Note 1 –
Nature of Operations
PDS Biotechnology Corporation, a Delaware corporation (the “Company,” “PDS,” or the “combined company”), PDS is a clinical-stage immunotherapy company with a growing pipeline of cancer immunotherapies and infectious disease vaccines based on the Company’s proprietary Versamune® T-cell activating technology platform. Versamune® effectively delivers disease-specific antigens for in
vivo uptake and processing, while also activating the critical type 1 interferon immunological pathway, resulting in production of potent disease-specific killer T-cells as well as neutralizing antibodies. PDS has engineered multiple therapies,
based on combinations of Versamune® and
disease-specific antigens, designed to train the immune system to better recognize disease cells and effectively attack and destroy them. Our current development pipeline of cancer immunotherapy products and infectious disease vaccines
is based on the Versamune
® platform. Our immuno-oncology products can potentially be used as a component of combination products with other leading technologies to
provide effective treatments across a range of cancer types, including Human Papillomavirus (HPV)-based cancers, melanoma, colorectal, lung, breast and prostate cancers or as monotherapies in early-stage disease. PDS is working to expand its
infectious disease pandemic development program, including novel vaccines for COVID-19 and universal influenza, in addition to its previously announced tuberculosis development collaboration with Farmacore Biotechnology.
From the Company's inception, it has devoted substantially all of its efforts to drug development, business planning, engaging regulatory, manufacturing and other technical consultants, acquiring
operating assets, planning and executing clinical trials and raising capital.
On March 15, 2019, the Company, then operating as Edge Therapeutics, Inc. (“Edge”), completed its reverse merger with privately held PDS Biotechnology Corporation (“Private PDS”), pursuant to and
in accordance with the terms of the Agreement and Plan of Merger
(the “Merger Agreement”), dated as of November 23, 2018, as amended on January 24, 2019, by and among the Company, Echos Merger Sub, a wholly-owned
subsidiary of the Company (“Merger Sub”), and Private PDS, whereby Private PDS merged with and into Merger Sub, with Private PDS surviving as the Company’s wholly-owned subsidiary (the “Merger”).
In
connection with and immediately following completion of the Merger, the Company effected a 1-for-20 reverse stock split (the “Reverse Stock Split”) and changed its corporate name from Edge Therapeutics, Inc. to PDS Biotechnology Corporation, and
Private PDS changed its name to PDS Operating Corporation.
For accounting purposes, the Merger was treated as a “reverse acquisition” under generally accepted accounting principles in the United States (“U.S. GAAP”) and Private PDS is considered the
accounting acquirer. Accordingly, upon consummation of the Merger, the historical financial statements of Private PDS became the Company's historical financial statements, and the historical financial statements of Private PDS are included in the
comparative prior periods. See “Note 4 – Reverse Merger” for more information on the Merger. As part of the Merger, the Company acquired all of Edge's assets relating to current and future research and development.
In December 2019, a coronavirus known as SARS-CoV-2 was first detected in Wuhan, Hubei Province, People’s Republic of China, causing outbreaks of the coronavirus disease, known as COVID-19, that
has now spread globally. On January 30, 2020 the World Health Organization (WHO) declared COVID-19 a pandemic (the “COVID-19 Pandemic”). The Secretary of Health and Human Services declared a public health emergency on January 31, 2020, under
section 319 of the Public Health Service Act (42 U.S.C. 247d), in response to the COVID-19 Pandemic. The full impact of the COVID-19 Pandemic is unknown and rapidly evolving. While the potential economic impact brought by and the duration of the
COVID-19 Pandemic may be difficult to assess or predict, the COVID-19 pandemic began to have a material adverse impact on our business operations, financial operations, and results of operations in the quarter ended March 31, 2020, and we expect
it to continue to adversely affect our business. In addition, a recession or market volatility resulting from the COVID-19 Pandemic could affect the Company’s business.
