UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One) 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the quarterly period ended March 31, 2016

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
   
  For the transition period from  ____________ to ____________  

 

Commission File Number: 001-12584

 

SYNTHETIC BIOLOGICS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada 13-3808303
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
   
9605 Medical Center Drive, Suite 270  
Rockville, MD 20850
(Address of principal executive offices) (Zip Code)

 

(301) 417-4364

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x   No  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated file, a non-accelerated file, or a smaller reporting company.  See the definitions of “large accelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer ¨ Accelerated filer x
Non-Accelerated filer ¨ Smaller reporting company ¨

(Do not check if a smaller reporting company) 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨  No     x

 

As of May 2, 2016 the registrant had 90,826,752 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 

Synthetic Biologics, Inc.

 

NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In particular, statements contained in this Quarterly Report Form 10-Q, including but not limited to, statements regarding the timing of our clinical trials and that involve substantial risks and uncertainties of the development and commercialization of our pipeline products; the sufficiency of our cash, our ability to finance our operations and business initiatives and obtain funding for such activities; our future results of operations and financial position, business strategy and plan prospects, or costs and objectives of management for future research, development or operations, are forward-looking statements. These forward-looking statements relate to our future plans, objectives, expectations and intentions and may be identified by words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “seeks,” “goals,” “estimates,” “predicts,” “potential” and “continue” or similar words. Readers are cautioned that these forward-looking statements are based on our current beliefs, expectations and assumptions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under Part II, Item 1A. “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, and those identified under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on March 10, 2016. Therefore, actual results may differ materially and adversely from those expressed, projected or implied in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.

 

NOTE REGARDING COMPANY REFERENCES

 

Throughout this Quarterly Report on Form 10-Q, “Synthetic,” the “Company,” “we,” “us” and “our” refer to Synthetic Biologics, Inc.

 

NOTE REGARDING TRADEMARKS

 

All trademarks, trade names and service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners.

 

 

 

 

SYNTHETIC BIOLOGICS, INC.

 

FORM 10-Q

TABLE OF CONTENTS

 

        Page
    PART I. FINANCIAL INFORMATION   3
         
Item 1.   Financial Statements (Unaudited)   3
         
    Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015   3
    Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015   4
    Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015   5
    Notes to Consolidated Financial Statements   6
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   12
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   21
Item 4.   Controls and Procedures   21
         
    PART II. OTHER INFORMATION   22
         
Item 1.   Legal Proceedings   22
Item 1A.   Risk Factors   22
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   23
Item 3.   Defaults Upon Senior Securities   23
Item 4.   Mine Safety Disclosures   23
Item 5.   Other Information   23
Item 6.   Exhibits   23
SIGNATURES   24

 

 2 

 

 

PART I.-FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

 

Synthetic Biologics, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands except share and per share amounts)

 

   March 31, 2016   December 31, 2015 
   (unaudited)     
Assets          
           
Current Assets          
Cash and cash equivalents  $15,100   $20,818 
Prepaid expenses and other current assets   7,116    9,519 
Total Current Assets   22,216    30,337 
           
Property and equipment, net   501    494 
           
Deposits and other assets   26    14 
           
Total Assets  $22,743   $30,845 
           
Liabilities and Stockholders' Equity          
           
Current Liabilities:          
Accounts payable  $4,597   $4,413 
Accrued expenses   946    297 
Warrant liabilities   11,065    10,567 
Accrued employee benefits   869    277 
Deferred rent   49    21 
Total Current Liabilities   17,526    15,575 
           
Long term deferred rent   240    267 
           
Total Liabilities   17,766    15,842 
           
Commitments and Contingencies   -    - 
           
Equity:          
Preferred stock,  $0.001 par value; 10,000,000 shares authorized, none issued and outstanding   -    - 
Common stock,  $0.001 par value; 250,000,000 shares authorized, 90,908,234 issued and 90,826,752 outstanding and 90,908,234 issued and 90,826,752 outstanding   91    91 
Additional paid-in capital   161,791    160,739 
Accumulated deficit   (155,624)   (144,779)
Total Synthetic Biologics, Inc. and Subsidiaries Equity   6,258    16,051 
Non-controlling interest   (1,281)   (1,048)
Total Stockholders'  Equity   4,977    15,003 
           
Total Liabilities and Stockholders' Equity  $22,743   $30,845 

 

See accompanying notes to unaudited consolidated financial statements.

 

 3 

 

 

Synthetic Biologics, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands except share and per share amounts)

(Unaudited)

 

   For the three months ended March 31, 
   2016   2015 
Operating Costs and Expenses:          
General and administrative  $2,426   $1,713 
Research and development   8,155    6,494 
Total Operating Costs and Expenses   10,581    8,207 
           
Loss from Operations   (10,581)   (8,207)
           
Other Income (Expense):          
Change in fair value of warrant liability   (498)   (4,152)
Interest income   1    1 
Total Other Income (Expense)   (497)   (4,151)
           
Net Loss   (11,078)   (12,358)
Net Loss Attributable to Non-controlling Interest   (233)   - 
           
Net Loss Attributable to Synthetic Biologics, Inc. and Subsidiaries  $(10,845)  $(12,358)
           
Net Loss Per Share - Basic and Dilutive  $(0.12)  $(0.17)
           
Weighted average number of shares outstanding during the period - Basic and Dilutive   90,826,752    72,673,959 

 

See accompanying notes to unaudited consolidated financial statements.

 

 4 

 

 

Synthetic Biologics, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

   For the three months ended March 31, 
   2016   2015 
Cash Flows From Operating Activities:          
Net Loss  $(11,078)  $(12,358)
Adjustments to reconcile net loss to net cash used in operating activities:          
Stock-based compensation   1,052    827 
Stock issued for milestone payments   -    350 
Change in fair value of warrant liabilities   498    4,152 
Depreciation   37    8 
Changes in operating assets and liabilities:          
Prepaid expenses and other current assets   2,403    (26)
Deposits and other assets   (12)   (12)
Accounts payable   184    563 
Accrued expenses   649    1,348 
Accrued employee benefits   592    (310)
Deferred rent   1    - 
Net Cash Used In Operating Activities   (5,674)   (5,458)
           
Cash Flows From Investing Activities:          
Purchases of property and equipment   (44)   (18)
Net Cash Used In Investing Activities   (44)   (18)
           
Net decrease in cash   (5,718)   (5,476)
           
Cash at beginning of period   20,818    17,525 
           
Cash at end of period  $15,100   $12,049 
           
Supplemental disclosures of cash flow information:          
Cash paid for interest  $-   $- 
Cash paid for taxes  $-   $- 

 

See accompanying notes to unaudited consolidated financial statements.

 

 5 

 

 

Synthetic Biologics, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

1. Organization and Nature of Operations and Basis of Presentation

 

Description of Business

 

Synthetic Biologics, Inc. (the “Company” or “Synthetic Biologics”) is a clinical stage company developing therapeutics to protect the gut microbiome while targeting pathogen-specific diseases. The Company’s lead candidates in Phase 2 development are: (1) 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), and (2) SYN-004 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) and antibiotic-associated diarrhea (AAD). In collaboration with Intrexon Corporation, the Company is also developing preclinical stage monoclonal antibody therapies for the prevention and treatment of pertussis, and novel discovery stage biotherapeutics for the treatment of phenylketonuria (PKU).

 

At March 31, 2016, the Company had cash and cash equivalents of approximately $15.1 million. Management believes that the Company’s current cash on hand will be sufficient to fund its operations for at least the foreseeable future. The Company will ultimately be required to obtain additional funding in order to execute its long-term business plans, although it does not currently have commitments from any third parties to provide it with capital. The Company cannot assure that additional funding will be available on favorable terms, or at all. If the Company fails to obtain additional funding when needed, it may not be able to execute its business plans and its business may suffer, which would have a material adverse effect on its financial position, results of operations and cash flows.

