Notes to the Financial Statements
(Unaudited)
|
1.
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Nature of Business and
Liquidity
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The terms “MBI”
or “the Company”, “we”, “our” and “us” are used herein to refer to Moleculin Biotech,
Inc. MBI is a preclinical pharmaceutical company organized as a Delaware corporation in July 2015 to focus on the development of
anti-cancer drug candidates, some of which are based on license agreements with The University of Texas System on behalf of the
M.D. Anderson Cancer Center, which we refer to as MD Anderson.
Our lead drug candidate
is liposomal Annamycin, which we refer to as Annamycin, an anthracycline being studied for the treatment of relapsed or refractory
acute myeloid leukemia, or AML. In 2015, the Company entered into a rights transfer agreement with AnnaMed, Inc. (“AnnaMed”),
a company affiliated with certain members of the Company’s management and board of directors, pursuant to which, in exchange
for shares of the Company’s common stock, AnnaMed agreed to transfer to MBI any and all data it had regarding the development
of Annamycin and the Annamycin investigative new drug application (“IND”) it had previously filed with the U.S. Food
and Drug Administration (“FDA”), including all trade secrets, know-how, confidential information and other intellectual
property rights held by AnnaMed. Annamycin was in clinical trials pursuant to an IND that had been filed with the FDA but the IND
was terminated due to a lack of activity by a prior drug developer. During the course of our review of that data in 2016, we identified
that Annamycin may have greater potential for efficacy than we originally believed, based on an unexpected potential opportunity
to increase the drug’s Maximum Tolerable Dose (“MTD”). As a result, we determined to adjust our clinical strategy
by adding in a Phase I arm to our next Phase II trial.
Because the
prior developer of Annamycin allowed their IND to lapse, we are required to submit a new IND for continued clinical trials
with Annamycin. We filed our IND application, with the clinical strategy of increasing the MTD mentioned above, for Annamycin
on February 10, 2017. In subsequent discussions with us, FDA requested certain revisions to the
protocol, additional information, and additional data related to Chemistry, Manufacturing and Controls
(“CMC”). We have the additional information, have made the requested revisions to the protocol, and we
are working on developing the CMC data. In the interim, we have withdrawn the IND application in order to resubmit it
when the requested data are available. We believe that resubmission of the IND application will occur in time for the IND to
go into effect by the end of July 2017, and we may begin clinical trials. This will mean that IRB (“Institutional
Review Board”) approvals and site initiations of various clinical sites participating in our Phase I/II clinical trial
of Annamycin should occur later in the second half of 2017. However, if we are unable to obtain the required CMC data on a
timely basis, we will be delayed in resubmitting our IND application, which will delay the commencement of our clinical
trials beyond July 2017.
The Annamycin drug
substance is no longer covered by any existing patent protection. We intend to submit patent applications for formulation, synthetic
process and reconstitution related to our Annamycin drug product candidate, although there is no assurance that we will be successful
in obtaining such patent protection. On March 21, 2017, we received Orphan Drug designation from the FDA for Annamycin for the
treatment of AML. Orphan Drug status could entitle us to market exclusivity of up to 7 years from the date of approval of
a New Drug Application (“NDA”), and 10 years’ exclusivity from the date of approval of a Marketing Authorization
Application (“MAA”), in the US and the European Union (“EU”). Separately, the FDA may also grant market
exclusivity of up to 5 years for newly approved new chemical entities (of which Annamycin would be one), but there can be no assurance
that any of these exclusivities will be granted.
We have two other drug
development projects in progress, one involving a portfolio of small molecules, which we refer to as the WP1066 Portfolio, focused
on the modulation of key oncogenic transcription factors involved in the progression of cancer, and the WP1122 Portfolio, a suite
of molecules targeting the metabolic processes involved in cancer in general, and glioblastoma (the most common form of brain tumor)
in particular. We have been granted royalty-bearing, worldwide, exclusive licenses for the patent and technology rights related
to our WP1066 Portfolio and WP1122 Portfolio drug technologies, as these patent rights are owned by MD Anderson.
In accordance with
FASB ASC Topic 280, Segment Reporting, we view our operations and manage our business as principally one segment. As a result,
the financial information disclosed herein represents all the material financial information related to our principal operating
segment.
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2.
