See accompanying notes to unaudited condensed
consolidated financial statements.
See accompanying notes to unaudited condensed
consolidated financial statements.
See accompanying notes to unaudited condensed
consolidated financial statements.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
1. Organization, Nature of Operations and Basis of Presentation
Description of Business
Synthetic Biologics, Inc. (the “Company”
or “Synthetic Biologics”) is a late-stage clinical company focused on developing therapeutics designed to preserve
the microbiome to protect and restore the health of patients. The Company’s lead candidates poised for Phase 3 development
are: (1) SYN-004 (ribaxamase) which is designed to protect the gut microbiome (gastrointestinal (GI) microflora) from the effects
of certain commonly used intravenous (IV) beta-lactam antibiotics for the prevention of
C. difficile
infection (CDI), overgrowth
of pathogenic organisms and the emergence of antimicrobial resistance (AMR), and (2) SYN-010 which is intended to reduce the
impact of methane-producing organisms in the gut microbiome to treat an underlying cause of irritable bowel syndrome with constipation
(IBS-C). The Company’s preclinical pursuits include an oral formulation of the enzyme intestinal alkaline phosphatase (IAP)
to treat both local GI and systemic diseases as well as monoclonal antibody therapies for the prevention and treatment of pertussis,
and novel discovery stage biotherapeutics for the treatment of phenylketonuria (PKU).
Basis of Presentation
On July 28, 2018, the Board of Directors
of the Company approved a reverse stock split of the Company’s authorized, issued and outstanding shares of common stock,
par value $0.001 per share, at a ratio of one (1) share of common stock for every thirty-five (35) shares of common stock (the
“Reverse Stock Split”). The Company filed a Certificate of Change (the “Certificate of Change”) with the
Secretary of State of the State of Nevada on August 8, 2018 to effectuate the Reverse Stock Split. The Reverse Stock Split was
effective as of 11:00 p.m. (Eastern Time) on August 10, 2018 (the “Effective Time”) and the Company’s common
stock began trading on the NYSE American on a post-split basis when the market opened on August 13, 2018. As a result of the Reverse
Stock Split, each thirty-five (35) pre-split shares of common stock outstanding automatically combined into one (1) new share of
common stock without any action on the part of the holders, and the number of outstanding shares of common stock was reduced from
132,969,743 shares to 3,799,136 shares (subject to rounding of fractional shares) and the number of authorized shares of common
stock was reduced form 350,000,000 share to 10,000,000 shares. Stockholders who otherwise were entitled to receive fractional shares
because they held a number of pre-reverse stock split shares of the Company’s common stock not evenly divisible by 35, received,
in lieu of a fractional share, that number of shares rounded up to the nearest whole share. The Company issued one whole share
of the post-Reverse Stock Split common stock to any stockholder who otherwise would have received a fractional share as a result
of the Reverse Stock Split. As a result, no fractional shares were issued in connection with the Reverse Stock Split and no cash
or other consideration was paid in connection with any fractional shares that would otherwise have resulted from the Reverse Stock
Split. The Reverse Stock Split was effected to meet the per share price requirements of the NYSE American, the Company’s
current listing exchange. The Reverse Stock Split did not alter the par value of the Company’s common stock or modify any
voting rights or other terms of the common stock. In addition, pursuant to their terms, a proportionate adjustment was made to
the per share exercise price and number of shares issuable under all of the Company’s outstanding shares of preferred stock
and stock options and warrants to purchase shares of common stock, and the number of shares authorized and reserved for issuance
pursuant to the Company’s equity incentive plans was reduced proportionately. After the Reverse Stock Split, the trading
symbol for the Company’s common stock continued to be “SYN.”
All share numbers in the condensed consolidated
financial statements and footnotes below have been adjusted for the one-for-thirty five reverse stock split effected August 10,2018.
The accompanying condensed consolidated financial
statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”)
for interim financial information. Accordingly, they do not include all of the information and notes required by Accounting Principles
Generally Accepted in the United States of America (“U.S. GAAP”) for complete financial statements. The accompanying
condensed consolidated financial statements include all adjustments, comprised of normal recurring adjustments, considered necessary
by management to fairly state the Company’s results of operations, financial position and cash flows. The operating results
for the interim periods are not necessarily indicative of results that may be expected for any other interim period or for the
full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company’s 2017 Form 10-K. The interim results for the three and nine months ended September
30, 2018 are not necessarily indicative of results for the full year.
