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MATINAS BIOPHARMA HOLDINGS, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the related notes and the other financial information included elsewhere in this Quarterly Report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Quarterly Report, particularly those under "Risk Factors" Dollars in tabular format are presented in thousands, except per share data, or otherwise indicated. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as "may," "can," "anticipate," "assume," "should," "indicate," "would," "believe," "contemplate," "expect," "seek," "estimate," "continue," "plan," "point to," "project," "predict," "could," "intend," "target," "potential" and other similar wordsand expressions of the future. There are a number of important factors that could cause the actual results to differ materially from those expressed in any forward-looking statement made by us. These factors include, but are not limited to: · our limited operating history; · our history of operating losses in each year since inception and the expectation that we will continue to incur operating losses for the foreseeable future; · our ability to raise additional capital to fund our development and commercialization efforts for MAT9001 and any product candidates under our MAT8800 discovery program; · our dependence on MAT9001, our lead product candidate, which is still in an early development stage; -20- · our ability to manufacture GMP batches of MAT9001 as required for pre-clinical and clinical trials and, subsequently, our ability to manufacture commercial quantities of MAT9001; · our ability to complete required clinical trials for MAT9001 and obtain approval from the FDA or other regulatory agents in different jurisdictions; · our lack of a sales and marketing organization and our ability to commercialize MAT9001, if we obtain regulatory approval; · our dependence on third-parties, including third-parties to manufacture MAT9001 and third-party CROs to conduct our clinical trials for MAT9001; · our ability to maintain or protect the validity of our patents and other intellectual property; · our ability to retain key executive members; · our ability to internally develop new inventions and intellectual property; · interpretations of current laws and the passages of future laws; · acceptance of our business model by investors; · the accuracy of our estimates regarding expenses and capital requirements; · our ability to adequately support growth; and · the factors listed under the headings "Risk Factors" elsewhere in this report and other reports that we file with the Securities and Exchange Commission. All forward-looking statements are expressly qualified in their entirety by this cautionary notice. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this report or the date of the document incorporated by reference into this report. We have no obligation, and expressly disclaim any obligation, to update, revise or correct any of the forward-looking statements, whether as a result of new information, future events or otherwise. We have expressed our expectations, beliefs and projections in good faith and we believe they have a reasonable basis. However, we cannot assure you that our expectations, beliefs or projections will result or be achieved or accomplished. -21- Overview We are a development stage biopharmaceutical company, founded in 2011, with a focus on identifying and developing novel pharmaceutical products for the treatment of abnormalities in blood lipids, referred to as dyslipidemia, and the treatment of cardiovascular and metabolic diseases. By capitalizing on our management's experience working on pharmacological formulation, evaluation and clinical development in the field of lipid science and the therapeutic benefits of omega-3 fatty acids in treating lipid disorders, we have designed a program to develop our lead product candidate MAT9001, with a focus on cardiovascular disease. Specifically, our Chief Executive Officer, Chief Scientific Officer and Executive Vice President for Pharmaceutical and Supply Chain Development were all colleagues at Reliant Pharmaceuticals, Inc., where they were directly responsible for the in-licensing, development, manufacturing optimization and commercialization of various dyslipidemia therapies, including Lovaza®, the first prescription omega-3 drug approved in the United States, Antara®, a fenofibrate, and Lescol®, more commonly known by its generic name fluvastatin. With respect to our lead product candidate, MAT9001, our goal is to establish significant differentiation over existing available therapies by demonstrating significant reductions in triglyceride levels, lowering of cholesterol levels, and improving other important physiological parameters, thereby addressing what we believe is currently a significant unmet medical need. In addition, our MAT8800 discovery program is seeking to identify and develop product candidates derived from omega-3 fatty acids for the treatment of prevalent liver diseases for which there are currently only limited therapeutic solutions available. We believe that our unique ability to produce and isolate highly concentrated omega-3 fatty acids which have demonstrated effects on liver enzyme levels and histology could yield product candidates which are particularly well