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 diversified clinical-stage company leveraging the microbiome to develop therapeutics
designed to prevent and treat gastrointestinal (GI) diseases in areas of high unmet need. 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 (a) microbiome damage, (b) Clostridioides difficile infection (CDI), (c) overgrowth
of pathogenic organisms, (d) the emergence of antimicrobial resistance (AMR) and (e) 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
is also advancing SYN-020, an oral formulation of the enzyme intestinal alkaline phosphatase (IAP) to treat both local GI
and systemic diseases.
Corporate Structure and Basis of
Presentation
As of December 31, 2019, 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 on 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.
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.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. Going Concern
The accompanying consolidated financial
statements have been prepared assuming the Company will continue as a going concern. The Company continues to incur losses and,
as of December 31, 2019, the Company had an accumulated deficit of approximately $235.5 million. Since inception, the Company has
financed its activities principally from the proceeds from the issuance of equity securities.
The Company’s ability to continue
as a going concern is dependent upon the Company’s ability to raise additional debt and equity capital. There can be no assurance
that such capital will be available in sufficient amounts or on terms acceptable to the Company. These factors raise substantial
doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not
include any adjustments relating to the recoverability of the recorded assets or the classification of liabilities that may be
necessary should the Company be unable to continue as a going concern.
The Company does not have sufficient capital
to fund our operations beyond the next twelve months. In order to address our capital needs, including our planned clinical
trials, the Company is actively pursuing additional equity or debt financing in the form of either a private placement or a public
offering. The Company has been in ongoing discussions with strategic institutional investors and investment banks with respect
to such possible offerings. Such additional financing opportunities might not be available to the Company when and if needed, on
acceptable terms or at all. If the Company is unable to obtain additional financing in sufficient amounts or on acceptable terms
under such circumstances, the Company’s operating results and prospects will be adversely affected.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. Going Concern – (continued)
At December 31, 2019 the Company had cash
and cash equivalents of approximately $15.0 million. Based upon the Company’s current business plans, management believes that the Company’s current cash on hand will be sufficient to fully execute its plans through December 31, 2020.
Commencement of planned future clinical trials is subject to the Company’s successful pursuit of opportunities that will
allow it to establish the clinical infrastructure and financial resources necessary to successfully initiate and complete its
plan. The Company anticipates its current cash will allow it to cover overhead costs, manufacturing costs for clinical supply,
commercial scale up costs and limited research efforts, including completing its funding requirements for its ongoing Phase 2b
investigator-sponsored clinical study of SYN-010, the planned Phase 1b/2a clinical study of SYN-004 (ribaxamase) in allogeneic
HCT recipients, as well as preclinical activities in support of an IND filing for its SYN-020 program. The Company will be required
to obtain additional funding in order to continue the development of its current product candidates within the anticipated time
periods (including initiation of its planned future clinical trials), if at all, and to continue to fund operations at the current
cash expenditure levels. Currently, the Company does not have commitments from any third parties to provide it with capital. Potential
sources of financing include strategic relationships, public or private sales of equity (including through the “at-the-market”
Issuance Sales Agreement (the “FBR Sales Agreement”) that the Company entered into with FBR Capital Markets &
Co. in August 2016) or debt and other sources. The Company cannot assure that it will meet the requirements for use of the FBR
Sales Agreement or that additional funding will be available on favorable terms, or at all. Current cash is expected to cover
overhead costs, manufacturing costs for clinical supply, commercial scale up costs and limited research efforts. If the Company
fails to obtain additional funding for its clinical trials, whether through the sale of securities or a partner or collaborator,
and otherwise when needed, it will not be able to execute its business plan as planned and will be forced to cease certain development
activities (including initiation of planned clinical trials) until funding is received and its business will suffer, which would
have a material adverse effect on its financial position, results of operations and cash flows.
The actual amount of funds we will need
to operate is subject to many factors, some of which are beyond our control. These factors include the following:
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the progress of our research activities;
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·
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the number and scope of our research programs;
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·
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the ability to recruit patients for clinical studies in a timely manner;
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·
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the progress of our preclinical and clinical development activities;
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·
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the progress of the development efforts of parties with whom we have entered into research and development agreements and amount of funding received from partners and collaborators;
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·
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our ability to maintain current research and development licensing arrangements and to establish new research and development and licensing arrangements;
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·
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our ability to achieve our milestones under licensing arrangements;
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·
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the costs associated with manufacturing-related services to produce material for use in our clinical trials;
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·
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the costs involved in prosecuting and enforcing patent claims and other intellectual property rights; and
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·
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the costs and timing of regulatory approvals.
