Net cash provided by financing activities of $9.1 million for the year ended December 31, 2016 was primarily due to the receipt of net proceeds from the issuance of debt of $10.8 million less payments of our existing debt obligations of $1.5 million and deferred offering costs of $0.5 million.
Net cash provided by financing activities of $139.5 million for the year ended December 31, 2015 was primarily due to the proceeds from the issuance of common stock of $82.8 million, preferred stock of $52.4 million and debt of $3.0 million.
We expect that our primary uses of capital will continue to be third-party clinical research, development and manufacturing services, compensation and related expenses, laboratory and related supplies, legal and other regulatory expenses and general administrative costs. We believe that our existing cash and cash equivalents as of December 31, 2016,2017, will be sufficient to meet our anticipated cash requirements throughfor at least the full data readout of the NEWTON 2 trial of EG-1962 for the treatment of aSAH which is anticipated to occur in late 2018.next 12 months.
Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially as a result of a number of factors. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Moreover, if circumstances are favorable, we may seek to secure additional capital opportunistically. Our future capital requirements are difficult to forecast and will depend on many factors, including:
The following is a summary of our contractual obligations as of the date indicated:
The primary objectives of our investment activities are to ensure liquidity and to preserve principal, while at the same time maximizing the income we receive from our cash and marketable securitiescash equivalents without significantly increasing risk. As of December 31, 2016,2017, we had cash and cash equivalents of $106.4 $88.1 million that were held in a non-interest-bearing money operating account and an institutional U.S. Treasury money market fund. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. Due to the short-term maturities of our cash equivalents and the low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our cash equivalents. To minimize the risk in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in institutional market funds that are comprised of U.S. Treasury and Treasury backed repurchase agreements.
The financial statements required to be filed pursuant to this Item 8 are appended to this report. An index of those financial statements is found in Item 15.
None.
Not applicable.
The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy statement related to the 20172018 Annual Meeting of Stockholders or an amendment to this Annual Report, which we intend to file with the SEC within 120 days of the end of our fiscal year pursuant to General Instruction G(3) of Form 10-K.
The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy statement related to the 20172018 Annual Meeting of Stockholders or an amendment to this Annual Report, which we intend to file with the SEC within 120 days of the end of our fiscal year pursuant to General Instruction G(3) of Form 10-K.
The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy statement related to the 20172018 Annual Meeting of Stockholders or an amendment to this Annual Report, which we intend to file with the SEC within 120 days of the end of our fiscal year pursuant to General Instruction G(3) of Form 10-K.
The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy statement related to the 20172018 Annual Meeting of Stockholders or an amendment to this Annual Report, which we intend to file with the SEC within 120 days of the end of our fiscal year pursuant to General Instruction G(3) of Form 10-K.
The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy statement related to the 20172018 Annual Meeting of Stockholders or an amendment to this Annual Report, which we intend to file with the SEC within 120 days of the end of our fiscal year pursuant to General Instruction G(3) of Form 10-K.
All financial statement schedules have been omitted because they are not applicable, not required or the information required is shown in the financial statements or the notes thereto.
(3) Exhibits. The exhibits filed as part of this Annual Report are set forth on the Exhibit Index immediately following our consolidated financial statements. The Exhibit Index is incorporated herein by reference.
None.
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed by the following persons in the capacities indicated below and on the dates indicated:
/s/ Rosemary A. CraneDirector | March 1, 2018 | Rosemary A. Crane | | | | | | /s/ James I. Healy | Director | March 2, 20171, 2018 | James I. Healy, M.D., Ph.D. | | | | | | /s/ James Loughlin | Director | March 2, 20171, 2018 | James Loughlin | | | | | | /s/ R. Loch Macdonald | Chief Scientific Officer and Director | March 2, 20171, 2018 | R. Loch Macdonald, M.D., Ph.D. | | | | | | /s/ Liam Ratcliffe | Director | March 2, 20171, 2018 | Liam Ratcliffe, M.D., Ph.D. | | | | | | /s/ Robert Spiegel | Director | March 1, 2018 | Robert Spiegel, M.D. | | March 2, 2017 | Report of Independent Registered Public Accounting Firm
TheTo the Stockholders and Board of Directors and Stockholders Edge
Edge Therapeutics, Inc.:
Opinion on the Financial Statements We have audited the accompanying balance sheets of Edge Therapeutics, Inc. (the Company) as of December 31, 20162017 and 2015,2016, and the related statements of operations and comprehensive loss, convertible preferred stock and changechanges in stockholders’ equity (deficit), and cash flows for each of the years in the three yearthree-year period ended 2017 and the related notes (collectively, the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2016. 2017, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Anmisstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit includesof its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Edge Therapeutics, Inc. as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
We have served as the Company’s auditor since 2014. Short Hills, New Jersey March 2, 20171, 2018 EDGE THERAPEUTICS, INC.
Balance Sheets
| | | | | | | | December 31, 2017 | | | December 31, 2016 | | ASSETS | | | | | | | | | | | | | Current assets: | | | | | | | | | | | | | Cash and cash equivalents | | $ | 106,398,919 | | | $ | 130,189,421 | | | $ | 88,067,647 | | | $ | 106,398,919 | | Prepaid expenses and other current assets | | | 954,581 | | | | 1,081,084 | | | | 986,680 | | | | 954,581 | | Total current assets | | | 107,353,500 | | | | 131,270,505 | | | | 89,054,327 | | | | 107,353,500 | | | | | | | | | | | | | | | | | | | Property and equipment, net | | | 3,418,077 | | | | 2,766,992 | | | | 3,423,880 | | | | 3,418,077 | | Other assets | | | 142,870 | | | | 55,161 | | | | 142,870 | | | | 142,870 | | | | | | | | | | | | | | | | | | | Total assets | | $ | 110,914,447 | | | $ | 134,092,658 | | | $ | 92,621,077 | | | $ | 110,914,447 | | | | | | | | | | | | | | | | | | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | | | | | | | | LIABILITIES | | | | | | | | | | | | | | | | | Current liabilities: | | | | | | | | | | | | | | | | | Accounts payable | | $ | 3,471,032 | | | $ | 2,584,249 | | | $ | 4,369,133 | | | $ | 3,471,032 | | Accrued expenses | | | 3,213,715 | | | | 3,734,348 | | | | 5,422,205 | | | | 3,213,715 | | Short term debt | | | - | | | | 2,271,111 | | | | 3,075,421 | | | | - | | Total current liabilities | | | 6,684,747 | | | | 8,589,708 | | | | 12,866,759 | | | | 6,684,747 | | | | | | | | | | | | | | | | | | | Noncurrent liability: | | | | | | | | | | | | | | | | | Long term debt | | | 14,953,143 | | | | 3,025,423 | | | | 17,382,907 | | | | 14,953,143 | | | | | | | | | | | | | | | | | | | STOCKHOLDERS' EQUITY | | | | | | | | | | | | | | | | | Preferred stock, 5,000,000 shares authorized at December 31, 2016 and 2015, zero outstanding | | | - | | | | - | | | Common stock, $0.00033 par value, 75,000,000 shares authorized at December 31, 2016 and December 31, 2015, 28,918,516 shares and 28,810,845 shares issued and outstanding at December 31, 2016 and December 31, 2015, respectively | | | 9,756 | | | | 9,720 | | | Preferred stock, 5,000,000 shares authorized at December 31, 2017 and 2016, zero outstanding | | | | - | | | | - | | Common stock, $0.00033 par value, 75,000,000 shares authorized at December 31, 2017 and December 31, 2016, 30,869,205 shares and 28,918,516 shares issued and outstanding at December 31, 2017 and December 31, 2016, respectively | | | | 10,400 | | | | 9,756 | | Additional paid-in capital | | | 190,341,769 | | | | 184,721,777 | | | | 214,309,370 | | | | 190,341,769 | | Accumulated deficit | | | (101,074,968 | ) | | | (62,253,970 | ) | | | (151,948,359 | ) | | | (101,074,968 | ) | Total stockholders' equity | | | 89,276,557 | | | | 122,477,527 | | | | 62,371,411 | | | | 89,276,557 | | | | | | | | | | | | | | | | | | | Total liabilities and stockholders' equity | | $ | 110,914,447 | | | $ | 134,092,658 | | | $ | 92,621,077 | | | $ | 110,914,447 | |
See accompanying notes to the financial statements. EDGE THERAPEUTICS, INC.
Statements of Operations and Comprehensive Loss
| | Year Ended December 31, | | | Year Ended December 31, | | | | 2016 | | | 2015 | | | 2014 | | | 2017 | | | 2016 | | | 2015 | | | | | | | | | | | | | | | | | | | | | Operating expenses: | | | | | | | | | | | | | | | | | | | Research and development expenses | | $ | 24,825,379 | | | $ | 17,839,951 | | | $ | 8,473,522 | | | $ | 34,311,650 | | | $ | 24,825,379 | | | $ | 17,839,951 | | General and administrative expenses | | | 14,686,767 | | | | 8,658,867 | | | | 4,720,661 | | | | 17,654,970 | | | | 14,686,767 | | | | 8,658,867 | | | | | | | | | | | | | | | | | | | | | | | | | | | Total operating expenses | | | 39,512,146 | | | | 26,498,818 | | | | 13,194,183 | | | | 51,966,620 | | | | 39,512,146 | | | | 26,498,818 | | | | | | | | | | | | | | | | | | | | | | | | | | | Loss from operations | | | (39,512,146 | ) | | | (26,498,818 | ) | | | (13,194,183 | ) | | | (51,966,620 | ) | | | (39,512,146 | ) | | | (26,498,818 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Other income (expense): | | | | | | | | | | | | | | | | | | | | | | | | | Warrant remeasurement | | | - | | | | (1,879,823 | ) | | | 582,360 | | | | - | | | | - | | | | (1,879,823 | ) | Other expense | | | (163,463 | ) | | | - | | | | - | | | | - | | | | (163,463 | ) | | | - | | Interest income | | | 212,299 | | | | 9,084 | | | | 2,941 | | | | 700,903 | | | | 212,299 | | | | 9,084 | | Interest expense | | | (1,203,674 | ) | | | (816,494 | ) | | | (183,179 | ) | | | (2,180,143 | ) | | | (1,203,674 | ) | | | (816,494 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Loss before income taxes | | | (40,666,984 | ) | | | (29,186,051 | ) | | | (12,792,061 | ) | | | (53,445,860 | ) | | | (40,666,984 | ) | | | (29,186,051 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Benefit for income taxes | | | 1,845,986 | | | | 1,107,405 | | | | 590,675 | | | | 2,586,057 | | | | 1,845,986 | | | | 1,107,405 | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss and comprehensive loss | | | (38,820,998 | ) | | | (28,078,646 | ) | | | (12,201,386 | ) | | | (50,859,803 | ) | | | (38,820,998 | ) | | | (28,078,646 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Cumulative dividend on Series C , C-1 and C-2 convertible preferred stock | | | - | | | | (4,356,408 | ) | | | (1,580,701 | ) | | Cumulative dividend on Series C, C-1 and C-2 convertible preferred stock | | | | - | | | | - | | | | (4,356,408 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss attributable to common stockholders | | $ | (38,820,998 | ) | | $ | (32,435,054 | ) | | $ | (13,782,087 | ) | | $ | (50,859,803 | ) | | $ | (38,820,998 | ) | | $ | (32,435,054 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Loss per share attributable to common stockholders basic and diluted | | $ | (1.34 | ) | | $ | (4.01 | ) | | $ | (8.16 | ) | | $ | (1.67 | ) | | $ | (1.34 | ) | | $ | (4.01 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted average common shares outstanding basic and diluted | | | 28,864,216 | | | | 8,087,924 | | | | 1,688,475 | | | | 30,393,952 | | | | 28,864,216 | | | | 8,087,924 | |
See accompanying notes to the financial statements. EDGE THERAPEUTICS, INC.
