The accompanying notes are an integral
part of these condensed financial statements.
The accompanying notes are an integral
part of these condensed financial statements.
The accompanying notes are an integral part
of these condensed financial statements.
Notes to Condensed Financial Statements
For the three and nine months ended September
30, 2018 and 2017 (Unaudited)
|
1.
|
organization,
business overview and basis of presentation
|
Organization and Nature of Operations.
RegeneRx Biopharmaceuticals, Inc. (“RegeneRx”,
the “Company”, “We”, “Us”, “Our”), a Delaware corporation, was incorporated in
1982. We are focused on the discovery and development of novel molecules to accelerate tissue and organ repair. Our operations
are confined to one business segment: the development and marketing of product candidates based on Thymosin Beta 4 (“Tß4”),
an amino acid peptide.
Management Plans to Address Operating Conditions.
We have a short-term need for additional capital
to continue operations beyond the first quarter of 2019. At present, we have sufficient cash that, together with certain cost savings
measures, we expect will allow us to continue operating into the first quarter of 2019. However, uncertainty regarding funding
by our strategic partners and our ability to raise additional capital raises significant concerns about our ability to continue
as a going concern. These issues are addressed in more detail below.
Our strategy is aimed at being capital efficient
while leveraging our portfolio of clinical assets by seeking strategic relationships with organizations with clinical development
capabilities including development capital. Currently, we have active partnerships in four major territories: North America, Europe,
China and Pan Asia. Our partners have been moving forward and making progress in each territory. In each case, the cost of development
is being borne by our partners with no financial obligation for RegeneRx. We still have significant clinical assets to develop,
primarily RGN-352 (injectable formulation of Tß4 for cardiac and CNS disorders) in the U.S., Pan Asia, and Europe, and RGN-259
in the EU. Our goal is to wait until satisfactory results are obtained from the current ophthalmic clinical program in the U.S.
before moving into the EU. This should allow us to obtain a higher value for the asset at that time. However, we intend to continue
to develop RGN-352, our injectable systemic product candidate for cardiac and central nervous system indications, either by obtaining
grants to fund a Phase 2a clinical trial in the cardiovascular or central nervous system fields or finding a suitable partner with
the resources and capabilities to develop it as we have with RGN-259.
In 2004, we entered into a strategic
partnership for development and marketing of RGN-137 and RGN-352 for specified fields of use in Europe and other contiguous
countries with Sigma-Tau Group, which was subsequently acquired by Alfa Wassermann S.p.A., both Italian pharmaceutical
companies. Pursuant to the terms of the license, we notified Alfa Wassermann that the license expired by its terms and we,
therefore, reacquired rights to our Tß4-based products in the licensed territory. In August 2017, the Company amended
the License Agreement for RGN-137 held by GtreeBNT in exchange for a series of payments
the last of which was received in June 2018. Under the amendment the Territory was expanded to include Europe,
Canada, South Korea, Australia and Japan. Further, we now control the cardiovascular and neurovascular assets (RGN-352) in
the EU and are able to consolidate them with similar assets in the U.S. and other territories in Asia to create a worldwide
portfolio that we believe will be more attractive to multi-national pharmaceutical companies.
Since inception, and through September 30,
2018, we have an accumulated deficit of $106 million and we had cash and cash equivalents of $396,041 as of September 30, 2018.
We anticipate incurring additional operating losses in the future as we continue to explore the potential clinical benefits of
Tß4-based product candidates over multiple indications. We have entered into a series of strategic partnerships under licensing
and joint venture agreements where our partners are responsible for advancing development of our product candidates by sponsoring
multiple clinical trials. On March 2, 2018 we entered into a warrant reprice, exercise and issuance agreement
(the “Reprice Agreement”) with the holders of the warrants issued in the 2016 Offering. Under the terms of the Reprice
Agreement, in consideration of the holders exercising in full all of the 2016 Offering warrants the exercise price per share of
the warrants was reduced to $0.20 per share. In addition, and as further consideration, we issued to the holders of the 2016 Offering
3,860,294 new warrants with an exercise price of $0.2301 per share. We received gross proceeds of approximately $1,029,000 pursuant
to the exercise and issued 5,147,059 shares of common stock. The amendment payments and warrant reprice proceeds plus our year
end cash balance will fund planned operations into the first quarter of 2019.
We will need to secure additional operating
capital to continue operations beyond the first quarter of 2019 as well as substantial additional funds in order to significantly
advance development of our unlicensed programs. Accordingly, we will continue to evaluate opportunities to raise additional capital
and are in the process of exploring various alternatives, including, without limitation, a public or private placement of our securities,
debt financing, corporate collaboration and licensing arrangements, or the sale of our Company or certain of our intellectual property
rights.
These factors raise substantial doubt about
our ability to continue as a going concern. The accompanying financial statements have been prepared assuming that we will continue
as a going concern. This basis of accounting contemplates the recovery of our assets and the satisfaction of our liabilities in
the normal course of business.
Although we intend to continue to seek additional
financing or additional strategic partners, we may not be able to complete a financing or corporate transaction, either on favorable
terms or at all. If we are unable to complete a financing or strategic transaction, we may not be able to continue as a going concern
after our funds have been exhausted, and we could be required to significantly curtail or cease operations, file for bankruptcy
or liquidate and dissolve. There can be no assurance that we will be able to obtain any sources of funding. The financial statements
do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of
liabilities that might be necessary should we be forced to take any such actions.
In addition to our current operational requirements,
we continually refine our operating strategy and evaluate alternative clinical uses of Tß4. However, substantial additional
resources will be needed before we will be able to achieve sustained profitability. Consequently, we continually evaluate alternative
sources of financing such as the sharing of development costs through strategic collaboration agreements. There can be no assurance
that our financing efforts will be successful and, if we are not able to obtain sufficient levels of financing, we would delay
certain clinical and/or research activities and our financial condition would be materially and adversely affected. Even if we
are able to obtain sufficient funding, other factors including competition, dependence on third parties, uncertainty regarding
patents, protection of proprietary rights, manufacturing of peptides, and technology obsolescence could have a significant impact
on us and our operations.
To achieve profitability, we, and/or a partner,
must successfully conduct pre-clinical studies and clinical trials, obtain required regulatory approvals and successfully manufacture
and market those pharmaceuticals we wish to commercialize. The time required to reach profitability is highly uncertain, and there
can be no assurance that we will be able to achieve sustained profitability, if at all.