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Summary of Significant
Accounting Policies
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Basis of Presentation
– Unaudited Interim Financial Information –
The accompanying unaudited interim financial statements and related
notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”) for financial information, and in accordance with the rules and regulations of the United States Securities and Exchange
Commission (the “SEC”) with respect to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim financial statements
furnished reflect all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary
for a fair statement of results for the interim periods presented. Interim results are not necessarily indicative of the results
for the full year. These interim unaudited financial statements should be read in conjunction with the audited financial statements
of the Company for the year ended December 31, 2016 and for the period from July 28, 2015 (inception) to December 31, 2015 and
notes thereto contained in the Registration Statement on Form S-1 filed with the SEC on April 27, 2016 and the Form 10-K filed
with the SEC on April 3, 2017.
Use of Estimates
in Financial Statement Presentation –
The preparation of these financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Going Concern –
These financial statements have been prepared on a going concern basis, which assumes the Company will continue to realize
its assets and discharge its liabilities in the normal course of business. The continuation of the Company as a going concern is
dependent upon the ability of the Company to obtain continued financial support from its stockholders’, necessary equity
financing to continue operations and the attainment of profitable operations. As of March 31, 2017, the Company has incurred an
accumulated deficit of $5.0 million since inception, and had not yet generated any revenue from operations. Additionally, management
anticipates that its cash on hand as of March 31, 2017 is sufficient to fund its planned operations into but not beyond the near
term. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These financial
statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification
of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company may seek additional
funding through a combination of equity offerings, debt financings, government or other third-party funding, commercialization,
marketing and distribution arrangements, other collaborations, strategic alliances and licensing arrangements and delay planned
cash outlays or a combination thereof. Management cannot be certain that such events or a combination thereof can be achieved.
Fair Value of Financial
Instruments –
Our financial instruments consist primarily of accounts payables, accrued expenses, warrant liability and
short and long-term debt. The carrying amount of accounts payables and accrued expenses approximates our fair value because of
the short-term maturity of such instruments and they are considered Level 1 liabilities under the fair value hierarchy. The
carrying amount of our debt approximates fair value. Interest rates that are currently available to us for issuance of short and
long-term debt with similar terms and remaining maturities are used to estimate the fair value of our short and long-term debt
and would be considered Level 3 inputs under the fair value hierarchy.
We have categorized
our assets and liabilities that are valued at fair value on a recurring basis into three-level fair value hierarchy in accordance
with GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets
and liabilities (Level 1) and lowest priority to unobservable inputs (Level 3).
Assets and liabilities
recorded in the balance sheet at fair value are categorized based on a hierarchy of inputs as follows:
Level 1 – Unadjusted
quoted prices in active markets of identical assets or liabilities.
Level 2 – Quoted
prices for similar assets or liabilities in active markets or inputs that are observable for the asset or liability, either directly
or indirectly through market corroboration, for substantially the full term of the financial instrument.
Level 3 – Unobservable
inputs for the asset or liability.
The Company’s
financial assets and liabilities recorded at fair value on a recurring basis include the fair value of warrant liability discussed
in Note 4. The fair value of this warrant liability is included in both short and long-term liabilities on the accompanying financial
statements.
The following table
provides the financial assets and liabilities reported at fair value and measured on a recurring basis at March 31:
In
thousands
Description
|
|
Liabilities Measured at Fair Value
|
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
|
Significant Other Observable Inputs (Level 2)
|
|
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Significant Other Unobservable Inputs (Level 3)
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|
|
|
|
|
|
|
|
|
|
|
|
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Fair value of warrant liability:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
$
|
3,084
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,084
|
|
The following table
provides a summary of changes in fair value associated with the Level 3 liabilities for the quarter ended March 31:
Fair
Value Measurements Using Significant Unobservable Inputs (Level 3) – in thousands
|
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Warrant Liability –
Current
|
|
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Warrant Liability –
Long-Term
|
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Warrant Liability –
Total
|
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Balance, beginning of period
|
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$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Issuances of warrants
|
|
|
2,453
|
|
|
|
1,690
|
|
|
|
4,143
|
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Change in fair value
|
|
|
(964
|
)
|
|
|
(95
|
)
|
|
|
(1,059
|
)
|
Transfer in/out (exercise of warrants)
|
|
|
(251
|
)
|
|
|
251
|
|
|
|
-
|
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Balance, end of period
|
|
$
|
1,238
|
|
|
$
|
1,846
|
|
|
$
|
3,084
|
|
The above table of
Level 3 liabilities begins with the initial valuation given the issuances occurred in the current quarter and adjusts the balances
for changes that occurred during the current quarter. The ending balance of the Level 3 financial instruments presented above represent
our best estimates and may not be substantiated by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instruments.