Statements of Convertible Preferred Stock and Changes in Stockholders’Stockholders' Equity (Deficit)
| | Convertible Preferred Stock | | Common Stock | | | | | | Total | | | Convertible Preferred Stock | | | Common Stock | | | Additional Paid-in Capital | | | Deficit Accumulated | | | Total | | | | | | Amount | | | | | Amount | | Shares Issued | | | Amount | | | Shares Issued | | | Amount | Balance - January 1, 2014 | | | 8,336,865 | | $ | 20,680,692 | | | 1,688,475 | | | $ | 770 | | $ | 686,414 | | $ | (16,036,829 | ) | $ | (15,349,645 | ) | | Balance - January 1, 2015 | | | | 11,895,755 | | | $ | 36,788,409 | | | | 1,688,475 | | | $ | 770 | | | $ | 1,984,399 | | | $ | (29,818,916 | ) | | $ | (27,833,747 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of Series C-1 Preferred Stock, net of issuance | | | | | | | | | | | | | | | | | | | | | | | | | costs of $2,022,025 | | | 3,558,890 | | | 14,527,016 | | | - | | | | - | | | - | | | - | | | - | | | Stock based compensation expense | | | - | | | - | | | - | | | | - | | | 1,297,985 | | | - | | | 1,297,985 | | | Dividend Series C Preferred Stock | | | - | | | 1,446,773 | | | - | | | | - | | | - | | | (1,446,773 | ) | | (1,446,773 | ) | | Dividend Series C-1 Preferred Stock | | | - | | | 133,928 | | | - | | | | - | | | - | | | (133,928 | ) | | (133,928 | ) | | Net loss | | | - | | | - | | | - | | | | - | | | - | | | (12,201,386 | ) | | (12,201,386 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance - December 31, 2014 | | | 11,895,755 | | | 36,788,409 | | | 1,688,475 | | | | 770 | | | 1,984,399 | | | (29,818,916 | ) | | (27,833,747 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of Series C-2 Preferred Stock, net of issuance | | | | | | | | | | | | | | | | | | | | | | | | | costs of $3,782,650 | | | 12,043,006 | | | 52,217,328 | | | - | | | | - | | | - | | | - | | | - | | | Issuance of Series C-2 Preferred Stock, net of issuance costs of $3,782,650 | | | | 12,043,006 | | | | 52,217,328 | | | | - | | | | - | | | | - | | | | - | | | | - | | Other | | | - | | | 2,130 | | | - | | | | - | | | - | | | - | | | - | | | | - | | | | 2,130 | | | | - | | | | - | | | | - | | | | - | | | | - | | Dividend Series C Preferred Stock | | | - | | | 1,101,926 | | | - | | | | - | | | - | | | (1,101,926 | ) | | (1,101,926 | ) | | | - | | | | 1,101,926 | | | | - | | | | - | | | | - | | | | (1,101,926 | ) | | | (1,101,926 | ) | Dividend Series C-1 Preferred Stock | | | - | | | 1,008,346 | | | - | | | | - | | | - | | | (1,008,346 | ) | | (1,008,346 | ) | | | - | | | | 1,008,346 | | | | - | | | | - | | | | - | | | | (1,008,346 | ) | | | (1,008,346 | ) | Dividend Series C-2 Preferred Stock | | | - | | | 2,246,136 | | | - | | | | - | | | - | | | (2,246,136 | ) | | (2,246,136 | ) | | | - | | | | 2,246,136 | | | | - | | | | - | | | | - | | | | (2,246,136 | ) | | | (2,246,136 | ) | Conversion of Preferred Stock to Common Stock upon initial public offering | | | (23,938,761 | ) | | (93,364,275 | ) | | 18,566,856 | | | | 6,127 | | | 93,358,148 | | | - | | | 93,364,275 | | | | (23,938,761 | ) | | | (93,364,275 | ) | | | 18,566,856 | | | | 6,127 | | | | 93,358,148 | | | | - | | | | 93,364,275 | | Initial public offering of of common stock, net of issuance costs | | | - | | | - | | | 8,412,423 | | | | 2,776 | | | 82,752,836 | | | - | | | 82,755,612 | | | Initial public offering of common stock, net of issuance costs | | | | - | | | | - | | | | 8,412,423 | | | | 2,776 | | | | 82,752,836 | | | | - | | | | 82,755,612 | | Conversion of Preferred Stock Warrant to Common Stock Warrant | | | - | | | - | | | - | | | | - | | | 3,726,043 | | | - | | | 3,726,043 | | | | - | | | | - | | | | - | | | | - | | | | 3,726,043 | | | | - | | | | 3,726,043 | | Issuance of common stock from exercise of stock options | | | - | | | - | | | 4,753 | | | | 1 | | | 1,093 | | | - | | | 1,094 | | | | - | | | | - | | | | 4,753 | | | | 1 | | | | 1,093 | | | | - | | | | 1,094 | | Issuance of common stock from exercise of warrants | | | - | | | - | | | 138,338 | | | | 46 | | | (46 | ) | | - | | | - | | | | - | | | | - | | | | 138,338 | | | | 46 | | | | (46 | ) | | | - | | | | - | | Stock based compensation expense | | | - | | | - | | | - | | | | - | | | 2,899,304 | | | - | | | 2,899,304 | | | | - | | | | - | | | | - | | | | - | | | | 2,899,304 | | | | - | | | | 2,899,304 | | Net loss | | | - | | | - | | | - | | | | - | | | - | | | (28,078,646 | ) | | (28,078,646 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (28,078,646 | ) | | | (28,078,646 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance - December 31, 2015 | | | - | | | - | | | 28,810,845 | | | | 9,720 | | | 184,721,777 | | | (62,253,970 | ) | | 122,477,527 | | | | - | | | | - | | | | 28,810,845 | | | | 9,720 | | | | 184,721,777 | | | | (62,253,970 | ) | | | 122,477,527 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Stock based compensation expense | | | - | | | - | | | - | | | | - | | | 5,305,070 | | | - | | | 5,305,070 | | | | - | | | | - | | | | - | | | | - | | | | 5,305,070 | | | | - | | | | 5,305,070 | | Issuance of common stock from exercise of stock options | | | - | | | - | | | 63,639 | | | | 21 | | | 293,967 | | | - | | | 293,988 | | | | - | | | | - | | | | 63,639 | | | | 21 | | | | 293,967 | | | | - | | | | 293,988 | | Issuance of common stock from exercise of warrants | | | - | | | - | | | 44,032 | | | | 15 | | | 20,955 | | | - | | | 20,970 | | | | - | | | | - | | | | 44,032 | | | | 15 | | | | 20,955 | | | | - | | | | 20,970 | | Net loss | | | - | | | - | | | - | | | | - | | | - | | | (38,820,998 | ) | | (38,820,998 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (38,820,998 | ) | | | (38,820,998 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance - December 31, 2016 | | | - | | $ | - | | | 28,918,516 | | | $ | 9,756 | | $ | 190,341,769 | | $ | (101,074,968 | ) | $ | 89,276,557 | | | | - | | | | - | | | | 28,918,516 | | | | 9,756 | | | | 190,341,769 | | | | (101,074,968 | ) | | | 89,276,557 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Stock based compensation expense | | | | - | | | | - | | | | - | | | | - | | | | 6,182,841 | | | | - | | | | 6,182,841 | | Issuance of common stock, net of issuance costs | | | | - | | | | - | | | | 1,800,000 | | | | 594 | | | | 17,382,349 | | | | - | | | | 17,382,943 | | Issuance of common stock from exercise of stock options | | | | - | | | | - | | | | 35,366 | | | | 12 | | | | 118,176 | | | | - | | | | 118,188 | | Issuance of common stock from exercise of warrants | | | | - | | | | - | | | | 94,200 | | | | 31 | | | | 53,118 | | | | - | | | | 53,149 | | Issuance of common stock from 401K match | | | | - | | | | - | | | | 21,123 | | | | 7 | | | | 217,529 | | | | - | | | | 217,536 | | Cumulative-effect of new share-based compensation guidance | | | | - | | | | - | | | | - | | | | - | | | | 13,588 | | | | (13,588 | ) | | | - | | Net loss | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (50,859,803 | ) | | | (50,859,803 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance - December 31, 2017 | | | | - | | | $ | - | | | | 30,869,205 | | | $ | 10,400 | | | $ | 214,309,370 | | | $ | (151,948,359 | ) | | $ | 62,371,411 | |
See accompanying notes to the financial statements. EDGE THERAPEUTICS, INC.