Basis of Presentation.
The accompanying unaudited interim financial
statements reflect, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of our financial position, results of operations and cash flows for each period presented. These statements
have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and with the rules
and regulations of the SEC, for interim financial statements. Accordingly, they do not include all of the information and footnotes
required by U.S. GAAP. The accounting policies underlying our unaudited interim financial statements are consistent with those
underlying our audited annual financial statements, but do not include all disclosures including notes required by U.S. GAAP for
complete financial statements. These unaudited interim financial statements should be read in conjunction with the audited annual
financial statements as of and for the year ended December 31, 2017, and related notes thereto, included in our Annual Report on
Form 10-K for the year ended December 31, 2017 (the “Annual Report”).
The Company’s significant accounting
policies are included in “Part IV - Item 15 – Exhibits, Financial Statement Schedules. - Note 2 – SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES” in the Company’s Annual Report. There have been no changes to these policies except
as described below.
The accompanying December 31, 2017 financial
information was derived from our audited financial statements included in the Annual Report. Operating results for the three and
nine month periods ended September 30, 2018 are not necessarily indicative of the results to be expected for the year ending December
31, 2018 or any other future period.
References in this Quarterly Report on Form
10-Q to “authoritative guidance” are to the Accounting Standards Codification (“ASC”) issued by the Financial
Accounting Standards Board (“FASB”).
Revenue Recognition.
Effective January 1, 2018, the Company adopted
the new revenue recognition guidance contained in ASC 606, using the modified retrospective method. The adoption of ASC 606 did
not result in any material change to how the Company recognizes revenue or to the accounting for costs to obtain and fulfill contracts
with customers. As a result, the adoption did not result in a cumulative effect change on the date of adoption. See discussion
below for the Company’s revenue recognition policies subsequent to the adoption of the new revenue recognition guidance.
Financial Instruments.
Effective January 1, 2018, the Company adopted
new accounting guidance for financial instruments that contain down round features. As of December 31, 2017, the Company’s
existing convertible notes contained embedded conversion features that under previous accounting guidance had been separately accounted
for as derivative liabilities due to the presence of down round protection which (which precluded those embedded features from
being classified as equity). Upon the adoption of the new guidance, the derivative liabilities were transferred to equity (additional
paid in-capital and accumulated deficit) since the presence of those down round features no longer preclude equity treatment. Accordingly,
no previously issued financial statements were adjusted as this guidance was applied prospectively. See Note 6 for further discussion
of the terms of the convertible notes and embedded conversion features.
Use of Estimates.
The preparation of financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Critical accounting policies involved in applying our accounting policies are
those that require management to make assumptions about matters that are highly uncertain at the time the accounting estimate was
made and those for which different estimates reasonably could have been used for the current period. Critical accounting estimates
are also those which are reasonably likely to change from period to period, and would have a material impact on the presentation
of our financial condition, changes in financial condition or results of operations. Our most critical accounting estimates relate
to accounting policies for fair value measurements in connection with derivative liabilities, and share-based arrangements. Management
bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances.
Actual results could differ from those estimates.
Convertible Notes with
Detachable Warrants.
In accordance with ASC 470-20,
Debt with
Conversion and Other Options
, the proceeds received from convertible notes are allocated between the convertible notes and
the detachable warrants based on the relative fair value of the convertible notes without the warrants and the relative fair value
of the warrants. The portion of the proceeds allocated to the warrants is recognized as additional paid-in capital and a debt discount.
The debt discount related to warrants is accreted into interest expense through maturity of the notes.
Derivative Financial Instruments.
Derivative financial instruments consist of
financial instruments or other contracts that contain a notional amount and one or more underlying variables (e.g., interest rate,
security price or other variable), which require no initial net investment and permit net settlement. Derivative financial instruments
may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently,
measured at fair value and recorded as liabilities or, in rare instances, assets.
The Company does not use derivative financial
instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has issued financial instruments
including warrants that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to
host contracts, or (iii) may be net-cash settled by the counterparty. In certain instances, these instruments are required to be
carried as derivative liabilities, at fair value, in the Company’s financial statements. In other instances, these instruments
are classified as equity instruments in the Company’s financial statements.
The Company estimates the fair value of its
derivative financial instrument using the Black-Scholes option pricing model because it embodies all of the requisite assumptions
(including trading volatility, estimated terms and risk free rates) necessary to fairly value these instruments. Estimating the
fair value of derivative financial instruments requires the development of significant and subjective estimates that may, and are
likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition,
option-based techniques are highly volatile and sensitive to changes in the trading market price of the Company’s common
stock, which has a high-historical volatility. Since derivative financial instruments are initially and subsequently carried at
fair value, the Company’s operating results reflect the volatility in these estimate and assumption changes in each reporting
period.
Upon the
adoption of new accounting guidance on January 1, 2018, the embedded conversion features in the Company’s convertible notes
are no longer accounted for as derivative liabilities.
Revenue
Recognition.
Subsequent to the adoption of Accounting
Standards Codification Revenue from Contracts with Customers (“ASC 606”) on January 1, 2018
The Company analyzes contracts to determine
the appropriate revenue recognition using the following steps: (i) identification of contracts with customers, (ii) identification
of distinct performance obligations in the contract, (iii) determination of contract transaction price, (iv) allocation of contract
transaction price to the performance obligations and (v) determination of revenue recognition based on timing of satisfaction of
the performance obligation. The Company recognizes revenues upon the satisfaction of its performance obligation (upon transfer
of control of promised goods or services to our customers) in an amount that reflects the consideration to which it expects to
be entitled to in exchange for those goods or services.
The Company's contracts with customers may
at times include multiple promises to transfer products and services. Contracts with multiple promises are analyzed to determine
whether the promises, which may include a license together with performance obligations such as providing a clinical supply of
product and steering committee services, are distinct and should be accounted for as separate performance obligations or whether
they must be accounted for as a single performance obligation. The Company accounts for individual performance obligations separately
if they are distinct. Determining whether products and services are considered distinct performance obligations may require significant
judgment.
Revenue associated with licensing agreements
consists of non-refundable upfront license fees and milestone payments. Non-refundable upfront license fees received under license
agreements, whereby continued performance or future obligations are considered inconsequential to the relevant license technology,
are recognized as revenue upon delivery of the technology.