Loss Per Common
Share
- Basic net loss per common share is computed by dividing net loss available to common shareholders by the weighted-average
number of common shares outstanding during the period. Diluted net loss per common share is determined using the weighted-average
number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods
when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their
inclusion would be anti-dilutive. As of March 31, 2017, the Company’s potentially dilutive shares, which were not included
in the calculation of net loss per share, included notes convertible to 772,486 common shares, options to purchase 530,000 common
shares and warrants to purchase 7,747,425 common shares.
Reclassifications
–
A reclassification was made to the December 31, 2016 financial statements to conform to the 2017 presentation. Such
reclassification did not affect net loss as previously reported. Historically, accrued interest associated with “convertible
notes payable” was included in the line item “accounts payable and accrued expenses”. Management believes that
these costs are best shown included in the amounts shown for “convertible notes payable” and, as such, a reclassification
was made to the balance sheet for the year ended December 31, 2016 by reducing “accounts payable and accrued expenses”
and increasing “convertible notes payable” by $0.02 million.
Research and Development
Costs -
Research and development costs are expensed as incurred.
Subsequent Events
-
The Company’s management reviewed all material events through the date these financial statements were issued for subsequent
events disclosure consideration and has noted an event in Note 8 below.
Recent Accounting
Pronouncements
In May 2014, the FASB
issued Accounting Standard Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606), which will replace
numerous requirements in U.S. GAAP, including industry-specific requirements, and provide companies with a single revenue recognition
model for recognizing revenue from contracts with customers. The core principle of the new standard is that a company should recognize
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the company expects to be entitled in exchange for those goods or services. In August 2015, the FASB approved a proposal to defer
the effective date of the guidance until annual and interim reporting periods beginning after December 15, 2017. The Company is
currently evaluating the impact that this standard will have on its financial statements at the time the Company starts to generate
revenue or enters into other contractual arrangements, which the Company does not expect in the near term.
In August 2014, the
FASB issued ASU 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about
an Entity’s Ability to Continue as a Going Concern. Under the new guidance, management will be required to assess an entity’s
ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. The provisions of
this ASU are effective for annual periods ending after December 15, 2016, and for annual and interim periods thereafter; early
adoption is permitted. This disclosure was adopted for the year ended December 31, 2016.
In January 2016, the
FASB issued ASU No. 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial
Liabilities (“ASU 2016-01”). ASU 2016-01 affects the accounting for equity investments, financial liabilities
under the fair value option and the presentation and disclosure requirements of financial instruments. ASU 2016-01 is effective
for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently
evaluating the impact that this standard will have on its financial statements.
In February 2016, the
FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). Under ASU 2016-02, an entity will be required to recognize
right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU
2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are
required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements
to assess the amount, timing and uncertainty of cash flows arising from leases. For public companies, ASU 2016-02 is effective
for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires
a modified retrospective adoption, with early adoption permitted. The Company is currently evaluating the impact that this
standard will have on its financial statements.
In March 2016, the
FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718). The new guidance changes the accounting and simplifies various
aspects of the accounting for share-based payments to employees. The guidance allows for a policy election to account for forfeitures
as they occur or based on an estimated number of awards that are expected to vest. The policy we elected was to expense forfeitures
as they occur. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, with early adoption permitted. The
adoption of this standard on January 1, 2017, did not have a significant impact on the Company’s financial statements.
In August 2016, the
FASB issued ASU, Statement of Cash Flows (Topic 230). This ASU applies to all entities that are required to present a statement
of cash flows under Topic 230. The amendments provide guidance on eight specific cash flow issues and includes clarification on
how these items should be classified in the statement of cash flows and is designed to help eliminate diversity in practice as
to where items are classified in the cash flow statement. Furthermore, in November 2016, the FASB issued additional guidance on
this Topic that requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash
and cash equivalents when reconciling the statement of cash flows. This ASU is effective for fiscal years beginning after December
15, 2017, and interim periods within those fiscal years, with earlier application permitted for all entities. We plan to adopt
the provisions of this ASU for our fiscal year beginning January 1, 2018 and are currently evaluating the impact the adoption of
this new accounting standard will have on our financial statements.
The Company does not
believe that any other recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would
have a material effect on the accompanying financial statements.
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3.
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Convertible Notes Payable
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On various dates from
August 31, 2015 through January 19, 2016, each as amended on March 10, 2016, the Company entered into seven unsecured promissory
notes with three separate third party investors. Each note bears interest at 8.0% per annum and was to mature on the earlier of
June 30, 2016 or the completion of an IPO of the Company’s securities.