 

Basis of Presentation

 

The accompanying 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 U.S. Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. The accompanying consolidated financial statements include all adjustments, comprised of normal recurring adjustments, considered necessary by management to fairly state our 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 consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015 (“2015 Form 10-K”) as filed with the SEC. The interim results for the three months ended March 31, 2016, are not necessarily indicative of results for the full year.

 

The 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. We believe that the accounting estimates employed are appropriate and the resulting balances are reasonable; however, due to the inherent uncertainties in making estimates, actual results could differ from the original estimates, requiring adjustments to these balances in future periods.

  

2. Management’s Plan

 

The Company has incurred an accumulated deficit of $155.6 million through March 31, 2016. With the exception of the quarter ended June 30, 2010, the Company has incurred negative cash flow from operations since its inception. The Company has spent, and expects to continue to spend, substantial amounts in connection with implementing its business strategy, including the planned product development efforts, clinical trials and research and discovery efforts.

 

The actual amount of funds the Company will need to operate is subject to many factors, some of which are beyond our control. These factors include the following:

 

·the progress of research activities;

 

·the number and scope of research programs;

 

·the progress of preclinical and clinical development activities;

 

·the progress of the development efforts of parties with whom the Company has entered into research and development agreements;

 

 6 

 

  

·costs associated with additional clinical trials of product candidates;

 

·the ability to maintain current research and development licensing arrangements and to establish new research and development, and licensing arrangements;

 

·the ability to achieve milestones under licensing arrangements;

 

·the costs associated with manufacturing-related services to produce material for use in our clinical trials;

 

·the costs involved in prosecuting and enforcing patent claims and other intellectual property rights; and

 

·the costs and timing of regulatory approvals.

 

The Company has based its estimate on assumptions that may prove to be wrong. The Company may need to obtain additional funds sooner or in greater amounts than it currently anticipates. Potential sources of financing include strategic relationships, public or private sales of the Company’s shares or debt and other sources.

 

The Company may seek to access the public or private equity markets when conditions are favorable due to long-term capital requirements. The Company does not have any committed sources of financing at this time, and it is uncertain whether additional funding will be available when needed on terms that will be acceptable to it, or at all. If the Company raises funds by selling additional shares of common stock or other securities convertible into common stock, the ownership interest of the existing stockholders will be diluted. If the Company is not able to obtain financing when needed, it may be unable to carry out its business plan. As a result, the Company may have to significantly limit its operations and its business, financial condition and results of operations would be materially harmed.

 

3. Fair Value of Financial Instruments

 

The fair value accounting standards define 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.

 

If the inputs used to measure fair value fall in different levels of the fair value hierarchy, the hierarchy level is based upon the lowest level of input that is significant to the fair value measurement.

 

Cash and cash equivalents include money market accounts of $6.9 million and $5.3 million as of March 31, 2016 and December 31, 2015, respectively, that are measured using Level 1 inputs.

 

The warrants issued in conjunction with the registered direct offering in October 2014 include a provision that if the Company were to enter into certain transactions, as defined in the agreement, the warrants would be purchased from the holder at a premium. Accordingly, the Company recorded the warrants as liabilities at their fair value upon issuance and re-measures the fair value at each period end with the change in fair value recorded in the Consolidated Statements of Operations. The Company uses the Black-Scholes options pricing model to estimate the fair value of the warrants. In using this model, the fair value is determined by applying Level 3 inputs for which there is little or no observable market data, requiring the Company to develop its own assumptions. The assumptions used in calculating the estimated fair value of the warrants represent the Company’s best estimates; however, these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and different assumptions are used, the warrant liability and the change in estimated fair value could be materially different.

   

 7 

 

  

4. Selected Balance Sheet Information

 

Prepaid expenses and other current assets (in thousands)

 

   March 31, 2016   December 31, 2015 
Intrexon prepaid research and development expenses  $307   $643 
Prepaid clinical research organizations   6,160    8,329 
Prepaid insurances   224    339 
Other prepaid expenses   425    208 
           
Total  $7,116   $9,519 

  

The Intrexon prepaid research and development expenses are classified as a current asset. The Company may terminate the arrangement at any time and receive a cash refund of the remaining balance minus any amounts owed to Intrexon. The Company anticipates that the majority of the prepaid will be applied to research and development expenses during 2016.

 

Prepaid clinical research organization expense are classified as a current asset. The Company makes payments to the clinical research organizations based on agreed upon terms that includes payments in advance of study services. The Company anticipates that the majority of the prepaid clinical research organization expenses will be applied to research and development expenses during 2016.

 

Property and equipment (in thousands)   

 

   March 31, 2016   December 31, 2015 
Computer and office equipment  $371   $346 
Software   11    11 
Leasehold improvements   242    242 
           
    624    599 
Less accumulated depreciation and amortization   (123)   (105)
           
Total  $501   $494 

 

Accrued expenses (in thousands)

 

   March 31, 2016   December 31, 2015 
Accrued manufacturing costs  $2   $- 
Accrued vendor payments   388    133 
Accrued clinical consulting  services   556    164 
           
Total  $946   $297 

 

Accrued employee benefits (in thousands)

  

   March 31, 2016   December 31, 2015 
Accrued bonus expense  $355   $- 
Accrued vacation expense   248    153 
Other accrued employee benefits   266    124 
           
Total  $869   $277 

 

5. Stock-Based Compensation

 

Stock Incentive Plan

 

During 2001, the Company’s Board of Directors and stockholders adopted the 2001 Stock Incentive Plan (the “2001 Stock Plan”). 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 2001 Stock Plan shall not exceed 250,000. All awards pursuant to the 2001 Stock Plan shall terminate upon the termination of the grantee’s employment for any reason. Awards include options, restricted shares, stock appreciation rights, performance shares and cash-based awards (the “Awards”). The 2001 Stock Plan contains certain anti-dilution provisions in the event of a stock split, stock dividend or other capital adjustment, as defined in the plan. The 2001 Stock Plan provides for a committee of the Board to grant Awards and to determine the exercise price, vesting term, expiration date and all other terms and conditions of the Awards, including acceleration of the vesting of an Award at any time. As of March 31, 2016, there were 671,607 options issued and outstanding under the 2001 Stock Plan.

 

On March 20, 2007, the Company’s Board of Directors approved the 2007 Stock Incentive Plan (the “2007 Stock Plan”) for the issuance of up to 2,500,000 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 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 Stock 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 March 31, 2016, there were 379,155 options issued and outstanding under the 2007 Stock Plan.

 

 8 

 

 

 

On November 2, 2010, the Board of Directors and stockholders adopted the 2010 Stock Incentive Plan (“2010 Stock Plan”) for the issuance of up to 3,000,000 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 2010 Stock Plan from 3,000,000 to 6,000,000. 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 2010 Stock Plan from 6,000,000 to 8,000,000. 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. There is no limit on the number or the value of the shares 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. Options become exercisable over various periods from the date of grant, and generally expire ten years after the grant date. As of March 31, 2016, there were 7,941,666 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 ratably over the stated vesting period.

 

The Company has applied fair value accounting for all stock-based payment awards since inception. The fair value of each option or warrant granted is estimated on the date of grant using the Black-Scholes option pricing model. The Black-Scholes assumptions used in the three months ended March 31, 2016 and 2015 are as follows:

  

    Three months ended March 31,
    2016   2015
Exercise price   $1.08 -$1.31   $1.54
Expected dividends   0%   0%
Expected volatility   117%   131%
Risk free interest rate   1.40% - 1.46%   2.03%
Expected life of option   7 years   10 years

 

The Company records stock-based compensation based upon the stated vested provisions in the related agreements. The vesting provisions for these agreements have various terms as follows:

 

· immediate vesting,

· half vesting immediately and remaining over three years,

· quarterly over three years,

· annually over three years,

· one-third immediate vesting and remaining annually over two years,

· one half immediate vesting and remaining over nine months,

· one quarter immediate vesting and remaining over three years,

· one quarter immediate vesting and remaining over 33 months; and

· monthly over three years.

