license and collaborative agreements for the right to use research, technology and patents. Some of these license
and collaborative agreements may contain milestones. The specific timing of such milestones cannot be predicted and are dependent
on future developments as well as regulatory actions which cannot be predicted with certainty (including actions which may never
occur). Further, under the terms of certain licensing agreements, the Company may have the obligation to pay certain milestones
contingent upon the achievement of specific levels of sales. Due to the long-range nature of such commercial milestone amounts,
they are neither probable at this time nor predictable and consequently are not included in this disclosure.
Cedars-Sinai Medical Center (“CSMC”)
Agreement
On December 5, 2013, the Company, through
its newly formed, majority owned subsidiary, SYN Biomics entered into a worldwide exclusive License Agreement with CSMC for the
development of new treatment approaches to target non-bacterial intestinal microorganism life forms known as archaea that are
associated with intestinal methane production and chronic diseases such as irritable bowel syndrome (IBS), obesity and type 2
diabetes. As part of the terms of the License Agreement the Company issued 9,569 unregistered shares of the Company’s common
stock to CSMC, paid $150,000 for the initial license fee and $220,000 for patent reimbursement fees. The License Agreement also
provides that, commencing on the second anniversary of the License Agreement, SYN Biomics will pay an annual maintenance fee,
which payment shall be creditable against annual royalty payments owed under the License Agreement. In addition to royalty payments
which are a percentage of net sales of licensed and technology products, SYN Biomics is obligated to pay CSMC a percentage of
any non-royalty sublicense revenues, as well as additional consideration upon the achievement of milestones (the first two of
which are payable in cash or unregistered shares of Company stock at the Company’s option). On December 5, 2013, the Company
also entered into an option agreement with CSMC, which expired unexercised on December 31, 2014.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. License, Collaborative and Employment
Agreements and Commitments – (continued)
The License Agreement terminates: (i)
automatically if SYN Biomics enters into a liquidating bankruptcy or other specified bankruptcy event or if the performance of
any term, covenant, condition or provision of the License Agreement will jeopardize the licensure of CSMC, its participation in
certain reimbursement programs, its full accreditation by the Joint Commission of Accreditation of Healthcare Organizations or
any similar state organizations, its tax exempt status or is deemed illegal; (ii) upon 30 days notice from CSMC if SYN Biomics
fails to make a payment or use commercially reasonable efforts to exploit the patent rights; (iii) upon 60 days notice from CSMC
if SYN Biomics fails to cure any breach or default of any material obligations under the License Agreement; or (iv) upon 90 days
notice from SYN Biomics if CSMC fails to cure any breach or default of any material obligations under the License Agreement. SYN
Biomics also has the right to terminate the License Agreement without cause upon six months notice to CSMC; however, upon such
termination, SYN Biomics is obligated to pay a termination fee with the amount of such fee reduced: (i) if such termination occurs
after an Investigational New Drug submission to the FDA but prior to completion of a Phase 2 clinical trial, (ii) reduced further
if such termination occurs after completion of, Phase 2 clinical trial but prior to completion of a Phase 3 clinical trial; and
(iii) reduced to zero if such termination occurs after completion of a Phase 3 clinical trial.
Prior to the execution of the
CSMC License Agreement, SYN Biomics issued shares of common stock of SYN Biomics to each of CSMC and Mark Pimentel, M.D.
(the primary inventor of the intellectual property), representing 11.5% and 8.5%, respectively, of the outstanding shares of
SYN Biomics (the “SYN Biomics Shares”). The Stock Purchase Agreements for the SYN Biomics shares provide for
certain anti-dilution protection until such time as an aggregate of $3.0 million in proceeds from equity financings are
received by SYN Biomics as well as a right, under certain circumstances in the event that the SYN Biomics shares are not then
freely tradable, and subject to NYSE American approval, as of the 18 and 36 month anniversary date of the effective date of
the Stock Purchase Agreements, for each of CSMC and the Dr. Pimentel to exchange up to 50% of their SYN Biomics shares
for unregistered share of the Company’s common stock, with the rate of exchange based upon the relative contribution of
the valuation of SYN Biomics to the public market valuation of the Company at the time of each exchange. The Stock
Purchase Agreements also provide for tag-along rights in the event of the sale by the Company of its shares of SYN
Biomics.
On August 29, 2015, the Company, SYN Biomics
and Mark Pimentel, M.D. entered into an amendment to the Pimentel Stock Purchase Agreement, which accelerated the date upon which
Dr. Pimentel can exchange his shares of common stock in SYN Biomics for shares of the Company’s common stock. On August
29, 2015, Dr. Pimentel notified the Company of his intent to exchange all of the shares of common stock in SYN Biomics owned by
him for 38,572 shares of the Company’s common stock in accordance with the terms of the Pimentel Stock Purchase Agreement,
as amended. On August 31, 2015, the Company issued 38,572 shares of the Company’s common stock to Dr. Pimentel in exchange
for all of the shares of common stock of SYN Biomics held by Dr. Pimentel.
During the year ended December 31, 2018
and 2017, the Company did not owe and did not pay CSMC for milestone payments related this license agreement.
On September 5, 2018, the Company entered
into an agreement with CSMC for an investigator-sponsored Phase 2 clinical study of SYN-010 to be co-funded by the Company and
CSMC (the “Study”). The Study will provide further evaluation of the efficacy and safety of SYN-010, the Company’s
modified-release reformulation of lovastatin lactone, which is exclusively licensed to the Company by CSMC. SYN-010 is designed
to reduce methane production by certain microorganisms (
M. smithii
) in the gut to treat an underlying cause of irritable
bowel syndrome with constipation (IBS-C).