Statements of Cash Flows
| | December 31, | | | December 31, | | | December 31, | | | Year Ended December 31, | | 2016 | | | 2015 | | | 2014 | | 2017 | | | 2016 | | | 2015 | | Cash flows from operating activities: | | | | | | | | | | | | | | | | | | | Net loss | | $ | (38,820,998 | ) | | $ | (28,078,646 | ) | | $ | (12,201,386 | ) | | $ | (50,859,803 | ) | | $ | (38,820,998 | ) | | $ | (28,078,646 | ) | Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | | | | | | | | | | | | | | | | Stock-based compensation expense | | | 5,305,070 | | | | 2,899,304 | | | | 1,297,985 | | | | 6,182,841 | | | | 5,305,070 | | | | 2,899,304 | | Stock-based 401K company common match | | | | 217,536 | | | | - | | | | - | | Warrant remeasurement | | | - | | | | 1,879,823 | | | | (582,360 | ) | | | - | | | | - | | | | 1,879,823 | | Depreciation expense | | | 100,117 | | | | 53,116 | | | | 31,229 | | | | 182,918 | | | | 100,117 | | | | 53,116 | | Loss on disposal of fixed assets | | | 102,788 | | | | - | | | | - | | | | - | | | | 102,788 | | | | - | | Amortization of debt discount | | | 75,214 | | | | 104,311 | | | | 35,288 | | | | 32,869 | | | | 75,214 | | | | 104,311 | | Amortization of debt issuance costs | | | 90,800 | | | | 94,648 | | | | - | | | | 108,407 | | | | 90,800 | | | | 94,648 | | Non-cash interest expense | | | 175,909 | | | | 38,521 | | | | 6,384 | | | | 363,909 | | | | 175,909 | | | | 38,521 | | Changes in assets and liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | Other receivable | | | - | | | | - | | | | 459,018 | | | Prepaid expenses and other assets | | | 38,794 | | | | (814,156 | ) | | | (96,754 | ) | | | (32,099 | ) | | | 38,794 | | | | (814,156 | ) | Accounts payable | | | 1,420,556 | | | | (71,751 | ) | | | 526,869 | | | | 898,101 | | | | 1,420,556 | | | | (71,751 | ) | Accrued expenses | | | (676,918 | ) | | | 2,142,187 | | | | 808,514 | | | | 2,208,490 | | | | (676,918 | ) | | | 2,142,187 | | | | | | | | | | | | | | | | | | | | | | | | | | | Net cash used in operating activities | | | (32,188,668 | ) | | | (21,752,643 | ) | | | (9,715,213 | ) | | | (40,696,831 | ) | | | (32,188,668 | ) | | | (21,752,643 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | | | | Purchases of property and equipment | | | (686,705 | ) | | | (1,305,086 | ) | | | (884,793 | ) | | | (188,721 | ) | | | (686,705 | ) | | | (1,305,086 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Net cash used in investing activities | | | (686,705 | ) | | | (1,305,086 | ) | | | (884,793 | ) | | | (188,721 | ) | | | (686,705 | ) | | | (1,305,086 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | | | | Proceeds from issuance of debt | | | 11,022,286 | | | | 3,000,000 | | | | 3,000,000 | | | | 5,000,000 | | | | 11,022,286 | | | | 3,000,000 | | Proceeds from exercise of stock options | | | 293,988 | | | | 1,094 | | | | - | | | | 118,188 | | | | 293,988 | | | | 1,094 | | Proceeds from exercise of warrants | | | 20,970 | | | | - | | | | | | | | 53,149 | | | | 20,970 | | | | - | | Payments for issuance costs | | | (544,773 | ) | | | (1,402,845 | ) | | | (1,351,450 | ) | | | - | | | | (544,773 | ) | | | (1,402,845 | ) | Payments for debt issuance costs | | | (219,042 | ) | | | - | | | | (94,998 | ) | | | - | | | | (219,042 | ) | | | - | | Repayment of debt | | | (1,488,558 | ) | | | (533,729 | ) | | | - | | | | - | | | | (1,488,558 | ) | | | (533,729 | ) | Proceeds from issuance of common stock, net of underwriting costs | | | - | | | | 86,059,087 | | | | - | | | | 17,382,943 | | | | - | | | | 86,059,087 | | Proceeds from issuance of preferred stock, net of issuance costs | | | - | | | | 52,394,571 | | | | 14,917,257 | | | | - | | | | - | | | | 52,394,571 | | | | | | | | | | | | | | | | | | | | | | | | | | | Net cash provided by financing activities | | | 9,084,871 | | | | 139,518,178 | | | | 16,470,809 | | | | 22,554,280 | | | | 9,084,871 | | | | 139,518,178 | | | | | | | | | | | | | | | | | | | | | | | | | | | Net (decrease) increase in cash | | | (23,790,502 | ) | | | 116,460,449 | | | | 5,870,803 | | | | (18,331,272 | ) | | | (23,790,502 | ) | | | 116,460,449 | | Cash and cash equivalents at beginning of period | | | 130,189,421 | | | | 13,728,972 | | | | 7,858,169 | | | | 106,398,919 | | | | 130,189,421 | | | | 13,728,972 | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents at end of period | | $ | 106,398,919 | | | $ | 130,189,421 | | | $ | 13,728,972 | | | $ | 88,067,647 | | | $ | 106,398,919 | | | $ | 130,189,421 | | | | | | | | | | | | | | | | | | | | | | | | | | | Supplemental disclosure of cash flow information: | | | | | | | | | | | | | | | | | | | | | | | | | Cash paid for: | | | | | | | | | | | | | | | | | | | | | | | | | Interest | | $ | 790,402 | | | $ | 559,175 | | | $ | 82,729 | | | $ | 1,635,562 | | | $ | 790,402 | | | $ | 559,175 | | | | | | | | | | | | | | | | | | | | | | | | | | | Supplemental cash flow information: | | | | | | | | | | | | | | | | | | | | | | | | | Conversion of Preferred Stock to Common Stock | | $ | - | | | $ | 93,364,275 | | | $ | - | | | $ | - | | | $ | - | | | $ | 93,364,275 | | Conversion of Preferred Stock Warrants to Common Stock Warrants | | $ | - | | | $ | 3,726,043 | | | $ | - | | | $ | - | | | $ | - | | | $ | 3,726,043 | | Deferred issuance costs included in accrued expenses and accounts payable | | $ | - | | | $ | 549,178 | | | $ | 53,946 | | | $ | - | | | $ | - | | | $ | 549,178 | | Non-cash financing costs | | $ | - | | | $ | 175,114 | | | $ | - | | | $ | - | | | $ | - | | | $ | 175,114 | | Accrued capital expenditures included in accrued expenses and accounts payable | | $ | 167,285 | | | $ | 71,040 | | | $ | 450,373 | | | $ | - | | | $ | 167,285 | | | $ | 71,040 | |
See accompanying notes to the financial statements. Edge Therapeutics, Inc.
Notes to Financial Statements
Note 1 - Nature of operations:
Edge Therapeutics, Inc. (the “Company”"Company") is a clinical-stage biotechnology company that discovers, develops and seeks to commercialize novel, hospital-based therapies capable of transforming treatment paradigms in the management of acute, life-threatening critical careneurological and other conditions. The Company’sCompany's initial product candidates target rare, acute, life-threatening neurological and other conditions for which the Company believes the approved existing therapies, if any, are inadequate. The Company’sCompany's product candidates utilize its proprietary, programmable, biodegradable polymer-based development platform (the Precisa PlatformTM)Platform), a novel delivery mechanism that seeks to enable targeted and sustained drug exposure and avoid the dose-limiting side effects associated with the current standards of care.
From the Company’sCompany's inception, it has devoted substantially all of its efforts to business planning, engaging regulatory, manufacturing and other technical consultants, acquiring operating assets, planning and executing clinical trials and raising capital. The Company’sCompany's future operations are highly dependent on a combination of factors, including (i) the success of its research and development, (ii) the development of competitive therapies by other biotechnology and pharmaceutical companies, and, ultimately, (iii) regulatory approval and market acceptance of the Company’sCompany's proposed future products.
On October 6, 2015, the Company completed an initial public offering (the “IPO”) of 8,412,423 shares of its common stock which included 1,097,272 shares of common stock issued upon the exercise in full by the underwriters of their over-allotment option at a price of $11.00 per share for aggregate gross proceeds of approximately $92.5 million. The Company received approximately $82.8 million in net proceeds after deducting underwriting discounts and commissions and other offering costs of approximately $9.7 million. Immediately prior to the closing of the IPO, all of the Company’s outstanding shares of convertible preferred stock, including shares issued for accrued dividends, automatically converted into 18,566,856 shares of common stock at the applicable conversion ratio then in effect. There are no shares of preferred stock outstanding.
Note 2 - Summary of Significant Accounting Policies
The preparation of 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(B) | Significant risks and uncertainties: |
The Company’sCompany'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 results of clinical testing and trial activities of the Company’sCompany's product candidates, the Company’sCompany's ability to obtain regulatory approval to market its products, the Company’sCompany'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’sCompany's ability to negotiate favorable licensing or other manufacturing and marketing agreements for its products, and the Company’sCompany's ability to raise capital.
The Company currently has no commercially approved products and there can be no assurance that the Company’sCompany's 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.
(C) | Cash equivalents and concentration of cash balance: |
The Company considers all highly liquid securities with an originala maturity weighted average of less than three months to be cash equivalents. The Company’sCompany's cash and cash equivalents in bank deposit accounts, at times, may exceed federally insured limits.
(D) | Property and equipment: |
Property and equipment is recorded at cost. Depreciation is recorded for property and equipment using the straight-line method over the estimated useful lives of three to five years. Leasehold improvements are amortized over the shorter of the estimated useful life or term of the underlying lease. The Company reviews the recoverability of all long-lived assets, including the related useful lives, whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset might not be recoverable. (E) | 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’sCompany's research and development projects as well as fees paid to consultants and various 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.
(G) | Stock-based compensation: |
The Company measures employee stock-based awards at grant-date fair value and recognizes employee compensation expense on a straight-line basis over the vesting period of the award.
Determining the appropriate fair value of stock-based awards requires the input of subjective assumptions, including, for stock options, the expected life of the option, and expected stock price volatility. The Company uses the Black-Scholes option pricing model to value its stock option awards. The assumptions used in calculating the fair value of stock-based awards represent management’smanagement's best estimates and involve inherent uncertainties and the application of management’smanagement's judgment. As a result, if factors change and management uses different assumptions, stock-based compensation expense could be materially different for future awards.
The expected life of stock options was estimated using the “simplified"simplified method,”" as the Company has limited historical information to develop reasonable expectations about future exercise patterns and employment duration for its stock options grants. The simplified method is based on the average of the vesting tranches and the contractual life of each grant. For stock price volatility, the Company uses comparable public companies as a basis for its expected volatility to calculate the fair value of options grants. The risk-free interest rate is based on U.S. Treasury notes with a term approximating the expected life of the option.
The estimation of the number of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from the Company’s current estimates, such amounts are recognized as an adjustment in the period in which estimates are revised.
(H) | Net loss per common share: |
Basic and diluted net loss per common share is determined by dividing net loss attributable to common stockholders by the weighted average common shares outstanding during the period. For all periods presented, the common shares underlying the preferred stock, common stock options and warrants have been excluded from the calculation because their effect would be anti-dilutive. Therefore, the weighted average shares outstanding used to calculate both basic and diluted loss per common share are the same. The following potentially dilutive securities have been excluded from the computations of diluted weighted average shares outstanding as they would be anti-dilutive:
| | As of December 31, | | | | | 2016 | | | 2015 | | | 2014 | | | As of December 31, | | | | | | | | | | | | | 2017 | | | 2016 | | | 2015 | | Stock options to purchase Common Stock | | | 5,316,511 | | | | 4,302,267 | | | | 2,445,711 | | | | 6,462,795 | | | | 5,316,511 | | | | 4,302,267 | | Convertible preferred stock to purchase Common Stock | | | - | | | | - | | | | 8,695,092 | | | Warrants to purchase Common Stock | | | 541,415 | | | | 600,184 | | | | 99,401 | | | | 374,653 | | | | 541,415 | | | | 600,184 | | Warrants to purchase Series C Preferred Stock | | | - | | | | - | | | | 338,534 | | | Warrants to purchase Series C-1 Preferred Stock | | | - | | | | - | | | | 257,028 | | | Total | | | 5,857,926 | | | | 4,902,451 | | | | 11,835,766 | | | | 6,837,448 | | | | 5,857,926 | | | | 4,902,451 | |
The Company provides for deferred income taxes under the asset and liability method, which requires deferred tax assets and liabilities to be recognized for the future tax consequences attributable to net operating loss carryforwards and for differences between the financial statement carrying amounts and the respective tax bases of assets and liabilities. Deferred tax assets are reduced if necessary by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized.