Whenever the Company determines that an arrangement
should be accounted for as a combined performance obligation, we must determine the period over which the performance obligation
will be performed and when revenue will be recognized. Revenue is recognized using either a relative performance or straight-line
method. We recognize revenue using the relative performance method provided that the we can reasonably estimate the level of effort
required to complete our performance obligation under an arrangement and such performance obligation is provided on a best-efforts
basis. Revenue recognized is limited to the lesser of the cumulative amount of payments received or the cumulative amount of revenue
earned, as determined using the relative performance method, as of each reporting period.
If the Company cannot reasonably estimate the
level of effort required to complete our performance obligation under an arrangement, the performance obligation is provided on
a best-efforts basis and we can reasonably estimate when the performance obligation ceases or the remaining obligations become
inconsequential and perfunctory, then the total payments under the arrangement, excluding royalties and payments contingent upon
achievement of substantive milestones, would be recognized as revenue on a straight-line basis over the period we expect to complete
our performance obligations. Revenue is limited to the lesser of the cumulative amount of payments received or the cumulative amount
of revenue earned, as determined using the straight-line basis, as of the period ending date.
If the Company cannot reasonably estimate when
our performance obligation either ceases or becomes inconsequential and perfunctory, revenue is deferred until we can reasonably
estimate when the performance obligation ceases or becomes inconsequential. Revenue is then recognized over the remaining estimated
period of performance.
At the inception of each arrangement that includes
development milestone payments, the Company evaluates the probability of reaching the milestones and estimates the amount to be
included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would
not occur in the future, the associated milestone value is included in the transaction price. Milestone payments that are not within
the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those
approvals are received and therefore revenue recognized is constrained as management is unable to assert that a reversal of revenue
would not be possible. The transaction price is then allocated to each performance obligation on a relative standalone selling
price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied.
At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such development milestones
and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded
on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.
Amounts received prior to satisfying the above
revenue recognition criteria are recorded as unearned revenue in our accompanying condensed balance sheets.
Contract assets are generated when contractual
billing schedules differ from revenue recognition timing. Contract assets represent a conditional right to consideration for satisfied
performance obligations that becomes a billed receivable when the conditions are satisfied.
Contract liabilities result from arrangements
where we have received payment in advance of performance under the contract. Changes in contract liabilities are generally due
to either receipt of additional advance payments or our performance under the contract.
We have the following amounts recorded for
contract liabilities:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Unearned revenue
|
|
$
|
2,274,038
|
|
|
$
|
2,124,515
|
|
The contract liabilities amount disclosed above
as of September 30, 2018, is primarily related to revenue being recognized on a straight-line basis over periods ranging from 23
to 30 years, which, in management’s judgment, is the best measure of progress towards satisfying the performance obligations
and represents the Company’s best estimate of the period of the obligation.
Revenue recognized from contract liabilities
as of January 1, 2018, during the three and nine months ended September 30, 2018, totaled $2,174 and $41,056, respectively. Revenue
is expected to be recognized in the future from contract liabilities as the related performance obligations are satisfied.
For details about the Company’s revenue
recognition policy prior to the adoption of ASC 606, refer to the Company’s Annual Report.
Variable Interest Entities.
The Company accounts for the Joint Venture
(see Note 7) as a “variable interest entity” and that its equity stake in the Joint Venture is a variable interest,
since the total equity investment at risk is not sufficient to permit the Joint Venture to finance its activities without additional
subordinated financial support. Further, because of GtreeBNT Co. Ltd.’s, a Korean pharmaceutical company (“GtreeBNT”)
and a shareholder of the Company, majority equity stake in the Joint Venture, voting control, control of the board of directors,
and substantive management rights, and given that the Company does not have the power to direct the Joint Venture’s activities
that most significantly impact its economic performance, the Company determined that it is not the primary beneficiary of the Joint
Venture and therefore is not required to consolidate the Joint Venture. The Company reports its equity stake in the Joint Venture
using the equity method of accounting because, while it does not control the Joint Venture, the Company can exert significant influence
over the Joint Venture’s activities by virtue of its large equity stake and its board representation.
Because the Company is not obligated to fund
the Joint Venture, and has not provided any financial support to the Joint Venture, the carrying value of its investment in the
Joint Venture is zero. As a result, the Company is not recognizing its share (38.5%) of the Joint Venture’s operating losses
and will not recognize any such losses until the Joint Venture produces net income (as opposed to net losses) and at that point
the Company will reduce its share of the Joint Venture’s net income by its share of previously suspended net losses. As of
September 30, 2018, because it has not provided any financial support and is not obligated to fund the Joint Venture, the Company
has no financial exposure as a result of its variable interest in the Joint Venture.
Research and Development
.
Research and development (“R&D”)
costs are expensed as incurred and include all of the wholly-allocable costs associated with our various clinical programs passed
through to us by our outsourced vendors. Those costs include: manufacturing Tβ4; formulation of Tβ4 into the various
product candidates; stability for both Tβ4 and the various formulations; pre-clinical toxicology; safety and pharmacokinetic
studies; clinical trial management; medical oversight; laboratory evaluations; statistical data analysis; regulatory compliance;
quality assurance; and other related activities. R&D includes cash and non-cash compensation, payroll taxes, travel and other
miscellaneous costs of our internal R&D personnel, part-time hourly employees and external consultants dedicated to R&D
efforts. R&D also includes a pro-ration of our common infrastructure costs for office space and communications.
Recently Adopted Accounting Pronouncements.
In May 2014, the FASB issued Accounting Standards
Update (“ASU”) 2014-09,
Revenue from Contracts with Customers
, which provides guidance for revenue recognition
for contracts, superseding the previous revenue recognition requirements, along with most existing industry-specific guidance.
The guidance requires an entity to review contracts in five steps: 1) identify the contract, 2) identify performance obligations,
3) determine the transaction price, 4) allocate the transaction price, and 5) recognize revenue. In March 2016, the FASB issued
an accounting standard update to clarify the implementation guidance on principal versus agent considerations. In April 2016, the
FASB issued an accounting standard update to clarify the identification of performance obligations and the licensing implementation
guidance, while retaining the related principles for those areas. In May 2016, the FASB issued an accounting standard update to
clarify guidance in certain areas and add some practical expedients to the guidance. The amendments in these 2016 updates do not
change the core principle of the previously issued guidance in May 2014. Effective January 1, 2018, the Company adopted ASU 2014-09
(Topic 606) using the modified retrospective method through a cumulative adjustment to equity, which resulted in an immaterial
difference and no adjustment to our opening balance of accumulated deficit as of January 1, 2018.