In consideration of the support provided
by CSMC for the Study, the Company will pay $321,000 and the Company entered into a Stock Purchase Agreement with CSMC pursuant
to which the Company has agreed, upon the approval of the Study protocol by the Institutional Review Board, (IRB) to: (i) issue
to CSMC fifty thousand (50,000) shares of common stock of the Company; and (ii) transfer to CSMC an additional two million four
hundred twenty thousand (2,420,000) shares of common stock of its subsidiary SYN Biomics, Inc. (“Synbiomics”) owned
by the Company, such that after such issuance CSMC will own an aggregate of seven million four hundred eighty thousand (7,480,000)
shares of common stock of SYN Biomics, representing seventeen percent (17%) of the issued and outstanding shares of SYN Biomics’
common stock. The services rendered are recorded to research and development expense in proportion with the progress of the
study and based overall on the fair value of the shares ($285,000) as determined at the date of IRB approval. During 2018, research
and development expense recorded related to this transaction approximated $36,000. Including the issuance of common stock and the
proportion of the cash contribution recognized to expense in 2018, total research and development expense recognized in 2018 for
this transaction approximated $102,000.
The Agreement also provides CSMC with
a right, commencing on the six month anniversary of issuance of the stock under certain circumstances in the event that the shares
of stock of Synbiomics are not then freely tradeable, and subject to NYSE American, LLC approval, to exchange its Synbiomics shares
for unregistered shares of the Company’s common stock, with the rate of exchange based upon the relative contribution of
the valuation of Synbiomics to the public market valuation of the Company at the time of each exchange. The Stock Purchase Agreement
also provides for tag-along rights in the event of the sale by the Company of its shares of Synbiomics.
University of Texas Austin Agreement
On December 19, 2012, the Company entered
into a License Agreement with The University of Texas at Austin (the “University”) for the exclusive license of the
right to use, develop, manufacture, market and commercialize certain research and patents related to pertussis antibodies. The
License Agreement provides that the University is entitled to payment of past patent expenses, an annual payment of $50,000 per
year commencing on the effective date through December 31, 2014, a $25,000 payment on December 31, 2015 and milestone payments
of $50,000 upon commencement of Phase 1 clinical trials, $100,000 upon commencement of Phase 3 clinical trials, $250,000 upon
NDA submission in the U.S., $100,000 upon European Medicines Agency approval and $100,000 upon regulatory approval in an Asian
country. In addition, the University is entitled to a running royalty upon net sales. The License Agreement terminates upon
the expiration of the patent rights; provided, however that the License Agreement is subject to early termination by the Company
in its discretion and by the University for a breach of the License Agreement by the Company.
In connection with the License Agreement,
the Company and the University also entered into a Sponsored Research Agreement pursuant to which the University will perform
certain research work related to pertussis. The Sponsored Research Agreement may be renewed annually, in the sole discretion of
the Company, after the first year for two additional one year terms with a fixed fee for the first year of $303,287. The Sponsored
Research Agreement was renewed for the second and third years for a fixed fee of $316,438 and $328,758 respectively, all payable
in quarterly installments. The Sponsored Research Agreement was to expire on December 31, 2015; provided, however, the Sponsored
Research Agreement is subject to early termination upon the written agreement of the parties, a default in the material obligations
under the Research Agreement which remain uncured for 60 days after receipt of notice, automatically upon the Company’s
bankruptcy or insolvency and by the Company in its sole discretion at any time after the one year anniversary of the date of execution
thereof upon no less than 90 days notice.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. License, Collaborative and Employment
Agreements and Commitments – (continued)
On October 22, 2015, the Company and the
University amended the Sponsored Research Agreement to extend the termination date to January 15, 2017, on September 2, 2016 to
extend the agreement until January 15, 2018, on August 22, 2017 to extend the agreement until January 17, 2019 and again on August
24, 2018 until January 17, 2021. All other terms and conditions of the Sponsored Research Agreement remain unchanged. No further
or additional payments will be made to the University as a result of this amendment.
Prev ABR LLC (“Prev”) Agreement
On November 28, 2012, the Company entered
into an agreement (“Prev Agreement”) to acquire the C. diff program assets of Prev, including pre-Investigational
New Drug (IND) package, Phase 1 and Phase 2 clinical data, manufacturing process data and all issued and pending U.S. and international
patents. Upon execution and closing of the Prev Agreement, the Company paid Prev cash payments of $235,000 and issued 17,858
unregistered shares of its common stock to Prev. As set forth in the Prev Agreement, Prev may be entitled to receive additional
consideration upon the achievement of certain milestones including: (i) commencement of an IND; (ii) commencement of a Phase 1
clinical trial; (iii) commencement of a Phase 2 clinical trial; (iv) commencement of a Phase 3 clinical trial; (v) filing a Biologic
License Application (BLA) in the U.S. and for territories outside of the U.S. (as defined in the Prev Agreement); and (vi) approval
of a BLA in the U.S. and for territories outside the U.S. With exception of the first milestone payment, the remaining milestones
are payable 50% in cash and 50% in our stock, however, at Prev’s option the entire milestone may be payable in shares of
the Company’s stock. Under the Prev Agreement, the Company may be required to the return all of assets acquired from Prev
if (i) the Company has not initiated toxicology studies in non-rodent models within 30 months of the Prev Agreement execution
date, or (ii) within 36 months of the Prev Agreement execution date the Company has not filed a C. Diff program IND and such failure
is not due to action or inaction of Prev or breach of its representations or warranties or covenants or if there is a change of
control as defined in the Prev Agreement and after such change of control the assets are not further developed; provided however
that such 30 and 36 month periods can be extended by the Company for an additional 12 months upon payment of a cash milestone
payment. As of December 31, 2015, the first three milestones have been met, and at Prev’s option, Prev elected to receive
18,724 shares of the Company’s common stock. No milestones were achieved or such payments were made during the years ended
December 31, 2018 and 2017.