Note 2 – Summary of Significant Accounting Policies
(A) Unaudited interim financial statements:
The interim balance sheet at March 31, 2020, the statements of operations and comprehensive loss and changes in stockholders' equity for the three
months
ended March 31, 2020 and 2019, and cash flows for the three months ended March 31, 2020 and 2019 are unaudited. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP,
in accordance with the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required
by U.S. GAAP can be condensed or omitted. These condensed consolidated financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments, consisting
only of normal recurring adjustments that are necessary for a fair statement of its financial information. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the
year ending December 31, 2020 or for any other future annual or interim period. The balance sheet as of December 31, 2019 included herein was derived from the audited condensed consolidated financial statements as of that date. These condensed
consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements
and notes thereto as of and for the year ended December 31, 2019,
filed by the Company with the SEC in its Annual Report on Form 10-K on March 27, 2020.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the reported amounts of expenses at the date of the consolidated financial statements and during the reporting periods, and to disclose contingent assets and liabilities at the date of the consolidated financial
statements. Actual results could differ from those estimates.
(C) Significant risks and uncertainties:
The Company's operations are subject to a number of factors that may affect its operating results and financial condition. Such factors include, but are not limited to: the
clinical and regulatory development of its products, the Company’s ability to preserve its cash resources, the Company’s
review of strategic alternatives, the Company’s ability to add product candidates to its
pipeline, the Company's intellectual property, competition from products manufactured and sold or being developed by other companies, the price of, and demand for, Company products if approved for sale, the Company's ability to negotiate
favorable licensing or other manufacturing and marketing agreements for its products, the Company’s ability to raise capital, and the
effects of health epidemics, pandemics, or outbreaks of infectious diseases,
including the recent COVID-19 pandemic.
The Company currently has no commercially approved products. As such, there can be no assurance that the Company's future research and development programs will be
successfully commercialized. Developing and commercializing a product requires significant time and capital and is subject to regulatory review and approval as well as competition from other biotechnology and pharmaceutical companies. The Company
operates in an environment of rapid change and is dependent upon the continued services of its employees and consultants and obtaining and protecting its intellectual property.
(D) Business acquisition:
The Company’s consolidated financial statements include the operations of an acquired business after the completion of the acquisition. We
account for acquired businesses using the acquisition method of accounting, which requires, among other things, that most assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date and that
the fair value of IPR&D be recorded on the balance sheet. Transaction costs are expensed as incurred.
The Company measures certain assets and liabilities at fair value, either upon initial recognition or for subsequent accounting or reporting. For example, we use fair value
in the initial recognition of net assets acquired in a business combination and when measuring impairment losses. We estimate fair value using an exit price approach, which requires, among other things, that we determine the price that would be
received to sell an asset or paid to transfer a liability in an orderly market. The determination of an exit price is considered from the perspective of market participants, considering the highest and best use of non-financial assets and, for
liabilities, assuming that the risk of non-performance will be the same before and after the transfer.
When estimating fair value, depending on the nature and complexity of the asset or liability, we may use one or all of the following techniques:
Our fair value methodologies depend on the following types of inputs:
(E) Cash equivalents and concentration of cash balance:
The Company considers all highly liquid securities with a maturity weighted average of less than three months to be cash equivalents. The Company's cash and cash equivalents
in bank deposit accounts, at times, may exceed federally insured limits.
(F) Research and development:
Costs incurred in connection with research and development activities are expensed as incurred. These costs include licensing fees to use certain technology in the Company's
research and development projects as well as fees paid to consultants and entities that perform certain research and testing on behalf of the Company.
Costs for certain development activities, such as clinical trials, are recognized based on an evaluation of the progress to completion of specific tasks using data, such as
patient enrollment, clinical site activations or information provided by vendors on their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs
incurred.
The Company expenses patent costs as incurred and classifies such costs as general and administrative expenses in the accompanying statements of operations and comprehensive
loss.
(H) Intangible
asset and impairment:
As part of the reverse merger transaction on March 15, 2019, the Company acquired an in-process research and development ("IPR&D") intangible asset valued at $2,974,000 using a discounted cash flow method. In determining the value of IPR&D, management considers, among other factors, the stage of completion of the project, the technological feasibility of the project, whether the project have
an alternative future use, and the estimated residual cash flows that could be generated from the various projects and technologies over their respective projected economic lives. The discount rate used is determined at the time of acquisition
and includes a rate of return which accounts for the time value of money, as well as risk factors reflecting the economic risk that the projected cash flows may not be realized.
The Company reviews all of
its long-lived assets for impairment indicators throughout the year.
The Company performs
impairment testing for indefinite-lived intangible assets annually and for all other long-lived assets whenever impairment indicators are present. When necessary,
the Company records charges for impairments of
long-lived assets for the amount by which the fair value is less than the carrying value of these assets.