The condensed consolidated financial statements
are prepared in conformity with U.S. GAAP, which requires the use of estimates, judgments and assumptions that affect the amounts
of assets and liabilities at the reporting date and the amounts of revenue and expenses in the periods presented. The Company believes
that the accounting estimates employed are appropriate and the resulting balances are reasonable; however, due to the inherent
uncertainties in making estimates, actual results may differ from the original estimates, requiring adjustments to these balances
in future periods.
Recent Accounting Pronouncements and
Developments
In February 2016, the Financial Accounting
Standards Board, (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02,
Leases (Topic 842
),
which establishes a new lease accounting model for lessees. The updated guidance requires an entity to recognize assets and liabilities
arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. The
amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with
early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial
statements.
In June 2018, FASB issued ASU 2018-07,
Improvements
to Nonemployee Share-Based Payment Accounting
, which expands the scope of Topic 718 to include share-based payments issued
to nonemployees, and generally aligns the accounting for nonemployee awards with the accounting for employee awards. The
ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early
adoption is permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated
financial statements.
The Tax Cuts and Jobs Act (the “Tax Act”)
was signed into law on December 22, 2017. The Tax Act changed many aspects of U.S. corporate income taxation and included reduction
of the corporate income tax rate from 35% to 21%, implementation of a territorial tax system and imposition of a tax on deemed
repatriated earnings of foreign subsidiaries. The Company recognized the tax effects of the Tax Act in the year ended December
31, 2017 and recorded $21.6 million in tax expense which relates almost entirely to the remeasurement of deferred tax assets to
the 21% tax rate. The Company will continue to assess its provision for income taxes as future guidance is issued but does not
currently anticipate significant revisions will be necessary. Accounting Standards Codification (“ASC”) No. 740,
Income
taxes,
requires the Company to record the effects of a tax law change in the period of enactment. However, shortly after the
enactment of the Tax Act, the SEC staff issued Staff Accounting Bulletin (“SAB”) 118, which allows the Company to record
a provisional amount when it does not have the necessary information available, prepared, or analyzed in reasonable detail to complete
its accounting for the change in the tax law. The measurement period ends when the Company has obtained, prepared and analyzed
the information necessary to finalize its accounting, but cannot extend beyond one year.
2. Fair Value of Financial Instruments
Fair Value of Financial Instruments
ASC 820,
Fair Value Measurement
, defines
fair value as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants. As such, fair value is determined based upon assumptions that market participants would use in pricing an
asset or liability. Fair value measurements are rated on a three-tier hierarchy as follows:
|
·
|
Level 1 inputs:
Quoted prices (unadjusted) for identical assets or liabilities in active markets;
|
|
·
|
Level 2 inputs:
Inputs, other than quoted prices, included in Level 1 that are observable either directly or indirectly; and
|
|
·
|
Level 3 inputs:
Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
In many cases, a valuation technique used
to measure fair value includes inputs from multiple levels of the fair value hierarchy described above. The lowest level of significant
input determines the placement of the entire fair value measurement in the hierarchy.
The carrying amounts of the Company’s
short-term financial instruments, including cash and cash equivalents, other current assets, accounts payable and accrued liabilities
approximate fair value due to the relatively short period to maturity for these instruments.
Cash and cash equivalents include money market
accounts of $98,000 as of September 30, 2018 and December 31, 2017 that are measured using Level 1 inputs.
The Company uses Monte Carlo simulations to
estimate the fair value of the stock 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.
3. Selected Balance Sheet Information
Prepaid expenses and other current assets
(in thousands)
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Prepaid conferences, travel
|
|
$
|
230
|
|
|
$
|
94
|
|
Prepaid consulting, subscriptions and other expenses
|
|
|
184
|
|
|
|
290
|
|
Other receivable
|
|
|
86
|
|
|
|
-
|
|
Prepaid insurances
|
|
|
59
|
|
|
|
351
|
|
Clinical consulting services refund receivable
|
|
|
-
|
|
|
|
46
|
|
Prepaid clinical research organizations
|
|
|
-
|
|
|
|
46
|
|
Total
|
|
$
|
559
|
|
|
$
|
827
|
|
Prepaid clinical research organizations expense
is classified as a current asset. The Company makes payments to the clinical research organizations based on agreed upon terms
that include payments in advance of study services.