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Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. Going Concern – (continued)
The Company has based its estimates of
funding requirements on assumptions that may prove to be wrong. The Company may need to obtain additional funds sooner or in greater
amounts than it currently anticipates.
If the Company raises funds by selling
additional shares of common stock or other securities convertible into common stock, the ownership interest of the existing stockholders
will be diluted. If the Company is not able to obtain financing when needed, it may be unable to carry out its business plan. As
a result, the Company may have to significantly limit its operations and its business, financial condition and results of operations
would be materially harmed.
3. 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, 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. The 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 (Deficit) Equity.
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.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
3. Summary of Significant Accounting
Policies – (continued)
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 $240,000 and $272,000 for the years ended December 31, 2019 and 2018, 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, 2019 and 2018.
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. Net loss attributable to common stockholders for the year ended December 31, 2019
excludes net loss attributable to non-controlling interest of $0.1 million and includes the accretion of Series B preferred
discount of $0.5 million on converted shares and Series A preferred stock accrued dividends of $0.2 million. Net loss
attributable to common stockholders for the year ended December 31, 2018 excludes net loss attributable to non-controlling
interest of $0.1 million and includes the accretion of the Series B preferred stock deemed dividend of $9.2 million,
accretion of Series B preferred discount of $2.5 million on converted shares and $0.2 million of Series A accrued dividends.
The number of common stock underlying 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, 2019 and 2018 were 6,641,736 and 7,966,057,
respectively. 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, 2019 were 2,502,012 and 18,714,999, respectively, for the year
ended December 31, 2018 were 938,982 and 18,915,850, respectively because their effect is anti-dilutive.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
3. 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, 2019 and 2018, the Company has accrued CRO expenses of $0.7 million and $0.7 million, respectively,
that are included in accrued expenses. The Company has prepaid CRO costs at December 31, 2019 of $48,000 and zero prepaid costs
as of December 31, 2018.
Fair Value of Financial Instruments
Accounting Standards Codification (ASC)
820, Fair Value Measurement, defines 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 classified on a three-tier hierarchy
as follows:
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·
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Level 1 inputs: Quoted prices (unadjusted) for identical assets or liabilities in active markets;
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·
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Level 2 inputs: Inputs, other than quoted prices, included in Level 1 that are observable either directly or indirectly; and
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·
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Level 3 inputs: Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.
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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, 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, 2019 and 2018, 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. In 2019, the Monte Carlo simulations were not used as the value
of the warrants were deemed to be minimal based on the historical fair value of the warrants and the Company’s current stock
price.
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
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
3. Summary of Significant Accounting
Policies – (continued)
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 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. In 2019, the Monte Carlo simulations were not used as the value
of the warrants were deemed to be minimal based on the historical fair value of the warrants and the Company’s current stock
price.
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, 2019 and 2018, the Company did not record any liabilities for uncertain tax positions.
Recent Accounting Pronouncements
and Developments
In February 2016,
the FASB issued Accounting Standards Codification (“ASC”) 842, Leases. The guidance requires lessees to
recognize assets and liabilities related to long-term leases on the balance sheet and expands disclosure requirements regarding
leasing arrangements. The guidance is effective for reporting periods beginning after December 15, 2018 and early adoption is permitted.
The guidance is required to be adopted using the modified retrospective method with the use of the alternative transition method being an option
that was provided for by ASU 2018-11 and provides for certain practical expedients. The Company adopted this guidance effective
January 1, 2019 using the modified retrospective alternative transition method wherein the Company
applied the guidance to each lease that had commenced as of January 1, 2019 (the beginning of effective date) with a cumulative
effect adjustment as of that date. The prior comparative period was not adjusted under this method and the Company has provided
the required disclosures under ASC 840, Leases for the comparative period to which ASC 840 is applied. The Company
has also elected to adopt the following package of practical expedients:
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the Company did not reassess if any expired or existing contracts are or contain leases.
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·
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the Company did not reassess the initial direct costs for existing leases.