suitedto treat these diseases. Our lead product candidate, MAT9001, is a proprietary prescription-grade omega-3 fatty acid composition, comprised of a complex mixture of omega-3 fatty acids, including eicosapentaenoic acid, or EPA, docosapentaenoic acid, or DPA, a potent but less prevalent omega-3 fatty acid, several other omega-3 fatty acids, and only nominal amounts of docosahexaenoic acid, or DHA, and non-omega-3 fatty acids. We have initiated the good manufacturing practice, or GMP, manufacturing process for our complex composition and have also initiated preclinical studies. To date, we have been optimizing the manufacturing process for the MAT9001 active pharmaceutical ingredient and are working toward our Investigational New Drug, or IND, filing with the United States Food and Drug Administration, or FDA. In addition to MAT9001, we have established a discovery program called MAT8800 to identify and develop product candidates derived from omega-3 fatty acids for the treatment of prevalent liver diseases for which there are currently only limited therapeutic solutions. Our development work indicated that certain omega-3 fatty acids may yield improvement in liver enzyme levels and liver histology. Accordingly, we have identified potential omega-3 fatty acid compositions to study in preclinical settings. This discovery program is focused on identifying and optimizing product candidates comprising omega-3 fatty acids as potential treatments for nonalcoholic fatty liver disease (NAFLD), nonalcoholic steatohepatitis (NASH) or other hepatic conditions. We are primarily focused on developing and commercializing MAT9001 through approval by the FDA, with an initial indication for the treatment of severe hypertriglyceridemia. Severe hypertriglyceridemia refers to a condition in which patients have high blood levels of triglycerides (TG ?500 mg/dl) and is recognized as an independent risk factor for pancreatitis and cardiovascular disease. Based on information provided by the National Heart, Lung and Blood Institute and National Cholesterol Education Program, or NCEP, ATP III Guidelines (collectively, the "NCEP Guidelines"), we estimate that more than four million people in the United States have severe hypertriglyceridemia. If we receive FDA approval for severe hypertriglyceridemia, we may seek approval for use of MAT9001 in additional indications, including the treatment of patients with mixed dyslipidemia who may already be undergoing treatment with a statin, a commonly used class of cholesterol lowering medication. Mixed dyslipidemia refers to a condition in which patients have a combination of both elevated triglycerides (?200mg/dl), and elevated cholesterol levels. Based on the NCEP Guidelines, we estimate that approximately 30 to 35 million Americans havemixed dyslipidemia. -22- We are a development stage company and have not generated any revenues. We have never been profitable. Our net loss was approximately $4.6 million and $0.5 million for the six months ended June 30, 2014 and 2013, respectively. We expect to incur significant expenses and increasing operating losses for the foreseeable future. We expect our expenses to increase significantly in connection with our ongoing activities to develop, seek regulatory approval and commercialization of MAT9001. Furthermore, we expect to incur additional costs associated with operating as a public company. Accordingly, we will need additional financing to support our continuing operations. We will seek to fund our operations through public or private equity or debt financings or other sources, which may include collaborations with third parties. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would impact our going concern and would have a negative impact on our financial condition and our ability to pursue our business strategy. We will need to generate significant revenues to achieve profitability, and we may never do so. Financial Operations Overview Revenue To date, we have not generated any revenue. Our ability to generate product revenue, which we do not expect will occur before 2017, if ever, will depend significantly on the successful development and eventual commercialization of our lead product candidate, MAT9001. Research and Development Expenses Research and development expenses consist of costs incurred for the development of MAT9001 and identification of product candidates under our MAT8800 discovery program, which include: · the cost of conducting pre-clinical work; · the cost of acquiring, developing and manufacturing pre-clinical trial materials; · costs for consultants and contractors associated with Chemistry and Manufacturing Controls (CMC), pre-clinical activities and regulatory operations; · expenses incurred under agreements with contract research organizations, or CROs, that conduct our pre-clinical trials; and · employee-related expenses, including salaries and stock-based compensation expense for those employees involved in the research and development process. The table below summarizes our direct research and development expenses for MAT9001 for the periods indicated. Our direct research and development expenses consist principally of external costs, such as fees paid to contractors, consultants, analytical laboratories and CROs, in connection with our development work. We typically use our employee and