(J) | Fair value of financial instruments: |
Financial Accounting Standards Board (“FASB”("FASB") guidance specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
The three levels of the fair value hierarchy are as follows:
Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as exchange-traded instruments and listed equities.
| ● | Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as exchange-traded instruments and listed equities. |
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (e.g., quoted prices of similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active). Level 2 includes financial instruments that are valued using models or other valuation methodologies.
| ● | Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (e.g., quoted prices of similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active). Level 2 includes financial instruments that are valued using models or other valuation methodologies. |
Level 3 — Unobservable inputs for the asset or liability. Financial instruments are considered Level 3 when their fair values are determined using pricing models, discounted cash flows or similar techniques and at least one significant model assumption or input is unobservable.
| ● | Level 3 — Unobservable inputs for the asset or liability. Financial instruments are considered Level 3 when their fair values are determined using pricing models, discounted cash flows or similar techniques and at least one significant model assumption or input is unobservable. |
Subsequent events have been evaluated through the date these financial statements were issued.
(L) | New accounting standards: |
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, “Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The new standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This standard is effective for annual reporting periods beginning after December 15, 2015, and interim periods within those fiscal years. The Company has adopted this guidance and is reflected in the presentation of debt on the Company’s balance sheet.
In February 2016, the Financial Accounting Standards Board (“FASB”("FASB") issued Accounting Standards Update (“ASU”("ASU") No. 2016-02, “Leases"Leases (Topic 842).”" The new standard requires organizations that lease assets—referred to as “lessees”"lessees"—to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases (see Note 9). This standard is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the impact of adoption.
In March 2016, the FASB issued ASU No. 2016-09 which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Public companies will be required to adopt this standard in annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods. The Company will adoptadopted this ASU on January 1, 2017. The adoption of the ASU will not have a material impact on the financial statements.
The impact of adopting ASU 2016-09 resulted in the following:
| ● | The Company recognized $84,786 of tax benefit along with a full valuation allowance as of the adoption date related to the historical excess tax benefits from historical option exercises related to employee equity award activity. |
| ● | The Company elected to recognize forfeitures as they occur. The cumulative effect adjustment as a result of the adoption of this amendment on a modified retrospective basis was not material. |
There were no other material impacts to our consolidated financial statements as a result of adopting this updated standard. Note 3 – Fair Value of Financial Instruments
| | Fair Value Measurements at Reporting Date Using | | | Fair Value Measurements at Reporting Date Using | | | | | Total | | | Quoted Prices in Active Markets (Level 1) | | | Quoted Prices in Inactive Markets (Level 2) | | | Significant Unobservable Inputs (Level 3) | | As of December 31, 2017: | | | | | | | | | | | | | | Cash and cash equivalents | | | $ | 88,067,647 | | | $ | 88,067,647 | | | $ | - | | | $ | - | | | | Total | | | Quoted Prices in Active Markets (Level 1) | | | Quoted Prices in Inactive Markets (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | | | | | | | | | | | | | | | | As of December 31, 2016: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 106,398,919 | | | $ | 106,398,919 | | | $ | - | | | $ | - | | | $ | 106,398,919 | | | $ | 106,398,919 | | | $ | - | | | $ | - | | | | | | | | | | | | | | | | | | | | As of December 31, 2015: | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 130,189,421 | | | $ | 130,189,421 | | | $ | - | | | $ | - | | |
There were no transfers between Levels 1, 2, or 3 during 20162017 or 2015.2016.
Prior to our IPO, which closed on October 6, 2015, Level 3 instruments consisted of the Company’s Series C and Series C-1 convertible preferred stock warrant liability and common stock warrant liability. The fair values of the outstanding warrants were measured using the Black-Scholes option-pricing model (Note 7). Inputs used to determine estimated fair value of the warrant liabilities include the estimated fair value of the underlying stock at the valuation date, the estimated term of the warrants, risk-free interest rates, expected dividends and the expected volatility of the underlying stock. The significant unobservable inputs used in the fair value measurement of the warrant liabilities were the fair value of the underlying stock at the valuation date and the estimated term of the warrants. Generally, increases (decreases) in the fair value of the underlying stock and estimated term would result in a directionally similar impact to the fair value measurement. After the IPO, the warrants were no longer liability classified and were no longer considered Level 3 instruments.
| | | | Fair value as of December 31, 2014 | | $ | 1,671,106 | | Fair value of warrants issued | | | 175,114 | | Change in fair value | | | 1,879,823 | | Reclassification to additional paid in capital at IPO | | | (3,726,043 | ) | Fair value as of December 31, 2015 | | | - | | Fair value as of December 31, 2016 | | $ | - | |
Note 4 – Property and Equipment
Property and equipment is summarized as follows:
| | December 31, | | | | 2017 | | | 2016 | | Furniture and equipment | | $ | 564,596 | | | $ | 456,515 | | Leasehold Improvements | | | 438,996 | | | | 358,356 | | Construction in Process | | | 2,725,569 | | | | 2,725,569 | | | | | 3,729,161 | | | | 3,540,440 | | Less accumulated depreciation | | | (305,281 | ) | | | (122,363 | ) | Property and equipment, net | | $ | 3,423,880 | | | $ | 3,418,077 | |
| | December 31, | | | | 2016 | | | 2015 | | | | | | | | | Furniture and equipment | | $ | 456,515 | | | $ | 163,162 | | Leasehold Improvements | | | 358,356 | | | | 115,938 | | Construction in Process | | | 2,725,569 | | | | 2,579,284 | | | | | 3,540,440 | | | | 2,858,384 | | Less accumulated depreciation | | | (122,363 | ) | | | (91,392 | ) | Property and equipment, net | | $ | 3,418,077 | | | $ | 2,766,992 | |
Page | 89
Note 5 – Accrued Expenses
Accrued expenses and other liabilities consist of the following:
| | December 31, | | | | | 2016 | | | 2015 | | | December 31, | | | | | | | | | | 2017 | | | 2016 | | Accrued research and development costs | | $ | 654,795 | | | $ | 1,874,126 | | | $ | 2,857,025 | | | $ | 654,795 | | Accrued professional fees | | | 366,394 | | | | 258,568 | | | | 267,646 | | | | 366,394 | | Accrued compensation | | | 1,866,255 | | | | 1,510,430 | | | | 1,886,638 | | | | 1,866,255 | | Accrued other | | | 319,434 | | | | 56,835 | | | | 385,896 | | | | 319,434 | | Deferred rent | | | 6,837 | | | | 34,389 | | | | 25,000 | | | | 6,837 | | Total | | $ | 3,213,715 | | | $ | 3,734,348 | | | $ | 5,422,205 | | | $ | 3,213,715 | |
Note 6 - Convertible Preferred Stock
Immediately prior to the closing of the IPO on October 6, 2015, all of the outstanding shares of convertible preferred stock, listed below, including shares received for accrued dividends, automatically converted into 18,566,856 shares of common stock at the applicable conversion ratio then in effect. There were no shares of preferred stock outstanding as of December 31, 20162017 and 2015.
The Company sold Convertible Preferred Stock as follows:
Issue Date | | Series | | Number of Shares | | | Price per Share | | | Proceeds (in thousands) | | | Common Stock Conversion Price | | Common shares on conversion | | Offer Costs (in thousands) | | 2009 | | | A | | | 390,486 | | | $ | 1.00 | | | $ | 390 | | | $ | 1.00 | | | 390,486 | | $ | 25 | | 2010 | | | A | | | 474,014 | | | $ | 1.00 | | | $ | 474 | | | $ | 1.00 | | | 474,014 | | $ | 43 | | 2011 | | | B | | | 2,333,000 | | | $ | 1.25 | | | $ | 2,916 | | | $ | 1.25 | | | 2,333,000 | | $ | 27 | | 2011(1) | | | B | | | 82,116 | | | $ | 1.25 | | | $ | 103 | | | $ | 1.25 | | | 82,116 | | | — | | 2012 | | | B-1 | | | 359,935 | | | $ | 1.75 | | | $ | 630 | | | $ | 1.75 | | | 359,935 | | $ | 153 | | 2013 | | | C | | | 4,631,505 | | | $ | 3.85 | | | $ | 17,831 | | | $ | 3.85 | | | 4,631,505 | | $ | 2,747 | | 2013(2) | | | C | | | 65,809 | | | $ | 3.85 | | | $ | 253 | | | $ | 3.85 | | | 65,809 | | | — | | 2014 | | | C-1 | | | 3,558,890 | | | $ | 4.65 | | | $ | 16,549 | | | $ | 4.65 | | | 3,558,890 | | $ | 2,022 | | 2015 | | | C-2 | | | 12,043,006 | | | $ | 4.65 | | | $ | 56,000 | | | $ | 4.65 | | | 12,043,006 | | $ | 3,783 | |
(1) | Conversion of $100,000 Note plus accrued interest of $2,645. |
(2) | Conversion of $250,000 promissory note plus accrued interest of $3,365. | 2016.
Dividends
The holders of the Series C, Series C-1 and Series C-2 Convertible Preferred Stock were entitled to receive, when, as and if declared by the board, cumulative dividends at the rate of 8% of the original purchase price per annum. The Series C, Series C-1 and Series C-2 dividends accrued from the date of issuance and were payable semi-annually on January 1 and July 1 in cash or common stock at the Company’sCompany's option. In accordance with accounting literature, Series C, Series C-1 and Series C-2 dividends since the date of issuance have been accrued in conjunction with the conversion of the Preferred Stock into Common. The other series of Convertible Preferred Stock had no dividend requirement.
Preferred Stock Warrants
In connection with certain of our preferred stock sales and debt issuances we issued warrants to the placement agent and lender, for preferred stock. The warrants were recorded as liabilities with changes in fair value being recorded in the statement of operations and are calculated utilizing the Black-Scholes option pricing model. At the closing of the IPO date on October 6, 2015 these warrants become exercisable for shares of our common stock. These warrants were exercisable for 600,184 shares of common stock at exercise prices ranging from $5.79 to $12.10 and expire at various dates through 2020. During 2017 and 2016, 166,762 and 58,769 warrants were exercised resulting in the issuance of 94,200 and 44,032 shares of common stock.stock, respectively. As of December 31, 2016, 541,4152017, 374,653 warrants were exercisable.