(I) Stock-based compensation:
The Company accounts for its stock-based compensation in accordance with ASC Topic 718, Compensation—Stock Compensation (“ASC 718”). ASC 718 requires all stock-based payments to employees,
directors and non-employees to be recognized as expense in the condensed statements of operations and comprehensive loss based on their grant date fair values. The Company estimates the fair value of options granted using the Black-Scholes option
pricing model for stock option grants to both employees and non-employees. This model requires the following assumptions: (1) the expected volatility of our stock is based on volatilities of a peer group of
similar companies in the biotechnology industry whose share prices are publicly available, (2) the expected term of the award is based on the simplified method, which is the midpoint between the
requisite service period and the contractual term of the option, as we have a limited history of being a public company from March 15, 2019 (the date of the Merger) to develop reasonable expectations about future exercise patterns and
employment duration for our options, (3) the risk-free interest rate based on U.S. Treasury notes with a term approximating the expected life of the option and (4) expected dividend yield of 0, since we have never paid cash dividends and have
no present intention to pay cash dividends.
The Company expenses the fair value of its stock-based compensation awards to employees, directors and non-employees on a straight-line basis over the requisite service period, which is generally
the vesting period. The Company recognizes forfeitures as they occur.
(J) Net income (loss) per common share:
Basic net income (loss) per share attributable to common stockholders is computed by dividing net income (loss) attributable to common stockholders by the weighted-average
number of common shares outstanding during the period. All participating securities are excluded from basic weighted-average common shares outstanding. In computing both basic net income (loss) per share attributable to common stockholders and
diluted net income (loss) per share attributable to common stockholders, undistributed earnings are re-allocated to reflect the potential impact of dilutive securities, including stock options and warrants. Diluted net income (loss) per share
attributable to common stockholders is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common equivalent shares outstanding for the period. Diluted net income (loss) per share
attributable to common stockholders includes any dilutive effect from outstanding stock options and warrants using the treasury stock method.
The common stock issuable upon the conversion or exercise of the following dilutive securities as of March 31, 2020 has been excluded from the diluted net loss per share
attributable to common stockholders calculation because their effect would have been antidilutive for the period presented.
The potentially dilutive securities excluded from the determination of diluted loss per share as their effect is antidilutive, are as follows:
The following is a reconciliation of the numerator (net income or loss) and the denominator (number of shares) used in the calculation of basic and diluted net
income (loss) per share attributable to common stockholders:
(K) Accounting standards adopted:
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"), which sets out the principles
for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The Company adopted the new lease
standard, as of January 1, 2019, using the optional transition method under which comparative financial information will not be restated and continue to apply the provisions of the previous lease standard in its annual disclosures for the
comparative periods. In addition, the new lease standard provides a number of optional practical expedients in transition. The Company elected the package of practical expedients. As such, the Company did not have to reassess whether expired
or existing contracts are or contain a lease; did not have to reassess the lease classifications or reassess the initial direct costs associated with expired or existing leases. Furthermore, the Company did not have any leases impacted by
ASC 842 on the adoption date. As part of the purchase price allocation from the reverse merger, the Company recorded a Right of Use asset and Liability of $1.4 million for office space located in Berkeley Heights, New Jersey. The lease for
property in Berkeley Heights was subsequently terminated. As of March 5, 2020 the Company entered into a new sub-lease for office space at Florham Park
commencing May 1, 2020. See note 6 for details.
The new lease standard also provides practical expedients for an entity's ongoing accounting. The Company elected the
short-term lease recognition exemption under which the Company will not recognize right-of-use (“ROU”) assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases. The Company
elected the practical expedient to not separate lease and non-lease components for certain classes of assets (office building).
The Company determines if an arrangement is a lease at inception. Operating lease ROU assets and operating lease
liabilities are recognized based on the present value of the future minimum lease payments over the lease term. Operating lease expense is recognized on a straight-line basis over the lease term, subject to any changes in the lease or
expectations regarding the terms. Variable lease costs such as operating costs and property taxes are expensed as incurred. As of March 31, 2020, there are no active leases accounted
for under ASC 842.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) (“ASU 2018-13”). ASU 2018-13 modifies disclosure requirements related to fair value measurement. On January 1, 2020, the Company adopted ASU 2018-07 and there was no impact to its financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40) (“ASU 2018-15”). ASU 2018-15 reduces complexity for the accounting for costs of
implementing a cloud computing service arrangement and aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs
incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). On January 1, 2020, the Company adopted ASU 2018-07
and there was no impact to its financial statements.