Since the completion
of the IPO occurred prior to June 30, 2016, these notes were to be automatically converted according to their terms into shares
of the Company’s common stock at applicable conversion price upon the Company’s IPO to the extent and provided that
no holder of these notes was or will be permitted to convert such notes to the extent that the holder or any of its affiliates
would beneficially own in excess of 4.99% of our common stock after such conversion. Due to this 4.99% limitation, a portion of
these notes was not converted at the time of the IPO and the remaining unconverted principal and accrued interest amounts of the
effected notes will remain outstanding and will be converted into shares of our common stock at such time as the 4.99% limitation
continues to be met. Until such time as the notes are converted into shares of common stock, the maturity date of the notes will
automatically be extended and we will not be required to repay the notes or the accrued interest relating to the notes in cash.
The IPO was completed
on May 31, 2016. On May 31, 2016, pursuant to the conversion feature of the foregoing notes and with restriction of the 4.99% beneficially
owned condition limitation, discussed above, the Company issued 1,166,503 common shares in total, reducing convertible debt principal
by $0.18 million and accrued interest by $0.02 million. Subsequent to these transactions and through March 31, 2017, an additional
2,116,640 common shares were issued due to the number of common shares outstanding allowing for conversion of additional shares
under the 4.99% beneficially owned condition limitation. This reduced the convertible debt principal by $0.32 million and accrued
interest by $0.03 million. Of these amounts, 1,206,543 shares were issued in the first quarter of 2017, thereby reducing convertible
debt principal by $0.19 million.
The convertible notes
were analyzed for a beneficial conversion feature on various issuance dates, at which time it was concluded that a beneficial conversion
feature did not exist.
The table below represents
the shares that are convertible at March 31, 2017 relating to the principal amounts of these convertible notes payable and excludes
any shares that are convertible relating to the associated accrued interest:
In
thousands (except conversion rate and share information)
Issuance Date
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
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Conversion
Rate
|
|
|
Shares
Convertible at
March 31,
2017
|
|
August 31, 2015(a)
|
|
$
|
38
|
|
|
$
|
38
|
|
|
$
|
0.1299
|
|
|
|
294,831
|
|
September 3, 2015(d)
|
|
|
48
|
|
|
|
125
|
|
|
|
0.1299
|
|
|
|
370,174
|
|
October 6, 2015(a)(b)
|
|
|
--
|
|
|
|
30
|
|
|
|
0.20
|
|
|
|
--
|
|
January 19, 2016(c)
|
|
|
22
|
|
|
|
83
|
|
|
|
0.20
|
|
|
|
107,481
|
|
Total
|
|
$
|
108
|
|
|
$
|
276
|
|
|
|
|
|
|
|
772,486
|
|
(a) Debt partially converted on May 31, 2016, August
19, 2016 and on September 1, 2016.
(b) Debt fully converted to common shares on March
7, 2017.
(c) Debt partially converted to common shares effective
March 7, 2017.
(d) Debt partially converted to common shares effective
February 21, 2017 and on March 1, 2017,
The common shares relating
to the above mentioned convertible notes payable contain the following trading restrictions: (a) beginning 90 days after the initial
closing of our IPO and until the one-year anniversary of the initial closing of the IPO, which will occur on May 31, 2017, the
holder of the note will be able to sell 1% of the number of shares of common stock underlying the note on a monthly basis, subject
to a maximum sale on any trading day of 4% of the daily volume; (b) if the common stock price is over $7.00 per share for five
consecutive trading days then the holder of the note can sell up to 3% of the number of shares of common stock underlying the note
on a monthly basis, subject to a maximum sale on any trading day of 4% of the daily volume; (c) if the common stock price is over
$10.00 per share for five consecutive trading days then the holder of the note can sell up to an additional 5% of the number of
shares of common stock underlying the note on a monthly basis, subject to a maximum sale on any trading day of 7% of the daily
volume; and (d) if the common stock price is over $14.00 per share then the holder of the note is not restricted from making any
sales until such time as the common stock price falls back below $14.00 per share; and (b) thereafter, until the two-year anniversary
of the initial closing of IPO, the holder of the note can sell on any trading day 10% of the daily volume; provided that if the
common stock price is over $10.00 per share then the holder of the note is not restricted from making any sales until such time
as the common stock falls back below $10.00 per share. The foregoing lock-up restrictions relate to public sales and do not restrict
the transfer of the shares privately, if permitted by applicable law, provided the acquirer of the shares agrees to comply with
the above restrictions with respect to any public sales.