 

During the three months ended March 31, 2016, the Company granted 150,000 options to employees having an approximate fair value of $153,000 based upon the Black-Scholes option pricing model. During the same period in 2015, the Company granted 550,000 options to employees having an approximate fair value of $817,000 based upon the Black-Scholes option pricing model.

 

A summary of stock option activities as of March 31, 2016, and for the year ended December 31, 2015, is as follows:

 

 9 

 

  

   Options   Weighted Average
Exercise Price
   Weighted Average
Remaining
Contractual Life
  Aggregate
Intrinsic Value
 
                
Balance - December 31, 2014   5,981,106   $2.01   5.80 years  $685,000 
                   
Granted   3,781,666   $2.37         
Exercised   (35,008)  $1.16      $44,000 
Expired   (483,332)  $2.48         
Forfeited   (302,502)  $1.91         
                   
Balance - December 31, 2015   8,941,930   $2.14   5.80 years  $2,900,000 
                   
Granted   150,000   $1.16         
Exercised   -   $-      $- 
Expired   (99,502)  $2.22         
Forfeited   -   $-         
                   
Balance -March 31, 2016 - outstanding   8,992,428   $2.13   5.41 years  $3,400,000 
                   
Balance - March 31, 2016 - exercisable   5,093,799   $1.95   4.38 years  $2,600,000 
                   
Grant date fair value of options granted - March 31, 2016       $153,000         
                   
Weighted average grant date fair value - March 31, 2016       $1.02         
                   
Grant date fair value of options granted - December 31, 2015       $7,974,000         
                   
Weighted average grant date fair value - December 31, 2015       $2.12         

 

Stock-based compensation expense included in general and administrative expenses and research and development expenses related to stock options issued to employees and consultants for the three months ended March 31, 2016 and 2015 was $1.1 million and $827,000, respectively.

 

As of March 31, 2016, total unrecognized stock-based compensation expense related to stock options was $7.3 million, which is expected to be expensed through May 2018.

 

6. Stock Purchase Warrants

 

On October 10, 2014, the Company raised net proceeds of $19.1 million through the sale of 14,059,616 units at a price of $1.47 per unit to certain institutional investors in a registered direct offering. Each unit consisted of one share of the Company’s common stock and a warrant to purchase 0.5 shares of common stock. The warrants, exercisable for an aggregate of 7,029,808 shares of common stock, have an exercise price of $1.75 per share and a life of five years. The warrants vested immediately and expire 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 will be recorded as non-cash income or expense in the Consolidated Statements of Operations at each subsequent period. At March 31, 2016, the fair value of the warrant liability was $11.1 million, which resulted in non-cash expense of $0.5 million for the three months ended March 31, 2016. At March 31, 2015, the fair value of the warrant liability was $10.9 million, which resulted in non-cash expense of $4.2 million for the three months ended March 31, 2015. In accordance with authoritative accounting guidance, the warrants were valued on the date of grant using the Black-Scholes valuation model. The assumptions used by the Company are summarized in the following table:

 

    March 31, 2016   December 31, 2015   Issuance Date
Closing stock price   $2.36   $2.29   $1.75
Expected dividends   0%   0%   0%
Expected volatility   90%   85%   95%
Risk free interest rate   0.96%   1.49%   1.39%
Expected life of warrant   3.54 years   3.79 years   5 years

 

The following table summarizes the estimated fair value of the warrant liability (in thousands):

 

Balance at December 31, 2015  $10,567 
Change in fair value of warrant liability   498 
Balance at March 31, 2016  $11,065 

 

As of March 31, 2016, all of the warrants remained outstanding.

 

 10 

 

  

On October 25, 2012, the Company entered into a Common Stock Purchase Agreement with certain accredited investors. As part of this agreement, the Company issued warrants to purchase 635,855 shares of common stock to the placement agent, or its permitted assigns. The warrants have an exercise price of $1.60 and a life of five years. The warrants vested immediately and expire October 25, 2017. Since these warrants were granted as part of an equity raise, the Company has treated them as a direct offering cost. The result of the transaction has no affect to equity. Warrants outstanding as of March 31, 2016 were 311,834.

 

A summary of warrant activity for the Company for the three months ended March 31, 2016 and for the year ended December 31, 2015 is as follows:

 

   Number of
Warrants
   Weighted Average
Exercise Price
 
         
Balance at December 31, 2014   7,974,794   $1.80 
Granted   -   $- 
Exercised   (2,448)  $1.60 
Forfeited   (63,447)  $1.79 
Balance at December 31, 2015   7,908,899   $1.79 
Granted   -   $- 
Exercised   -   $- 
Forfeited   (50,000)  $3.75 
Balance at March 31, 2016   7,858,899   $1.77 

 

 

A summary of all outstanding and exercisable warrants as of March 31, 2016 is as follows:

 

Exercise Price   Warrants
Outstanding
   Warrants
Exercisable
   Weighted Average
Remaining
Contractual Life
$1.60    311,834    311,834   1.57 years
$1.75    7,029,808    7,029,808   3.53 years
$2.22    517,257    517,257   0.66 years
                
$1.77    7,858,899    7,858,899   3.26 years

   

7. Net Loss per Share

 

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding. Diluted net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding including the effect of common share equivalents. Diluted net loss per share assumes the issuance of potential dilutive common shares outstanding for the period and adjusts for any changes in income and the repurchase of common shares that would have occurred from the assumed issuance, unless such effect is anti-dilutive. 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 months ended March 31, 2016 were 8,992,428 and 7,858,899, respectively, and for the three months ended March 31, 2015 were 6,531,106 and 7,974,794, respectively.

    

8. Non-controlling Interest

 

The Company’s non-controlling interest is accounted for under ASC 810, Consolidation (“ASC 810”) and represents the minority shareholder’s ownership interest related to the Company’s subsidiary, 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 Consolidated Balance Sheets and reports both net loss attributable to the non-controlling interest and net loss attributable to the Company’s common shareholders on the face of the 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 months ended March 31, 2016, the accumulated net loss attributable to the non-controlling interest was $233,000.

 

 11 

 

  

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following discussion should be read in conjunction with our unaudited consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q, and our audited consolidated financial statements and notes thereto for the year ended December 31, 2015, included in our Annual Report on Form 10-K filed with the SEC on March 10, 2016. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See “Note Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth below, under Part II, Item 1A. “Risk Factors” and elsewhere herein, and those identified under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on March 10, 2016.

  

Overview

 

We are a clinical stage company developing therapeutics to protect the gut microbiome while targeting pathogen-specific diseases. Our lead product candidates in Phase 2 development are: (1) 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), and (2) SYN-004, 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) and antibiotic-associated diarrhea (AAD). In collaboration with Intrexon Corporation (Intrexon), we are also developing preclinical stage monoclonal antibody therapies for the prevention and treatment of pertussis, and novel discovery stage biotherapeutics for the treatment of phenylketonuria (PKU).