Intrexon Exclusive Channel Collaboration
On August 6, 2012, the Company expanded
its relationship with Intrexon and entered into an Exclusive Channel Collaboration (“ECC”) (“Infectious Disease
ECC”) with Intrexon that governs an “exclusive channel collaboration” arrangement in which the Company will
use Intrexon’s technology relating to the identification, design and production of human antibodies and DNA vectors for
the development and commercialization of a series of monoclonal antibody therapies for the treatment of certain serious infectious
diseases. Pursuant to the terms of the Second Stock Issuance Agreement with Intrexon, which was approved by the Company’s
stockholders on October 5, 2012, the Company issued 101,492 shares of its common stock, $0.001 par value, which issuance is
also deemed paid in consideration for the execution and delivery of the Infectious Disease ECC, dated August 6, 2012, between
the Company and Intrexon. The fair value of this transaction was $7.8 million and was charged to research and development expense
for the year ended December 31, 2012, in accordance with the Company’s accounting policy. In connection with the transactions
contemplated by the Second Stock Issuance Agreement, and pursuant to the First Amendment to Registration Rights Agreement (the
“First Amendment to Registration Rights Agreement”) executed and delivered by the parties at the closing, which was
declared effective on May 5, 2013. The Company filed a “resale” registration statement registering the resale of the
shares issued under the Second Stock Issuance Agreement.
Subject to certain expense allocations
and other offsets provided in the Infectious Disease ECC, the Company will pay Intrexon royalties on annual net sales of the Synthetic
Products, calculated on a Synthetic Product-by-Synthetic Product basis. The Company has likewise agreed to pay Intrexon a percentage
of quarterly revenue obtained from a sublicensor in the event of a sublicensing arrangement. No such payments were made during
the year ended December 31, 2018 and 2017.
The Company also agreed upon the filing
of an IND application with the FDA for a Synthetic Product, or alternatively the filing of the first equivalent regulatory filing
with a foreign regulatory agency (both as applicable, the “IND Milestone Event”), to pay Intrexon either (i) $2.0 million
in cash, or (ii) that number of shares of common stock (the “IND Milestone Shares”) having a fair market value equaling
$2.0 million where such fair market value is determined using published market data of the share price for common stock at the
close of market on the business day immediately preceding the date of public announcement of attainment of the IND Milestone Event.
Upon the first to occur of either first
commercial sale of a Synthetic Product in a country or the granting of the regulatory approval of that Synthetic Product (both
as applicable, the “Approval Milestone Event”), the Company agreed to pay to Intrexon either (i) $3.0 million in cash,
or (ii) that number of shares of common stock (the “Approval Milestone Shares”) having a fair market value equaling
$3.0 million where such fair market value is determined using published market data of the share price for common stock at the
close of market on the business day immediately preceding the date of public announcement of attainment of the Approval Milestone
Event.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. License, Collaborative and Employment
Agreements and Commitments – (continued)
On August 10, 2015, the Company
expanded its relationship with Intrexon and entered into an Exclusive Channel Collaboration Agreement (the “Channel
Agreement”) with Intrexon that governs a “channel collaboration” arrangement in which the Company will use
Intrexon’s technology relating to the development and commercialization of novel biotherapeutics (a
“Collaboration Product”) for the treatment of patients with PKU. On September 2, 2015, in accordance with the
terms of the Intrexon Stock Issuance Agreement that that the Company entered into in connection with the Channel Agreement,
the Company paid Intrexon a technology access fee by the issuance of 26,786 shares of common stock, having a value equal to
$3.0 million as of August 7, 2015. Pursuant to the Second Amendment to Registration Rights Agreement, the Company filed a
“resale” registration statement to register the shares issued under the Intrexon Stock Issuance Agreement, which
was declared effective by the SEC on October 15, 2015.
On November 30, 2018, the Company received
written notice from Intrexon Corporation (“Intrexon”) stating that Intrexon and the Company had terminated by mutual
agreement the Exclusive Channel Collaboration Agreement (the “ECC”) executed by and between the Company and Intrexon
on August 10, 2015 that governed a “channel collaboration” arrangement in which the Company intended to use Intrexon’s
technology for the treatment of Phenylketonuria (“PKU”), such termination to be effective immediately. The ECC had
granted the Company a worldwide exclusive license to use the patents and other intellectual property of Intrexon in connection
with the research, development, use, importing, manufacture, sale, and offer for sale of biotherapeutic products (a “Collaboration
Product”) for the treatment of PKU in humans by direct administration of a viral construct containing a gene to alter genetic
expression of phenyalanine hydroxylase and/or administration of genetically modified bacteria that express an effector directed
to the metabolic conversion of phenyalanine (the “Field”). The license was exclusive to both parties within the Field.
As a result of the mutually agreed upon November 30, 2018 termination, each party retains its own respective confidential information
and intellectual property and all licenses between the parties granted under the ECC are terminated. The Company had also entered
into the Exclusive Channel Collaboration Agreement, dated August 6, 2012 with Intrexon that governs a “channel collaboration”
arrangement in which the Company intends to use Intrexon’s technology relating to the identification, design and production
of human antibodies and DNA vectors for the development and commercialization of a series of monoclonal antibody therapies for
the treatment of Pertussis, remains in effect.
During December 2012, the Company paid
Intrexon a prepayment of research and development expenses of $2.5 million for research and development goods and services to
be provided in the future and was recorded on the Company’s Consolidated Balance Sheets in prepaid expenses and other current
assets. Related research and development expenses of $643,000 and $424,000 were recorded against this prepayment for the years
ended December 31, 2016 and 2015, respectively. At December 31, 2018, there is no remaining balance of the Intrexon prepayment
of research and development expenses.
Employment Agreements
On April 28, 2015, the Company entered
into a two-year employment agreement with Steven A. Shallcross (the “Shallcross Employment Agreement”), who was appointed
to serve as the Company’s Chief Financial Officer, Treasurer and Secretary, effective June 1, 2015. Pursuant to the Shallcross
Employment agreement, Mr. Shallcross was entitled to an annual base salary of $315,000. Additionally, Mr. Shallcross was granted
options to purchase 25,714 shares of the Company’s common stock with an exercise price equal to the per share market price
on the date of issue. These options vested pro rata, on a monthly basis, over 36 months. The Company measured the fair value of
the stock options at approximately $1.9 million using the Black-Scholes option pricing model. In 2015 and for each full calendar
year thereafter, Mr. Shallcross was eligible for an annual performance bonus of up to seventy-five percent (75%) of his base
salary. The annual bonus is to be based upon the Board’s assessment of Mr. Shallcross’ performance. The Shallcross
Employment Agreement also includes confidentiality obligations and inventions assignments by Mr. Shallcross and non-solicitation
and non-competition provisions.