On February 9, 2017, the Company entered
into an Underwriting Agreement (the “Underwriting Agreement”) with Roth Capital Partners, LLC, as representative of
the several underwriters identified therein (collectively, the “Underwriters”), pursuant to which we sold in a registered
public offering (the “Offering”), 3,710,000 units, priced at a public offering price of $1.35 per unit (the closing
price that day was $1.50), with each unit consisting of: (i) one share of common stock, (ii) a five-year Series A warrant to purchase
0.50 of a share of common stock, (iii) a 90-day Series B warrant to purchase one share of common stock, and (iv) a five-year Series
C warrant to purchase 0.50 of a share of common stock. The Series C warrants in a unit may only be exercised to the extent and
in proportion to a holder of the Series C warrants exercising its Series B warrants included in the unit. The Series A and Series
C warrant have an exercise price of $1.50 per share of common stock. The Series B warrant has an exercise price of $1.35 per share
of common stock.
Under the terms of the Underwriting Agreement,
we granted the Underwriters a 45-day option to purchase an additional 556,500 shares of common stock and/or an additional 556,500
warrant combinations (comprised of an aggregate of 278,250 Series A warrants, 556,500 Series B warrants and 278,250 Series C warrants),
in any combinations thereof, from us to cover over-allotments at the public offering price per share of $1.349 and public offering
price per warrant combination of $.001, respectively, less the underwriting discounts and commissions. Upon the closing of the
Offering, the Underwriters exercised the over-allotment option with respect to 278,100 warrant combinations. We received approximately
$4.5 million in net proceeds from the Offering, after deducting underwriting discounts and commissions and estimated offering expenses.
The basis of value is fair value, which is defined pursuant
to Accounting Standards Codification (“ASC”) 820 to be “The price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the measurement date”. The Company
estimated the fair value of the Warrants under ASC 820 as of the closing date of February 14, 2017 for financial reporting purposes.
We used the Black-Scholes option pricing model (“BSM”) to determine the fair value of the Series A, Series B, and Series
C Vested Common Warrants and a Monte Carlo simulation (“MCM”) with regard to the Series C Unvested Common Warrants
in consideration of path dependent vesting terms of the contract. Both the BSM and MCM models are acceptable in accordance with
GAAP. The BSM requires the use of a number of assumptions including volatility of the stock price, the weighted average risk-free
interest rate, and the weighted average term of the Warrant. The MCM simulates the Company’s common stock price from the
valuation date through the Series B Warrant and the unvested Series C Warrant expiration dates using Geometric Browman Motion on
a risk-neutral basis - thereby impacting the likelihood that the Series B Warrants will be exercised and, subsequently, the Series
C Warrants will then vest.
The risk-free interest rate assumption is
based upon observed interest rates on zero coupon U.S. Treasury bonds whose maturity period is appropriate for the term of the
Warrants and is calculated by using the average daily historical stock prices through the day preceding the grant date.
Estimated volatility is a measure of the
amount by which our stock price is expected to fluctuate each year during the expected life of the Warrants. Our estimated volatility
is an average of the historical volatility of our stock prices (and that of peer entities whose stock prices were publicly available)
over a period equal to the expected life of the Warrants. Where appropriate we used the historical volatility of peer entities
due to the lack of sufficient historical data of our stock price during 2016-2017.
The assumptions used in the BSM and MCM
models for the Warrants are as follows:
|
|
Three Months
Ended
March 31, 2017
|
|
Year
Ended
December 31, 2016
|
Risk- free interest rate
|
|
0.54%-1.96%
|
|
-
|
Volatility
|
|
82.5%-160.11%
|
|
-
|
Expect life (years)
|
|
0.25-5.0
|
|
-
|
Dividend yield
|
|
0.00%
|
|
-
|
A summary of our Warrant activity and related
information follows:
|
|
Number of Shares Under Warrant
|
|
|
Range of Warrant Price Per Share
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life
|
Balance at January 1, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
Granted
|
|
|
8,235,923
|
|
|
|
$1.35-$1.50
|
|
|
$
|
1.43
|
|
|
1.6
|
Exercised
|
|
|
(596,300
|
)
|
|
|
$1.35
|
|
|
$
|
1.35
|
|
|
.25
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
Balance at March 31, 2017
|
|
|
7,639,623
|
|
|
|
$1.35-$1.50
|
|
|
$
|
1.43
|
|
|
1.8
|
Vested and Exercisable at March 31, 2017
|
|
|
5,943,718
|
|
|
|
$1.35-$1.50
|
|
|
$
|
1.41
|
|
|
2.3
|
Warrant Activity During the First Quarter
of 2017:
On February 14, 2017, 8,235,923 warrants
were granted, as discussed above.