 

Product Pipeline:

 

 

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Summary of Clinical and Preclinical Programs

  

Therapeutic Area   Product Candidate   Status
Treatment of IBS-C   SYN-010
(oral modified-release
lovastatin lactone)
  •     Reported positive topline data from two Phase 2 clinical trials (4Q 2015 & 1Q 2016)
          Received Type C meeting responses from FDA regarding late-stage aspects of clinical pathway (2Q 2016)
             
          Scheduled to present detailed data supporting previously reported positive topline data from two Phase 2 clinical trials at DDW 2016 (May 2016)
             
        •     Intend to hold end of Phase 2 meeting with FDA (Summer 2016)
             
        •     Plan to initiate Phase 3 clinical trial(s) (2H 2016)
             
        •     Collaboration with Cedars-Sinai Medical Center
             
Prevention of CDI and AAD (Degrade IV beta-lactam antibiotics)   SYN-004
(oral enzyme)
  •     Reported positive Phase 1a/1b data (1Q 2015)
        •     Initiated Phase 2b proof-of-concept clinical trial (3Q 2015); to date, enrollment of approximately 185 patients across global sites
             
        •     Reported supportive topline data from first Phase 2a clinical trial (4Q 2015)
             
        •     Expect to report topline data from second Phase 2a clinical trial (2Q 2016)
             
        •     Anticipate an interim analysis of blinded data by an independent data monitoring committee (Summer 2016)
             
        •     Plan to initiate Phase 3 clinical trial(s) (1H 2017)
             
Prevention of CDI and AAD
(Degrade oral beta-lactam antibiotics)
  SYN-007
(oral enzyme)
  •     Preclinical work ongoing to determine ability of SYN-007 to protect the gut microbiome and degrade oral beta-lactam antibiotics
             
Prevention and Treatment of pertussis   SYN-005
(monoclonal antibody
therapies)
  •     Reported positive preclinical research findings (2014)
        •     The University of Texas at Austin (UT Austin) received a grant to support a preclinical study to evaluate the prophylactic capability of SYN-005 (4Q 2015)
             
        •     Collaborations with Intrexon and UT Austin

  

All of our programs are supported by our growing intellectual property portfolio. We are maintaining and building our patent portfolio through: filing new patent applications; prosecuting existing applications; and licensing and acquiring new patents and patent applications. In total, we hold approximately 95 U.S. and foreign patents and have over 65 U.S. and foreign patents pending.

 

Our Microbiome-Focused Pipeline

 

Our IBS-C and CDI/AAD programs are focused on protecting the gut microbiome, or gut flora, which is home to billions of bacteria and composed of a natural balance of both “good” beneficial bacteria and potentially “bad” pathogenic bacteria. When the natural balance of these bacteria is disrupted, a person’s health can be compromised.

 

SYN-010 — Treatment of Irritable Bowel Syndrome with Constipation (IBS-C)

 

SYN-010 is our proprietary, modified-release formulation of lovastatin lactone that is intended to reduce methane production by certain microorganisms (M. smithii) in the gut while minimizing disruption to the microbiome. Methane produced by M. smithii is perceived as an underlying cause of pain, bloating and constipation associated with IBS-C, and published reports have associated higher intestinal methane production with increased constipation severity in IBS-C patients. SYN-010 is intended to act primarily in the intestinal lumen while avoiding systemic absorption, thereby targeting the major cause of IBS-C, not just the patient’s symptoms.

 

In December 2013, through our subsidiary Synthetic Biomics, Inc. (SYN Biomics), we 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. We 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.

 

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We believe SYN-010 may reduce the impact of methane producing organisms on IBS-C.

 

Irritable Bowel Syndrome

 

IBS is a functional GI disorder characterized by gas, abdominal pain, bloating and diarrhea or constipation, or alternating episodes of both. The illness affects both men and women; however, two-thirds of diagnosed sufferers are women. The onset of IBS can begin anytime from adolescence to adulthood. Four bowel patterns may be seen with IBS including: IBS-C (constipation predominant), IBS-D (diarrhea predominant), IBS-M (mixed diarrhea and constipation) and IBS-U (unsubtyped). According to GlobalData’s IBS Global Drug Forecast and Market Analysis to 2023 (December 2014) stringent disease diagnosis criteria to ensure market relevance and a population most likely to receive a diagnosis and prescription drug treatment, the prevalence of IBS in adults in the U.S., Europe and Japan was expected to be 41.1 million in 2015, and it has been reported that up to 20 percent of all IBS patients have IBS-C.

 

Extensive studies conducted by Dr. Pimentel and collaborators have shown that overproduction of methane gas is directly associated with bloating, pain and constipation in IBS-C patients. Investigators at CSMC have discovered that inhibiting intestinal methane production may reverse constipation associated with IBS-C, and may be beneficial in treating other major diseases such as obesity, insulin resistance and type 2 diabetes.

 

Limitations of Current Treatments and Market Opportunity

 

Currently, the U.S. Food and Drug Administration (FDA)-approved therapies for the treatment of IBS-C and other treatments including prescription and over-the-counter laxatives, which provide patients with temporary symptomatic relief and often cause diarrhea, but do not treat the underlying cause of pain, bloating and constipation associated with IBS-C. According to GlobalData, IBS — Global Drug Forecast and Market Analysis to 2023 (December 2014), the estimated global sales for IBS therapeutics for 2015 was $669.3 million, and global sales are expected to be greater than $1.5 billion in 2023.

 

First Phase 2 Clinical Trial Topline Results (4 Week Placebo-Controlled Acute Study)

 

In December 2015, we reported positive topline results from our first Phase 2 placebo-controlled, randomized clinical trial of SYN-010, including lowered breath methane and improved stool frequency in patients with IBS-C. This first Phase 2 clinical trial was initiated in June 2015 and enrolled 63 patients who were randomized using a 1:1:1 ratio to one of three groups, including two different SYN-010 dose groups and a placebo group. Patients received single oral doses of SYN-010 or a placebo each day for 28 days. The primary objective of this clinical trial was to evaluate the change from baseline in the area under the curve (AUC) of breath methane, as determined by a lactulose breath test, in methane-positive patients with IBS-C after seven days of treatment with one of two dose levels of SYN-010 as compared with a placebo. The trial’s secondary endpoints included improvement in the number of complete spontaneous bowel movements (CSBM) per week, and improvement in abdominal pain and bloating per standard scales required per FDA guidance. There were no serious adverse events observed.

 

In the first Phase 2 clinical trial of SYN-010, 65 percent of patients had no detectable plasma trough levels of lovastatin lactone or lovastatin beta-hydroxyacid after 28 days of treatment. In the few patients with detectable trough levels at day 28, concentrations of both lovastatin lactone and lovastatin beta-hydroxyacid were significantly lower than observed for commercial lovastatin formulations. Consistent with limited absorption, there were no statistically significant changes in LDL-C levels relative to placebo after 28 days.

  

Second Phase 2 Clinical Trial Topline Results (8 Week Open-Label Extension Study)

 

In January 2016, we reported positive topline data from our second Phase 2 clinical trial of SYN-010, which was initiated in October 2015. As the patients completed the first Phase 2 clinical trial, they were eligible to immediately rollover into the second Phase 2 clinical trial (multi-center, open-label) of SYN-010 that evaluated the sustainability of the effect of one dose strength of SYN-010 (42 mg) on breath methane production in 54 breath methane-positive patients with IBS-C, as well as key clinical outcomes, including frequency of CSBM, abdominal pain and bloating.

 

Patients in the second Phase 2 clinical trial reported compliance with the daily SYN-010 dosing regimen such that all patients in the second Phase 2 clinical trial received a minimum of 8 weeks treatment with SYN-010 42 mg. Patients who completed the second Phase 2 clinical trial demonstrated a statistically significant decrease in methane production (p=0.002) from the beginning of the first Phase 2 clinical trial (Baseline, Day 1, prior to any drug administration in the randomized study) to the end of the second Phase 2 clinical trial (12 weeks, Day 84), thus meeting the clinical trial's primary endpoint. Topline data from the second Phase 2 clinical trial also showed improvements in secondary efficacy endpoints, including: (1) a statistically significant reduction in the mean IBS Symptom Severity Score (IBS-SSS; p<0.0001), which includes abdominal pain, bloating, stool frequency and quality of life scores, for all patients from the first Phase 2 clinical trial baseline to the end of the second Phase 2 clinical trial, and (2) an increase in the percentage of patients identified as Monthly Responders, an FDA-defined composite measure incorporating improvements in CSBMs and abdominal pain. There were no serious adverse events observed.

 

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We are scheduled to present detailed data supporting previously reported positive topline data from both SYN-010 Phase 2 clinical trials in a poster presentation at the Digestive Disease Week 2016 (DDW 2016) meeting in May 2016.

 

Phase 3 Planning

 

We received Type C meeting responses from the FDA regarding late-stage aspects of the SYN-010 clinical pathway during the second quarter of 2016. We anticipate holding an end of Phase 2 meeting with the FDA during summer 2016. We plan to initiate pivotal Phase 3 clinical trial(s) during the second half of 2016.