infrastructure resources for developing MAT9001. -23- Three months Ended June 30, 2014 2013 ($ in thousands) Direct research and development expenses: Manufacturing process development $ 428 $ 176 Preclinical trails 140 Clinical Development 73 Regulatory 122 38 Internal staffing, Overhead and Other 355 28 Total research & development $ 1,118 $ 240 Six months Ended June 30, 2014 2013 ($ in thousands) Direct research and development expenses: Manufacturing process development $ 740 $ 217 Preclinical trails 142 0 Clinical Development 73 0 Regulatory 218 36 Internal staffing, Overhead and Other 1,019 37 Total research & development $ 2,192 $ 290 Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage human trials. We believe we have optimized the manufacturing process for the active pharmaceutical ingredient of MAT9001 and have initiated preclinical studies with the MAT9001 active ingredient. We completed the first preclinical studies of MAT9001 during the fourth quarter of 2013. We commenced manufacturing of GMP batches of MAT9001 late in the first quarter of 2014 and expect to file our IND with the U.S. FDA and commence a human study of MAT9001 during the third quarter of 2014. Thereafter we are considering initiating a Special Protocol Assessment Review with the FDA during late 2014 and expect to commence the first pivotal Phase III study of MAT9001 in patients with severe hypertriglyceridemia in late 2014 or early 2015, complete our Phase III program and plan to submit an NDA with the FDA during late 2016, and to commercialize MAT9001 in the United States for the treatment of patients with triglyceride levels greater than or equal to 500 mg/dl, or severe hypertriglyceridemia, during 2017. -24- The continued development of MAT9001 is subject to a number of risks including, but not limited to: · the uncertainty of the outcome of preclinical studies with MAT9001; · the uncertainty of the timing and outcome of regulatory IND submissions for MAT9001 and subsequent FDA review thereof; · the uncertainty of the timing and outcome of the manufacturing of GMP batches of MAT9001; · the uncertainty of the timing and outcome of initial human studies with MAT9001; · the possibility of changes to existing treatment guidelines for dyslipidemia and cardiovascular disease; · the uncertainty of the timing and outcome of regulatory review of the potential Special Protocol Assessment for the pivotal Phase III program for MAT9001; · the uncertainty of the timing and outcome of our Phase III program for MAT9001; · the uncertainty of the timing and outcome of an NDA submission for MAT9001 and subsequent FDA review thereof; · the uncertainty of the timing and outcome of the prosecution of patents covering MAT9001, within the U.S. or abroad; · the possibility that the emergence of competing technologies and products and other adverse market developments could impede our fund raising and commercial efforts; and · the requirement that the facilities used by our contract manufacturers to manufacture MAT9001 must be approved by the FDA pursuant to inspections that will be conducted after we submit our NDA to the FDA. The estimated costs expected to be incurred for the research and development activities prior to the initiation of Phase III pivotal studies of MAT9001, including those activities already completed, are between $5.0 million and $7.0 million, which we expect to fund from the proceeds of the 2013 Private Placement. The estimated additional costs expected to be incurred for research and development activities thereafter through the filing of our first NDA with the U.S. FDA are between $20.0 million and $60.0 million, which we expect to fund through future capital raising activities. -25- General and Administrative Expenses General and administrative expenses consist principally of salaries and related costs for personnel in executive and finance functions. Other general and administrative expenses include facility costs, communication expenses, and professional fees for legal, patent review, consulting and accounting services. We anticipate that our general and administrative expenses will increase in 2014 and 2015 due to many factors, the most significant of which include: · increased personnel as we expand our operations to prepare for and execute upon our Phase III pivotal studies of MAT9001, which we expect to commence late in 2014 or early 2015; · increased expenses related to becoming a publicly-traded company, including increased legal and accounting services, stock registration and printing fees, expenses in support of compliance and communication needs, and increased insurance premiums; · increased compensation costs since 2013 was only a partial year (approximately 5 months vs. full year compensation costs of existing staff moving forward in 2014 and 2015; and · increased infrastructure costs related to rent expense, office infrastructure expenses, and Information Technology/Communication costs. Other Expense, net Other Expense, net for the six months ended June 30, 2014 is comprised of miscellaneous tax payments partially offset by interest income earned on cash balances. Application of Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are described in more detail in the notes to our financial statements appearing elsewhere in this Quarterly Report. We believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our financial statements. -26- Accrued Research and Development Expenses As part of the process of preparing our financial statements, we are required to estimate our accrued expenses, particularly for product development costs. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments as necessary. Examples of estimated accrued research and development expenses include: · fees paid to contractors in connection with the development of manufacturing processes for MAT9001; · fees paid to CROs in connection with preclinical development activities; · fees paid to contractors in connection with preparation of regulatory submissions; and · fees paid to vendors related to product manufacturing, development and distribution of clinical study supplies. We base our expenses related to pre-clinical and human studies on our estimates of the services received and efforts expended pursuant to contracts with multiple development contractors that conduct and manage development work and studies on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts may depend on factors such as the successful enrollment of subjects and the completion of specific study milestones. In accruing service fees, we will estimate the time period over which services will be performed, the completion of certain tasks, enrollment of subjects, study center activation and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we will adjust the accrual or prepayment accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high or too low in any particular period. Based on limited historical experience, actual results have not been materially different from our estimates. Research and Development expenses Research and development expenses are charged to operations as they are incurred. -27- Stock-Based Compensation Option Grants We account for all share-based compensation payments issued to employees, directors, and non-employees using an option pricing model for estimating fair value. Accordingly, share-based compensation expense is measured based on the estimated fair value of the awards on the date of grant, net of forfeitures. We recognize compensation expense for the portion of the award that is ultimately expected to vest over the period during which the recipient renders the required services to us using the straight-line single option method. In accordance with authoritative guidance, we remeasure the fair value of non-employee share-based awards as the awards vest, and recognize the resulting value, if any, as expense during the period the related services are rendered. Significant Factors, Assumptions and Methodologies Used in Determining Fair Value We apply the fair value recognition provisions of ASC Topic 718, Compensation-Stock Compensation, which we refer to as ASC 718. Determining the amount of share-based compensation to be recorded required us to develop estimates of the fair value of stock options as of their grant date before operating as a public company. We recognize share-based compensation expense ratably over the requisite service period, which in most cases is the vesting period of the award. Calculating the fair value of share-based awards requires that we make highly subjective assumptions. We use the Black-Scholes option pricing model to value our stock option awards. Use of this valuation methodology requires that we make assumptions as to the volatility of our common stock, the expected term of our stock options, the risk free interest rate for a period that approximates the expected term of our stock options and our expected dividend yield. As a privately-held company with a limited operating history, we utilized data from a representative group of companies to estimate expected stock price volatility. We selected companies from the biopharmaceutical industry with similar characteristics to us, including those in the early stage of product development and with a therapeutic focus. We use the simplified method as prescribed by the Securities and Exchange Commission Staff Accounting Bulletin No. 107, Share-Based Payment, to calculate the expected term of stock option grants to employees as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term of stock options granted to employees. We utilize a dividend yield of zero based on the fact that we have never paid cash dividends and have no current intention to pay cash dividends. The risk-free interest rate used for each grant is based on the U.S. Treasury yield curve in effect at the time of grant for instruments with a similar expected life. We recognize compensation expense for stock option awards on a straight-line basis over the applicable service period of the award. The service period is generally the vesting period, with the exception of options granted subject to a consulting agreement, whereby the option vesting period and the service period defined pursuant to the terms of the consulting agreement may be different. Stock options issued to consultants are revalued quarterly until fully vested, with any change in fair value expensed. We did not issue any options or warrants in the six month periods ended June 30, 2014 or 2013, however the following assumptions were used to re-measure stock options issued to consultants atJune 30, 2014. -28- 2014Weighted-average exercise price of options granted $ 0.94 Expected volatility 71.40 