On March 24, 2017, 596,300 Series B warrants
were exercised for an equivalent amount of common shares which vested 298,150 Series C Warrants.
On March 31, 2017, the Warrants were revalued
with a fair value determination of $3.08 million which included a fair value adjustment of $1.06 million which was included as
a change in fair value of warranty liability in the accompanying financial statements.
Series B and Series C Warrants
As noted above, Series
C Common Warrants vest and become eligible for exercise ratably in proportion to the Warrant holder’s exercising of their
Series B Common Warrants. The Series B Warrants and the unvested Series C Warrants expire May 15, 2017. Therefore, the associated
warranty liability of $1.24 million, which is shown as a “Warrant Liability – Current” on the balance sheet,
may be extinguished on May 15, 2017 if no other Series B Warrants are exercised prior to that date.
On May 2, 2016, the
Company amended and restated its certificate of incorporation to increase the number of shares authorized to 80,000,000 of which
5,000,000 shares of preferred stock are authorized and 75,000,000 shares of common stock are authorized.
Preferred Stock
We are authorized to
issue up to 5,000,000 shares of preferred stock. Our certificate of incorporation authorizes the board to issue these shares in
one or more series, to determine the designations and the powers, preferences and relative, participating, optional or other special
rights and the qualifications, limitations and restrictions thereof, including the dividend rights, conversion or exchange rights,
voting rights (including the number of votes per share), redemption rights and terms, liquidation preferences, sinking fund provisions
and the number of shares constituting the series. As of March 31, 2017, there was no issued preferred stock.
Common Stock
On January 13, 2017, the Company agreed to issue 79,167 shares
of common stock to a consultant in full settlement for prior services rendered to the Company. Settlement occurred February 21,
2017 with the issuance of the shares, resulting in a gain on settlement of $0.15 million recorded in Gain in settlement of liability
on the Statements of Operations. The obligation of $0.24 million had been recorded by the Company in Accounts payable and accrued
expenses as of December 31, 2016.
On February 14, 2017, the Company completed
a public offering and sold 3,923,923 shares of the Company’s common stock. The offering price per share was $1.35. The Company
received net cash proceeds of $4.46 million after deducting underwriting discounts, commissions and direct offering expenses payable
by us. See Note 4 above regarding Warrant issuance related to our February public offering.
Adoption of 2015 Stock Plan
On December 5, 2015,
the Board of Directors of the Company approved the Company’s 2015 Stock Plan, which was amended on April 22, 2016.
The expiration date of the plan is December 5, 2025 and the total number of underlying shares of the Company’s common stock
available for grant to employees, directors and consultants under the plan is 2,500,000 shares. The awards under the 2015 Stock
Plan can be in the form of stock options, stock awards or stock unit awards. The following is a summary of option activities for
the periods ended December 31, 2016 and the three months ended 2017:
|
|
Number of
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding, December 31, 2015
|
|
|
200,000
|
|
|
$
|
0.14
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
Granted - 2016
|
|
|
460,000
|
|
|
|
3.75
|
|
|
|
5.83
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(150,000
|
)
|
|
|
0.14
|
|
|
|
0.20
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2016
|
|
|
510,000
|
|
|
$
|
3.40
|
|
|
$
|
5.28
|
|
|
|
9.29
|
|
|
$
|
48,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted - Q1 2017
|
|
|
20,000
|
|
|
$
|
1 .76
|
|
|
$
|
2.31
|
|
|
|
|
|
|
|
|
|
Cancelled – Q1 2017
|
|
|
-
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
–
|
|
Outstanding, March 31, 2017
|
|
|
530,000
|
|
|
$
|
3.33
|
|
|
$
|
5.17
|
|
|
|
8.82
|
|
|
$
|
48,500
|
|
Exercisable, March 31, 2017
|
|
|
50,000
|
|
|
$
|
0.14
|
|
|
$
|
0.20
|
|
|
|
3.17
|
|
|
$
|
48,500
|
|
During the quarter
ended March 31, 2017, the Company granted members of its science advisory board options in the aggregate, to purchase 20,000 shares
of the Company’s common stock with an exercise price $2.31, a term of 10 years, and a vesting period of 4 years. The exercise
price was based upon the closing price of stock on the day of the grant. These options have an aggregated fair value of $35,196
that was calculated using the Black-Scholes option-pricing model.