 

Anticipated Regulatory Strategy

 

We believe that we will be able to utilize the regulatory approval pathway provided in Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act (FDCA) for SYN-010. A New Drug Application (NDA) submitted under Section 505(b)(2), referred to as a 505(b)(2) NDA, contains full safety and efficacy reports but allows at least some of the information required for NDA approval, such as safety and efficacy information on the active ingredient, to come from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. We believe we can rely on the FDA’s previous findings of safety for a currently marketed product and published clinical data. We expect to rely on published clinical trials using a similar drug product to provide support of efficacy. Consequently, we believe we can move directly into a pivotal clinical trial.

 

Intellectual Property

 

The SYN-010 intellectual property portfolio includes approximately 55 issued U.S. and foreign patents, and approximately 20 U.S. and foreign patents pending.

 

SYN-004 — Prevention of C. difficile infections (CDI) and antibiotic-associated diarrhea (AAD)

 

SYN-004 is an oral prophylactic therapy designed to degrade certain IV beta-lactam antibiotics within the GI tract and maintain the natural balance of the gut microbiome for the prevention of CDI, AAD and emergence of antibiotic-resistant organisms. Beta-lactam antibiotics are a mainstay in hospital infection management and include the commonly used penicillin and cephalosporin classes of antibiotics.

 

In November 2012, we acquired a series of oral beta-lactamase enzymes (P1A, P2A and P3A) and related assets targeting the prevention of CDI, the leading healthcare-associated infection that generally occurs secondary to treatment with IV antibiotics from Prev ABR LLC. The acquired assets include a pre-Investigation New Drug (IND) package for P3A (which we now refer to as SYN-004), Phase 1 and Phase 2 clinical data for P1A, manufacturing processes and data, and a portfolio of issued and pending U.S. and foreign patents intended to support an IND and Biologics License Application (BLA) with the FDA. Utilizing this portfolio of assets, we developed a proprietary, second generation oral beta-lactamase enzyme product candidate that we call SYN-004.

 

Compared to the first generation oral enzyme candidate of P1A, we believe that the second generation candidate, SYN-004, will have activity against a broader spectrum of beta-lactam antibiotics, including both penicillins and certain cephalosporins. Due to the structural similarities between P1A and SYN-004, and based on previous discussions with the FDA, certain preclinical data collected on P1A was used in support of an IND application for our new product candidate, SYN-004. P1A was evaluated in four Phase 1 and one Phase 2 clinical trials conducted in Europe. In total, 112 patients and 143 healthy normal subjects participated in these studies.

 

Beta-lactamase enzymes have the ability to degrade beta-lactam antibiotics that may be excreted into the GI tract. P1A (the first generation candidate) showed acceptable safety and tolerability in a Phase 1 clinical trial. In addition, data from two Phase 2 clinical trials demonstrated that P1A had the ability to preserve GI microflora in hospitalized patients treated with IV ampicillin or the combination of piperacillin and tazobactam.

 

C. difficile

 

C. difficile is the leading type of hospital acquired infection and is frequently associated with IV beta-lactam antibiotic treatment. According to an article published in the New England Journal of Medicine (Leffler DA et al. N Engl J Med 2015; 372: 1539-1548), CDIs more than quadruple the cost of hospitalizations, increasing annual expenditures by approximately $1.5 billion in the U.S. CDI is a rising global hospital acquired infection (HAI) problem in which the toxins produced by C. difficile bacteria result in AAD, and in the most serious cases, pseudomembranous colitis (severe inflammation of the lower GI tract) that can lead to death. The Centers for Disease Control and Prevention (CDC) identified C. difficile as an “urgent public health threat,” particularly given its resistance to many drugs used to treat other infections. CDI is a major, unintended risk associated with the prophylactic or therapeutic use of IV antibiotics, which may alter the natural balance of microflora that normally protect the GI tract, leading to C. difficile overgrowth and infection. Other risk factors for CDI include hospitalization, prolonged length of stay, underlying illness, immune-compromising conditions including the administration of chemotherapy and advanced age. In addition, many patients experience a recurrence of CDI within one to three months.

 

 15 

 

 

Limitations of Current Treatments and Market Opportunity

 

CDI is a widespread and often drug resistant infectious disease. According to an article published in the New England Journal of Medicine (Leffler DA et al. N Engl J Med 2015; 372:1539-1548), it is estimated that 453,000 patients are infected with C. difficile annually in the U.S., and it has been reported that approximately 29,000 patients die due to a CDI each year. CDI has surpassed methicillin-resistant staphylococcus aureus (MRSA) as the most frequent hospital acquired infection. Controlling the spread of CDI has proven challenging, as the C. difficile spores are easily transferred to patients via normal contact with healthcare personnel and with inanimate objects. There is currently no vaccine or approved product for the prevention of CDI.

 

SYN-004’s significant target market is represented by the 117 million average days SYN-004 could be administered with target IV beta-lactam antibiotics. This estimate is based upon data derived from the following report: Arlington Medical Resources (AMR), a Decision Resources Group Company, 2014 Audits of Acute Care Hospital Antibiotic Utilization. Currently there are no approved treatments designed to protect the microbiome from the damaging effects of IV antibiotics. The worldwide market for SYN-004 could represent a multi-billion dollar opportunity for us.

 

Phase 1a and 1b Clinical Trial Pharmacokinetic Data

 

In March 2015, we reported positive pharmacokinetic data from our Phase 1a and 1b clinical trials, which suggests that SYN-004 may have no effect on the IV antibiotic in the bloodstream, allowing the antibiotic to fight the primary infection. In February 2015, we reported positive topline results from our Phase 1b clinical trial of escalating doses of oral SYN-004, with no safety or tolerability issues reported at dose levels and dose regimens both meeting and exceeding those expected to be studied in upcoming clinical trials. The Phase 1a (40 participants) and 1b (24 participants) clinical trials of SYN-004 were initiated in December 2014.

 

First Phase 2a Clinical Trial Topline Results

 

In December 2015, we reported positive topline results from our Phase 2a clinical trial of SYN-004, including data from ten ileostomized participants that demonstrated SYN-004 successfully degraded residual IV ceftriaxone in the chyme (digestive fluid in the small intestine) without affecting the intended level of ceftriaxone in the bloodstream. This Phase 2a clinical trial was initiated in March 2015 to evaluate the GI antibiotic-degrading effects and the safety of SYN-004.

 

Second Phase 2a Clinical Trial Topline Results

 

In June 2015, we initiated a second Phase 2a clinical trial of SYN-004 to evaluate the GI antibiotic-degrading ability and the safety of SYN-004, in the presence of the proton pump inhibitor (PPI), esomeprazole, in healthy participants with functioning ileostomies. Enrollment is complete and topline data is expected from the second Phase 2a clinical trial during the second quarter of 2016.

 

Phase 2b Clinical Trial Design

 

In September 2015, we initiated a Phase 2b proof-of-concept clinical trial of SYN-004. This randomized, placebo-controlled clinical trial is expected to enroll approximately 370 patients at up to 75 global clinical sites. This clinical trial is intended to evaluate the ability of SYN-004 to prevent CDI, C. difficile associated diarrhea (CDAD) and AAD in patients hospitalized for a lower respiratory tract infection and receiving IV ceftriaxone. Once either 120 patients complete treatment and there are 10 confirmed cases of CDI, or 186 patients complete treatment, an interim analysis to evaluate baseline rate of CDI in the placebo group is anticipated. This anticipated interim analysis is expected to be conducted during the summer of 2016 and will be performed by an independent data monitoring committee. To date, approximately 185 patients have been enrolled into the SYN-004 Phase 2b clinical trial.

 

Phase 3 Planning

 

A Type C meeting has been requested with the FDA. We plan to initiate a pivotal Phase 3 clinical trial during the first half of 2017.