Risk-free interest rate 1.87 % Expected life of options (years) 5.29 years Expected annual dividend per share $ 0.00 The expected term of stock options represents the weighted average period the stock options are expected to remain outstanding and is based on the options vesting term, contractual terms, and industry peers as we did not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior. The expected stock price volatility assumption was determined by examining the historical volatilities for industry peers, as we did not have any trading history for our common stock. We will continue to analyze the historical stock price volatility and expected term assumptions as more historical data for our common stock becomes available. The risk-free interest rate assumption is based on the U.S. Treasury instruments whose term was consistent with the expected term of our stock options. The expected dividend assumption is based on our history and expectation of dividend payouts. We have never paid dividends on our common stock and do not anticipate paying dividends on our common stock in the foreseeable future. Accordingly, we have assumed no dividend yield for purposes of estimating the fair value of our share-based compensation. We are also required to estimate forfeitures at the time of grant, and revise those estimates in subsequent periods if actual forfeitures differ from our estimates. We use historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest. To the extent that actual forfeitures differ from our estimates, the difference is recorded as a cumulative adjustment in the period the estimates were revised. Share-based compensation expense associated with stock options and restricted stock granted to employees and non-employees was $0 for the six months ended June 30, 2013 and $547,589 for the six months ended June 30, 2014. As of June 30, 2014, we had $1.6 million of total unrecognized share-based compensation expense, which we expect to recognize over a weighted-average remaining vesting period of approximately 2.3 years. While our share-based compensation for stock options granted to employees and non-employees to date has not been material to our financial results, in future periods, our share-based compensation expense is expected to increase as a result of recognizing our existing unrecognized share-based compensation for awards that will vest and as we issue additional share-based awards to attract and retain our employees. -29- We have included stock based compensation as part of our operating expenses in our statement of operation for the six months and three months ended June 30, 2014 and 2013 as follows: Three months ended June 30, 2014 2013 General and administrative $ 219,211 - Research and development $ 54,613 - Total $ 273,824 - Six months ended June 30, 2014 2013 General and administrative $ 440,021 - Research and development $ 107,568 - Total $ 547,589 - Described below is the methodology we utilized in measuring stock-based compensation. Management had for financial reporting purposes determined the estimated per share fair value of our common stock and redeemable convertible preferred stock using valuation consistent with the American Institute of Certified Public Accountants Practice Aid, "Valuation of Privately-Held Company Equity Securities Issued as Compensation," also known as the Practice Aid. This valuation was performed as of September 1, 2013 with the assistance of a third-party valuation specialist. In conducting the valuation, management considered all objective and subjective factors that it believed to be relevant, including management's best estimate of our business condition, prospects and operating performance at the valuation date. Within the valuation performed, a range of factors, assumptions and methodologies were used as previously described in this section. The significant factors included; · external market conditions affecting the biotechnology industry; · trends within the biotechnology industry; · the prices at which we sold shares of preferred stock; · the superior rights and preferences of the preferred stock relative to common stock at the time of each grant; · the prices at which we sold units of common stock and warrants; · the results of operations and financial position; · status of research and development efforts; · stage of development and business strategy; · the lack of an active public market for the common stock; and -30- · the likelihood of achieving a liquidity event such as a sale of the company in light of prevailing market conditions. We estimated the forfeiture rate at the time of grant and, if necessary, revised in subsequent periods if actual forfeitures differed from those estimates. Forfeitures were estimated based on management's expectation through industry knowledge and historical data. The 2013 Equity Compensation Plan, or the Plan, is the only active plan pursuant to which options to acquire common stock or restricted stock awards can be granted and are currently outstanding. As of June 30, 2014, there were approximately 5,190,918 shares of our common stock available for issuance under the Plan. As of June 30, 2014, we had outstanding options to purchase an aggregate of 3,059,082 shares of our common stock with a weighted average exercise price of $0.94. At June 30, 2014, 808,764 options vested at a weighted