Effective November 30, 2016, the Company
entered into an amendment to the Shallcross Employment Agreement to increase Mr. Shallcross’ annual base salary to $346,500.
The Company entered into another amendment to the Shallcross Employment Agreement, dated as of May 31, 2017, to, among other things,
extend the term of the agreement two years, or until May 30, 2019 (unless earlier terminated pursuant to the terms of the agreement).
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. License, Collaborative and Employment
Agreements and Commitments – (continued)
On December 5, 2017, Mr. Shallcross was
appointed as the Company’s Interim Chief Executive Officer. Effective December 20, 2017, the Company entered into an amendment
to the Shallcross Employment Agreement to increase Mr. Shallcross’ annual base salary to $381,150 and for the period that
Mr. Shallcross serves as Interim Chief Executive Officer, he shall receive a cash payment from the Company of Eight Thousand Dollars
($8,000) per calendar month; pro-rated for any partial months that Mr. Shallcross serves as Interim Chief Executive Officer, payable
in accordance with the regular payroll practices of the Company.
On December 6, 2018, the Company entered
into a three-year employment agreement with Steven A. Shallcross (the “Employment Agreement”), to serve as the Chief
Executive Officer and to continue to serve as the Chief Financial Officer of the Company. The Employment Agreement replaced the
prior employment agreement with the Company that Mr. Shallcross entered into on April 28, 2015. In addition, Mr. Shallcross was
appointed as a director of the Company. Mr. Shallcross will not receive additional compensation for service as a Director of the
Company and will not serve on any committees of the Board of Directors (the “Board”). The material terms of the Employment
Agreement are set forth below.
Pursuant to the Employment Agreement,
Mr. Shallcross is entitled to an annual base salary of $550,000 and an annual performance bonus of up to seventy five percent
(75%) of his annual base salary. The annual bonus will be based upon the assessment of the Board of Mr. Shallcross’s performance.
The Employment Agreement also includes confidentiality obligations and inventions assignments by Mr. Shallcross and non-solicitation
and non-competition provisions.
The Employment Agreement has a stated
term of three years but may be terminated earlier pursuant to its terms. If Mr. Shallcross’s employment is terminated for
any reason, he or his estate as the case may be, will be entitled to receive the accrued base salary, vacation pay, expense reimbursement
and any other entitlements accrued by him to the extent not previously paid (the “Accrued Obligations”); provided,
however, that if his employment is terminated (i) by the Company without Cause or by Mr. Shallcross for Good Reason (as each is
defined in the Employment Agreement) then in addition to paying the Accrued Obligations, (a) the Company will continue to pay
his then current base salary and continue to provide benefits at least equal to those that were provided at the time of termination
for a period of twelve (12) months and (b) he shall have the right to exercise any vested equity awards until the earlier of six
(6) months after termination or the remaining term of the awards; or (ii) by reason of his death or Disability (as defined in
the Employment Agreement), then in addition to paying the Accrued Obligations, Mr. Shallcross would have the right to exercise
any vested options until the earlier of six (6) months after termination or the remaining term of the awards. In such event, if
Mr. Shallcross commenced employment with another employer and becomes eligible to receive medical or other welfare benefits under
another employer-provided plan, the medical and other welfare benefits to be provided by the Company as described herein would
terminate.
The Employment Agreement provides that
upon the closing of a “Change in Control” (as defined in the Employment Agreement), all unvested options shall immediately
vest and the time period that Mr. Shallcross will have to exercise all vested stock options and other awards that Mr. Shallcross
may have will be equal to the shorter of: (i) six (6) months after termination, or (ii) the remaining term of the award(s). If
within one (1) year after the occurrence of a Change in Control, Mr. Shallcross terminates his employment for “Good Reason”
or the Company terminates Mr. Shallcross’s employment for any reason other than death, disability or Cause, Mr. Shallcross
will be entitled to receive: (i) the portion of his base salary for periods prior to the effective date of termination accrued
but unpaid (if any); (ii) all unreimbursed expenses (if any); (iii) an aggregate amount (the “Change in Control Severance
Amount”) equal to two (2) times the sum of his base salary plus an amount equal to the bonus that would be payable if the
“target” level performance were achieved under the Company’s annual bonus plan (if any) in respect of the fiscal
year during which the termination occurs (or the prior fiscal year if bonus levels have not yet been established for the year
of termination); and (iv) the payment or provision of any other benefits. If within two (2) years after the occurrence of a Change
in Control, Mr. Shallcross terminates his employment for “Good Reason” or the Company terminates Mr. Shallcross’s
employment for any reason other than death, disability or Cause, Mr. Shallcross will be entitled to also receive for the period
of two (2) consecutive years commencing on the date of such termination of his employment, medical, dental, life and disability
insurance coverage for him and the members of his family that are not less favorable to him than the group medical, dental, life
and disability insurance coverage carried by the Company for him. The Change in Control Severance Amount is to be paid in a lump
sum if the Change in Control event constitutes a “change in the ownership” or a “change in the effective control”
of the Company or a “change in the ownership of a substantial portion of a corporation’s assets” (each within
the meaning of Section 409A of the Internal Revenue Code (“Rule 409A”)), or in 48 substantially equal payments, if
the Change in Control event does not so comply with Section 409A.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. License, Collaborative and Employment
Agreements and Commitments – (continued)
On January 17, 2017, the Company entered
into a two-year employment agreement with Dr. Joseph Sliman (the “Sliman Employment Agreement”), who was promoted
at the Company from the position of Senior Vice President–Clinical & Regulatory Affairs to the position of Chief Medical
Officer. The terms of the Employment Agreement are set forth below. Pursuant to the terms of the Employment Agreement, Dr.