Variables used in the
Black-Scholes option-pricing model include ranges of: (1) discount of 1.30-2.24% (2) expected lives of 6 to 6.25 years, (3) expected
volatility of 70.18% to 89.11%, and (4) zero expected dividends. The Company, due to the limited number of participants in the
plan and their positions within the Company, uses a 0% estimated forfeiture rate. During the quarter ended March 31, 2017, the
Company recorded $0.11 million in stock-based compensation in relation to the options. As of March 31, 2017, there was $1.49 million
of unrecognized compensation cost, net of estimated forfeitures, related to the Company’s non-vested equity awards, which
is expected to be recognized over a weighted average period of 3.28 years.
The fair value of each
stock option is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in
the above paragraph. The expected term of the options was computed using the “plain vanilla” method as prescribed by
the Securities and Exchange Commission Staff Accounting Bulletin 107 because we do not have sufficient data regarding employee
exercise behavior to estimate the expected term. The volatility was determined by referring to the average historical volatility
of a peer group of public companies because we do not have sufficient trading history to determine our historical volatility. The
risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the
time of grant.
Deferred income tax
assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We do
not expect to pay any significant federal or state income tax for 2017 as a result of the losses recorded during the three months
ended March 31, 2017 and the additional losses expected for the remainder of 2017 and net operating loss carry forwards from prior
years. Accounting standards require the consideration of a valuation allowance for deferred tax assets if it is “more likely
than not” that some component or all of the benefits of deferred tax assets will not be realized. As of March 31, 2017, we
maintained a full valuation allowance for all deferred tax assets.
The Company recorded
no income tax provision for the three months ended March 31, 2017 and 2016. The effective tax rate for the three months ended
March 31, 2017 and 2016 was 0%. The income tax rates vary from the federal and state statutory rates primarily due to the valuation
allowances on the Company’s deferred tax assets. The Company estimates its annual effective tax rate at the end of each
quarterly period. Jurisdictions with a projected loss for the year where no tax benefit can be recognized due to the valuation
allowances on the Company’s deferred tax assets are excluded from the estimated annual effective tax rate. The impact of
such an exclusion could result in a higher or lower effective tax rate during a particular quarter depending on the mix and timing
of actual earnings versus annual projections.
|
7.
|
Commitments and Contingencies
|
MD Anderson – IntertechBio Agreement
In 2015, the Company
acquired the rights and obligations under the Patent and Technology License Agreement entered into between IntertechBio and MD
Anderson dated April 2, 2012. Pursuant to the agreement, IntertechBio obtained a royalty-bearing, worldwide, exclusive license
to intellectual property including patent rights related to the Company’s drug product candidate, WP1122. Under the agreement,
IntertechBio agreed to pay annual maintenance fees in the amount of $10,000 on the first anniversary of the effective date of the
agreement, $20,000 on the second anniversary of the effective date of the agreement, $40,000 on the third anniversary of the effective
date of the agreement, $60,000 on the fourth anniversary of the effective date of the agreement, $80,000 on the fifth anniversary
of the effective date of the agreement and $100,000 on the sixth anniversary of the effective date of the agreement, except that
such payments will no longer be due upon the first sale of a licensed product. Under the agreement, IntertechBio also agreed to
make a minimum annual royalty payment in the amount of $200,000 for the first anniversary following the first sale of a licensed
product, $400,000 for the second anniversary following the first sale of a licensed product, and $600,000 for the third year following
the first sale of a licensed product. IntertechBio also agreed to make certain milestone payments. Pursuant to an amendment on
October 19, 2015, the Company will pay milestone payments as follows:
In
thousands (except conversion rate and share information)
Phase
|
|
Amount
|
|
|
|
|
|
Commencement of Phase II Study for a licensed product
|
|
$
|
200
|
|
Commencement of Phase III Study for a licensed product
|
|
$
|
250
|
|
Filing of a New Drug Application for a licensed product
|
|
$
|
400
|
|
Receipt of market approval for a licensed product
|
|
$
|
500
|
|
Per the October 2015
amendment to the agreement, MD Anderson has the right to terminate the license agreement if (i) a preclinical toxicology program
for a licensed product is not initiated within one year of the effective date of the amendment (which has occurred), (ii) an investigational
new drug application is not filed with the Food and Drug Administration for a Phase I study for a licensed product within three
years of the effective date of the amendment, or (iii) a Phase I study for a licensed product is not commenced within five years
of the effective date of the amendment. The agreement will expire upon the expiration of the licensed intellectual property. The
rights obtained by the Company pursuant to the agreement are made subject to the rights of the U.S. government to the extent that
the technology covered by the licensed intellectual property was developed under a funding agreement between MD Anderson and the
U.S. government. All out-of-pocket expenses incurred by MD Anderson in filing, prosecuting and maintaining the licensed patents
have been and shall continue to be assumed by the Company.