Property and equipment, net (in thousands)
|
|
September 30,
2018
|
|
|
December 31
2017
|
|
Computers and office equipment
|
|
$
|
851
|
|
|
$
|
851
|
|
Leasehold improvements
|
|
|
439
|
|
|
|
439
|
|
Software
|
|
|
11
|
|
|
|
11
|
|
|
|
|
1,301
|
|
|
|
1,301
|
|
Less: accumulated depreciation and amortization
|
|
|
(636
|
)
|
|
|
(429
|
)
|
Total
|
|
$
|
665
|
|
|
$
|
872
|
|
Accrued expenses (in thousands)
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Accrued clinical consulting services
|
|
$
|
1,167
|
|
|
$
|
658
|
|
Accrued vendor payments
|
|
|
243
|
|
|
|
193
|
|
Accrued manufacturing costs
|
|
|
64
|
|
|
|
661
|
|
Other accrued expenses
|
|
|
11
|
|
|
|
14
|
|
Total
|
|
$
|
1,485
|
|
|
$
|
1,526
|
|
Accrued employee benefits (in thousands)
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Accrued bonus expense
|
|
$
|
1,007
|
|
|
$
|
1,283
|
|
Accrued vacation expense
|
|
|
289
|
|
|
|
201
|
|
Accrued severance
|
|
|
138
|
|
|
|
590
|
|
Total
|
|
$
|
1,434
|
|
|
$
|
2,074
|
|
4. Stock-Based Compensation
Stock Incentive Plans
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 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. 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 250,000. Options become exercisable
over various periods from the date of grant, and generally expire ten years after the grant date. As of September 30, 2018, there
were 19,885 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 (the “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 2010 Stock Plan to increase the number of shares of the 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 2010 Stock Plan to increase the number of shares of the Company’s common stock reserved for
issuance under the Plan from 171,429 to 228,571. 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 228,571 to 400,000. On September 7, 2017, the stockholders approved and adopted an amendment to the 2010
Stock Plan to increase the number of shares of the Company’s common stock reserved for issuance under the 2010 Stock
Plan from 400,000 to 500,000. On September 24, 2018, the stockholders approved and adopted an amendment to the 2010 Stock
Plan to increase the number of shares of the Company’s common stock reserved for issuance under the 2010 Stock Plan
from 500,000 to 1,000,000. The exercise price of stock options under the 2010 Stock Plan is determined by the
compensation committee of the Board of Directors and may be equal to or greater than the fair market value of the
Company’s common stock on the date the option is granted. Options become exercisable over various periods from the date
of grant and expire between five and ten years after the grant date. As of September 30, 2018, there were 327,402 options
issued and outstanding under the 2010 Stock Plan.
In the event of an employee’s termination,
the Company will cease to recognize compensation expense for that employee. 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 is estimated on the date of grant using the Black-Scholes
option pricing model. There were no options granted during the three and nine months ended September 30, 2018. The assumptions
used for the nine months ended September 30, 2017 are as follows:
Exercise price
|
|
|
$29.05-$30.45
|
Expected dividends
|
|
|
0%
|
Expected volatility
|
|
|
90%-92%
|
Risk free interest rate
|
|
|
1.67%-1.75%
|
Expected life of option
|
|
|
4.2-4.3 years
|
The Company records stock-based compensation
based upon the stated vesting provisions in the related agreements. The vesting provisions for these agreements have various terms
as follows:
|
·
|
half vesting immediately and remaining over three years;
|
|
·
|
in full on one-year anniversary date of grant date;
|
|
·
|
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 nine months ended September 30,
2018, the Company did not grant options to employees. During the same period in 2017, the Company granted 15,541 options
to employees having an approximate fair value of $308,000 based upon the Black-Scholes option pricing model.
A summary of stock option activities for the
nine months ended September 30, 2018 is as follows:
|
|
Options
|
|
|
Weighted
Average Exercise
Price
|
|
|
Weighted Average
Remaining
Contractual Life
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2016
|
|
|
332,561
|
|
|
$
|
61.87
|
|
|
5.49 years
|
|
$
|
194,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
90,286
|
|
|
$
|
20.12
|
|
|
|
|
|
|
|
Exercised
|
|
|
(11,966
|
)
|
|
$
|
13.89
|
|
|
|
|
$
|
163,050
|
|
Expired
|
|
|
(19,091
|
)
|
|
$
|
77.46
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(32,714
|
)
|
|
$
|
42.21
|
|
|
|
|
|
|
|
Balance - December 31, 2017
|
|
|
359,076
|
|
|
$
|
53.93
|
|
|
4.60 years
|
|
$
|
1,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
$
|
-
|
|
Expired
|
|
|
(8,124
|
)
|
|
$
|
53.27
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(3,187
|
)
|
|
$
|
27.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - September 30, 2018 - outstanding
|
|
|
347,765
|
|
|
$
|
54.19
|
|
|
3.90 years
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - September 30, 2018 - exercisable
|
|
|
257,985
|
|
|
$
|
64.63
|
|
|
3.21 years
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant date fair value of options granted - September 30, 2018
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value - September 30, 2018
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
Stock-based compensation expense included in
operating expenses related to stock options issued to employees and consultants for the three months ended September 30, 2018 and
2017 was $475,000 and $900,000 respectively, and $1.7 million and $2.9 million for the nine months ended September 30, 2018 and
2017, respectively.