In July 2017, the FASB issued ASU 2017-11,
Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part
I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for
Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests
with a Scope Exception.
Part I of this Update addresses the complexity of accounting for certain financial instruments with
down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in
the strike price being reduced on the basis of the pricing of future equity offerings. When determining whether certain financial
instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification
when assessing whether the instrument is indexed to an entity’s own stock. Part II of this Update addresses the difficulty
of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB
Accounting Standards Codification®. For public business entities, the amendments in Part I of this Update are effective for
years, beginning after December 15, 2018. Effective January 1, 2018, the Company adopted ASU 2017-11,
Distinguishing Liabilities
from Equity (Topic 480)
. As a result, the December 31, 2017 qualifying liabilities of approximately $1.3 million were reclassified
as equity as of January 1, 2018. Accordingly, no previously issued financial statements were adjusted as this guidance was applied
prospectively.
In May 2017, the FASB issued ASU 2017-09,
Compensation-Stock
Compensation (Topic 718) Scope of Modification Accounting
. ASU 2017-09 provides clarification on when modification accounting
should be used for changes to the terms or conditions of a share-based payment award. This ASU does not change the accounting for
modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting
conditions, or award classification and would not be required if the changes are considered non-substantive. The Company adopted
ASU 2017-09 in the first quarter of 2018 and the adoption of this ASU did not have a material effect on the financial statements.
Recent Accounting Pronouncements.
In February 2016, the FASB issued ASU 2016-02,
Leases
, which supersedes ASC Topic 840,
Leases
, and creates a new topic, ASC Topic 842,
Leases
. ASU 2016-02
requires lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater
than 12 months on its balance sheet. ASU 2016-02 also expands the required quantitative and qualitative disclosures surrounding
leases. ASU 2016-02 is effective for the Company beginning January 1, 2019. Early adoption is permitted. The Company has determined
that the adoption of ASU 2016-02 will currently not have a significant impact on its financial statements.
In June 2018, the FASB issued ASU 2018-07:
Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.
This ASU
expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees,
and as a result, the accounting for share-based payments to non-employees will be substantially aligned. ASU 2018-07 is effective
for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year, early adoption is permitted
but no earlier than an entity’s adoption date of Topic 606. The Company is currently evaluating the impact this new guidance
will have on its financial statements and related disclosures.
In August 2018, the SEC adopted the final
rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were
redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements
on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each
caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis
should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive
income is required to be filed. This final rule is effective on November 5, 2018. We are evaluating the impact of this guidance
on our unaudited condensed consolidated financial statements.
|
2.
|
Net Loss per
Common Share
|
Basic net loss per common share for the three and nine month periods
ended September 30, 2018 and 2017, is based on the weighted-average number of shares of common stock outstanding during the periods.
Diluted loss per share is based on the weighted-average number of shares of common stock outstanding during each period in which
a loss is incurred. Potentially dilutive shares are excluded because the effect is antidilutive. In periods where there is net
income, diluted income per share is based on the weighted-average number of shares of common stock outstanding plus dilutive securities
with a purchase or conversion price below the per share price of our common stock on the last day of the reporting period. The
potentially dilutive securities include 14,474,649 shares and 18,576,046 shares in 2018 and 2017, respectively, reserved for the
conversion of convertible debt or exercise of outstanding options and warrants.
|
3.
|
Stock-Based Compensation
|
We measure stock-based compensation expense
based on the grant date fair value of the awards, which is then recognized over the period which service is required to be provided.
We estimate the value of our stock option awards on the date of grant using the Black-Scholes option pricing model (“Black-Scholes”)
and amortize that cost over the expected vesting term of the grant. We recognized $100,053 and $96,907 in stock-based compensation
expense for the three months ended September 30, 2018 and 2017, respectively. We recognized $220,398 and $211,199 in stock-based
compensation expense for the nine months ended September 30, 2018 and 2017, respectively.
On June 13, 2018, the stockholders of the
Company approved the 2018 Equity Incentive Plan. We issued 1,605,000 stock options to employees, consultants and
directors during the nine months ended September 30, 2018. We used the following forward-looking range of assumptions to
value these stock options as well as 1,000,000 stock options granted to employees, consultants and directors during the nine
months ended September 30, 2017:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Risk-free rate of return
|
|
|
2.76
|
%
|
|
|
1.73
|
%
|
Expected life in years
|
|
|
5.88
|
|
|
|
5.88
|
|
Volatility
|
|
|
89
|
%
|
|
|
90
|
%
|
Forfeiture rate
|
|
|
2.6
|
%
|
|
|
2.6
|
%
|
A summary of the Company’s stock options
for the nine months ended September 30, 2018 is as follows:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic
Value
|
|
Options Outstanding, December 31, 2017
|
|
|
8,058,788
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
Granted
|
|
|
1,605,000
|
|
|
$
|
0.21
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(326,400
|
)
|
|
$
|
0.22
|
|
|
|
|
|
|
|
Options Outstanding, September 30, 2018
|
|
|
9,337,388
|
|
|
$
|
0.28
|
|
|
4.4 years
|
|
$
|
56,051
|
|
Vested and unvested but expected to vest, September 30, 2018
|
|
|
9,197,771
|
|
|
$
|
0.28
|
|
|
4.4 years
|
|
$
|
56,051
|
|
Exercisable at September 30, 2018
|
|
|
7,309,888
|
|
|
$
|
0.28
|
|
|
3.2 years
|
|
$
|
56,051
|
|
The average expected life was determined using
historical data. We expect to recognize the compensation cost related to non-vested options as of September 30, 2018 of $328,675
over the weighted average remaining recognition period of 1.27 years.
As of
September
30, 2018
, there have been no material changes to our uncertain tax positions disclosures as provided
in Note 9 of the Annual Report. The tax returns for all years in the Company’s major tax jurisdictions are not settled as
of January 1, 2018; no changes in settled tax years have occurred through September 30, 2018. Due to the existence of tax attribute
carryforwards (which are currently offset by a full valuation allowance), the Company treats all years’ tax positions as
unsettled due to the taxing authorities’ ability to modify these attributes.
|
5.
|
Fair Value Measurements
|
The authoritative guidance for fair value measurements
defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in
the principal or the most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable,
(iii) able to transact, and (iv) willing to transact. The guidance describes a fair value hierarchy based on the levels of inputs,
of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the
following:
Level 1 — Quoted prices in active
markets for identical assets and liabilities.