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·
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the Company did not reassess the classification of any expired or existing leases.
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Additionally, the Company made
ongoing accounting policy elections whereby it (i) did not recognize right of use (“ROU”) assets or lease
liabilities for short-term leases (those with original terms of 12-months or less) and (ii) does not combine lease and
non-lease elements of its operating leases. The determination of whether an arrangement contains a lease and the
classification of a lease, if applicable, is made at lease commencement.
Upon adoption
of the new guidance on January 1, 2019, the Company recorded a ROU asset of approximately $537,000 (net existing deferred
rent liability) and recognized a lease liability of approximately $939,000.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. Selected Balance Sheet Information
PREPAID EXPENSES AND OTHER CURRENT ASSETS (in thousands):
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Prepaid manufacturing expenses
|
|
$
|
622
|
|
|
$
|
-
|
|
Prepaid insurance
|
|
|
549
|
|
|
|
419
|
|
Prepaid consulting, subscriptions and other expenses
|
|
|
134
|
|
|
|
132
|
|
Prepaid clinical research organizations
|
|
|
48
|
|
|
|
-
|
|
Prepaid conferences, travel
|
|
|
25
|
|
|
|
42
|
|
Other receivable
|
|
|
3
|
|
|
|
-
|
|
|
|
|
|
|
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Total
|
|
$
|
1,381
|
|
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$
|
593
|
|
Prepaid CRO expense is classified as a
current asset. The Company makes payments to the CROs based on agreed upon terms that include payments in advance of study services.
PROPERTY AND EQUIPMENT (in thousands)
|
|
December 31,
2019
|
|
|
December 31
2018
|
|
Computers and office equipment
|
|
$
|
804
|
|
|
$
|
852
|
|
Leasehold improvements
|
|
|
439
|
|
|
|
439
|
|
Software
|
|
|
11
|
|
|
|
11
|
|
|
|
|
1,254
|
|
|
|
1,302
|
|
Less: accumulated depreciation and amortization
|
|
|
(887
|
)
|
|
|
(695
|
)
|
|
|
|
|
|
|
|
|
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Total
|
|
$
|
367
|
|
|
$
|
607
|
|
ACCRUED EXPENSES (in thousands)
|
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Accrued clinical consulting services
|
|
$
|
684
|
|
|
$
|
674
|
|
Accrued manufacturing costs
|
|
|
635
|
|
|
|
83
|
|
Accrued vendor payments
|
|
|
456
|
|
|
|
150
|
|
Other accrued expenses
|
|
|
1
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,776
|
|
|
$
|
919
|
|
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. Selected Balance Sheet Information – (continued)
ACCRUED EMPLOYEE BENEFITS (in thousands)
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Accrued bonus expense
|
|
$
|
858
|
|
|
$
|
907
|
|
Accrued vacation expense
|
|
|
77
|
|
|
|
118
|
|
Accrued severance
|
|
|
-
|
|
|
|
307
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
935
|
|
|
$
|
1,332
|
|
5. 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, 2019, there
were 7,052 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. On September 5, 2019, the stockholders
approved and adopted an amendment to the 2010 Stock Plan to increase the number of shares of the Common Stock reserved for issuance
under the 2010 Stock Plan from 1,000,000 to 4,000,000. 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, 2019, there were 2,494,960 options issued and outstanding under
the 2010 Stock Plan.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Stock-Based Compensation and
Warrants – (continued)
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, 2019 and 2018 are as
follows:
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Exercise price
|
|
$
|
0.42
|
|
|
$
|
0.69
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
84
|
%
|
|
|
86
|
%
|
Risk free interest rate
|
|
|
1.61
|
%
|
|
|
2.75
|
%
|
Expected life of option (years)
|
|
|
4.5
|
|
|
|
4.0
|
|
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
5. 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, 2019
and 2018, the Company granted 1,725,000 and 671,500 options to employees and directors having an approximate fair value of $0.5
million and $0.3 million based upon the Black-Scholes option 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, 2019 and 2018 was $0.3 million and $1.8 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, 2019 and 2018 were $45,000 and $297,000, respectively.