As of September 30, 2018, total unrecognized
stock-based compensation expense related to stock options was $1,070,000, which is expected to be expensed through January 2020.
5. Stock Purchase Warrants
On November 18, 2016, the Company completed
a public offering of 714,286 shares of common stock with accompanying warrants to purchase an aggregate of 1,428,571 million shares
of 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. 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 was $50.05 and the per share exercise
price of the Series B warrants was $60.20, each subject to adjustment as specified in the warrant agreements. The Series A
warrants are exercisable until the four year anniversary of the issuance date. The Series B warrants expired on December 31, 2017
and none were exercised prior to expiration. The Series A warrants may be exercised at any time until they expire. 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, which was $15.7 million, and changes in estimated fair value will be recorded as non-cash income or expense
in the Company’s condensed consolidated statements of operations at each subsequent period. At September 30, 2018, the fair
value of the warrant liability was $19,000, which resulted in non-cash income of $605,000 and $3.6 million for the three and nine
months ended September 30, 2018, respectively. At September 30, 2017, the fair value of the warrant liability was $10.7 million,
which resulted in non-cash expense of $4.1 million for the three months ended September 30, 2017 and non-cash income of $2.0 million
for the nine months ended September 30, 2017. In accordance with U.S. GAAP, the warrants were valued on the date of grant using
a Monte Carlo simulation.
The assumptions used by the Company are summarized
in the following table:
|
|
Series A
|
|
|
|
September 31,
2018
|
|
|
December 31,
2017
|
|
|
Issuance
Date
|
|
Closing stock price
|
|
$
|
2.60
|
|
|
$
|
17.85
|
|
|
$
|
31.15
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
80
|
%
|
|
|
80
|
%
|
|
|
85
|
%
|
Risk free interest rate
|
|
|
2.82
|
%
|
|
|
1.97
|
%
|
|
|
1.58
|
%
|
Expected life of warrant (years)
|
|
|
2.14
|
|
|
|
2.90
|
|
|
|
4.00
|
|
On October 10, 2014, the Company raised
net proceeds of $19.1 million through the sale of 401,703 units at a price of $51.45 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
0.5 shares of common stock. The warrants, exercisable for an aggregate of 200,852 shares of common stock, have an exercise price
of $61.25 per share and a life of five years. The warrants vested immediately and expire on October 10, 2019.
The warrants issued in conjunction with the
registered direct offering in October 2014 include a provision that if the Company were to enter into a certain transaction, as
defined in the agreement, the warrants would be purchased from the holder at a premium. Accordingly, the Company recorded the warrants
as a liability at their estimated fair value on the issuance date, which was $7.4 million, and changes in estimated fair value
are being recorded as non-cash income or expense in the Company’s condensed consolidated statement of operations at each
subsequent period. At September 30, 2018, the fair value of the warrant liability was $200.00, which resulted in non-cash income
of $21,000 and $415,000 for the three and nine months ended September 30, 2018, respectively. At September 30, 2017, the fair value
of the warrant liability was $2.0 million, which resulted in non-cash expense of $1.0 million for the three months ended September
30, 2017 and non-cash income of $0.2 million for the nine months ended September 30, 2017. In accordance with U.S. GAAP,
the warrants were valued on the date of grant using the Black-Scholes valuation model which approximates the value derived using
a Monte Carlo simulation.