Level 2 — Observable inputs other
than quoted prices in active markets for identical assets and liabilities.
Level 3 — Unobservable inputs.
As of September 30, 2018 and December 31, 2017,
our only qualifying assets that required measurement under the foregoing fair value hierarchy were funds held in our Company bank
accounts included in Cash and Cash Equivalents valued at $396,041 and $181,708, respectively, using Level 1 inputs. Our December
31, 2017 balance sheet reflects qualifying liabilities resulting from the price protection provision in the convertible promissory
notes issued in March, July and September of 2013 and January 2014 (see Note 6). Previously we evaluated the derivative liability
embedded in the series of convertible notes using the Black-Scholes model to determine if an adjustment to the carrying value of
the liability was required each reporting period. Given the conditions surrounding the trading of the Company’s equity securities,
the Company had valued its derivative instruments related to embedded conversion features from the issuance of convertible debentures
in accordance with the Level 3 guidelines. Our September 30, 2018 balance sheet no longer reflects these liabilities
pursuant to the adoption ASU 2017-11,
Distinguishing Liabilities from Equity (Topic 480)
. As a result, the December
31, 2017 qualifying liabilities were reclassified as equity.
For the nine months ended September 30, 2018,
the following table reconciles the beginning and ending balances for financial instruments that are recognized at fair value in
these financial statements.
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
December 31,
|
|
|
New
|
|
|
Change in
|
|
|
|
|
|
September 30,
|
|
|
|
2017
|
|
|
Issuances
|
|
|
Fair Values
|
|
|
Reclassifications
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion features
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 2013
|
|
$
|
412,500
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(412,500
|
)
|
|
$
|
-
|
|
July 2013
|
|
|
183,334
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(183,334
|
)
|
|
|
-
|
|
September 2013
|
|
|
588,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(588,500
|
)
|
|
|
-
|
|
January 2014
|
|
|
100,835
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(100,835
|
)
|
|
|
-
|
|
Derivative instruments
|
|
$
|
1,285,169
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(1,285,169
|
)
|
|
$
|
-
|
|
2012 Convertible
Notes
On October 19, 2012 we completed
a private placement of convertible notes (the “2012 Notes”) raising an aggregate of $300,000 in gross proceeds. The
2012 Notes were originally to mature after twenty-four (24) months from issuance. The 2012 Notes bore interest at a rate of five
percent (5%) per annum and were convertible into shares of our common stock at a conversion price of fifteen cents ($0.15) per
share (subject to adjustment as described in the 2012 Notes) at any time prior to repayment, at the election of the Investors.
In the aggregate, the 2012 Notes were convertible into up to 2,000,000 shares of our common stock excluding interest.
At any time prior to maturity
of the 2012 Notes, with the consent of the holders of a majority in interest of the 2012 Notes, we may prepay the outstanding principal
amount of the 2012 Notes plus unpaid accrued interest without penalty. The outstanding principal and all accrued interest on the
2012 Notes would accelerate and automatically become immediately due and payable upon the occurrence of certain events of default.
In connection with the issuance
of the 2012 Notes we also issued warrants to each Investor. The warrants are exercisable for an aggregate of 400,000 shares of
common stock with an exercise price of fifteen cents ($0.15) per share for a period of five years. The relative fair value of the
warrants issued is $27,097, calculated using the Black-Scholes valuation model value of $0.07 with an expected and contractual
life of 5 years, an assumed volatility of 74.36%, and a risk-free interest rate of 0.77%. The warrants were recorded as additional
paid-in capital and a discount on the 2012 Notes of $27,097.
The Investors, and the principal
amount of their respective 2012 Notes and number of shares of common stock issuable upon exercise of their respective warrants,
are as set forth below:
Investor
|
|
Note Principal
|
|
|
Warrants
|
|
Sinaf S.A.
|
|
$
|
200,000
|
|
|
|
266,667
|
|
Joseph C. McNay
|
|
$
|
50,000
|
|
|
|
66,667
|
|
Allan L. Goldstein
|
|
$
|
35,000
|
|
|
|
46,666
|
|
J.J. Finkelstein
|
|
$
|
15,000
|
|
|
|
20,000
|
|
Sinaf S. A. has historically
been affiliated with our largest stockholder. The other Investors are members of our Board of Directors including Mr. Finkelstein
who serves as our CEO and also the Chairman of our Board of Directors and Dr. Goldstein who also serves as our Chief Scientific
Advisor.
During 2014, the Company
amended the existing October 2012 convertible debt agreement with the lenders, solely to extend the due date of the principal and
accrued unpaid interest until October 19, 2017. No other terms of the original debt were amended or modified, and the lenders did
not reduce the borrowed amount or change the interest rate of the debt. The Company considered the restructuring a troubled debt
restructuring as a result of the Company’s financial condition (see Note 1 discussion of “going concern”). At
the date of the amendment, all existing debt discounts and deferred financing fees were fully amortized and the amendment did not
involve any additional fees paid to the lender or third parties; as such there was no gain recognized as a result of the amendment.
The 2012 Notes matured, and the holders elected to convert the note balances and accrued interest into common stock and also exercise
the associated warrants in October 2017.
2013 Convertible
Notes
On March 29, 2013, we completed
a private placement of convertible notes (the “March 2013 Notes”) raising an aggregate of $225,000 in gross proceeds.
The March 2013 Notes bore interest at a rate of five percent (5%) per annum, mature sixty (60) months after their date of issuance
and were convertible into shares of our common stock at a conversion price of six cents ($0.06) per share (subject to adjustment
as described in the March 2013 Notes) at any time prior to repayment, at the election of the investor. In the aggregate, the March
2013 Notes were initially convertible into up to 3,750,000 shares of our common stock.
At any time prior to maturity
of the March 2013 Notes, with the consent of the holders of a majority in interest of the March 2013 Notes, we may prepay the outstanding
principal amount of the March 2013 Notes plus unpaid accrued interest without penalty. The outstanding principal and all accrued
interest on the March 2013 Notes would accelerate and automatically become immediately due and payable upon the occurrence of certain
events of default.