Sliman was entitled to an annual base salary of $385,000 and an annual performance bonus of up to seventy five percent (75%) of
his annual base salary. The annual bonus was to be based upon the assessment of the Board of Dr. Sliman’s performance. Dr.
Sliman was also granted a seven (7) year incentive stock option to purchase at an exercise price equal to the per share market
price on the date of issue, 5,397 shares of the Company’s common stock, vesting pro rata on a monthly basis over a three
year period. The Employment Agreement also includes confidentiality obligations and inventions assignments by Dr. Sliman and non-solicitation
and non-competition provisions.
The Shallcross Employment Agreement and
the Sliman Employment Agreement each provide for a stated term of two years but may be terminated earlier pursuant to their terms.
If either Mr. Shallcross’ or Dr. Sliman’s (each an “Executive”) employment is terminated for any reason,
he or his estate as the case may be, will be entitled to receive the accrued base salary, vacation pay, expense reimbursement
and any other entitlements accrued by him to the extent not previously paid (the “Accrued Obligations”);
provided
,
however
, that if his employment is terminated (1) by the Company without Cause or by the Executive for Good Reason
(as each is defined below) then in addition to paying the Accrued Obligations, (x) the Company will continue to pay his then current
base salary and continue to provide benefits at least equal to those which were provided at the time of termination for a period
of twelve (12) months and (y) he shall have the right to exercise any vested equity awards until the earlier of six (6) months
after termination or the remaining term of the awards, or (2) by reason of his death or Disability (as defined in the Shallcross
Employment Agreement and the Sliman Employment Agreement), then in addition to paying the Accrued Obligations, he would have the
right to exercise any vested options until the earlier of six (6) months after termination or the remaining term of the awards.
In such event, if the Executive commenced employment with another employer and becomes eligible to receive medical or other welfare
benefits under another employer-provided plan, the medical and other welfare benefits to be provided by the Company as described
herein will terminate.
The Shallcross Employment Agreement and
the Sliman Employment Agreement each provide that upon the closing of a “Change in Control” (as defined below), the
time period that the Executive will have to exercise all vested stock options and other awards that the Executive may have will
be equal to the shorter of: (i) six (6) months after termination, or (ii) the remaining term of the award(s). Upon the closing
of a Change in Control, all of Mr. Shallcross’ and Dr. Sliman’s unvested options shall immediately vest. If within
one year after the occurrence of a Change in Control, the Executive terminates his employment for “Good Reason” or
the Company terminates the Executive’s employment for any reason other than death, Disability or Cause, the Executive will
be entitled to receive: (i) the portion of his base salary for periods prior to the effective date of termination accrued but
unpaid (if any); (ii) all unreimbursed expenses (if any); (iii) an aggregate amount (the “Change in Control Severance Amount”)
equal to two times the sum of the base salary plus an amount equal to the bonus that would be payable if the “target”
level performance were achieved under the Company’s annual bonus plan (if any) in respect of the fiscal year during which
the termination occurs (or the prior fiscal year if bonus levels have not yet been established for the year of termination); and
(iv) the payment or provision of any other benefits. The Change in Control Severance Amount is to be paid in a lump sum, if the
Change in Control event constitutes a “change in the ownership” or a “change in the effective control”
of the Company or a “change in the ownership of a substantial portion of a corporation’s assets” (each within
the meaning of Section 409A of the Internal Revenue Code), or in 48 substantially equal payments, if the Change in Control event
does not so comply with Section 409A. Upon the termination of employment for Good Reason by the Executive or upon the involuntary
termination of employment of Executive for any reason other than death, Disability or Cause, in either case within two years commencing
after the occurrence of a Change in Control, the Executive will be entitled to receive for a period of two years commencing on
the date of such termination medical, dental, life and disability coverage for himself and his family members which is not less
favorable than the coverage carried by the Company at the time of termination.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. License, Collaborative and Employment
Agreements and Commitments – (continued)
For the purposes of the Shallcross Employment
Agreement and the Sliman Employment Agreement “Change in Control” is defined as: (i) any person or entity becoming
the beneficial owner, directly or indirectly, of the Company’s securities representing fifty (50%) percent of the total
voting power of all its then outstanding voting securities; (ii) a merger or consolidation of the Company in which its voting
securities immediately prior to the merger or consolidation do not represent, or are not converted into securities that represent,
a majority of the voting power of all voting securities of the surviving entity immediately after the merger or consolidation;
or (iii) a sale of substantially all of the Company’s assets or its liquidation or dissolution.
For purpose of the Shallcross Employment
Agreement and the Sliman Employment Agreement, “Good Reason” is defined as the occurrence of any of the following
events without the respective Executive’s consent: (i) a material reduction in the Executive’s base salary (other
than an across-the-board decrease in base salary applicable to all executive officers of the Company); (ii) a material breach
of the employment agreement by the Company; (iii) a material reduction in the Executive’s duties, authority and responsibilities
relative to the Executive’s duties, authority, and responsibilities in effect immediately prior to such reduction; or (iv)
the relocation of the Executive’s principal place of employment, without the Executive’s consent, in a manner that
lengthens his one-way commute distance by fifty (50) or more miles from his then-current principal place of employment immediately
prior to such relocation.
For purposes of the Shallcross Employment
Agreement and the Sliman Employment Agreement, “Cause” is defined as that the Executive shall have engaged in any
of the following acts or that any of the following events shall have occurred, all as determined by the Board of Directors of
the Company in its sole and absolute discretion: (i) gross insubordination, acts of embezzlement or misappropriation of funds,
fraud, dereliction of fiduciary obligations; (ii) conviction of a felony or other crime involving moral turpitude, dishonesty
or theft (including entry of a
nolo contendere
plea); (iii) willful unauthorized disclosure of confidential information
belonging to the Company or entrusted to the Company by a client; (iv) material violation of any provision of the Executive’s
employment agreement, of any Company policy, and/or of a confidentiality agreement, which, to the extent it is curable by the
Executive, is not cured by the Executive within 30 days of receiving written notice of such violation by the Company; (v) being
under the influence of drugs (other than prescription medicine or other medically related drugs to the extent that they are taken
in accordance with their directions) during the performance of the Executive’s duties; (vi) engaging in behavior that would
constitute grounds for liability for harassment (as proscribed by the U.S. Equal Employment Opportunity Commission Guidelines
or any other applicable state or local regulatory body) or other egregious conduct that violates laws governing the workplace;
or (vii) willful failure to perform his written assigned tasks, where such failure is attributable to the fault of the Executive
which, to the extent it is curable by the Executive, is not cured by the Executive within 30 days of receiving written notice
of such violation by the Company.