The assumptions used by the Company are summarized
in the following table:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
Issuance
Date
|
|
Closing stock price
|
|
$
|
2.60
|
|
|
$
|
17.85
|
|
|
$
|
61.25
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
90
|
%
|
|
|
80
|
%
|
|
|
95
|
%
|
Risk free interest rate
|
|
|
2.60
|
%
|
|
|
1.86
|
%
|
|
|
1.39
|
%
|
Expected life of warrant (years)
|
|
|
1.04
|
|
|
|
1.79
|
|
|
|
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
|
|
|
(4,064
|
)
|
Balance at September 30, 2018
|
|
$
|
19
|
|
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:
|
|
Issuance
Date
|
|
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 warrant activity for the Company
for the nine months ended September 30, 2018 is as follows:
|
|
Number of
Warrants
|
|
|
Weighted Average
Exercise Price
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
|
915,138
|
|
|
$
|
52.50
|
|
Granted
|
|
|
714
|
|
|
|
18.20
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Balance at September 30, 2018
|
|
|
915,852
|
|
|
$
|
52.48
|
|
A summary of all outstanding and exercisable
warrants as of September 30, 2018 is as follows:
Exercise Price
|
|
|
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
|
|
Weighted Average
Remaining
Contractual Life (years)
|
|
$
|
18.20
|
|
|
|
714
|
|
|
|
714
|
|
|
|
4.24
|
|
$
|
50.05
|
|
|
|
714,286
|
|
|
|
714,286
|
|
|
|
2.14
|
|
$
|
61.25
|
|
|
|
200,852
|
|
|
|
200,852
|
|
|
|
1.03
|
|
$
|
52.48
|
|
|
|
915,852
|
|
|
|
915,852
|
|
|
|
1.90
|
|
6. Net Loss per Share
Basic net loss per share is computed by
dividing net loss by the weighted average number of common shares outstanding. Included in net loss is the deemed dividend from
preferred shares issuance of $61,000 and $181,000 for the three and nine months ended September 30, 2018, respectively. The deemed
dividend relates to the discount provided to preferred stockholders upon conversion of their preferred stock to common shares and
is subtracted from net loss (see Note 8). 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 potentially 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. The number of options and warrants
for the purchase of common stock that were excluded from the computations of net loss per common share for the three and nine months
ended September 30, 2018 were 347,765 and 915,852, respectively, and for the three and nine months and ended September 30, 2017
were 320,543 and 1,638,333, respectively.
The following tables set forth the computation
of diluted net loss per weighted average number of shares outstanding attributable to Synthetic Biologics, Inc. and Subsidiaries
for the three and nine months ended September 30, 2018 and 2017
(in thousands except share and per share amounts)
:
|
|
Three months ended September 30, 2018
|
|
|
Nine months ended September 30, 2018
|
|
|
|
Net loss
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per Share
Amount
|
|
|
Net Loss
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per Share
Amount
|
|
Net loss - Basic
|
|
$
|
(3,741
|
)
|
|
|
4,028,304
|
|
|
$
|
(0.93
|
)
|
|
$
|
(10,375
|
)
|
|
|
3,802,812
|
|
|
$
|
(2.73
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive shares related to warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss - Dilutive
|
|
$
|
(4,214
|
)
|
|
|
4,028,304
|
|
|
$
|
(0.93
|
)
|
|
$
|
(10,375
|
)
|
|
|
3,802,812
|
|
|
$
|
(2.73
|
)
|
|
|
Three months ended September 30, 2017
|
|
|
Nine months ended September 30, 2017
|
|
|
|
Net loss
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per Share
Amount
|
|
|
Net Loss
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per Share
Amount
|
|
Net loss - Basic
|
|
$
|
(17,823
|
)
|
|
|
3,665,134
|
|
|
$
|
(4.90
|
)
|
|
$
|
(24,925
|
)
|
|
|
3,512,868
|
|
|
$
|
(7.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive shares related to warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss - Dilutive
|
|
$
|
(17,823
|
)
|
|
|
3,665,134
|
|
|
$
|
(4.90
|
)
|
|
$
|
(24,925
|
)
|
|
|
3,512,868
|
|
|
$
|
(7.00
|
)
|
7. Non-controlling Interest
The Company’s non-controlling interest
is accounted for under ASC 810,
Consolidation
, and represents the minority shareholder’s ownership interest related
to the Company’s subsidiary, Synthetic Biomics, Inc. (“SYN Biomics”). In accordance with ASC 810, the Company
reports its non-controlling interest in subsidiaries as a separate component of equity in the condensed consolidated balance sheets
and reports both net loss attributable to the non-controlling interest and net loss attributable to the Company and its subsidiaries
on the face of the condensed consolidated statements of operations. The Company’s equity interest in SYN Biomics is 88.5%
and the non-controlling stockholder’s interest is 11.5%. For the three and nine months ended September 30, 2018, the accumulated
net loss attributable to the non-controlling interest was $9,000 and $35,000, respectively.
8. Common and Preferred Stock
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 upon 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.
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 $18.90 per share, subject to certain customary anti-dilution adjustments.