A summary of stock option activity for
the years ended December 31, 2019 and 2018 is as follows:
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Stock-Based Compensation and Warrants – (continued)
|
|
Options
|
|
|
Weighted
Average Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual Life
|
|
Aggregate
Intrinsic
Value
|
|
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
|
|
|
938,982
|
|
|
$
|
15.18
|
|
|
6.19 years
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,725,000
|
|
|
|
0.42
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
$
|
-
|
|
Expired
|
|
|
(94,738
|
)
|
|
|
58.25
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(67,232
|
)
|
|
|
5.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance -December 31, 2019 - outstanding
|
|
|
2,502,012
|
|
|
$
|
3.62
|
|
|
6.51 years
|
|
$
|
153,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2019 - exercisable
|
|
|
358,949
|
|
|
$
|
21.92
|
|
|
5.18 years
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant date fair value of options granted - December 31, 2019
|
|
|
|
|
|
$
|
470,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value - December 31, 2019
|
|
|
|
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant date fair value of options granted - December 31, 2018
|
|
|
|
|
|
$
|
301,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value - December 31, 2018
|
|
|
|
|
|
$
|
0.45
|
|
|
|
|
|
|
|
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Stock-Based Compensation and Warrants – (continued)
The options outstanding and exercisable
at December 31, 2019 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
|
|
|
|
2,431,708
|
|
|
$
|
1.38
|
|
|
6.58 years
|
|
|
288,645
|
|
|
$
|
7.56
|
|
|
5.46 years
|
|
41.00 – $70.00
|
|
|
|
8,364
|
|
|
|
50.29
|
|
|
3.60 years
|
|
|
8,364
|
|
|
|
50.29
|
|
|
3.60 years
|
$
|
71.00 – $102.00
|
|
|
|
61,940
|
|
|
$
|
85.02
|
|
|
4.07 years
|
|
|
61,940
|
|
|
$
|
85.02
|
|
|
4.07 years
|
As of December 31, 2019, total unrecognized
stock-based compensation expense related to stock options was $681,000, which is expected to be expensed through June 2022.
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 2019 or 2018. Cash received
from option exercises under the Company’s stock-based compensation plans for the years ended December 31, 2019 and 2018
was zero.
Stock Warrants
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
(the “Class A Units”), with each Class A Unit consisting of one share of 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 that the Company had entered into with A.G.P./Alliance Global Partners (the
“Underwriters”), as representative of the underwriters, 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 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. In 2019, the Monte Carlo simulations were not used as the value of the warrants were deemed to be minimal based on the historical
fair value of the warrants and the Company’s current stock price.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Stock-Based Compensation and
Warrants – (continued)
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, 2019, the fair value of the
warrant liability was $100. 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. The warrants were valued on the date of grant and on each remeasurement period.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Stock-Based Compensation and Warrants
– (continued)
The assumptions used by the Company are
summarized in the following table:
|
|
Series A
|
|
|
|
December 31,
2018
|
|
|
November
18,
2016
|
|
Closing stock price
|
|
$
|
0.56
|
|
|
$
|
31.15
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
92.50
|
%
|
|
|
85.00
|
%
|
Risk free interest rate
|
|
|
2.50
|
%
|
|
|
1.58
|
%
|
Expected life of warrant (years)
|
|
|
1.9
|
|
|
|
4.0
|
|
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 expired 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, 2019, the fair value of the warrant liability was zero. At December 31, 2018, the fair value of the warrant
liability was zero, which resulted in non-cash income of $416,000 in 2018. The warrants were valued on the date of grant using
the Black-Scholes valuation model which approximates the value derived using Monte Carlo simulations. In 2019, the Monte Carlo simulations were not used as the value of the warrants were deemed to be minimal based on the historical
fair value of the warrants and the Company’s current stock price.