 

SYN-007 — Prevention of CDI and AAD

 

Preclinical work is ongoing to determine the ability of SYN-007 to protect the gut microbiome and degrade oral beta-lactam antibiotics. SYN-007 comprises a reformulated version of SYN-004 for use with oral beta-lactam antibiotics versus IV beta-lactam antibiotics.

 

SYN-006 — Prevention of CDI and AAD

 

The development of SYN-006 is in the discovery stage. SYN-006 is intended to be an oral prophylactic therapy designed to degrade IV carbapenem antibiotics (a third class of beta-lactam antibiotics) within the GI tract and maintain the natural balance of the gut microbiome for the prevention of CDI and AAD. While SYN-004 is intended to degrade penicillin and certain cephalosporins in the GI tract, the SYN-006 discovery program has the potential to expand the activity to a broader spectrum of IV beta-lactam antibiotics in the GI tract to include carbapenem antibiotics.

 

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C. difficile: Intellectual Property

 

The SYN-004 intellectual property portfolio includes approximately 40 issued U.S. and foreign patents, and approximately 30 U.S. and foreign patents pending.

 

Research Programs

 

Infectious disease outbreaks are increasing while intervention options are declining due to widespread multidrug-resistant bacteria, increasing numbers of immuno-compromised patients (e.g., the elderly and cancer patients) and the isolation of new pathogens.

 

Monoclonal Antibodies for Infectious Diseases

 

Antibodies are proteins, generally found in the bloodstream, that provide immunity in detecting and destroying pathogens, such as viruses and bacteria and their associated toxins. Monoclonal antibodies (mAbs) can also be designed and produced as therapeutic agents, utilizing protein engineering and recombinant production technologies. The mAbs being developed under our collaboration with Intrexon are intended to supplement a patient’s own immune system by providing the means to specifically and rapidly neutralize and/or clear specific pathogens and toxins of interest in a process known as “passive immunity.” Many pathogens that cause infectious diseases are innately resistant to, or over time have developed increased resistance to, antibiotics and other drugs.

 

SYN-005 — Pertussis (Whooping Cough)

 

Bordetella pertussis (B. pertussis) is a gram-negative bacterium that infects the upper respiratory tract, causing uncontrollable and violent coughing. Antibiotic treatment does not have a major effect on the course of pertussis. While such treatment can eliminate the B. pertussis bacteria from the respiratory tract, it does not neutralize the pertussis toxin. Infants with pertussis often require hospitalization in pediatric intensive care units, frequently requiring mechanical ventilation. Pertussis in adults generally leads to a chronic cough referred to as the “cough of 100 days.” The incidence of pertussis is increasing due to the declining effectiveness of the acellular vaccine introduced in the 1990s, exposure of unvaccinated and under-vaccinated individuals including infants who are not yet fully vaccinated and exposure of individuals whose immunity has diminished over time.

 

According to the World Health Organization (WHO), there are 50 million cases of whooping cough, and it is estimated that B. pertussis infection causes up to 300,000 deaths each year worldwide, primarily among unvaccinated infants. Recent news reports throughout the U.S. indicate that the pertussis vaccine introduced in the 1990s does not provide long-term protection and, as a result, whooping cough cases have increased to a 60-year high.

 

Intrexon Collaboration and The University of Texas at Austin Agreement

 

In August 2012, we entered into a worldwide exclusive channel collaboration with Intrexon through which we intend to develop mAb therapies for the treatment of certain infectious diseases not adequately addressed by existing therapies. In December 2012, we initiated mAb development for the prevention and treatment of pertussis focusing on toxin neutralization. Unlike antibiotics, we are developing a mAb therapy to target and neutralize the pertussis toxin as a prophylaxis for high-risk newborns and in order to reduce the mortality rate in infected infants. This program intends to utilize Intrexon’s comprehensive suite of proprietary technologies, including the mAbLogix TM platform for rapid discovery of fully human mAbs and the LEAP® cell processing station.

 

To further the development of this potential therapy for pertussis, we entered into an agreement with The University of Texas at Austin (UT Austin) to license the rights to certain research and pending patents related to pertussis antibodies. These research efforts are being conducted at the Cockrell School of Engineering in the laboratory of Associate Professor, Jennifer A. Maynard, Ph.D., the Laurence E. McMakin, Jr. Centennial Faculty Fellow in the McKetta Department of Chemical Engineering. Dr. Maynard brings to the project her expertise in defining the key neutralizing epitopes of pertussis toxin to optimize the potential efficacy of antibody therapeutics.

 

Preclinical and Clinical Development

 

Working with our collaborator, Intrexon, and our academic collaborator, UT Austin, we have established a humanized mAb product candidate, SYN-005, designed to neutralize pertussis toxin, a major cause of pertussis-mediated infant morbidity and mortality. The two humanized mAbs, hu1B7 and hu11E6, bound tightly to the toxin and potently neutralized the toxin. In addition, the antibodies were highly efficacious in a murine model of pertussis in which they completely mitigated elevations of the white blood cell count that is characteristic of the illness. The antibodies, alone and in combination, were compared to the WHO international pertussis human antiserum standard by ELISA. After administration to non-human primates, SYN-005 was detectable in the blood for more than three weeks.

 

In April 2014, and again in September 2014, we received positive preclinical research findings of SYN-005 for the treatment of pertussis in three non-human primate studies (n = 19). In the latter two pertussis studies in particular, SYN-005 rapidly stopped the rise in white blood cell count that is characteristic of the disease and accelerated its return to baseline.

 

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In September 2014, we received U.S. Orphan Drug Designation from the FDA for SYN-005 for the treatment of pertussis.

 

In April 2015, preclinical efficacy data that support advancing SYN-005 toward clinical trials were presented in two poster presentations at the European Congress of Clinical Microbiology and Infectious Diseases meeting (ECCMID) 2015 in Copenhagen, Denmark. The data suggest that SYN-005 has therapeutic potential to diminish morbidity, long-term complications and mortality from pertussis in critically ill infants. In addition, the data support a prophylactic approach for use in newborns that has the potential to save thousands of lives annually, particularly in the developing world where the unmet need is greatest.

 

In October 2015, the Bill & Melinda Gates Foundation awarded a grant to UT Austin to generate preclinical proof-of-concept data to test the hypothesis that antibody administration at birth may also have a role in the prevention of pertussis.

 

In December 2015, a non-human primate prophylaxis study was initiated by UT Austin to evaluate the potential of our monoclonal antibody, 1B7, in the prevention of pertussis. This preclinical study is expected to provide support for the use of our 1B7 in potential clinical application.

 

Intellectual Property

 

We have patents pending on compositions and uses of SYN-005 and we have two issued U.S. patent and patents pending on other pertussis mAbs from UT Austin.

 

SYN-200 — Treatment of Phenylketonuria (PKU)

 

PKU is a genetic disease that begins at birth characterized by a deficiency in the liver enzyme that breaks down the essential amino acid phenylalanine (Phe), a building block of proteins normally obtained through the foods we eat. As a result, Phe accumulates in the body, becoming toxic and leading to serious health consequences, including profound mental retardation, brain damage, mental illness, behavioral problems, seizures, tremors, limited cognitive ability and hyperactivity. If left untreated, the most severe form of PKU leads to permanent cognitive damage. PKU affects more than 14,000 people in the U.S. and 50,000 people in developed nations globally. There is no existing cure for PKU, requiring patients to maintain a life-long treatment program and a carefully controlled diet.

 

Intrexon Collaboration

 

In August 2015, we initiated the SYN-200 discovery program for development and commercialization of novel biotherapeutics for the treatment of patients with PKU pursuant to an exclusive channel collaboration with Intrexon. We intend to utilize Intrexon’s ActoBiotics platform to provide a proprietary method of delivering therapeutic protein and peptides to the GI tract through food-grade microbes. This program is in the discovery stage.