MD Anderson – Patent
& Technology License Agreement
Upon the Company’s
acquisition of Moleculin, LLC on May 2, 2016, we obtained a royalty-bearing, worldwide, exclusive license to intellectual property
rights, including patent rights related to our WP1066 drug product candidate from MD Anderson through a Patent and Technology License
Agreement Moleculin, LLC entered with MD Anderson on June 21, 2010 (the “Moleculin License Agreement”). Under
the Moleculin License Agreement, Moleculin, LLC obtained the right to manufacture, have manufactured, use, import, offer to sell
or sell products worldwide for any indication under the licensed intellectual property with the right to sublicense. In consideration,
Moleculin, LLC agreed to make payments to MD Anderson including an up-front payment, milestone payments and minimum annual royalty
payments for sales of products developed under the license agreement. Specifically, under the Moleculin License Agreement, Moleculin,
LLC agreed to pay a nonrefundable upfront documentation fee and an annual maintenance fee in the amount of $20,000 on June 21,
2011, which has and shall increase in $10,000 increments on an annual basis thereafter up to a maximum of $100,000, except that
such payments will no longer be due upon marketing approval in any country of a licensed product. Under the Moleculin License Agreement,
Moleculin, LLC also agreed to make a minimum annual royalty payment.
Upon completion of
our acquisition of Moleculin, LLC, we assumed the rights and obligations of Moleculin, LLC. However, the rights we have obtained
pursuant to the assignment of the Moleculin License Agreement are made subject to the rights of the U.S. government to the extent
that the technology covered by the licensed intellectual property was developed under a funding agreement between MD Anderson and
the U.S. government. All out-of-pocket expenses incurred by MD Anderson in filing, prosecuting and maintaining the licensed patents
have been and shall continue to be assumed by us.
On October 8, 2015,
Moleculin, LLC entered into a letter agreement with MD Anderson for Moleculin, LLC’s past due fees to MD Anderson in the
amount of $691,186 of which $300,000 had been paid prior to the letter agreement. Pursuant to the letter agreement, MD Anderson
agreed to receive the remaining past due fee in three installments: a) $125,000 on October 31, 2015; b) $175,000 on January 31,
2016; and c) $91,186 on April 30, 2016. Moleculin, LLC paid $125,000 to MD Anderson on November 2, 2015.
On October 19, 2015,
the agreement was amended for the milestone payments. The amended milestone payments are as follows: (i) commencement of Phase
III Study for first licensed drug/product within the United States, Europe, China or Japan - $150,000; (ii) submission of the first
NDA within the United States - $500,000; and (iii) receipt of first marketing approval for sale of a license product in the United
States - $600,000.
On January 28, 2016,
the Company and Moleculin, LLC entered into a letter agreement with MD Anderson where MD Anderson agreed to receive the remaining
outstanding amount on or before the earlier of April 30, 2016 or four days after our IPO. This date was amended and per the amended
agreement, the Company paid the outstanding Moleculin, LLC fees on May 31, 2016 in the amount of $306,186 in cash.
On January 9,
2017, the Company amended its Sponsored Laboratory Study Agreement with MD Anderson whereby the Company would pay $302,500 in
2017 and the agreement is extended to October 31, 2018. Of this amount, $202,500 had been paid as of March 31, 2017. The
remaining $100,000 is due on July 31, 2017.
Houston Pharmaceuticals,
Inc.
Our acquisition of
Moleculin, LLC, occurring prior to our IPO offering, provided us with the rights of the license agreement that Moleculin, LLC had
with MD Anderson covering the WP1066 Portfolio. We are obligated to make payments to HPI totaling $0.75 million over a three-year
period commencing after the IPO offering in exchange for HPI allowing us to access any data, information or know-how resulting
from the research and development conducted by HPI. Pursuant to the HPI Out-Licensing Agreement, we have the right within three
years of the date we enter into the agreement to buy-out from HPI all rights granted to HPI under the agreement for a payment of
$1.0 million. Upon our exercise of the buy-out we will no longer be obligated to make any payments to HPI remaining from the $0.75
million obligation discussed above. We will need to raise additional funds to make the buy-out payment. We cannot assure that such
additional funding will be available on satisfactory terms, or at all.
On April 11, 2017,
the Company announced that it has appointed Theradex Systems, Inc. as its contract
research organization for its planned Phase I/II clinical trial for Annamycin for the treatment of relapsed or refractory
AML. Engaging Theradex is a key step in preparing to initiate the Company’s Phase I/II clinical trial for Annamycin. The
Company’s IND for Annamycin must go into effect for clinical trials to begin.