Note 7 - Stock Options
The Company has three equity compensation plans: the 2010 Equity Incentive Plan, the 2012 Equity Incentive Plan and the 2014 Equity Incentive Plan (the “Plans”"Plans"). Originally, the Company was able to grant up to 548,206 and 1,096,411 shares of Common Stock as both incentive stock options (“ISOs”("ISOs") and nonqualified stock options (“NQs”("NQs") under the 2010 Equity Incentive Plan and the 2012 Equity Incentive Plan, respectively. In 2013, the Company’sCompany's stockholders approved an increase to 1,279,146 shares authorized for issuance under the 2010 Equity Incentive Plan. In 2014, the Board of Directors of the Company (the “Board”"Board") approved an increase to 1,350,412 shares authorized for issuance under the 2010 Equity Incentive Plan.
In 2014, the Company’sCompany's stockholders approved the 2014 Equity Incentive Plan pursuant to which the Company may grant up to 1,827,351 shares as both ISOs and NQs, subject to increases as hereafter described (the “Plan Limit”"Plan Limit"). However, 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 the Plan Limit was increased to 3,047,323 shares. As of January 1, 2017, the Plan Limit increased to 4,204,063.
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 three or four year term. 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.
On November 16, 2015,The Company issued the Company issuedfollowing non-qualified options to purchase a total of 80,000 shares of common stock to its newly appointed Senior Vice President, General Counsel and Secretary.executives. The award wasawards were granted outside of the Company’sCompany's 2014 Equity Incentive Plan and vests over four years with 25% vesting on October 30, 2016, which is one year following the date of hire, and the remaining 75% vesting in 36 equal monthly installments thereafter, subject to continued service to the Company through each vesting date and subject to acceleration or forfeiture upon the occurrence of certain events as set forth in the applicable option agreement and employment agreement. The foregoing grant award wasawards were made pursuant to the NASDAQ inducement grant exception as a material component of employment compensation.
On July 1, 2016, the Company issued non-qualified options to purchase a total of 85,000 shares of common stock to its newly appointed Vice President, Clinical Development. The award was granted outside of the Company’s 2014 Equity Incentive Plan and vests over four years with 25% vesting on June 20, 2017, which is one year following the date of hire, and the remaining 75% vesting in 36 equal monthly installments thereafter, subject to continued service to the Company through each vesting date and subject to acceleration or forfeiture upon the occurrence of certain events as set forth in the applicable option agreement and Company policies. The foregoing grant award was made pursuant to the NASDAQ inducement grant exception as a material component of the employment compensation.
Issue Date | | 25% Vesting Date | | Executive | | Number of Options | November 16, 2015 | | October 30, 2016 | | SVP, General Counsel and Secretary | | 80,000 | November 1, 2016 | | October 17, 2017 | | Chief Operating Officer | | 150,000 | March 1, 2017 | | February 28, 2018 | | SVP, Regulatory Affairs | | 80,000 | November 1, 2017 | | October 31, 2018 | | Chief Financial Officer | | 200,000 |
On November 1, 2016, the Company issued non-qualified options to purchase a total of 150,000 shares of common stock to its newly appointed Chief Operating Officer. The award was granted outside of the Company’s 2014 Equity Incentive Plan and vests over four years with 25% vesting on October 17, 2017, which is one year following the date of hire, and the remaining 75% vesting in 36 equal monthly installments thereafter, subject to continued service to the Company through each vesting date and subject to acceleration or forfeiture upon the occurrence of certain events as set forth in the applicable option agreement and employment agreement. The foregoing grant award was made pursuant to the NASDAQ inducement grant exception as a material component of the employment compensation.
The Company’sCompany's stock-based compensation expense was recognized in operating expense as follows:
| | Year Ended December 31, | | | Year Ended December 31, | | | | 2016 | | | 2015 | | | 2014 | | | 2017 | | | 2016 | | | 2015 | | Stock-Based Compensation | | | | | | | | | | | | | | | | | | | Research and development | | $ | 2,177,643 | | | $ | 1,129,556 | | | $ | 569,132 | | | $ | 2,687,975 | | | $ | 2,177,643 | | | $ | 1,129,556 | | General and administrative | | | 3,127,427 | | | | 1,769,748 | | | | 728,853 | | | | 3,494,866 | | | | 3,127,427 | | | | 1,769,748 | | Total | | $ | 5,305,070 | | | $ | 2,899,304 | | | $ | 1,297,985 | | | $ | 6,182,841 | | | $ | 5,305,070 | | | $ | 2,899,304 | |
The fair value of options and warrants granted during the years ended December 31, 2017, 2016 2015 and 20142015 was estimated using the Black-Scholes option valuation model utilizing the following assumptions:
| | For the year ended December 31, | | | | | 2016 | | | 2015 | | | 2014 | | | Year Ended December 31, | | | | | | | | | | | | | 2017 | | | 2016 | | | 2015 | | | | | | | | | | | | | Weighted Average | | | Weighted Average | | | Weighted Average | | Volatility | | | 77.20 | % | | | 79.80 | % | | | 75.54 | % | | | 88.87 | % | | | 77.20 | % | | | 79.80 | % | Risk-Free Interest Rate | | | 1.39 | % | | | 1.74 | % | | | 1.96 | % | | | 1.88 | % | | | 1.39 | % | | | 1.74 | % | Expected Term in Years | | | 6.02 | | | | 6.05 | | | | 5.78 | | | | 6.00 | | | | 6.02 | | | | 6.05 | | Dividend Rate | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % | Fair Value of Option on Grant Date | | $ | 5.39 | | | $ | 5.42 | | | $ | 5.35 | | | $ | 6.93 | | | $ | 5.39 | | | $ | 5.42 | |
The following table summarizes the number of options outstanding and the weighted average exercise price:
| | Number of Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Life in Years | | | Aggregate Intrinsic Value | | Options outstanding at January 1, 2015 | | | 2,445,711 | | | | 3.13 | | | | | | | | Granted | | | 1,902,609 | | | | 7.87 | | | | | | | | Exercised | | | (4,753 | ) | | | 0.23 | | | | | | | | Forfeited | | | (30,640 | ) | | | 7.98 | | | | | | | | Expirations | | | (10,660 | ) | | | 8.28 | | | | | | | | Options outstanding at December 31, 2015 | | | 4,302,267 | | | $ | 5.19 | | | | 8.14 | | | $ | 31,659,550 | | Vested and expected to vest at December 31, 2015 | | | 4,213,091 | | | $ | 5.14 | | | | 8.12 | | | $ | 31,202,132 | | Exercisable at December 31, 2015 | | | 1,857,077 | | | $ | 2.83 | | | | 7.05 | | | $ | 17,952,965 | | | | | | | | | | | | | | | | | | | Options outstanding at December 31, 2015 | | | 4,302,267 | | | $ | 5.19 | | | | | | | | | | Granted | | | 1,211,400 | | | | 8.09 | | | | | | | | | | Exercised | | | (63,639 | ) | | | 4.62 | | | | | | | | | | Forfeited | | | (133,517 | ) | | | 5.79 | | | | | | | | | | Options outstanding at December 31, 2016 | | | 5,316,511 | | | $ | 5.84 | | | | 7.60 | | | $ | 35,599,646 | | Vested and expected to vest at December 31, 2016 | | | 5,235,931 | | | $ | 5.80 | | | | 7.58 | | | $ | 35,246,927 | | Exercisable at December 31, 2016 | | | 3,027,112 | | | $ | 4.41 | | | | 6.76 | | | $ | 24,559,384 | | | | | | | | | | | | | | | | | | | Options outstanding at December 31, 2016 | | | 5,316,511 | | | $ | 5.84 | | | | | | | | | | Granted | | | 1,365,400 | | | | 9.39 | | | | | | | | | | Exercised | | | (35,366 | ) | | | 3.34 | | | | | | | | | | Forfeited | | | (183,750 | ) | | | 9.46 | | | | | | | | | | Options outstanding at December 31, 2017 | | | 6,462,795 | | | $ | 6.50 | | | | 7.13 | | | $ | 20,467,335 | | Vested and expected to vest at December 31, 2017 | | | 6,462,795 | | | $ | 6.50 | | | | 7.13 | | | $ | 20,467,335 | | Exercisable at December 31, 2017 | | | 4,066,066 | | | $ | 5.14 | | | | 6.21 | | | $ | 18,100,589 | |
| | Number of Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Life in Years | | | Aggregate Intrinsic Value | | | | | | | | | | | | | | | Options outstanding at January 1, 2014 | | | 1,993,301 | | | $ | 2.00 | | | | | | | | Granted | | | 452,410 | | | $ | 8.15 | | | | | | | | Exercised | | | - | | | | - | | | | | | | | Forfeited | | | - | | | | - | | | | | | | | Options outstanding at December 31, 2014 | | | 2,445,711 | | | $ | 3.13 | | | | 8.18 | | | $ | 6,247,407 | | Vested and expected to vest at December 31, 2014 | | | 2,408,395 | | | $ | 3.12 | | | | 8.17 | | | $ | 6,175,025 | | Exercisable at December 31, 2014 | | | 1,413,335 | | | $ | 2.46 | | | | 7.86 | | | $ | 4,162,373 | | | | | | | | | | | | | | | | | | | Options outstanding at December 31, 2014 | | | 2,445,711 | | | $ | 3.13 | | | | | | | | | | Granted | | | 1,902,609 | | | | 7.87 | | | | | | | | | | Exercised | | | (4,753 | ) | | | 0.23 | | | | | | | | | | Forfeited | | | (30,640 | ) | | | 7.98 | | | | | | | | | | Expirations | | | (10,660 | ) | | | 8.28 | | | | | | | | | | Options outstanding at December 31, 2015 | | | 4,302,267 | | | $ | 5.19 | | | | 8.14 | | | $ | 31,659,550 | | Vested and expected to vest at December 31, 2015 | | | 4,213,091 | | | $ | 5.14 | | | | 8.12 | | | $ | 31,202,132 | | Exercisable at December 31, 2015 | | | 1,857,077 | | | $ | 2.83 | | | | 7.05 | | | $ | 17,952,965 | | | | | | | | | | | | | | | | | | | Options outstanding at December 31, 2015 | | | 4,302,267 | | | $ | 5.19 | | | | | | | | | | Granted | | | 1,211,400 | | | | 8.09 | | | | | | | | | | Exercised | | | (63,639 | ) | | | 4.62 | | | | | | | | | | Forfeited | | | (133,517 | ) | | | 5.79 | | | | | | | | | | Options outstanding at December 31, 2016 | | | 5,316,511 | | | $ | 5.84 | | | | 7.60 | | | $ | 35,599,646 | | Vested and expected to vest at December 31, 2016 | | | 5,235,931 | | | $ | 5.80 | | | | 7.58 | | | $ | 35,246,927 | | Exercisable at December 31, 2016 | | | 3,027,112 | | | $ | 4.41 | | | | 6.76 | | | $ | 24,559,384 | |
At December 31, 20162017 there was approximately $10,076,261$12,968,689 of unamortized stock compensation expense, which is expected to be recognized over a remaining average vesting period of 1.352.48 years.