Effective February 3, 2012, Jeffrey Riley
was appointed to serve as the Company’s Chief Executive Officer and President and entered into an agreements with Mr. Riley
to serve in such capacity.
Effective March 18, 2015, the Company
entered into a new two-year employment agreement with Mr. Riley (the “2015 Riley Employment Agreement”). Pursuant
to the 2015 Riley Employment Agreement, Mr. Riley’s annual base salary remained at $385,000. Beginning in 2015 and for each
full calendar year thereafter, Mr. Riley was eligible for an annual performance bonus of up to seventy-five percent (75%) of his
base salary. The annual bonus was to be based upon the Board’s assessment of Mr. Riley’s performance. The 2015 Employment
Agreement also included employment termination provisions similar to those in the Shallcross Employment Agreement and the Sliman
Employment Agreement as well as confidentiality obligations, inventions assignments by Mr. Riley as well as change in control,
non-solicitation and non-competition provisions.
Effective December 4, 2015, the Company
entered into an amendment to the Riley Employment Agreement dated March 18, 2015, to increase Mr. Riley’s annual base salary
to $550,000. Effective February 2, 2017, the Company entered into a new two-year employment agreement with Mr. Riley (the “2017
Riley Employment Agreement”). Pursuant to the 2017 Riley Employment Agreement, Mr. Riley’s annual base salary remained
at $550,000. The 2017 Riley Employment Agreement provided that Mr. Riley was eligible for an annual performance bonus of up to
seventy-five percent (75%) of his base salary. The 2017 Employment Agreement also included employment termination provisions similar
to those in the Shallcross Employment Agreement and the Sliman Employment Agreement as well as confidentiality obligations, inventions
assignments by Mr. Riley as well as change in control, non-solicitation and non-competition provisions.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. License, Collaborative and Employment
Agreements and Commitments – (continued)
Effective December 4, 2017, Mr. Riley
resigned his position as President and Chief Executive Officer of the Company. Pursuant to his resignation, the Company entered
into a Separation Agreement effective December 4, 2017 (the “Separation Agreement”) with Mr. Riley. The Separation
Agreement provides that in addition to receiving all accrued obligations, including salary and earned and unused vacation days,
Mr. Riley will receive the following separation benefits: (i) twelve months’ payment of Mr. Riley’s current base salary,
subject to payroll withholdings and deductions, paid on the Company’s regular payroll dates; (ii) a cash bonus for 2017
of $200,000; and (iii) the right to exercise vested stock options for one year following December 5, 2017. Mr. Riley is also entitled
to COBRA continuation coverage and the Company shall pay the COBRA premium for Mr. Riley for a maximum period of twelve months
after his separation from the Company. The Separation Agreement also contains additional provisions that are customary for agreements
of this type. These include confidentiality and non-solicitation provisions. All costs associated with the Separation Agreement
were recorded during the year ended December 31, 2017.
Operating Lease
During the years ended December 31, 2018
and 2017, the Company recognized rent expense of $201,000 and $199,000, respectively. The following table summarizes the Company’s
future minimum lease payments as of December 31, 2019
(in thousands)
:
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Lease
|
|
$
|
300
|
|
|
$
|
309
|
|
|
$
|
321
|
|
|
$
|
192
|
|
|
$
|
1,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
300
|
|
|
$
|
309
|
|
|
$
|
321
|
|
|
$
|
192
|
|
|
$
|
1,122
|
|
Consulting Fees
In November 2017, the Company engaged a
regulatory consultant to assist in the Company’s efforts to prepare, file and obtain FDA approval for ribaxamase. The
term of the engagement is on a monthly basis, provided that either party may terminate the agreement at any time by providing the
other party a six-month notice period. The Company is obligated to pay the consultant a monthly retainer in addition to the success
fee payments of up to an aggregate of $4,500,000 for attainment of certain regulatory milestones. The achievement of the milestones
is not probable at this time.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Restructuring Charge
On November 26, 2018, the Board of Directors
of the Company approved a corporate restructuring plan to reduce its cost structure as part of its commitment to shareholders
to reduce operating costs.
As part of the Company’s
commitment to reduce operating expenses and preserve cash, the Company eliminated positions effective December 7, 2018. The
reduction included 8 employees, which represented approximately 33% of its workforce as of November 29, 2018, the date
affected employees were notified. The affected employees are entitled to receive certain severance benefits as provided in
the Plan. As a result, the Company expects to realize annualized cost savings beginning with the first quarter of
2019. The Company has incurred a one-time severance-related charge totaling approximately $409,000 which will be recorded
in the fourth quarter of 2018.