The assumptions used by the
Company are summarized in the following table:
|
|
December 31,
2018
|
|
|
October
10,
2014
|
|
Closing stock price
|
|
$
|
0.56
|
|
|
$
|
61.25
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
110.00
|
%
|
|
|
95.00
|
%
|
Risk free interest rate
|
|
|
2.60
|
%
|
|
|
1.39
|
%
|
Expected life of warrant (years)
|
|
|
0.79
|
|
|
|
5.00
|
|
The following table summarizes the estimated
fair value of the warrant liability (in thousands):
Balance at December 31, 2017
|
|
$
|
4,083
|
|
Change in fair value of warrant liability
|
|
|
(4,083
|
)
|
Balance at December 31, 2018
|
|
|
-
|
|
Change in fair value of warrant liability
|
|
|
-
|
|
Balance at December 31, 2019
|
|
$
|
-
|
|
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Stock-Based Compensation and Warrants – (continued)
A summary of all warrant activity for the Company for the years
ended December 31, 2019 and 2018 is as follows:
|
|
Number of
Warrants
|
|
|
Weighted Average
Exercise Price
|
|
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
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(200,852
|
)
|
|
|
61.25
|
|
Balance at December 31, 2019
|
|
|
18,714,999
|
|
|
$
|
3.24
|
|
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, 2019 and 2018.
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, 2019 is as follows:
Exercise Price
|
|
|
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
|
|
Weighted Average
Remaining
Contractual Life
|
$
|
1.38
|
|
|
|
17,999,999
|
|
|
|
17,999,999
|
|
|
3.78 years
|
|
18.20
|
|
|
|
714
|
|
|
|
714
|
|
|
2.99 years
|
|
50.05
|
|
|
|
714,286
|
|
|
|
714,286
|
|
|
0.88 years
|
$
|
3.24
|
|
|
|
18,714,999
|
|
|
|
18,714,999
|
|
|
3.67 years
|
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
6. Stockholders’ Equity
Series B Preferred Stock
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. During the years
ended December 31, 2019 and 2018, 1,523 and 6,562, respectively, shares have been converted resulting in the recognition $525,000
and $2.5 million, respectively, 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.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
6. Stockholders’ Equity – (continued)
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 $9.2 million and immediately amortized the discount to record the deemed dividend.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
6. Stockholders’ Equity – (continued)
Series A Preferred Stock
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.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
6. Stockholders’ Equity – (continued)
The Series A Preferred Stock is classified
as temporary equity due to the shares being redeemable based on contingent events outside of the Company’s control. 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, 2019 and 2018, the Company accrued dividends of $248,000 and $243,000,
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
6. Stockholders’ Equity – (continued)
FBR Sales Agreement
On August 5, 2016, the Company entered
into the B. Riley FBR Sales Agreement with FBR Capital Markets & Co. (now known as B. Riley FBR, Inc.), which enables the Company
to offer and sell shares of the Common Stock with an aggregate sales price of up to $40.0 million from time to time through B.
Riley FBR, Inc. as the Company’s sales agent. Sales of common stock under the B. Riley FBR Sales Agreement are made in sales
deemed to be “at-the-market” equity offerings as defined in Rule 415 promulgated under the Securities Act. B. Riley
FBR, Inc. is entitled to receive a commission rate of up to 3.0% of gross sales in connection with the sale of the Common Stock
sold on the Company’s behalf. For the year ended December 31, 2018, the Company sold through the B. Riley FBR Sales Agreement
an aggregate of 3.5 million shares of the Common Stock and received net proceeds of approximately $12.2 million. The Company has
not sold any shares of common stock during 2019 through the B. Riley FBR Sales Agreement.
Also, during the years ended December 31,
2019 and 2018, the Company did not issue any shares of common stock in connection with the exercise of stock options.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. Non-controlling Interest
On September 5, 2018, the Company entered
into an agreement (the ‘Stock Purchase 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 $441,000 to support the Study and the Company entered into a Stock Purchase Agreement
with CSMC pursuant to which the Company, upon the approval of the Study protocol by the Institutional Review Board (IRB) : (i)
issued to CSMC 50,000 shares of Common Stock of the Company; and (ii) transferred to CSMC an additional 2,420,000 shares of common
stock of its subsidiary SYN Biomics, Inc. (“Synbiomics”) owned by the Company, such that after such issuance CSMC owns
an aggregate of 7,480,000 shares of common stock of SYN Biomics, representing 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 are based overall on the fair value of the shares ($285,000) as determined at the date of IRB approval. During the years
ended December 31, 2019 and 2018, research and development expense recorded related to this transaction approximated
$198,000 and $102,000, respectively.
The Stock Purchase 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 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. During the years
ended December 31, 2019 and 2018, the Company did not owe and did not pay CSMC for milestone payments related this license agreement.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. Non-controlling Interest – (continued)
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, 2019, the accumulated net loss attributable to the non-controlling
interest is $2.9 million. As of December 31, 2018, the accumulated net loss attributable to the non-controlling interest is
$2.9 million and includes $54,000 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.