The investors in the offering
included two directors of the Company, Dr. Goldstein and Joseph C. McNay, an outside director. The principal amounts of their respective
March 2013 Notes are as set forth below:
Investor
|
|
Note Principal
|
|
Joseph C. McNay
|
|
$
|
50,000
|
|
Allan L. Goldstein
|
|
$
|
25,000
|
|
The March 2013 Notes contained
a down round provision under which the conversion price could be decreased as a result of future equity offerings, as defined in
the March 2013 Notes. The adjustment would reduce the conversion price of the March 2013 Notes to be equivalent to that
of the newly issued stock or stock-related instruments. As a result, the Company concluded that the conversion feature
represented an embedded conversion feature for accounting purposes and should be recognized as a derivative liability, requiring
a mark-to-market adjustment at the end of each reporting period until the related March 2013 Notes have been settled prior to the
adoption of ASU 2017-11. The bifurcated liability of $225,000 was recorded on the date of issuance which resulted in a residual
debt value of $0. The discount related to the embedded feature was accreted back to debt through the maturity of the notes.
The March 2013 Notes matured, and the holders elected to convert the note balances and accrued interest into common stock in March
2018.
On July 5, 2013, we completed
a private placement of convertible notes (the “July 2013 Notes”) raising an aggregate of $100,000 in gross proceeds.
The July 2013 Notes bear interest at a rate of five percent (5%) per annum, mature sixty (60) months after their date of issuance
and are convertible into shares of our common stock at a conversion price of six cents ($0.06) per share (subject to adjustment
as described in the July 2013 Notes) at any time prior to repayment, at the election of the investor. In the aggregate, the July
2013 Notes are initially convertible into up to 1,666,667 shares of our common stock.
At any time prior to maturity
of the July 2013 Notes, with the consent of the holders of a majority in interest of the July 2013 Notes, we may prepay the outstanding
principal amount of the July 2013 Notes plus unpaid accrued interest without penalty. The outstanding principal and all accrued
interest on the July 2013 Notes will accelerate and automatically become immediately due and payable upon the occurrence of certain
events of default.
The investors in the offering
included four directors of the Company, Mr. Finkelstein, Dr. Goldstein, Mr. McNay and L. Thompson Bowles, a former outside director.
The principal amounts of their respective July 2013 Notes are as set forth below:
Investor
|
|
Note Principal
|
|
Joseph C. McNay
|
|
$
|
50,000
|
|
Allan L. Goldstein
|
|
$
|
10,000
|
|
J.J. Finkelstein
|
|
$
|
5,000
|
|
L. Thompson Bowles
|
|
$
|
5,000
|
|
The July 2013 Notes contain
a down round provision under which the conversion price could be decreased as a result of future equity offerings, as defined in
the July 2013 Notes. The adjustment would reduce the conversion price of the July 2013 Notes to be equivalent to that
of the newly issued stock or stock-related instruments. As a result, the Company concluded that the conversion feature
represented an embedded conversion feature for accounting purposes and should be recognized as a derivative liability, requiring
a mark-to-market adjustment at the end of each reporting period until the related July 2013 Notes have been settled prior to the
adoption of ASU 2017-11. The bifurcated liability of $66,667 was recorded on the date of issuance which resulted in
a residual debt value of $33,333. The discount related to the embedded feature will be accreted back to debt through the maturity
of the notes. The July 2013 Notes matured, and the holders elected to convert the note balances and accrued interest into common
stock in July 2018.
On September 11, 2013, we
completed a private placement of convertible notes raising an aggregate of $321,000 in gross proceeds (the “September 2013
Notes”). The September 2013 Notes bear interest at a rate of five percent (5%) per annum, mature sixty (60) months
after their date of issuance and are convertible into shares of our common stock at a conversion price of six cents ($0.06) per
share (subject to adjustment as described in the September 2013 Notes) at any time prior to repayment, at the election of the investor. In
the aggregate, the September 2013 Notes are initially convertible into up to 5,350,000 shares of our common stock.
At any time prior to maturity
of the September 2013 Notes, with the consent of the holders of a majority in interest of the September 2013 Notes, we may prepay
the outstanding principal amount of the September 2013 Notes plus unpaid accrued interest without penalty. The outstanding principal
and all accrued interest on the September 2013 Notes will accelerate and automatically become immediately due and payable upon
the occurrence of certain events of default.
The investors in the offering
included an affiliate and four directors of the Company. The principal amounts of the affiliate and directors respective September
2013 Notes are as set forth below:
Investor
|
|
Note Principal
|
|
SINAF S.A.
|
|
$
|
150,000
|
|
Joseph C. McNay
|
|
$
|
100,000
|
|
Allan L. Goldstein
|
|
$
|
11,000
|
|
L. Thompson Bowles
|
|
$
|
5,000
|
|
R. Don Elsey
|
|
$
|
5,000
|
|
The September 2013 Notes
contain a down round provision under which the conversion price could be decreased as a result of future equity offerings, as defined
in the September 2013 Notes. The adjustment would reduce the conversion price of the September 2013 Notes to be equivalent
to that of the newly issued stock or stock-related instruments. As a result, the Company concluded that the conversion
feature represented an embedded conversion feature for accounting purposes and should be recognized as a derivative liability,
requiring a mark-to-market adjustment at the end of each reporting period until the related September 2013 Notes have been settled
prior to the adoption of ASU 2017-11. The bifurcated liability of $267,500 was recorded on the date of issuance which
resulted in a residual debt value of $53,500. The discount related to the embedded feature will be accreted back to debt through
the maturity of the notes. The September 2013 Notes matured, and the holders elected to convert the note balances and accrued interest
into common stock in September 2018.
2014 Convertible
Notes
On January 7, 2014, we completed
a private placement of convertible notes raising an aggregate of $55,000 in gross proceeds (the “January 2014 Notes”).
The January 2014 Notes will pay interest at a rate of 5% per annum, mature 60 months after their date of issuance and are convertible
into shares of our common stock at a conversion price of $0.06 per share (subject to adjustment as described in the January 2014
Notes) at any time prior to repayment, at the election of the Investor. In the aggregate, the Notes are initially convertible
into up to 916,667 shares of our common stock.
At any time prior to maturity
of the January 2014 Notes, with the consent of the holders of a majority in interest of the January 2014 Notes, we may prepay the
outstanding principal amount of the January 2014 Notes plus unpaid accrued interest without penalty. The outstanding principal
and all accrued interest on the January 2014 Notes will accelerate and automatically become immediately due and payable upon the
occurrence of certain events of default.