9. Income Taxes
There was no income tax expense for the years ended December 31, 2018 and 2017 due to the Company’s
net losses. The Company’s tax expense differs from the “expected” tax expense for the years ended December 31,
2018 and 2017 (computed by applying the Federal corporate tax rate of 21% to loss before taxes and 4.74% for blended state income
tax rate, the blended rate used was 25.74%), as follows (in thousands):
|
|
2018
|
|
|
2017
|
|
Computed “expected” tax-benefit – Federal
|
|
$
|
(2,818
|
)
|
|
$
|
(5,267
|
)
|
Computed “expected” tax-benefit – State
|
|
|
(636
|
)
|
|
|
(613
|
)
|
Adjustment of “expected” tax-benefit to actual
|
|
|
19
|
|
|
|
(2
|
)
|
Meals, entertainment and other
|
|
|
3
|
|
|
|
10
|
|
Non-deductible stock-based compensation
|
|
|
266
|
|
|
|
502
|
|
Fair Market Value Adjustment – Warrants
|
|
|
(1,051
|
)
|
|
|
(4,076
|
)
|
Impact of U.S. tax reform
|
|
|
-
|
|
|
|
21,555
|
|
Change in valuation allowance
|
|
|
4,217
|
|
|
|
(12,109
|
)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The effects of temporary differences that gave rise to significant portions of deferred tax assets at December
31, 2018 and 2017 are as follows (
in thousands
):
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Stock issued for services
|
|
$
|
1,998
|
|
|
$
|
1,730
|
|
Accrued compensation
|
|
|
38
|
|
|
|
164
|
|
Stock issued for acquisition of program
|
|
|
1,224
|
|
|
|
1,202
|
|
Stock issued for license agreement
|
|
|
1,760
|
|
|
|
1,947
|
|
Stock issued for milestone payment
|
|
|
278
|
|
|
|
301
|
|
Amortizable license fee
|
|
|
5
|
|
|
|
6
|
|
Net operating loss carry-forward
|
|
|
44,512
|
|
|
|
40,248
|
|
Total gross deferred tax assets
|
|
|
49,815
|
|
|
|
45,598
|
|
Less: valuation allowance
|
|
|
(49,815
|
)
|
|
|
(45,598
|
)
|
Total net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
The Tax Cuts and Jobs Act (the Tax Act) was signed into law on December 22, 2017. The
Tax Act changed many aspects of U.S. corporate income taxation and included reduction of the corporate income tax rate from 35%
to 21%, implementation of a territorial tax system and imposition of a tax on deemed repatriated earnings of foreign subsidiaries.
We recognized the tax effects of the Tax Act in the year ended December 31, 2017 and recorded $21.6 million in tax expense which
relates almost entirely to the remeasurement of deferred tax assets to the 21% tax rate. ASC 740 requires the Company to record
the effects of a tax law change in the period of enactment, however, shortly after the enactment of the Tax Act, the SEC staff
issued SAB 118, which allows the Company to record a provisional amount when it does not have the necessary information available,
prepared, or analyzed in reasonable detail to complete its accounting for the change in the tax law. The measurement period ends
when the Company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond
one year. At December 31, 2018, the Company has a net operating loss carry-forward of approximately $172.9 million available to
offset future taxable income. The Company’s pre-2018 net operating losses expire on various dates through 2037 while the
net operating loss carry-forward originating in the 2018 year carry-forward indefinitely. However, utilization of these net operating
losses may be limited due to potential ownership changes under Section 382 of the Internal Revenue Code. The valuation allowance
at December 31, 2018 was approximately $49.8 million. The net change in valuation allowance during the year ended December 31,
2018 was an increase of approximately $4.2 million. In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate
realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which
those temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities,
projected future taxable income, and tax planning strategies in making this assessment. Based on consideration of these items,
management has determined that enough uncertainty exists relative to the realization of the deferred income tax asset balances
to warrant the application of a full valuation allowance as of December 31, 2018.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
10. Related Party Transactions
On November 30, 2018, the Company received
written notice from Intrexon Corporation stating that Intrexon and the Company had terminated by mutual agreement the Exclusive
Channel Collaboration Agreement executed by and between the Company and Intrexon on August 10, 2015 that governed a “channel
collaboration” arrangement in which the Company intended to use Intrexon’s technology for the treatment of Phenylketonuria
(“PKU”), such termination to be effective immediately. The ECC had granted the Company a worldwide exclusive license
to use the patents and other intellectual property of Intrexon in connection with the research, development, use, importing, manufacture,
sale, and offer for sale of biotherapeutic products (a “Collaboration Product”) for the treatment of PKU in humans
by direct administration of a viral construct containing a gene to alter genetic expression of phenyalanine hydroxylase and/or
administration of genetically modified bacteria that express an effector directed to the metabolic conversion of phenyalanine
(the “Field”). The license was exclusive to both parties within the Field. As a result of the mutually agreed upon
November 30, 2018 termination, each party retains its own respective confidential information and intellectual property and all
licenses between the parties granted under the ECC are terminated. The Company had also entered into the Exclusive Channel Collaboration
Agreement, dated August 6, 2012 with Intrexon that governs a “channel collaboration” arrangement in which the Company
intends to use Intrexon’s technology relating to the identification, design and production of human antibodies and DNA vectors
for the development and commercialization of a series of monoclonal antibody therapies for the treatment of Pertussis, remains
in effect
On September 5, 2018, the Company entered
into an agreement with CSMC for an investigator-sponsored Phase 2b clinical study of SYN-010 to be co-funded by the Company and
CSMC (the “Study”). The Study will provide further evaluation of the efficacy and safety of SYN-010, the Company’s
modified-release reformulation of lovastatin lactone, which is exclusively licensed to the Company by CSMC. SYN-010 is designed
to reduce methane production by certain microorganisms (M. smithii) in the gut to treat an underlying cause of irritable bowel
syndrome with constipation (IBS-C).
In consideration of the support
provided by CSMC for the Study, the Company entered into a Stock Purchase Agreement with CSMC pursuant to which the Company
has agreed, upon the approval of the Study protocol by the Institutional Review Board, (IRB) to: (i) issue to CSMC fifty
thousand (50,000) shares of common stock of the Company; and (ii) transfer to CSMC an additional two million Four hundred
twenty thousand (2,420,000) shares of common stock of its subsidiary Synthetic Biomics, Inc. (“SYN Biomics”)
owned by the Company, such that after such issuance CSMC will own an aggregate of seven million four hundred eighty thousand
(7,480,000) shares of common stock of Synbiomics, representing seventeen percent (17%) of the issued and outstanding shares
of SynBiomics’ common stock.