Note 3 – Liquidity
As of March 31, 2020, the Company had $21.0 million of cash and cash equivalents, primarily provided by $29.1 million of pre-existing cash on Edge’s balance sheets that the Company obtained as a
result of the Merger and net proceeds of $12.8 million from the sale of our common stock. The Company's primary uses of cash are to fund operating expenses, primarily research and development expenditures. Cash used to fund operating expenses is
impacted by the timing of when the Company pays these expenses, as reflected in the change to the Company's outstanding accounts payable and accrued expenses.
In July 2019, we entered into a common stock purchase agreement, or the Aspire Purchase Agreement, with Aspire Capital, which provides that, upon the terms and
subject to the conditions and limitations set forth therein, at our discretion, Aspire Capital is committed to purchase up to an aggregate of $20.0 million of shares of our common stock, or the Purchased Shares, over the 30-month term of the
Aspire Purchase Agreement. We may sell an aggregate of 1,034,979 shares of our common stock (which represented 19.99% of the Company’s outstanding shares of common stock on the date of the Aspire Purchase Agreement) without stockholder
approval. We may sell additional shares of our common stock above the 19.99% limit provided that (i) we obtain stockholder approval or (ii) stockholder approval has not been obtained at any time the 1,034,979 share limitation is reached and at
all times thereafter the average price paid for all shares issued
under the Aspire Purchase Agreement, is equal to or greater than $5.76, which was the consolidated closing bid price of our common stock on July 26,
2019.
. On July 29, 2019, we issued 100,654 shares of our common stock to Aspire Capital, as consideration for entering into the Aspire Purchase Agreement, which we refer to as the Commitment. As of March 31,
2020 no shares have been sold to Aspire.
In February 2020, we completed an underwritten public offering, in which we sold 10,000,000 shares of common stock at a public offering price of $1.30 per share. The shares
sold included 769,230 shares issued upon the exercise by the underwriter of its option to purchase additional shares at the public offering price. We received gross proceeds of approximately $13 million and net proceeds of approximately $11.9
million after deducting underwriting discounts and commissions.
Our primary uses of cash are to fund operating expenses, primarily research and development expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these
expenses, as reflected in the change in our outstanding accounts payable and accrued expenses.
The Company evaluated whether there are any conditions and events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern
within one year beyond the filing of this Quarterly Report on Form 10-Q. The Company’s budgeted cash requirements in 2020 and beyond include expenses related to continuing development and clinical studies. Based on the Company’s available cash
resources and cash flow projections as of the date the consolidated financial statements were available for issuance,
the Company believes there are sufficient funds to continue operations and research and
development programs for at least 12 months from the date of this report. Until the Company can generate significant cash from its operations, the Company expects to continue to fund its operations with its available financial resources. These
financial resources may not be adequate to sustain its operations.
The Company plans to continue to fund
its operations and capital funding needs through equity and/or debt financings.
However, the Company cannot be certain that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to the Company or its existing stockholders. The Company may also enter into government funding programs and consider selectively partnering for clinical development and commercialization. The sale of additional equity would result in additional dilution to
its stockholders. Incurring debt financing would result in debt service obligations, and the instruments governing such debt could provide for operating and financing covenants that would restrict
the Company’s operations. If
the Company is unable to raise additional capital in sufficient amounts or on acceptable terms,
it may be required to delay,
limit, reduce, or terminate
its product development or future commercialization efforts or grant rights to develop and market immunotherapies that
the Company would otherwise prefer to
develop and market
itself. Any of these actions could harm
the Company’s business, results of operations and prospects.
Failure to obtain adequate
financing also may adversely affect the Company’s ability to operate as a going concern.
Note 4 – Reverse Merger
On March 15, 2019, the Company (then operating as Edge), Merger Sub and Private PDS completed the Merger in accordance with the Plan of Merger and Reorganization, dated as of November 23, 2018,
as amended on January 24, 2019, pursuant to and in accordance with which Merger Sub merged with and into Private PDS, with Private PDS surviving as the Company’s wholly-owned subsidiary. Immediately following completion of the Merger, the Company
effected the Reverse Stock Split at a ratio of one new share for every twenty shares of its common stock then-outstanding, and changed its corporate name from Edge Therapeutics, Inc. to PDS Biotechnology Corporation, and Private PDS, now the
Company’s wholly-owned subsidiary, changed its name to PDS Operating Corporation. The Merger is intended to qualify for federal income tax purposes as a tax-free reorganization under the provisions of Section
368(a) of the Internal Revenue Code of 1986, as amended.