Note 8 – Income Taxes
A reconciliation of the statutory U.S. federal income tax rate to the Company’sCompany's effective tax rate is as follows:
| | Year Ended December 31, | | | | 2017 | | | 2016 | | | 2015 | | Federal statutory rate | | | 34.0 | % | | | 34.0 | % | | | 34.0 | % | State taxes | | | 1.1 | % | | | 1.2 | % | | | 2.9 | % | Change in Statutory Rate | | | (25.6 | )% | | | - | | | | - | | Permanent differences | | | (11.0 | )% | | | (10.6 | )% | | | (5.8 | )% | Research and development | | | 21.2 | % | | | 16.0 | % | | | 14.3 | % | State taxes/ sale of NOL | | | 4.8 | % | | | 4.5 | % | | | 3.8 | % | Valuation allowance | | | (19.7 | )% | | | (40.6 | )% | | | (45.8 | )% | Other | | | - | | | | - | | | | 0.4 | % | Effective tax rate | | | 4.8 | % | | | 4.5 | % | | | 3.8 | % |
| | Year ended December 31, | | | | 2016 | | | 2015 | | | 2014 | | | | | | | | | | | | Federal statutory rate | | | 34.00 | % | | | 34.00 | % | | | 34.00 | % | State taxes | | | 1.16 | % | | | 2.89 | % | | | 0.81 | % | Permanent differences | | | -10.62 | % | | | -5.84 | % | | | -6.58 | % | Research and development | | | 15.99 | % | | | 14.31 | % | | | 3.81 | % | State taxes/ sale of NOL | | | 4.54 | % | | | 3.79 | % | | | 6.25 | % | Valuation allowance | | | -40.53 | % | | | -45.77 | % | | | -32.04 | % | Other | | | 0.00 | % | | | 0.41 | % | | | 0.00 | % | Effective tax rate | | | 4.54 | % | | | 3.79 | % | | | 6.25 | % |
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets were as follows:
| | December 31, | | | | 2017 | | | 2016 | | Federal net operating losses | | $ | 21,312,121 | | | $ | 23,644,647 | | State net operating losses | | | 2,268,249 | | | | 1,554,730 | | Stock options | | | 1,608,750 | | | | 1,419,494 | | Federal tax credit | | | 24,060,243 | | | | 12,709,438 | | State tax credits | | | 384,740 | | | | 353,684 | | Amortization | | | 612,878 | | | | 69,529 | | Accrued expense | | | 7,027 | | | | 2,731 | | Other | | | 30,999 | | | | 18,042 | | Total gross deferred tax assets | | | 50,285,007 | | | | 39,772,295 | | Less valuation allowance | | | (50,285,007 | ) | | | (39,772,295 | ) | Net deferred tax assets | | $ | - | | | $ | - | |
| | As of December 31, | | | | 2016 | | | 2015 | | Federal net operating losses | | $ | 23,644,647 | | | $ | 14,763,641 | | State net operating losses | | | 1,554,730 | | | | 1,144,762 | | Stock options | | | 1,419,494 | | | | 669,012 | | Federal tax credit | | | 12,709,438 | | | | 4,832,146 | | State tax credits | | | 353,684 | | | | 159,258 | | Amortization | | | 69,529 | | | | 76,222 | | Accrued expense | | | 2,731 | | | | 13,735 | | Other | | | 18,042 | | | | 15,431 | | Total gross deferred tax assets | | | 39,772,295 | | | | 21,674,207 | | Less valuation allowance | | | (39,772,295 | ) | | | (21,674,207 | ) | Net deferred tax assets | | $ | - | | | $ | - | |
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. There was a full valuation allowance against the net deferred tax assets as of December 31, 20162017 and December 31, 2015.2016.
At December 31, 2016,2017, the Company had federal net operating loss (“NOL”("NOL") carryforwards of approximately $69.5$101.5 million which expire between 2029 and 2036.2037. At December 31, 2016,2017, the Company had federal research and development credits carryforwards of approximately $1.3$1.9 million and an orphan drug credit carryover of approximately $11.4$22.1 million. The Company may be subject to the net operating loss utilization provisions of Section 382 of the Internal Revenue Code. The effect of an ownership change would be the imposition of an annual limitation on the use of NOL carryforwards attributable to periods before the change. The amount of the annual limitation depends upon the value of the Company immediately before the change, changes to the Company’sCompany's capital during a specified period prior to the change, and the federal published interest rate. Although we have not completed an analysis under Section 382 of the Code, it is likely that the utilization of the NOLs will be limited.
At December 31, 2016,2017, the Company had approximately $26.2$31.9 million of State of New Jersey NOL’sNOL's which expire between 2030 and 2035.2037. At December 31, 2016,2017, the Company had approximately $0.6$0.4 million of the State of New Jersey research development credits carryforwards. The State of New Jersey has enacted legislation permitting certain corporations located in New Jersey to sell state tax loss carryforwards and state research and development credits, or net loss carryforwards. In 2017, the Company sold $26,097,607 of State of New Jersey NOL's and $424,466 of State of New Jersey R&D Credits for $2,586,057. In 2016, the Company sold $19,196,765 of State of New Jersey NOL’sNOL's and $257,222 of State of New Jersey R&D Credits for $1,845,986.
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 December 31, 2016,2017, there were no uncertain positions. The Company’sCompany's U.S. federal and state net operating losses have occurred since its inception in 2009 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. TheIn September 2017, the IRS is currentlyconcluded auditing the Company's 2015 tax year. Even though the audit isyear resulting in the beginning phase, the Company does not expect any material audit adjustments.a no change letter. Interest and penalties, if any, as they relate to income taxes assessed, are included in the income tax provision. The Company did not have any unrecognized tax benefits and has not accrued any interest or penalties through 2016.2017.
On December 22, 2017, H.R. 1 (also, known as the Tax Cuts and Jobs Act (the “Act”)) was signed into law. Among its numerous changes to the Internal Revenue Code, the Act reduces U.S. federal corporate tax rate to 21%. As a result, the Company believes that the most significant impact on its consolidated financial statements will be reduction of approximately $13.6 million for the deferred tax assets related to net operating losses and other assets. Such reduction is offset by changes to the Company’s valuation allowance. The Company is also in the process of considering the impact under the Act of the disallowance of certain incentive based compensation tax deductibility under Internal Revenue Code Section 162(m). If an adjustment to the deferred tax asset is required, the impact will be offset by a corresponding adjustment to the valuation allowance. Note 9 – Commitments and Contingencies
Evonik
The Company entered into an agreement with SurModics Pharmaceuticals, Inc. (“SurModics”("SurModics") in October 2010 for the exclusive worldwide licensing of certain technology, patent rights and know-how rights related to the production of EG-1962, the Company’sCompany's lead product candidate (the “Evonik Agreement”"Evonik Agreement"). This agreement was later transferred to Evonik Industries AG (“Evonik”("Evonik") when it purchased substantially all the assets of SurModics.
Pursuant to the Evonik Agreement, in exchange for the license, the Company agreed to make milestone payments totaling up to $14.75 million upon the achievement of certain development, regulatory and sales milestones detailed in the Evonik Agreement. The Company paid $0.25 million upon execution of the Evonik Agreement. In August 2016, the Company paid a milestone of $1.0 million after the first patient in the Phase 3 clinical trial of EG-1962 was dosed. In addition, the Evonik Agreement calls for the Company to pay royalties on sales of certain products based on a mid-single digit percentage of net sales. The Evonik Agreement provides for the reduction of royalties in certain limited circumstances.
In September 2015, the Company and Evonik entered into Amendment No. 1 to the Evonik Agreement. This amendment clarified the Company’s obligations to pay Evonik certain royalty and milestone payments with respect to the sale of certain products whether or not manufactured by Evonik and removed the Company’s obligation to negotiate exclusively with Evonik for Phase 3 and commercial supply of EG-1962. The term of the Evonik Agreement will continue until the expiration of the Company’s obligation to pay royalties to Evonik. Either party may terminate the Evonik Agreement due to material breach by the other party. Evonik may terminate the Evonik Agreement or convert it to a non-exclusive license, in either case upon giving the Company written notice, if the Company fails to use commercially reasonable efforts to hit certain specified development, regulatory and commercial milestones.
Oakwood Amended and Restated Master Formulation Development Agreement
In June 2017, the Company entered into an Amended and Restated Master Formulation Development Agreement (the “Restated Development Agreement”) with Oakwood Laboratories, L.L.C. (“Oakwood”), pursuant to which Oakwood will continue to provide the Company with certain drug formulation development and non-commercial manufacturing services for EG-1962, in accordance with project plans to be entered into from time to time. Oakwood is currently performing process engineering, optimization and other scale up activities for the Company and is currently the sole manufacturer of EG-1962 used in Edge’s ongoing NEWTON 2 Phase 3 pivotal trial for EG-1962.
Under the Restated Development Agreement, we agreed to pay Oakwood to perform services under agreed upon project plans and to pay Oakwood up to an aggregate of $4.5 million. In July 2017, we paid $1.5 million of such aggregate amount in connection with entering into the Restated Development Agreement. Of the remaining $3.0 million of such aggregate amount, $0.5 million is payable no later than April 1, 2018 and $2.5 million is payable no later than April 1, 2019. These remaining payments may be accelerated if: (i) we achieve various regulatory milestones, (ii) we close an equity or similar financing in excess of a predetermined amount, or (iii) there is an early termination, under certain circumstances, of the Restated Development Agreement or the Supply Agreement with Oakwood. As additional consideration for performance under the Restated Development Agreement and the Supply Agreement (as defined below), the Company agreed to pay Oakwood a royalty, during the Royalty Term, in an amount equal to a low single digit percentage of net sales of EG-1962, regardless of the manufacturer or supplier thereof. The “Royalty Term” is the period commencing upon the commercial launch of EG-1962 by the Company and continuing until twelve (12) years following such launch.
The term of the Restated Development Agreement continues until the expiration or termination of the Supply Agreement, unless earlier terminated (the “Term”). The Company has the right to terminate project plans upon the occurrence of various circumstances described in the Restated Development Agreement. In the event that the Company terminates the most recent project plan prior to completion (including due to the Company’s decision to discontinue the development or commercialization of EG-1962), the Company must pay to Oakwood a termination fee. Either party has the right to terminate the Restated Development Agreement upon sixty (60) days written notice for failure by the other party to cure a material breach during the applicable cure period. The Company can terminate the Restated Development Agreement immediately upon notice to Oakwood if Oakwood’s annual financial audit report required to be provided to the Company contains any going concern or similar qualification or if Oakwood fails to maintain a pre-determined working capital ratio. Either party may also terminate the Restated Development Agreement immediately in the event of certain failures with regard to validation of the manufacturing process and other specified regulatory failures.
Oakwood Manufacturing and Supply Agreement
Concurrent with its entry into the Restated Development Agreement, on June 30, 2017, the Company entered into a Manufacturing and Supply Agreement with Oakwood (the “Supply Agreement”), pursuant to which Oakwood will manufacture and supply, and the Company will purchase from Oakwood, EG-1962 in commercial quantities following the commercial launch of the product.