8. 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.
Washington University School of Medicine
in St. Louis Clinical Trial Agreement
In August 7, 2019, the Company entered into a clinical trial agreement (“CTA”) with Washington University School
of Medicine in St. Louis (“Washington University”) to conduct a Phase 1b/2a single-center, randomized, double-blinded,
placebo-controlled clinical trial designed to evaluate the safety, tolerability and pharmacokinetics of oral SYN-004 (ribaxamase)
in up to 36 adult allogeneic hematopoietic cell transplant (HCT) recipients (the “Study”). Under the terms of
the CTA, the Company will serve as the sponsor of the Study and supply SYN-004 (ribaxamase), as well as compensate Washington
University for all research services to be provided in connection with the Study which is estimated to cost approximately
$3,200,000.
The CTA continues in effect until completion of all obligations under the CTA. Either party may terminate the CTA prior to
completion of its obligations (i) if authorization of the study is withdrawn by the FDA; (ii) if the emergence of any adverse
reaction or side effect with SYN-004 (ribaxamase) administered in the Study is of such magnitude or incidence in the opinion
of either party to support termination; or (iii) upon a breach of the terms of the CTA if the breaching party fails to cure
the breach within 30 days after receipt of notice. The Company has the right to terminate the CTA (i) effective immediately
if Washington University fails to perform the study in accordance with the terms of the protocol, the CTA or applicable laws
or regulations or if Washington University or the principal investigator become debarred or (ii) upon 14 days written notice
and Washington University has the right to terminate the CTA upon 14 days notice if the principal investigator becomes unable
to perform or complete the Study and the parties have not, prior to the expiration of such fourteen (14) day period, agreed
to an alternative principal investigator.
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
8. 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 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 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, 2019
and 2018, the Company did not owe and did not pay CSMC for milestone payments related to 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).
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. License, Collaborative and Employment
Agreements and Commitments – (continued)
In consideration of the support
provided by CSMC for the Study, the Company will pay $441,000 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 the years ended December 31, 2019 and 2018, research and
development expense related to this transaction approximated $198,000 and $102,000,
respectively.
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
8. 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. 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, 2019 and 2018.
Intrexon Exclusive Channel Collaboration
On August 6, 2012, the Company entered
into an Exclusive Channel Collaboration (“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. 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 years ended December 31, 2019 and 2018.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. License, Collaborative and Employment
Agreements and Commitments – (continued)
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
8. License, Collaborative and Employment
Agreements and Commitments – (continued)
On August 10, 2015, the Company entered
into an Exclusive Channel Collaboration Agreement (the “PKU ECC”) with Intrexon that governs a “channel
collaboration” arrangement in which the Company was granted 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 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 license was exclusive to both parties within the Field. On September 2, 2015,
in accordance with the terms of the Intrexon Stock Issuance Agreement that the Company entered into in connection with the PKU ECC, 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 stating that Intrexon and the Company had terminated by mutual agreement the PKU
Exclusive Channel Collaboration Agreement. 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.
Synthetic
Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. License, Collaborative and Employment Agreements and Commitments – (continued)
Employment Agreements
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 when he was appointed as the Company’s Chief Financial Officer, which prior employment agreement, as amended, provided
for an annual base salary of $381,150 and for the period that Mr. Shallcross served as Interim Chief Executive Officer (December
20, 2017 through December 6, 2018), it provided that he receive a cash payment of $8,000 per calendar month; pro-rated for
any partial months that Mr. Shallcross serves as Interim Chief Executive Officer. 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 was initially entitled to an annual base salary of $550,000 (which was increased to $565,000 on December 4, 2019) 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’ 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.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. License, Collaborative and Employment
Agreements and Commitments – (continued)
The Employment Agreement provides
that upon the closing of a “Change in Control” (as defined in the Shallcross 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.
On December 4, 2019, the Board of the Company
awarded Steven A. Shallcross, (i) a cash bonus equal to his full target bonus of 75% of his prior base salary and (ii) an option
to purchase 450,000 shares of the Company’s common stock. The stock option granted to Mr. Shallcross has an exercise price
of $0.418 per share, which is the closing price of the common stock on the date of the grant (December 4, 2019), vests pro rata,
on a monthly basis, over 36 consecutive months and expires in seven (7) years from the date of the grant, unless terminated earlier.