The Investors in the offering
included three directors of the Company. The principal amounts of their respective Notes are as set forth below:
Investor
|
|
Note Principal
|
|
Joseph C. McNay
|
|
$
|
25,000
|
|
Allan L. Goldstein
|
|
$
|
10,000
|
|
L. Thompson Bowles
|
|
$
|
5,000
|
|
The January 2014 Notes contain
a down round provision under which the conversion price could be decreased as a result of future equity offerings, as defined in
the January 2014 Notes. The adjustment would reduce the conversion price of the January 2014 Notes to be equivalent
to that of the newly issued stock or stock-related instruments. As a result, the Company concluded that the conversion
feature represented an embedded conversion feature for accounting purposes and should be recognized as a derivative liability,
requiring a mark-to-market adjustment at the end of each reporting period until the related January 2014 Notes have been settled
prior to the adoption of ASU 2017-11. The bifurcated liability of $55,000 was recorded on the date of issuance which
resulted in a residual debt value of $0. The discount related to the embedded feature will be accreted back to debt through the
maturity of the notes.
The Company recorded interest
expense and discount accretion as set forth below:
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 Notes
|
|
$
|
-
|
|
|
$
|
3,782
|
|
|
$
|
-
|
|
|
$
|
11,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 2013 Notes
|
|
|
-
|
|
|
|
14,178
|
|
|
|
14,192
|
|
|
|
42,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2013 Notes
|
|
|
585
|
|
|
|
4,621
|
|
|
|
9,677
|
|
|
|
13,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 2013 Notes
|
|
|
15,172
|
|
|
|
17,530
|
|
|
|
49,661
|
|
|
|
52,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2014 Notes
|
|
|
2,923
|
|
|
|
3,465
|
|
|
|
9,742
|
|
|
|
10,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,680
|
|
|
$
|
43,576
|
|
|
$
|
83,272
|
|
|
$
|
129,306
|
|
The fair value of the derivative
liability is as follows:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
March 2013 Notes
|
|
$
|
-
|
|
|
$
|
412,500
|
|
|
|
|
|
|
|
|
|
|
July 2013 Notes
|
|
|
-
|
|
|
|
183,334
|
|
|
|
|
|
|
|
|
|
|
September 2013 Notes
|
|
|
-
|
|
|
|
588,500
|
|
|
|
|
|
|
|
|
|
|
January 2014 Notes
|
|
|
-
|
|
|
|
100,835
|
|
|
|
|
|
|
|
|
|
|
Total fair value of derivative liability
|
|
$
|
-
|
|
|
$
|
1,285,169
|
|
As of January 1, 2018, the
Company early adopted ASU 2017-11, which revised the guidance for instruments with down round provisions. In accordance with the
guidance presented in the ASU, the fair value of the derivative liability balance as of December 31, 2017 of $1,285,169 was reclassified
by means of a cumulative-effect adjustment to equity as of January 1, 2018.
The change in fair value
of derivative liability is as follows:
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 2013 Notes
|
|
$
|
-
|
|
|
$
|
225,000
|
|
|
$
|
-
|
|
|
$
|
37,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2013 Notes
|
|
|
-
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
16,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 2013 Notes
|
|
|
-
|
|
|
|
321,000
|
|
|
|
-
|
|
|
|
53,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2014 Notes
|
|
|
-
|
|
|
|
45,833
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
|
-
|
|
|
|
231,063
|
|
|
|
-
|
|
|
|
(48,937
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rights liability
|
|
|
-
|
|
|
|
(50,000
|
)
|
|
|
-
|
|
|
|
(190,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change in fair value of derivative
|
|
$
|
-
|
|
|
$
|
872,896
|
|
|
$
|
-
|
|
|
$
|
(131,271
|
)
|
Joint Venture Agreement - ReGenTree
On January 28, 2015, the Company entered into
the Joint Venture Agreement with GtreeBNT, a stockholder in the Company. The Joint Venture Agreement provides for the creation
of the Joint Venture, jointly owned by the Company and GtreeBNT, which is commercializing RGN-259 for treatment of dry eye and
neurotrophic keratopathy in the United States and Canada.
GtreeBNT is solely responsible for funding
all the product development and commercialization efforts of the Joint Venture. GtreeBNT made an initial contribution of $3 million
in cash and received an initial equity stake of 51%. RegeneRx’s ownership interest in ReGenTree was reduced to 38.5% when
the Clinical Study Report was filed for the Phase 2/3 dry eye clinical trial. Based on when, and if, certain additional development
milestones are achieved in the U.S. with RGN-259, our equity ownership may be incrementally reduced to between 38.5% and 25%, with
25% being the final equity ownership upon approval of an NDA for DES in the U.S. In addition to our equity ownership, RegeneRx
retains a royalty on net sales that varies between single and low double digits, depending on whether commercial sales are made
by ReGenTree or a licensee. In the event ReGenTree is acquired or there is a change of control that occurs following achievement
of an NDA, RegeneRx shall be entitled to a minimum of 40% of all proceeds paid or payable and will forgo any future royalties.
The Company is not required or otherwise obligated to provide financial support to the Joint Venture.
The Joint Venture is responsible for executing
all development and commercialization activities under the License Agreement, which activities will be directed by a joint development
committee comprised of representatives of the Company and GtreeBNT. The License Agreement has a term that extends to the later
of the expiration of the last patent covered by the License Agreement or 25 years from the first commercial sale under the License
Agreement. The License Agreement may be earlier terminated if the Joint Venture fails to meet certain commercialization milestones,
if either party breaches the License Agreement and fails to cure such breach, as a result of government action that limits the
ability of the Joint Venture to commercialize the product, as a result of a challenge to a licensed patent, following termination
of the license between the Company and certain agencies of the United States federal government, or upon the bankruptcy of either
party.
Under the License Agreement, the Company received
$1.0 million in up-front payments and is entitled to receive royalties on the Joint Venture’s future sales of products. On
April 6, 2016, we received $250,000 from ReGenTree in connection with the amendment of the License Agreement in April 2016 to expand
the territorial rights to include Canada. The Company is accounting for the License Agreement with the Joint Venture as a revenue
arrangement. Since participation in the joint development committee is required it was deemed to be a material promise. Management
has concluded that the participation in the joint development committee is not distinct from other promised goods and services.
The Company assessed the license agreements in accordance with ASC 606. The Company evaluated the promised goods and services under
the license agreements and determined that there was one combined performance obligation representing a series of distinct goods
and services including the license to research, develop and commercialize RGN-259 and participation in the joint development committee.