In connection with the Merger, each share of Private PDS’s common stock outstanding immediately prior to the Merger was converted into 0.3262 shares (on a post-Reverse Stock Split basis) of the
Company’s common stock. As a result, the Company issued 3,573,760 shares of its common stock to the stockholders of Private PDS in exchange for all of the outstanding shares of common stock of Private PDS.
For accounting purposes, Private PDS is considered to be the accounting acquirer in the Merger because Private PDS’s stockholders owned approximately 70% of
PDS’s
common stock immediately following the closing of the Merger. As the accounting acquirer, Private PDS’s assets and liabilities continue to be recorded at their historical carrying amounts and the historical operations that will be reflected in
the Company’s financial statements will be those of Private PDS. All references in the unaudited interim condensed consolidated financial statements to the number of shares and per share amounts of the Company’s common stock have been
retroactively restated to reflect completion of the Merger and the Reverse Stock Split.
Purchase Price
Pursuant to the Merger Agreement, Edge issued to Private PDS's stockholders a number of shares of Edge’s common stock representing approximately 70% of the outstanding shares of common stock of
the combined company. The purchase price, which represents the consideration transferred to Edge’s stockholders in the Merger is calculated based on the number of shares of common stock of the combined company that Edge’s stockholders owned as of
the closing of the Merger on March 15, 2019, which consists of the following:
Final Purchase Price Allocation
The Company completed its analysis of the allocation of the purchase price in the fourth quarter of 2019. The purchase price was allocated to the net assets acquired of Edge based upon their
preliminary estimated fair values as of March 15, 2019. The in-process research and development asset (“IPR&D”) that is recognized relates to Edge’s NEWTON 2 clinical trial for EG-1962 that has not
reached technological feasibility. The Company was actively looking to license out EG-1962 and had preliminary discussions with third parties who were actively looking at the data of EG-1962 during the
prior year. Accordingly, the IPR&D was initially capitalized as an indefinite-lived intangible asset and tested for impairment at least annually until it is determined that there is no future economic benefit from EG-1962. As a result of
capitalizing the IPR&D, the Company initially recognized an indefinite life deferred tax liability. During the three months ended June 30, 2019, two adjustments were made to the preliminary allocation. The first was for $275,000 relating to
an offer to purchase equipment that was given a value of $0 in the preliminary allocation. The second was for $65,551 relating to Edge's bonus plan that was effective prior to the date of acquisition. During the three months ended December 31,
2019 two additional adjustments were made to the preliminary valuation. The first was for an increase of $1,751,000 relating to the IPR&D in which the Company finalized the valuation of the IPR&D and as a result recognized an additional
deferred tax liability of $224,513. The second was for a write-off relating to a transition service arrangement that was effective prior to the date of the acquisition for $131,250. In accordance with ASC 805, Business Combinations any the excess
of the fair value of the acquired net assets over the purchase price has been recognized as a bargain purchase gain in the consolidated statement of operations and comprehensive loss. The Company has reassessed whether all the assets acquired,
and the liabilities assumed have been identified and recognized in the purchase price allocation.
The final allocation of the purchase price to the net assets of Edge, based on the fair values as of March 15, 2019, is as follows:
The fair value of the IPR&D was determined using the discounted cash flow method based on probability- adjusted cash flow success scenarios to develop EG-1962 into
a commercial product, estimating the revenue and costs. The rates utilized to discount the net cash flows to the present value are commensurate with the stage of development of the projects and uncertainties in the economic estimates used in the
projections.
During the three months ended December 31, 2019, the Company determined that the intangible asset related to Edge’s NEWTON 2 clinical trial for EG-1962 was
impaired due to significantly reduced activity in the data room and a lack of new interest from third parties to purchase or license the product. Further the Company does not have the internal resources to pursue EG 1962 as an
internal development project and has stated publicly that it had intended to find a partner to fund and run the EG 1962 program. The drop off in interest from third parties and the lack of any new inbound interest has made this an extremely low
probability of success. As a result for the year ended December 31, 2019, the Company recorded an impairment charge - IPR&D of $2,974,000 for the estimated value of the IPR&D asset of $2,974,000 in its
consolidated statement of operations and comprehensive loss.