Pursuant to the Supply Agreement, the price per unit of EG-1962 to be purchased by the Company is based on the expected commercially usable units per batch. In addition, the Company has agreed to pay Oakwood milestone payments that could total up to an aggregate of $2.25 million upon the achievement of certain development and regulatory milestones. The Company will have no minimum order requirement under the Supply Agreement until the third (3rd) year following commercial launch of EG-1962. Beginning in the third year following commercial launch and continuing until the fifth year following commercial launch, the Company will be required to (x) order, at a minimum, the greater of (a) five (5) batches and (b) fifty percent (50%) of the aggregate vials of EG-1962 purchased by the Company from all sources in such year (such greater amount being the “Minimum Order Commitment”) or (y) pay a catch-up price to Oakwood based on the amount of EG-1962 actually ordered by the Company during the applicable time period.
The term of the Supply Agreement will continue (unless earlier terminated) until three (3) years following commercial launch of EG-1962. Thereafter, the Supply Agreement will automatically renew for additional two (2)-year periods unless Edge provides notice of non-renewal at least twelve (12) months prior to the end of the then-current term. The Supply Agreement will also terminate automatically upon the termination of the Restated Development Agreement for any reason. Following the first anniversary of the commercial launch of EG-1962, either party may terminate upon two (2) years written notice. Further, either party may terminate the Supply Agreement upon a material breach by the other party that fails to be cured in the applicable cure period.
The Company may terminate the Supply Agreement immediately upon notice to Oakwood in the event that (a) any regulatory authority requires or causes the withdrawal of EG-1962 from the market or (b) the Company ceases to develop or commercialize EG-1962; provided, that in the latter case of termination prior to completion of the most recent project plan attached to the Restated Development Agreement, the Company must pay to Oakwood a termination fee. Employment Agreements
The Company has entered into employment agreements with each of its executive officers. The agreements generally provide for, among other things, salary, bonus and severance payments. The employment agreements provide for between 12 months and 18 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’sexecutive's employment without cause. The continued provision of severance benefits is conditioned on each executive’sexecutive's compliance with the terms of the Company’sCompany's confidentiality and invention and assignment agreement as well as his or her release of claims.
Leases
Effective December 13, 2013, the Company entered into a 63 month lease for approximately 8,000 square feet of office space in Berkeley Heights, New Jersey. On February 18, 2016, the Company entered into a new 63 month lease for approximately 20,410 square feet of office space within the same office complex in Berkeley Heights, New Jersey. The terms of the new lease were structured so that the termination date of the December 13, 2013 lease coincided with the commencement date of the new lease on August 13, 2016. As a result of the lease termination, the Company wrote off $67,118 of leasehold improvements.
Rent expense is recognized on a straight line basis where there are escalating payments, and was approximately $602,925, $344,341 $207,541 and $227,662$207,541 for the years ended December 31, 2017, 2016 and 2015 and 2014,, respectively.
The following is a schedule by years of future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2016:2017:
Year Ended December 31, | | | | 2018 | | $ | 602,461 | | 2019 | | | 604,541 | | 2020 | | | 603,371 | | 2021 | | | 530,385 | | 2022 and after | | | - | | Total minimum payments required | | $ | 2,340,758 | |
Year ended December 31, | | | | 2017 | | $ | 592,256 | | 2018 | | | 602,461 | | 2019 | | | 604,541 | | 2020 | | | 603,371 | | 2021 | | | 530,384 | | Total minimum payments required | | $ | 2,933,013 | |
Note 10 - Debt
On August 28, 2014, the Company entered into a loan and security agreement with Hercules Technology Growth Capital, Inc., (the “Original"Original Loan Agreement”Agreement"). The Original Loan Agreement provided funding for an aggregate principal amount of up to $10,000,000 in three separate term loans. The first term loan was funded on August 28, 2014 in the amount of $3,000,000. The second term loan of $3,000,000 was funded on January 29, 2015. Both the first and second term loans were due to mature on March 1, 2018. The Company elected not to draw the third term loan of $4.0 million, the availability of which expired on June 30, 2015. Initially, the loan bore interest at a rate per annum equal to the greater of (i) 10.45% or (ii) the sum of (a) 10.45% plus (b) the prime rate (as reported in The Wall Street Journal) minus 4.50%. On April 6, 2015, the base rate on the loan was lowered to the greater of (i) 9.95% or (ii) the sum of (a) 9.95% plus (b) the prime rate (as reported in The Wall Street Journal) minus 4.50. The Company was required to make interest-only payments on the loan through September 2015.
Commencing in October 2015, the term loans began amortizing in equal monthly installments of principal and interest over 30 months. On the maturity date or the date the loan otherwise became due and payable, the Company was also required to make a payment equal to 1.5% of the total amounts funded under the Original Loan Agreement. On August 1, 2016, the Company entered into an Amended and Restated Loan and Security Agreement (the “Amended Loan Agreement”) with Hercules Capital, Inc., formerly known as Hercules Technology Growth Capital, Inc. Pursuant to the Amended Loan Agreement, the Company may borrow up to $20,000,000. At closing, the Company borrowed $15,000,000 of the amount available for draw under the Amended Loan Agreement (and received proceeds net of the amount then outstanding under the Original Loan Agreement, fees and expenses). The Amended Loan Agreement allowsOn May 23, 2017, the Company at its option,elected to drawndraw down athe second tranche of $5 million on or before June 15, 2017.million. Amounts drawn under the Amended Loan Agreement bear interest at a rate per annum equal to the greater of either (i) the sum of (a) 9.15%, plus (b) the prime rate as reported in The Wall Street Journal minus 4.50% or (ii) 9.15%. The effective interest rate on the loan as of December 31, 20162017 was 9.15%. Pursuant to the terms of theThe Amended Loan Agreement the Company will makerequires interest-only payments until March 1, 2018, and thenon that date the Company will begin to repay the principal balance of the loan in 24 equal monthly payments of principal and interest through the scheduled maturity date of February 3, 2020. The period of interest-only payments and the maturity date may be extended ifIn January 2018, the Company satisfiessatisfied a certain conditionscondition as described in the Amended Loan Agreement.Agreement to extend the period of interest-only payments to September 1, 2018 and the maturity date was extended to August 3, 2020. The interest-only payment period may be extended for an additional six months at the lender’s discretion.
Pursuant to the Amended Loan Agreement, in March 2018, the Company must make a payment of $90,000, which is equal to 1.5% of the total amounts funded under the Original Loan Agreement. On the maturity date or the date the loan otherwise becomes due and payable, under the Amended Loan Agreement the Company must also make a payment of $900,000, which is equal to 4.5% of the total amounts available under the Amended Loan Agreement. In addition, if the Company prepays the term loan (i) during the first year following the initial closing, the Company must pay a prepayment charge equal to 2% of the amount being prepaid, if the Company prepays the term loan(ii) during the second year following the closing, the Company must pay a prepayment charge equal to 1% of the amount being prepaid, and if the Company prepays the term loan(iii) after the second year following the closing, the Company must pay a prepayment charge equal to 0.5% of the amount being prepaid.
The loan is secured by substantially all of the Company’s assets, other than intellectual property, which is the subject of a negative pledge. Under the Amended Loan Agreement, the Company is subject to certain customary covenants that limit or restrict the Company’sCompany's ability to, among other things, incur additional indebtedness, investments, distributions, transfer assets, make acquisitions, grant any security interests, pay cash dividends, repurchase its common stock,Common Stock, make loans, or enter into certain transactions without prior consent. The Amended Loan Agreement contains several events of default, including, among others, payment defaults, breaches of covenants or representations, material impairment in the perfection of Hercules’ security interest or in the collateral and events related to bankruptcy or insolvency. Upon an event of default, Hercules may declare all outstanding obligations immediately due and payable (along with a prepayment charge), a default rate of an additional 5.0% may be applied to the outstanding loan balances, and Hercules may take such further actions as set forth in the Amended Loan Agreement, including collecting or taking such other action with respect to the collateral pledged in connection with the Amended Loan Agreement.
Future principal payments on the note as of December 31, 20162017 were as follows: Year Ended December 31,: | | (000's) | | 2018 | | $ | 3,075 | | 2019 | | | 9,822 | | 2020 | | | 7,103 | | | | $ | 20,000 | |
Year Ending in December 31: | | (000's) | | 2017 | | $ | - | | 2018 | | | 5,912 | | 2019 | | | 7,716 | | 2020 | | | 1,372 | | | | $ | 15,000 | |
The estimated fair value of the debt (categorized as a Level 2 liability for fair value measurement purposes) is determined using current market factors and the ability of the Company to obtain debt at comparable terms to those that are currently in place. The Company believes the estimated fair value at December 31, 20162017 approximates the carrying amount.
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 contribution for the 2017, 2016 and 2015 plan years were $258,383, $16,979 and $15,253 respectively.