The stock option was granted pursuant to the Company’s 2010 Stock Incentive Plan, as amended, and the Company’s effective
registration statement on Form S-8 for the 2010 Stock Incentive Plan. In addition, Mr. Shallcross’ current employment agreement
with the Company, dated December 6, 2018, was amended (the “Amended Employment Agreement”) on December 5, 2019 to reflect
a 3% cost of living adjustment to Mr. Shallcross’ base salary, increasing his annual base salary to $565,000.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. 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, which agreement expired in January 2019 and was not renewed. On October 9, 2018, we received
a letter from Dr. Sliman, purporting to provide notice of a right to terminate the Sliman Employment Agreement for “good
reason”, alleging a material reduction in his duties, authorities, and responsibilities as an executive of the Company. The
Company is reviewing with legal counsel its rights and remedies and dispute certain aspects regarding Mr. Sliman’s attempt
to terminate the Sliman Employment Agreement.
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 Sliman Employment Agreement provided
for a stated term of two years but could be terminated earlier pursuant to their terms and provided that if Dr. Sliman’s
employment was terminated for any reason, he or his estate as the case may be, was 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 was 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
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 Dr. Sliman
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.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. 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 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 February 2, 2017, the Company entered into a new two-year employment agreement
with Mr. Riley (the “2017 Riley Employment Agreement”), pursuant to which Mr. Riley’s annual base salary
remained at $550,000 and he 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
8. 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
All of the Company’s existing
leases as of December 31, 2019 are classified as operating leases. As of December 31, 2019, the Company has one material
operating lease for facilities with a remaining term expiring in 2022. The existing lease has fair value renewal options,
none of which are considered certain of being exercised or included in the minimum lease term. The discount rate used in the
calculation of the lease liability was 9.9 percent. The rates implicit within the Company's leases are generally not
determinable, therefore, the Company's incremental borrowing rate is used to determine the present value of lease payments.
The determination of the Company’s incremental borrowing rate requires judgment. Because the Company currently has no
outstanding debt, the incremental borrowing rate for each lease is primarily based on publicly-available information for
companies within the same industry and with similar credit profiles. The rate is then adjusted for the impact of
collateralization, the lease term and other specific terms included in the Company’s lease arrangements. The
incremental borrowing rate is determined at lease commencement, or as of January 1, 2019 for operating leases in existence
upon adoption of ASC 842. The incremental borrowing rate is subsequently reassessed upon a modification to the lease
arrangement. ROU assets are subsequently assessed for impairment in accordance with the Company’s accounting policy for
long-lived assets. Operating lease costs are presented as part of the general and administrative expenses in the condensed
consolidated statements of operations, and for the years ended December 31, 2019 and 2018 approximated $201,000 each year.
During the same period, operating cash flows used for operating leases approximated $300,000. During 2019, there were no ROU
assets exchanged for operating lease obligations. The initial non-cash addition of ROU assets due to adoption of ASC 842 was
$537,000.
A maturity analysis of our operating leases
as of December 31, 2019 is as follows (amounts in thousands of dollars):
Future undiscounted cash flows:
|
|
|
|
|
2020
|
|
$
|
309
|
|
2021
|
|
|
321
|
|
2022
|
|
|
192
|
|
Total
|
|
$
|
822
|
|
|
|
|
|
|
Discount factor
|
|
$
|
(100
|
)
|
Lease liability
|
|
$
|
722
|
|
Amount due within 12 months
|
|
$
|
(249
|
)
|
Non-current lease liability
|
|
$
|
473
|
|
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
9. 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 received certain severance benefits as provided in the Plan. As a result, the Company realized
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 was recorded in the fourth quarter of 2018.