Note 5 – Fair Value of Financial Instruments
There were no transfers among Levels 1, 2, or 3 during 2020 or 2019.
Note 6 – Leases
On July 8, 2019, the Company entered into a lease termination agreement for its office space located at 300 Connell Drive, Suite 4000, Berkeley
Heights, NJ 07922 effective August 31, 2019 (the “Lease Termination Agreement”). Pursuant to the Lease Termination Agreement, the Company was required to pay 50 percent of the remaining lease payments of $665,802 over three installments on
September 1, 2019, December 1, 2019, and March 1, 2020, which was recorded as lease termination costs in the third quarter of 2019. The Company maintains a month-to-month lease for its research facilities at the Princeton Innovation Center
BioLabs located at 303A College Road E, Princeton NJ, 08540. On August 31, 2019, the right-of-use asset of $1.2 million and operating lease liability of $1.2 million was written off. Leasehold improvements amounting to approximately $0.3 million
were also written off and are included in lease termination costs. The Company entered into a temporary month-to-month lease as of September 1, 2019 for office space located at 830 Morris Turnpike, Short Hills, NJ 07078 until the Company entered
into a new lease for permanent office space. This lease will terminate on May 31, 2020.
Effective March 5, 2020, the Company entered into a sublease for approximately 11,200 square feet of office space located at 25B Vreeland Road, Florham Park, NJ. The sublease
commenced on May 1, 2020 and will continue for a term of forty (40) months with an option to renew through October 31, 2027. Upon inception of the lease, the Company expects to recognize approximately $0.7 million of a ROU asset and operating
lease liabilities. The discount rate used to measure the operating lease liability as of May 1, 2020 was 9.15%.
Note 7 – Accrued Expenses and Restructuring Reserve
Accrued expenses and other liabilities consist of the following:
Restructuring Reserve
Note 8 – Stock-Based Compensation
The Company has four equity compensation plans: the 2009 Amended Stock Option Plan, the 2010 Equity Incentive Plan, the 2014 Equity Incentive Plan and the 2018 Stock
Incentive Plan
(the “Plans”). Originally, the Company was able to grant up to 27,410 of Common Stock as both incentive stock options (“ISOs”) and nonqualified stock options (“NQs”) under the 2010 Equity Incentive
Plan. In 2013, the Company's stockholders approved an increase to 63,957 shares authorized for issuance under the 2010 Equity Incentive Plan. In 2014, the Board of Directors of the Company (the
“Board
”) approved an increase to 67,520 shares authorized for issuance under the 2010 Equity Incentive Plan.
In 2014, the Company's stockholders approved the 2014 Equity Incentive Plan pursuant to which the Company may grant up to 91,367 shares as ISOs, NQs and restricted stock
units (
“RSUs
”), subject to increases as hereafter described (the
“Plan Limit
”). In addition, on January 1, 2015 and each
January 1 thereafter prior to the termination of the 2014 Equity Incentive Plan, pursuant to the terms of the 2014 Equity Incentive Plan, the Plan Limit was and shall be increased by the lesser of (x) 4% of the number of shares of Common Stock
outstanding as of the immediately preceding December 31 and (y) such lesser number as the Board of Directors may determine in its discretion. On January 1, 2016, 2017, 2018 and 2019 the Plan Limit was increased to 152,366 shares, 210,203 shares,
271,941 shares and 323,529 shares, respectively. In March 2019, the Plan was amended and restated which removed the annual increase component and was limited to 826,292 shares.
In 2018, the Company's stockholders approved the 2018 Stock Incentive Plan pursuant to which the Company may grant up to 558,071 shares as Stock Options, (ii) Stock
Appreciation Rights, (iii) Restricted Stock, (iv) Deferred Stock, (v) Stock Reload Options and/or (vi) Other Stock-Based Awards.
Pursuant to the terms of the Plans, ISOs have a term of ten years from the date of grant or such shorter term as may be provided in the option agreement. Unless specified
otherwise in an individual option agreement, ISOs generally vest over a four-year term and NQs generally vest over a one to five-year terms. Unless terminated by the Board, the Plans shall continue to remain effective for a term of ten years or
until such time as no further awards may be granted and all awards granted under the Plans are no longer outstanding. As of March 31, 2020 there were 190,799 shares available for grant under the 2018 Stock Incentive Plan.