 

SYN-020 — Oral Intestinal Alkaline Phosphatase

 

The development of SYN-020 is in the discovery stage. SYN-020 is being developed as a modified-release oral dosage form of intestinal alkaline phosphatase (IAP). Published preclinical and clinical studies on IAP indicate that an oral IAP product may have efficacy in a broad range of significant therapeutic indications including celiac disease, inflammatory bowel disease, microbial dysbiosis and metabolic syndrome. We have identified cell systems in which IAP can be expressed and anticipate selection of an oral formulation in 2H 2016 for evaluation in preclinical disease models.

 

Multiple Sclerosis Program

 

We discontinued our multiple sclerosis (MS) program in February 2016 and the development of a Phase 2 oral estriol drug for the treatment of relapsing-remitting multiple sclerosis (RRMS) and cognitive dysfunction in MS. Previously, our drug candidate Trimesta (oral estriol) was evaluated in investigator-sponsored Phase 2 clinical trials for RRMS in women, and cognitive dysfunction in women with MS.

 

On February 1, 2016, our subsidiary, Putney Drug, Inc. provided written notice to the Regents of the University of California (Regents) that we were terminating our (i) License Agreement with the Regents, dated as of July 11, 2005, as amended on November 8, 2005, January 3, 2007, August 29, 2007, December 31, 2012, July 25, 2014 and July 8, 2015 (License Agreement) and (ii) Clinical Trial Agreement with the Regents, dated April 29, 2010, as amended July 8, 2015 (CTA). Pursuant to the terms of the License Agreement, Putney Drug had licensed from the Regents certain U.S. patents for multiple sclerosis therapy related to our drug candidate, Trimesta and Trimesta-combination therapies. Based upon the independent third party analysis of the investigator-sponsored Phase 2 clinical trial that evaluated Trimesta as a treatment for relapsing-remitting MS in women, it was determined that the License Agreement and the CTA should be terminated. In accordance with the termination provisions of the License Agreement and the CTA, the License Agreement and CTA terminated on May 2, 2016.

 

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Critical Accounting Policies

 

The consolidated financial statements are prepared in conformity with U.S. GAAP, which require the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses in the periods presented. We believe that the accounting estimates employed are appropriate and resulting balances are reasonable; however, due to inherent uncertainties in making estimates, actual results could differ from the original estimates, requiring adjustments to these balances in future periods. The critical accounting estimates that affect the consolidated financial statements and the judgments and assumptions used are consistent with those described under Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015.

 

Results of Operations

 

Three Months Ended March 31, 2016 and 2015

 

General and Administrative Expenses

 

General and administrative expenses increased by 42% to $2.4 million for the three months ended March 31, 2016, from $1.7 million for the three months ended March 31, 2015.  This increase is primarily the result of increased employee costs associated with the transition of the administrative and financial office to our Maryland headquarters, and increased legal fees and stock-based compensation. The charge related to stock-based compensation expense was $643,000 for the three months ended March 31, 2016, compared to $582,000 for the three months ended March 31, 2015.

 

Research and Development Expenses

 

Research and development expenses increased by 26% to $8.2 million for the three months ended March 31, 2016, from $6.5 million for the three months ended March 31, 2015. This increase is primarily the result of increased Phase 2 program costs associated with expanded clinical development programs, manufacturing and research activities within our microbiome-focused pipeline. Research and development expenses also include a charge related to non-cash stock-based compensation expense of $409,000 for the three months ended March 31, 2016, compared to $246,000 for the three months ended March 31, 2015.

 

The following table sets forth our research and development expenses directly related to our therapeutic areas for the three months ended March 31, 2016 and 2015. These direct expenses were external costs associated with preclinical studies and clinical trials. Indirect research and development expenses related to employee costs, facilities, stock-based compensation and research and development support services that are not directly allocated to specific drug candidates.

 

Therapeutic Areas  March 31, 2016   March 31, 2015 
SYN-004  $2,480   $4,334 
SYN-010   2,028    229 
SYN-005   22    524 
Other therapeutic areas   12    71 
           
Total direct costs   4,542    5,158 
Total indirect costs   3,613    1,336 
           
Total Research and Development  $8,155   $6,494 

   

Other Income (Expense)

 

Other expense was $497,000 for the three months ended March 31, 2016, compared to $4.2 million for the three months ended March 31, 2015. Other expense for the three months ended March 31, 2016 is due to non-cash expense of $498,000 from the change in fair value of warrants. The increase in the fair value of the warrants was due to the increase in our stock price from the year ended December 31, 2015. Non-cash expense related to fair value of warrants for the three months ended March 31, 2015 was $4.2 million.

 

Net Loss

 

Our net loss was $11.1 million, or $0.12 per common share for the three months ended March 31, 2016, compared to a net loss of $12.4 million, or $0.17 per common share for the three months ended March 31, 2015.

 

Liquidity and Capital Resources

 

With the exception of the three months ended June 30, 2010, we have experienced significant losses since inception and have a significant accumulated deficit. To date, we have financed our operations primarily through public and private sales of our common stock, and we expect to continue to seek to obtain the required capital in a similar manner. We have incurred an accumulated deficit of $155.6 million as of March 31, 2016. We cannot provide any assurance that we will be able to achieve profitability on a sustained basis, if at all, obtain the required funding to achieve our current business plan, obtain the required regulatory approvals for our product candidates or complete additional corporate partnering or acquisition transactions in order to commercialize such product candidates once regulatory approval is received.

 

Our cash and cash equivalents totaled $15.1 million as of March 31, 2016, a decrease of $5.7 million from December 31, 2015. During the three months ended March 31, 2016, the primary use of cash was for working capital requirements and operating activities which resulted in a net loss of $11.1 million for the three months ended March 31, 2016.

 

Our continued operations will primarily depend on our ability to raise additional capital from various sources, including equity and debt financings, as well as, license fees from potential corporate partners, joint ventures and grant funding. Such additional funds may not become available on acceptable terms or at all and there can be no assurance that any additional funding that we do obtain will be sufficient to meet our needs in the long term. We will continue to fund operations from cash on hand and through the similar sources of capital previously described. We can give no assurance that any additional capital that we are able to obtain will be sufficient to meet our needs.

 

Current and Future Financing Needs

 

We have incurred an accumulated deficit of $155.6 million through March 31, 2016. With the exception of the quarter ended June 30, 2010, we have incurred negative cash flow from operations since our inception. We have spent, and expect to continue to spend, a substantial amount of funds in connection with implementing our business strategy, including our planned product development efforts, our clinical trials and our research and discovery efforts.

 

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Based on our current plans, we believe that our cash and cash equivalents will be sufficient to enable us to meet our anticipated operating needs for at least the foreseeable future.

 

However, the actual amount of funds we will need to operate is subject to many factors, some of which are beyond our control. These factors include the following:

 

·the progress of our research activities;

 

·the number and scope of our research programs;

 

·the progress of our preclinical and clinical development activities;

 

·the progress of the development efforts of parties with whom we have entered into research and development agreements;

 

·our ability to maintain current research and development licensing arrangements and to establish new research and development and licensing arrangements;

 

·our ability to achieve our milestones under licensing arrangements;

 

·the costs associated with manufacturing-related services to produce material for use in our clinical trials;

 

·the costs involved in prosecuting and enforcing patent claims and other intellectual property rights; and

 

·the costs and timing of regulatory approvals.

 

We have based our estimate on assumptions that may prove to be wrong. We may need to obtain additional funds sooner or in greater amounts than we currently anticipate. Potential sources of financing include strategic relationships, public or private sales of our shares or debt and other sources. We may seek to access the public or private equity markets when conditions are favorable due to our long-term capital requirements. We do not have any committed sources of financing at this time, and it is uncertain whether additional funding will be available when we need it on terms that will be acceptable to us, or at all. If we raise funds by selling additional shares of common stock or other securities convertible into common stock, the ownership interest of our existing stockholders will be diluted. If we are not able to obtain financing when needed, we may be unable to carry out our business plan. As a result, we may have to significantly limit our operations and our business, financial condition and results of operations would be materially harmed.

 

Off-Balance Sheet Arrangements

 

During the three months ended March 31, 2016, we did not have, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules.