10. Income Taxes
There was no income tax expense for the
years ended December 31, 2019 and 2018 due to the Company’s net losses. The Company’s tax expense differs from the
“expected” tax expense for the years ended December 31, 2019 and 2018 (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):
|
|
2019
|
|
|
2018
|
|
Computed “expected” tax-benefit – Federal
|
|
$
|
(3,230
|
)
|
|
$
|
(2,818
|
)
|
Computed “expected” tax-benefit – State
|
|
|
(729
|
)
|
|
|
(636
|
)
|
Non-deductible stock-based compensation
|
|
|
864
|
|
|
|
288
|
|
Fair Market Value Adjustment – Warrants
|
|
|
-
|
|
|
|
(1,051
|
)
|
Change in valuation allowance
|
|
|
3,095
|
|
|
|
4,217
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The effects of temporary differences that
gave rise to significant portions of deferred tax assets at December 31, 2019 and 2018 are as follows (in thousands):
|
|
2019
|
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Stock issued for services
|
|
$
|
1,223
|
|
|
$
|
1,998
|
|
Accrued compensation
|
|
|
20
|
|
|
|
38
|
|
Stock issued for acquisition of program
|
|
|
1,301
|
|
|
|
1,224
|
|
Stock issued for license agreement
|
|
|
1,574
|
|
|
|
1,760
|
|
Stock issued for milestone payment
|
|
|
255
|
|
|
|
278
|
|
Amortizable license fee
|
|
|
5
|
|
|
|
5
|
|
Net operating loss carry-forward
|
|
|
48,532
|
|
|
|
44,512
|
|
Total gross deferred tax assets
|
|
|
52,910
|
|
|
|
49,815
|
|
Less: valuation allowance
|
|
|
(52,910
|
)
|
|
|
(49,815
|
)
|
Total net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
At December 31, 2019, the Company has
a net operating loss carry-forward of approximately $188.6 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 and later carry-forward indefinitely and are subject to additional limitations based on taxable income. 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,
2019 was approximately $52.9 million. The net change in valuation allowance during the year ended December 31, 2019 was an increase
of approximately $3.1 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, 2019.
The Company assesses uncertain tax positions
in accordance with the guidance for accounting for uncertain tax positions. This pronouncement prescribes a recognition threshold
and measurement methodology for recording within the financial statements uncertain tax positions taken, or expected to be taken,
in the Company’s income tax returns. To the extent the uncertain tax positions do not meet the “more likely than
not” threshold, the Company has derecognized such positions. To the extent the uncertain tax positions meet the “more
likely than not” threshold, the Company has measured and recorded the highest probable benefit, and have established appropriate
reserves for benefits that exceed the amount likely to be sustained upon examination. The Company currently has not recorded
any uncertain tax positions and does not anticipate that the unrecognized tax benefits will significantly increase or decrease
within the next twelve months.
Synthetic Biologics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
11. Related Party Transactions
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 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. During the year ended December 31, 2016, the Company paid CSMC $350,000 for milestone payments related this license
agreement. There were no milestone payments made during the years ended December 31, 2019 and 2018.
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 on December 31, 2017.
12. Subsequent Event
On November 25, 2019 the Company received notification (the “Deficiency Letter”) from the NYSE American LLC (the
“NYSE American”) that it was not in compliance with certain NYSE American continued listing standards relating
to stockholders’ equity as of September 30, 2019. Specifically, the Deficiency Letter stated that the Company is not
in compliance with Section 1003(a)(i) (requiring stockholders’ equity of $2.0 million or more if it has reported losses
from continuing operations and/or net losses in two of its three most recent fiscal years), Section 1003(a)(ii) (requiring
stockholders’ equity of $4.0 million or more if it has reported losses from continuing operations and/or net losses
in three of its four most recent fiscal years), and Section 1003(a)(iii) (requiring stockholders’ equity of $6.0 million
or more if it has reported losses from continuing operations and/or net losses in its five most recent fiscal years). The
Deficiency Letter noted that the Company had a stockholders’ equity of $4,930,000 as of September 30, 2019, and has
reported net losses in its five most recent fiscal years. The Company was required to submit a plan to the NYSE American by
December 26, 2019 advising of actions it has taken or will take to regain compliance with the continued listing standards
by November 25, 2020.
On February 7, 2020, the Company received
notice from the NYSE American that it had accepted the Company’s plan and granted a plan period through November 25, 2020.
During the plan period the Company will be subject to periodic review to determine if it is making progress consistent with the
plan. If the Company does not regain compliance with the NYSE American listing standards by November 25, 2020, or if the Company
does not make sufficient progress consistent with its plan, then the NYSE American may initiate delisting proceedings.