On June 17, 2019, the Board adopted the 2019 Inducement Plan. The 2019 Inducement Plan provides for the grant of non-qualified stock options.
The 2019 Inducement Plan was recommended for approval by the Compensation Committee of the Board and subsequently approved and adopted by the Board without stockholder approval pursuant to Rule 5635(c)(4) of the Nasdaq Listing Rules.
The Board has reserved 200,000 shares of the Company's common stock for issuance pursuant to non-qualified stock options granted under the
2019 Inducement Plan, and the 2019 Inducement Plan will be administered by the Compensation Committee of the Board. In accordance with Rule 5635(c)(4) of the Nasdaq Listing Rules, non-qualified stock options under the 2019 Inducement Plan may
only be made to an employee who has not previously been an employee or member of the Board (or any parent or subsidiary of the Company), or following a bona fide period of non-employment by the Company (or a parent or subsidiary of the
Company), if he or she is granted such non-qualified stock options in connection with his or her commencement of employment with the Company or a subsidiary and such grant is an inducement material to his or her entering into employment with
the Company or such subsidiary. As of March 31, 2020, there were 126,500 shares available for grant under the 2019 Inducement Plan.
The Company’s stock-based compensation expense was recognized in operating expense as follows:
The fair value of options and warrants granted during the three months ended March 31, 2020 was estimated using the Black-Scholes option valuation model utilizing the following assumptions:
The following table summarizes the number of options outstanding and the weighted average exercise price:
At March 31, 2020 there was approximately $1,565,673 of unamortized stock option compensation expense, which is
expected to be recognized over a remaining average vesting period of 3.13 years.
Note 9 – Income Taxes
In assessing the realizability of the net deferred tax assets, the Company considers all relevant positive and negative evidence to determine whether it is more
likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent on several factors, including the generation of sufficient taxable income prior to
the expiration of the net operating loss carryforwards. The Company expects to have a loss for 2020 and there will be no current income tax expense. Additionally, there was a full valuation allowance against the net deferred tax assets as of March 31, 2020 and December 31, 2019. As such, the Company recorded no income tax benefit due to realization uncertainties.
The Company’s U.S. statutory rate is 21%. The primary factor impacting the effective tax rate for the three months ended March 31, 2020 is the anticipated full year operating loss which will
require full valuation allowances against any associated net deferred tax assets.
Entities are also required to evaluate, measure, recognize and disclose any uncertain income tax provisions taken on their income tax returns. The Company has analyzed its
tax positions and has concluded that as of March31, 2020, there were no uncertain positions. The Company's U.S. federal and state net operating losses have occurred since its inception and as such, tax years subject to potential tax examination
could apply from that date because the utilization of net operating losses from prior years opens the relevant year to audit by the IRS and/or state taxing authorities. The Company did not have any unrecognized tax benefits and has not accrued
any interest or penalties for the three months ended March 31, 2020 and for the year ended December 31, 2019.
Note 10 – Commitments and Contingencies
Employment Matters
The Company has entered into employment agreements or offer letters with each of its executive officers. The employment agreements generally provide for, among other things,
salary, bonus and severance payments. The employment agreements generally provide for between 12 months and 24 months of severance benefits to be paid to an executive (as well as certain potential bonus, COBRA and equity award benefits), subject
to the effectiveness of a general release of claims, if the executive terminates his or her employment for good reason or if the Company terminates the executive's employment without cause. Such severance payments may be provided for as long as
24 months in connection with a termination following a change of control. The continued provision of severance benefits is conditioned on each executive's compliance with the terms of the Company's confidentiality and invention and assignment
agreement as well as his or her release of claims.
Rent
For the three months ended March 31, 2020 and 2019, rent was $58,641 and $11,076, respectively, for month-to-month arrangements not impacted by the adoption of ASC 842.
Note 11 – Retirement Plan
The Company has a 401(k) defined contribution plan for the benefit for all employees and permits voluntary contributions by employees subject to IRS-imposed
limitations. The 401K employer contributions were $9,800 and $0 for the three months ended March 31, 2020 and 2019, respectively.
Note 12– Subsequent Events
Subsequent events have been evaluated through the date these financial statements were issued.