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 has 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 (as defined in the Certificate of Designations).
The Series A Preferred Stock is classified
as temporary equity due to the shares being (i) redeemable based on contingent events outside of the Company’s control, and
(ii) convertible immediately and from time to time. Since the effective conversion price of the Series A Preferred Stock is less
than the fair value of the underlying common stock at the date of issuance, there is a beneficial conversion feature (“BCF”)
at the issuance date. Because the Series A Preferred Stock has no stated maturity or redemption date and is immediately convertible
at the option of the holder, the discount created by the BCF is immediately charged to retained earnings 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, 2017 and the quarters ended March 31, 2018, June 30, 2018 and September
30, 2018, the Company accrued dividends of $73,000, $59,000, $60,000 and $62,000, 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.
B. Riley 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 Company’s common stock with an aggregate sales price of up to $40.0 million from
time to time through B. Riley FBR Capital Markets & Co. 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, as amended. B. Riley FBR Capital Markets & Co. is entitled to receive a commission rate
of up to 3.0% of gross sales in connection with the sale of the Company’s common stock sold on the Company’s behalf.
For the three and nine months ending September 30, 2018, the Company sold through the B. Riley FBR Sales Agreement an aggregate
of 1.6 million and 1.7 million shares of the Company’s common stock, and received net proceeds of approximately $6.0 million
and $6.4 million, respectively. For the three and nine months ending September 30, 2017, the Company sold through the B. Riley
FBR Sales Agreement an aggregate of 0.8 million and 11.0 million shares of the Company’s common stock, and received net
proceeds of approximately $0.4 million and $6.4 million, respectively. Subsequent to September 30, 2018, the Company has sold
approximately 1.9 million shares of the Company’s common stock, and received net proceeds of approximately $5.8 million.
9. Related Party Transactions
In December 2013, through the Company’s
subsidiary, Synthetic Biomics, Inc., the Company entered into a worldwide exclusive license agreement with Cedars-Sinai Medical
Center (“CSMC”) and acquired the rights to develop products for therapeutic and prophylactic treatments of acute and
chronic diseases, including the development of SYN-010 to target IBS-C. The Company licensed from CSMC a portfolio of intellectual
property comprised of several U.S. and foreign patents and pending patent applications for various fields of use, including IBS-C,
obesity and diabetes. An investigational team led by Mark Pimentel, M.D. at CSMC discovered that these products may reduce the
production of methane gas by certain GI microorganisms. During the nine months ended September 30, 2018 and 2017, the Company
did not owe and did not pay Cedars-Sinai Medical Center for milestone payments related this license agreement.
On September 5, 2018, the Company entered
into an agreement with CSMC for an investigator-sponsored Phase 2 clinical study of SYN-010 to be co-funded by the Company and
CSMC (the “Study”). The Study will provide further evaluation of the efficacy and safety of SYN-010, the Company’s
modified-release reformulation of lovastatin lactone, which is exclusively licensed to the Company by CSMC. SYN-010 is designed
to reduce methane production by certain microorganisms (M. smithii) in the gut to treat an underlying cause of irritable bowel
syndrome with constipation (IBS-C).
In consideration of the support provided
by CSMC for the Study, the Company 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. (“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 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 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. The study is not yet approved
by the IRB.
10. Subsequent Events
On October 15, 2018, the
Company closed its underwritten public offering (the “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 Company’s common stock, par value $0.001 per share (the “Common Stock”), and one five-year warrant to purchase
one share of Common Stock at an exercise price of $1.38 per share (the “October 2018 Warrants”), with each Class A
Unit 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 October 2018 Warrants. A.G.P./Alliance Global Partners (the
“Underwriters”) acted as sole book-running manager for the Offering.
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 October
2018 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 October 2018 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 October 2018 Warrants is subject to adjustment in the event of certain dilutive issuances.
The October 2018 Warrants are immediately
exercisable at a price of $1.38 per share of common stock (which is 120% of the public offering price of the Class A Units) and
will expire on October 15, 2023. If at the time of exercise, there is no effective registration statement registering, or no current
prospectus available for, the issuance of the shares of common stock to the holder, then the October 2018 warrants may only be
exercised through a cashless exercise. No fractional shares of common stock will be issued in connection with the exercise of any
October 2018 warrants. In lieu of fractional shares, the holder will receive an amount in cash equal to the fractional amount multiplied
by the fair market value of any such fractional shares.
The Company may not effect, and holder
will not be entitled to, exercise any October 2018 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.