The
Agreement also provides CSMC with a right, commencing on the six month anniversary of issuance of the stock under certain
circumstances in the event that the shares of stock of SYN Biomics are not then freely tradeable, and subject to NYSE
American, LLC approval, to exchange its SYN Biomics shares for unregistered shares of the Company’s common stock, with
the rate of exchange based upon the relative contribution of the valuation of Syn Biomics to the public market valuation of
the Company at the time of each exchange. The Stock Purchase Agreement also provides for tag-along rights in the event of the
sale by the Company of its shares of SYN Biomics.
In December 2013, through the Company’s
subsidiary, SYN Biomics, Inc., the Company entered into a worldwide exclusive license agreement with Cedars-Sinai Medical Center
“CSMC” and acquired the rights to develop products for therapeutic and prophylactic treatments of acute and chronic
diseases, including the development of SYN-010 to target IBS-C. The Company licensed from CSMC a portfolio of intellectual property
comprised of several U.S. and foreign patents and pending patent applications for various fields of use, including IBS-C, obesity
and diabetes. An investigational team led by Mark Pimentel, M.D. at CSMC discovered that these products may reduce the production
of methane gas by certain GI microorganisms. During the year ended December 31, 2016, the Company paid Cedars-Sinai Medical Center
$350,000 for milestone payments related this license agreement. There were no milestone payments made during the years ended December
31, 2018 and 2017.
On November 18, 2016, a member of the
board of directors, Scott Tarriff acquired 8,572 shares of the Company’s common stock together with a Series A warrant to
purchase 8,572 shares of the Company’s common stock at an exercise price of $50.05 and a Series B warrant to purchase 8,572
shares of the Company’s common stock at an exercise price of $60.20 for an aggregate purchase price of $8,572. The shares
of stock and warrants were acquired in the Company’s public offering that was consummated on November 18, 2016. The Series
A warrant may be exercised until the four year anniversary of the date of its issuance and the Series B warrant expired December
31, 2017.
In August 2015, the Company expanded
its relationship with Intrexon and entered into an Exclusive Channel Collaboration Agreement with Intrexon. In connection
with the Channel Agreement, the Company paid Intrexon a technology access fee by the issuance of 26,785 shares of common
stock having a value equal to $3 million as of August 7, 2015. In August 2012, the Company entered into an Infectious Disease
ECC with Intrexon and issued 101,492 shares of common stock as consideration, having a fair value of $7.8 million ($77.00 per
share), based on the quoted closing trading price on October 5, 2012. In November 2011, the Company entered into its initial
ECC with Intrexon and issued 89,245 shares of common stock as consideration, having a fair value of $1.7 million ($18.90 per
share), based on the quoted closing trading price on that date. In connection with the November 2011 and August 2012 ECCs,
the Company paid Intrexon approximately $2.9 million during 2012. In October 2012, the Company consummated its October 2012
Private Placement and entered into a stock purchase agreement with several investors, including NRM VII Holdings I, LLC, an
entity affiliated with Intrexon. Randal J. Kirk, directly and through certain affiliates, has voting and dispositive power
over a majority of the outstanding capital of Intrexon Corporation, and controls NRM VII Holdings I, LLC. Mr. Kirk disclaims
beneficial ownership of the shares held by Intrexon Corporation and NRM VII Holdings I, LLC, except to the extent of any
pecuniary interest therein.
11. Selected Quarterly Financial Data
(Unaudited)
(In thousands, except per share amounts)
|
|
Quarter Ended
|
|
|
|
March 31,
2018
|
|
|
June 30,
2018
|
|
|
September 30,
2018
|
|
|
December
31, 2018
|
|
Loss from operations
|
|
$
|
(4,990
|
)
|
|
$
|
(5,003
|
)
|
|
$
|
(4,320
|
)
|
|
$
|
(3,258
|
)
|
Net (loss)
|
|
$
|
(2,326
|
)
|
|
$
|
(4,214
|
)
|
|
$
|
(3,689
|
)
|
|
$
|
(3,193
|
)
|
Net loss per share – basic
|
|
$
|
(0.70
|
)
|
|
$
|
(1.05
|
)
|
|
$
|
(0.93
|
)
|
|
$
|
(1.12
|
)
|
Net loss per share – dilutive
|
|
$
|
(0.70
|
)
|
|
$
|
(1.05
|
)
|
|
$
|
(0.93
|
)
|
|
$
|
(1.12
|
)
|
Weighted average common share – basic
|
|
|
3,673,340
|
|
|
|
3,683,384
|
|
|
|
4,028,304
|
|
|
|
13,442,104
|
|
Weighted average common share – dilutive
|
|
|
3,673,340
|
|
|
|
3,683,384
|
|
|
|
4,028,304
|
|
|
|
13,442,104
|
|
|
|
Quarter Ended
|
|
|
|
March 31,
2017
|
|
|
June 30,
2017
|
|
|
September 30,
2017
|
|
|
December 31,
2017*
|
|
Loss from operations
|
|
$
|
(8,149
|
)
|
|
$
|
(6,475
|
)
|
|
$
|
(5,842
|
)
|
|
$
|
(5,783
|
)
|
Net (loss) income
|
|
$
|
(3,058
|
)
|
|
$
|
(4,315
|
)
|
|
$
|
(10,930
|
)
|
|
$
|
2,812
|
|
Net (loss) income per share – basic
|
|
$
|
(0.70
|
)
|
|
$
|
(1.05
|
)
|
|
$
|
(4.90
|
)
|
|
$
|
0.76
|
|
Net (loss) income per share – dilutive
|
|
$
|
(0.70
|
)
|
|
$
|
(1.05
|
)
|
|
$
|
(4.90
|
)
|
|
$
|
0.76
|
|
Weighted average common share – basic
|
|
|
3,355,636
|
|
|
|
3,514,435
|
|
|
|
3,665,134
|
|
|
|
3,673,340
|
|
Weighted average common share – dilutive
|
|
|
3,355,636
|
|
|
|
3,514,435
|
|
|
|
3,665,134
|
|
|
|
3,673,340
|
|
*Net Income due to gain on remeasurement
of the warrant liabilities in excess of the quarter to date loss.