Note 12 – Selected Quarterly Financial Data (Unaudited)
The following table summarizes unaudited quarterly financial data for the years ended December 31, 20162017 and 20152016 (in thousands, except per share data). | | 2016 | | | 2017 | | | | | | | | | | | | | | | | Total | | | First Quarter | | | Second Quarter | | | Third Quarter | | | Fourth Quarter | | | Total | | Total operating expenses | | $ | 9,032 | | | $ | 9,264 | | | $ | 10,277 | | | $ | 10,939 | | | $ | 39,512 | | | $ | 11,791 | | | $ | 13,149 | | | $ | 10,903 | | | $ | 16,124 | | | $ | 51,967 | | Loss from operations | | $ | (9,032 | ) | | $ | (9,264 | ) | | $ | (10,277 | ) | | $ | (10,939 | ) | | $ | (39,512 | ) | | $ | (11,791 | ) | | $ | (13,149 | ) | | $ | (10,903 | ) | | $ | (16,124 | ) | | $ | (51,967 | ) | Net loss and comprehensive loss | | $ | (9,170 | ) | | $ | (9,376 | ) | | $ | (10,759 | ) | | $ | (9,516 | ) | | $ | (38,821 | ) | | $ | (12,170 | ) | | $ | (13,504 | ) | | $ | (11,281 | ) | | $ | (13,905 | ) | | $ | (50,860 | ) | Net loss attributable to common stockholders | | $ | (9,170 | ) | | $ | (9,376 | ) | | $ | (10,759 | ) | | $ | (9,516 | ) | | $ | (38,821 | ) | | $ | (12,170 | ) | | $ | (13,504 | ) | | $ | (11,281 | ) | | $ | (13,905 | ) | | $ | (50,860 | ) | Loss per share attributable to common stockholders basic and diluted | | $ | (0.32 | ) | | $ | (0.33 | ) | | $ | (0.37 | ) | | $ | (0.33 | ) | | $ | (1.34 | ) | | $ | (0.42 | ) | | $ | (0.44 | ) | | $ | (0.37 | ) | | $ | (0.45 | ) | | $ | (1.67 | ) |
| | 2016 | | | | First Quarter | | | Second Quarter | | | Third Quarter | | | Fourth Quarter | | | Total | | Total operating expenses | | $ | 9,032 | | | $ | 9,264 | | | $ | 10,277 | | | $ | 10,939 | | | $ | 39,512 | | Loss from operations | | $ | (9,032 | ) | | $ | (9,264 | ) | | $ | (10,277 | ) | | $ | (10,939 | ) | | $ | (39,512 | ) | Net loss and comprehensive loss | | $ | (9,170 | ) | | $ | (9,376 | ) | | $ | (10,759 | ) | | $ | (9,516 | ) | | $ | (38,821 | ) | Net loss attributable to common stockholders | | $ | (9,170 | ) | | $ | (9,376 | ) | | $ | (10,759 | ) | | $ | (9,516 | ) | | $ | (38,821 | ) | Loss per share attributable to common stockholders basic and diluted | | $ | (0.32 | ) | | $ | (0.33 | ) | | $ | (0.37 | ) | | $ | (0.33 | ) | | $ | (1.34 | ) |
| | | | | | | | | | | | | | | | | | 2015 | | | | | | | | | | | | | | | | Total | | Total operating expenses | | $ | 4,182 | | | $ | 4,961 | | | $ | 8,485 | | | $ | 8,871 | | | $ | 26,499 | | Loss from operations | | $ | (4,182 | ) | | $ | (4,961 | ) | | $ | (8,485 | ) | | $ | (8,871 | ) | | $ | (26,499 | ) | Net loss and comprehensive loss | | $ | (4,468 | ) | | $ | (5,521 | ) | | $ | (10,130 | ) | | $ | (7,960 | ) | | $ | (28,079 | ) | Net loss attributable to common stockholders | | $ | (5,152 | ) | | $ | (7,267 | ) | | $ | (11,958 | ) | | $ | (8,058 | ) | | $ | (32,435 | ) | Loss per share attributable to common stockholders basic and diluted | | $ | (3.05 | ) | | $ | (4.30 | ) | | $ | (7.08 | ) | | $ | (0.30 | ) | | $ | (4.01 | ) |
Basic and diluted net loss per share amounts included in the above table were computed independently for each of the quarters presented. Accordingly, the sum of the quarterly basic and diluted net loss per share amounts may not agree to the total for the year. EXHIBIT INDEX
Exhibit
Number
| | Exhibit Description | | | 3.1 | | Eighth Amended and Restated Certificate of Incorporation of Edge Therapeutics, Inc. (filed as exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October 6, 2015, and incorporated by reference herein).
| | | | 3.2 | | Second Amended and Restated Bylaws of Edge Therapeutics, Inc. (filed as exhibit 3.2 to the Company’s Current Report on Form 8-K filed on October 6, 2015, and incorporated by reference herein).
| | | | 4.1 | | Form of Certificate of Common Stock. (filed as exhibit 4.1 to the Company’s Pre-Effective Amendment No. 1 to the registration statement on Form S-1 (File No. 333- 206416) filed on September 21, 2015, and incorporated by reference herein).
| | | | 4.2
| | Warrant to Purchase 16,667 Shares of Capital Stock Issued to New Jersey Economic Development Authority, dated as of May 3, 2010. (filed as exhibit 4.2 to the Company’s Registration Statement on Form S-1 (File No. 333- 206416) filed on September 21, 2015, and incorporated by reference herein).
| | | | 4.3
| | First Amendment to Warrant Issued to New Jersey Economic Development Authority, dated October 9, 2013 (filed as exhibit 4.3 to the Company’s Registration Statement on Form S-1 (File No. 333- 206416) filed on August 14, 2015, and incorporated by reference herein).
| | | | 4.4 | | Form of Warrant Issued to Series B-1 Stockholders. (filed as exhibit 4.4 to the Company’s Registration Statement on Form S-1 (File No. 333- 206416) filed on August 14, 2015, and incorporated by reference herein).
| | | | 4.5 | | Form of Warrant to Purchase Series C Preferred Stock issued to Maxim Group LLC. (filed as exhibit 4.5 to the Company’s Registration Statement on Form S-1 (File No. 333- 206416) filed on August 14, 2015, and incorporated by reference herein).
| | | | 4.6
| | Warrant Agreement, dated as of August 28, 2014, by and between the Company and Hercules. (filed as exhibit 4.6 to the Company’s Registration Statement on Form S-1 (File No. 333- 206416) filed on August 14, 2015, and incorporated by reference herein).
| | | | 4.7 | | Form of Warrant to Purchase Series C-1 Preferred Stock issued to Maxim Group LLC. (filed as exhibit 4.7 to the Company’s Registration Statement on Form S-1 (File No. 333- 206416) filed on August 14, 2015, and incorporated by reference herein).
| | | | 4.8
| | Investors’ Rights Agreement, dated as of April 6, 2015, by and among the Company and the Investors named therein. (filed as exhibit 4.8 to the Company’s Registration Statement on Form S-1 (File No. 333- 206416) filed on August 14, 2015, and incorporated by reference herein).
| | | | 4.9 | | Warrant to Purchase 18,000 Shares of Common Stock issued to Maxim Partners LLC, dated as of October 6, 2015. (filed as exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q filed on November 6, 2015, and incorporated by reference herein).
| | | | 10.1 *
| | Licensing Agreement by and between the Company and Evonik Industries (as successor in interest to SurModics Pharmaceuticals, Inc.), dated as of October 20, 2010. (filed as exhibit 10.1 to the Company’s Registration Statement on Form S-1 (File No. 333- 206416) filed on August 14, 2015, and incorporated by reference herein).
|
10.2 *
| | Amendment No. 1 to the License Agreement, effective as of September 21, 2015, by and between the Company and Evonik Corporation. (filed as exhibit 10.15 to the Company’s Pre-Effective Amendment No. 1 to the registration statement on Form S-1 (File No. 333- 206416) filed on September 21, 2015, and incorporated by reference herein).
| | | | 10.3 ** | | Master Formulation Development Agreement by and between the Company and Oakwood Laboratories LLC, dated as of March 12, 2015 (filed as Exhibit 10.3 to the Company’s Annual Report on Form 10-K filed on March 8, 2016, and incorporated by reference herein). | | | | 10.4+
| | Edge Therapeutics, Inc. 2010 Equity Incentive Plan and forms of agreement thereunder. (filed as exhibit 10.2 to the Company’s Pre-Effective Amendment No. 1 to the registration statement on Form S-1 (File No. 333- 206416) filed on September 21, 2015, and incorporated by reference herein).
| | | | 10.5+
| | Amendment to the Edge Therapeutics, Inc. 2010 Equity Incentive Plan, dated June 30, 2014 (filed as exhibit 10.11 to the Company’s Registration Statement on Form S-1 (File No. 333- 206416) filed on August 14, 2015, and incorporated by reference herein).
| | | | 10.6+
| | Edge Therapeutics, Inc. 2012 Equity Incentive Plan and forms of agreement thereunder. (filed as exhibit 10.3 to the Company’s Pre-Effective Amendment No. 1 to the registration statement on Form S-1 (File No. 333- 206416) filed on September 21, 2015, and incorporated by reference herein).
| | | | 10.7+
| | Edge Therapeutics, Inc. 2014 Equity Incentive Plan and forms of agreement thereunder. (filed as exhibit 10.4 to the Company’s Pre-Effective Amendment No. 1 to the registration statement on Form S-1 (File No. 333- 206416) filed on September 21, 2015, and incorporated by reference herein).
| | | | 10.8+
| | Second Amended and Restated Employment Agreement by and between Brian A. Leuthner and the Company dated as of June 10, 2015. (filed as exhibit 10.5 to the Company’s Registration Statement on Form S-1 (File No. 333- 206416) filed on August 14, 2015, and incorporated by reference herein).
| | | | 10.9+
| | Second Amended and Restated Employment Agreement by and between Andrew J. Einhorn and the Company dated as of June 8, 2015 (filed as exhibit 10.7 to the Company’s Registration Statement on Form S-1 (File No. 333- 206416) filed on August 14, 2015, and incorporated by reference herein).
| | | | 10.10+
| | Second Amended and Restated Employment Agreement by and between Albert N. Marchio, II and the Company dated as of June 8, 2015 (filed as exhibit 10.8 to the Company’s Registration Statement on Form S-1 (File No. 333- 206416) filed on August 14, 2015, and incorporated by reference herein).
| | | | 10.11+
| | Amended and Restated Employment Agreement by and between Herbert J. Faleck and the Company dated as of August 11, 2015 (filed as exhibit 10.13 to the Company’s registration statement on Form S-1 (File No. 333- 206416) filed on August 14, 2015, and incorporated by reference herein).
| | | | 10.12+
| | Second Amended and Restated Employment Agreement by and between Dr. R. Loch Macdonald and the Company dated September 21, 2015 (filed as exhibit 10.14 to the Company’s Pre-Effective Amendment No. 1 to the registration statement on Form S-1 (File No. 333- 206416) filed on September 21, 2015, and incorporated by reference herein).
| | | | 10.13+ | | Executive Employment Agreement by and between W. Bradford Middlekauff and the Company dated as of October 30, 2015 (filed as exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 5, 2015, and incorporated by reference herein).
| | | | 10.14 | | Employment Agreement by and between Daniel Brennan and the Company, dated as of October 17, 2016 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 18, 2016, and incorporated by reference herein). |
| | Employment Agreement by and between Alyssa Wyant and the Company, dated as of February 21, 2017. |
10.16 | | Form of Indemnification Agreement for officers and directors (filed as exhibit 10.9 to the Company’s Registration Statement on Form S-1 (File No. 333-206416) filed on August 14, 2015, and incorporated by reference herein). | | | | | | Form of Executive Stock Option Agreement (filed herewith). | | | | | | Form of Employee Stock Option Agreement (filed herewith). | | | | 10.19 | | Lease, dated February 18, 2016, between The Connell Company and Edge Therapeutics, Inc. (filed as exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on May 3, 2016, and incorporated by reference herein).
| | | | 10.20 | | Amended and Restated Loan and Security Agreement, dated as of August 1, 2016, by and between the Company and Hercules Capital, Inc. (filed as exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on November 1, 2016, and incorporated by reference herein).
| | | | | | Consent of KPMG LLP (filed herewith). | | | | | | Principal Executive Officer’s Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | | Principal Financial Officer’s Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | 101.INS | | XBRL Instance Document | | | 101.SCH | | XBRL Taxonomy Extension Schema Document | | | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
| (1) | This certification is deemed not filed for purpose of section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act. |
| + | Indicates management contract or compensatory plan. |
| * | Confidential Treatment has been granted with respect to certain portions of this Exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission. |
| ** | Confidential Treatment has been requested with respect to certain portions of this Exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission. |
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