 

Contractual Obligations

 

There have been no material changes to our contractual obligations during the period covered by this report from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

The primary objective of our investment activities is to preserve our capital to fund operations. We also seek to maximize income from our investments without assuming significant risk. Our exposure to market risk is confined to our cash and cash equivalents. As of March 31, 2016, our cash and cash equivalents consisted primarily of money market securities. We do not engage in any hedging activities against changes in interest rates. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates or credit conditions on our securities portfolio. We may, however, require additional financing to fund future obligations and no assurance can be given that the terms of future sources of financing will not expose us to material market risk.

 

ITEM 4.  CONTROLS AND PROCEDURES.

 

(a) Evaluation of Disclosure Controls and Procedures

 

The Company has adopted and maintains disclosure controls and procedures (as defined Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in the reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is collected, recorded, processed, summarized and reported within the time periods specified in the rules of the SEC. The Company’s disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure. As required under Exchange Act Rule 13a-15, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures as of March 31, 2016, the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that based on such evaluation, the Company’s disclosure controls and procedures are effective as of March 31, 2016 to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

(b) Changes in Internal Control over Financial Reporting

 

There have not been any changes in our internal controls over financial reporting during our quarter ended March 31, 2016, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II-OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS.

 

From time to time we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

 

ITEM 1A. RISK FACTORS.

 

The following information updates, and should be read in conjunction with, the information disclosed in Part 1, Item 1A, “Risk Factors,” contained in our Annual Report on Form 10-K for the year ended December 31, 2015, which was filed with the SEC on March 10, 2016. Except as disclosed below, there have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

RISKS RELATING TO OUR BUSINESS

 

We will need to raise additional capital to operate our business and our failure to obtain funding when needed may force us to delay, reduce or eliminate our development programs or commercialization efforts.

 

During the three months ended March 31, 2016, our operating activities used net cash of approximately $5.7 million and as of March 31, 2016 our cash and cash equivalents were $15.1 million. With the exception of the three months ended June 30, 2010, we have experienced significant losses since inception and have a significant accumulated deficit. As of March 31, 2016, our accumulated deficit totaled approximately $155.6 million on a consolidated basis. We expect to incur additional operating losses in the future and therefore expect our cumulative losses to increase. With the exception of the quarter ended June 30, 2010, and limited laboratory revenues from Adeona Clinical Laboratory, which we sold in March 2012, we have generated very minimal revenues. We do not expect to derive revenue from any source in the near future until we or our potential partners successfully commercialize our products. We expect our expenses to increase in connection with our ongoing activities, particularly as we continue research and development, initiate and conduct clinical trials and seek marketing approval for our product candidates. Until such time as we receive approval from the FDA and other regulatory authorities for our product candidates, we will not be permitted to sell our products and therefore will not have product revenues from the sale of products. For the foreseeable future we will have to fund all of our operations and capital expenditures from equity and debt offerings, cash on hand, licensing fees and grants. If our current cash, cash equivalents and short-term investments are not sufficient to sustain our operations, we will need to seek additional sources of funding, such as additional financing or grant funding, and additional financing may not be available on favorable terms, if at all. If we do not succeed in raising additional funds on acceptable terms, we may be unable to complete planned preclinical and clinical trials or obtain approval of our product candidates from the FDA and other regulatory authorities. In addition, we could be forced to delay, discontinue or curtail product development, forego sales and marketing efforts, and forego licensing in attractive business opportunities. Any additional sources of financing will likely involve the issuance of our equity or debt securities, which will have a dilutive effect on our stockholders.

 

RISKS RELATING TO OUR STOCK

 

We cannot assure you that the common stock will be liquid or that it will remain listed on the NYSE MKT.

 

Our common stock is listed on the NYSE MKT. Although we currently meet the NYSE MKT’s listing standards, which generally mandate that we meet certain requirements relating to stockholders’ equity, market capitalization, aggregate market value of publicly held shares and distribution requirements, we cannot assure you that we will be able to maintain the continued listing standards of the NYSE MKT. The NYSE MKT requires companies to meet certain continued listing criteria including a minimum stockholders’ equity of $6.0 million if an issuer has sustained losses from continuing operations and/or net losses in its five most recent years, as outlined in the NYSE MKT Exchange Company Guide. At March 31, 2016, we had stockholders’ equity of $6.3 million. The NYSE MKT Exchange Company Guide also states that the NYSE normally will not consider removing from listing securities of an issuer with total value of market capitalization of at least $50.0 million and 1,100,000 shares publicly held, a market value of publicly held shares of at least $15.0 million and 400 round lot shareholders. Although the total value of our market capitalization exceeds $50.0 million and we have 1,100,000 shares publicly held, a market value of publicly held shares of at least $15.0 million and 400 round lot shareholders, there can be no assurance that the NYSE MKT will continue to list our common stock if we should fail to maintain the minimum stockholders’ equity. In addition, in the future we may not be able to maintain such minimum stockholders’ equity and/or issue additional equity securities in exchange for cash or other assets, if available, to maintain certain minimum stockholders’ equity required by the NYSE MKT. If we are delisted from the NYSE MKT then our common stock will trade, if at all, only on the over-the-counter market, such as the OTC Bulletin Board securities market, and then only if one or more registered broker-dealer market makers comply with quotation requirements. In addition, delisting of our common stock could depress our stock price, substantially limit liquidity of our common stock and materially adversely affect our ability to raise capital on terms acceptable to us, or at all. Delisting from the NYSE MKT could also have other negative results, including the potential loss of confidence by suppliers and employees, the loss of institutional investor interest and fewer business development opportunities.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None.

 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

 

Not Applicable.

 

ITEM 4.  MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5.  OTHER INFORMATION.

 

We currently intend to hold our annual meeting of stockholders on August 25, 2016 (2016 Annual Meeting).  The exact time and location of the 2016 Annual Meeting will be specified in our proxy statement for the 2016 Annual Meeting.

 

Because the expected date of the 2016 Annual Meeting has been advanced more than 30 calendar days from the date of the anniversary of our 2015 annual meeting of stockholders, we are affirming the deadline for receipt of stockholder proposals submitted pursuant to Rule 14a-8 of the Securities Exchange Act of 1934, as amended (Exchange Act), for inclusion in our proxy materials for the 2016 Annual Meeting.  In order to be considered timely, such proposals must be received in writing by our Corporate Secretary at our principal executive offices at 9605 Medical Center Drive, Suite 270, Rockville, Maryland, 20850 no later than the close of business on May 20, 2016, which we consider to be a reasonable time before we begin to print and send our proxy materials for the 2016 Annual Meeting.  Such proposals must comply with the rules and regulations of the Securities and Exchange Commission under Rule 14a-8 regarding the inclusion of stockholder proposals in company-sponsored proxy materials.

 

ITEM 6. EXHIBITS

 

The exhibits filed or furnished as part of this Quarterly Report on Form 10-Q are set forth on the Exhibit Index, which Exhibit Index is incorporated herein by reference.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  SYNTHETIC BIOLOGICS, INC.
     
  By: /s/ Jeffrey Riley
    Jeffrey Riley
    President and Chief Executive Officer
    (Principal Executive Officer)
    Date: May 5, 2016
     
  By: /s/ Steven A. Shallcross
    Steven A. Shallcross
    Chief Financial Officer
    (Principal Financial and Accounting Officer)
    Date: May 5, 2016

 

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EXHIBIT INDEX

 

31.1 Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) *
   
31.2 Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) *
   
32.1 Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
   
32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
   
101.INS XBRL Instance Document *
   
101.SCH XBRL Taxonomy Extension Schema *
   
101.CAL XBRL Taxonomy Extension Calculation Linkbase *
   
101.DEF XBRL Taxonomy Extension Definition Linkbase *
   
101.LAB XBRL Taxonomy Extension Label Linkbase *
   
101.PRE XBRL Taxonomy Extension Presentation Linkbase *

 

*Filed herewith.

 

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