Revenue is being recognized on a straight-line basis over a period of 30 years, which, in management’s judgment, is the best
measure of progress towards satisfying the performance obligation and represents the Company’s best estimate of the period
of the obligation. Revenue will be recognized for future royalty payments as they are earned.
GtreeBNT.
We are a party to a license agreement with
GtreeBNT for the license of RGN-259 related to certain development and commercialization rights for RGN-259, in Asia (excluding
China, Hong Kong, Macau and Taiwan). Separately, we licensed GtreeBNT the rights to RGN-137 which was recently amended in exchange
for a series of payments the last of which was received in June 2018. GtreeBNT is currently our second largest stockholder. GtreeBNT
filed an investigational new drug application (“IND”) with the Korean Ministry of Food and Drug Safety to conduct a
Phase 2/3 study with RGN-259 in patients with dry eye syndrome and in July 2015 received approval to conduct the trial. In late
2016 GtreeBNT informed us that it believes marketing approval in the U.S. will allow expedited marketing in Korea, possibly without
the need for a clinical trial.
Under the license agreement, the Company received
a series of non-refundable payments and is entitled to receive royalties on the future sales of products. The Company is accounting
for the license agreement as a revenue arrangement. Since participation in the joint development committee is required it was deemed
to be a material promise. Management has concluded that the participation in the joint development committee is not distinct from
other promised goods and services. The Company assessed the license agreement in accordance with ASC 606. The Company evaluated
the promised goods and services under the license agreement and determined that there was one combined performance obligation representing
a series of distinct goods and services including the license to research, develop and commercialize RGN-137 and participation
in the joint development committee. Revenue is being recognized on a straight-line basis over a period of 23 years, which, in management’s
judgment, is the best measure of progress towards satisfying the performance obligation and represents the Company’s best
estimate of the period of the obligation. Revenue will be recognized for future royalty payments as they are earned.
Lee’s Pharmaceutical.
We are a party to a license agreement with
Lee’s Pharmaceutical (HK) Limited (“Lee’s”), headquartered in Hong Kong, for the license of Thymosin Beta
4 in any pharmaceutical form, including our RGN-259, RGN-352 and RGN-137 product candidates, in China, Hong Kong, Macau and Taiwan
(the “Lee’s License Agreement”). Lee’s previously filed an IND with the Chinese FDA (‘CFDA”)
to conduct a Phase 2, randomized, double-masked, dose-response clinical trial with RGN-259 in China for dry-eye syndrome. Lee's
subsequently informed us that it received notice from CFDA declining its IND application for a Phase 2b dry eye clinical trial
because the API (active pharmaceutical ingredient or Tß4) was manufactured outside of China. The API was manufactured in
the U.S. and provided to Lee's by RegeneRx pursuant to a license agreement to develop RGN-259 ophthalmic eye drops in the licensed
territory. However, in mid-2016, we were informed by Lee’s that the CFDA modified its manufacturing regulations and will
now allow Chinese companies to utilize API manufactured outside of China for Phase 1 and 2 clinical trials. We have not yet been
informed of a projected starting date for Phase 2 trials.
Under the license agreement, the Company received
$400,000 in non-refundable payments and is entitled to receive royalties on the future sales of products. The Company is accounting
for the license agreement as a revenue arrangement. Since participation in the joint development committee is required it was deemed
to be a material promise. Management has concluded that the participation in the joint development committee is not distinct from
other promised goods and services. The Company assessed the license agreement in accordance with ASC 606. The Company evaluated
the promised goods and services under the license agreement and determined that there was one combined performance obligation representing
a series of distinct goods and services including the license to research, develop and commercialize RGN-259 and participation
in the joint development committee. To-date, management has not been able to reasonably measure the outcome of the performance
obligation, but still expects to recover the costs incurred in satisfying the performance obligation. Accordingly, the Company
has deferred all revenue until such time that it can reasonably measure the outcome of the performance obligation or until the
performance obligation becomes onerous. Revenue will be recognized for future royalty payments as they are earned.
On March 2, 2018, we entered into the Reprice
Agreement with Sabby Healthcare Master Fund, Ltd., and Sabby Volatility Warrant Master Fund, Ltd. (collectively, “Sabby”).
In connection with that certain securities purchase agreement between the Company and Sabby dated June 27, 2016 (the “Purchase
Agreement”) we also issued to Sabby warrants to purchase 5,147,059 shares of common stock (the “Warrant Shares”)
at an exercise price of $0.51 per share (the “Sabby Warrants”). Under the terms of the Reprice Agreement, in consideration
of Sabby exercising in full all of the Sabby Warrants (the “Warrant Exercise”), the exercise price per share of the
Sabby Warrants was reduced to $0.20 per share. In addition, and as further consideration, we issued to Sabby warrants to purchase
up to 3,860,294 shares of common stock at an exercise price of $0.2301 per share, the closing bid price for the Company’s
Common Stock on February 28, 2018 (the “New Warrants”). We received gross proceeds of approximately $1,029,000 from
the warrant reprice transaction.
The Reprice Agreement was accounted for as
an inducement and consequently, we recognized a non-operating expense of $582,904 equal to the fair value of the New Warrants calculated
using a customized Monte Carlo simulation. The repricing of the Warrant Shares did not result in any incremental fair value and
consequently did not result in any additional expense.
In conjunction with the Reprice Agreement we
incurred $101,110 of expenses comprised of: (i) 102,947 warrants valued at $15,545 issued to an outside third party as a fee for
the transaction and (ii) $85,565 of expenses for professional fees. Such expenses were netted against the proceeds from the transaction.
The warrants contained the same terms and conditions as the New Warrants and were valued using the Black-Scholes model.
On March 29, 2018, the March 2013 Convertible
Notes matured, and the holders elected to convert the note balances and accrued interest into common stock. As a result, we issued
4,700,520 shares of common stock.
On July 5, 2018, the July 2013 Convertible
Notes matured, and the holders elected to convert the note balances and accrued interest into common stock. As a result, we issued
2,089,120 shares of common stock.
On September 13, 2018, the September 2013 Convertible
Notes matured, and the holders elected to convert the note balances and accrued interest into common stock. As a result, we issued
6,706,076 shares of common stock.
In February 2017, we amended
our office lease agreement and the term was extended through July 2020. During the extended term our rental payments will average
approximately $4,000 per month.