average exercise price of $0.94 per share. The computation of the aggregate intrinsic value is based upon the difference between the original exercise price of the options and our estimate of the deemed fair value of our common stock at June 30, 2014. The total intrinsic value of options outstanding and vested at June 30, 2014 was de minimis. The per share estimated fair market value of common stock in the table below represents the determination by our board of directors of the fair market value of our common stock as of the date of grant, taking into consideration the various objective and subjective factors described above, including the conclusions, if applicable, of contemporaneous valuations of our common stock as discussed below. We computed the per share weighted average estimated fair value for stock option grants based on the Black-Scholes option pricing model. The following table sets forth information about our stock option grants since August 2013 on a monthly basis for each month during which we granted stock options: A summary of the Company stock option grants for 2013 and the six months ended June 30, 2014 is as follows: Common Stock Fair Value # options Exercise on Date # of options vested as of Price Per Share of Date of Grant/Termination granted 06/30/2014 Per Share Grant Third Quarter 8/1/2013 1,835,000 N/A $ 0.79 $ 0.94 Fourth QuarterOctober 3, 2013 (cancellation) (1,835,000 N/A $ 0.79 $ 0.94 October 3, 2013 (reissuance) * 1,835,000 560,694 $ 0.94 $ 0.94 10/4/2013 200,000 50,000 $ 0.94 $ 0.94 10/15/2013 375,000 34,875 $ 0.94 $ 0.94 11/1/2013 475,000 105,556 $ 0.94 $ 0.94 11/15/2013 150,000 33,333 $ 0.94 $ 0.94 12/2/2013 125,000 24,306 $ 0.94 $ 0.94 Total 2013 3,160,000 808,764 Forfeited options 5/29/2014 (100,918 )Total as of June 30, 2014 ** 3,059,082 808,764 -31- *All grants outstanding as of September 30, 2013 (1,835,000 shares) were terminated and reissued at an exercise price of $ 0.94 on October 3, 2013, to reflect the independent valuation contracted by the Company on September 1, 2013. The $0.79 exercise price initially set was based upon management's estimate of the fair value of the underlying shares in July 2013. We received a subsequent valuation report from a third party valuation firm, whose valuation report was finalized as of September 16, 2013. Pursuant to that report and consistent with the value of the Company's shares sold in transactions in the time period around the issuance of the stock options, the fair value of the securities was determined to be $0.94 per share. Given that the exercise price was below the previously estimated fair value for the underlying shares, we obtained Board approval on October 3, 2013 to cancel the existing stock options and reissue them with a strike price of $0.94 per share. The cancellation and reissuance of the shares did not result in additional total compensation cost to be amortized over the options requisite service period because the strike price increased from $0.79 to $0.94. **All options expire ten years from the date of grant. Except for options granted on October 15, 2013, all remaining options vest entirely and evenly over three years. The October 15, 2013 options had been granted to non-employee consultants. A portion of each of these consultant options vests over four years, with the remaining vesting being based upon the achievement of performance milestones, which are tied to either financing or drug development initiatives. No new options have been granted in 2014. Basic and Diluted Net Loss Per Share of Common Stock We compute basic net loss per share of common stock by dividing net loss applicable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, excluding the dilutive effects stock options. We compute diluted net loss per share of common stock by dividing the net loss applicable to common stockholders by the sum of the weighted-average number of shares of common stock outstanding during the period plus the potential dilutive effects stock options outstanding during the period calculated in accordance with the treasury stock method, but such items are excluded if their effect is anti-dilutive. Because the impact of these items is anti-dilutive during periods of net loss, there was no difference between our basic and diluted net loss per share of common stock for the three months ended June 30, 2014 and 2013. Emerging Growth Company Status Under Section 107(b) of the Jumpstart Our Business Startups Act of 2012, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. -32- Results of Operations Comparison of three months ended June 30, 2014 and 2013 Three months ended June 30, Increase 2014 2013 (Decrease) (In thousands) Expenses: Research and development $ 1,118 $ 240 $ 878 General and administrative 1,302 103 1,199 Operating Expenses $ 2,420 $ 343 $ 2,027 Research and Development expenses. Research and development expense for the three months ended June 30, 2014 was $1.1 million, compared to $240,000 for the three months ended June 30, 2013, an increase of $.9 million. The increase in research and development expense was primarily due to an increase in activities for the development of the manufacturing process for MAT9001, preclinical studies and build out of our R&D infrastructure. General and Administrative expenses. General and administrative expense for the three months ended June 30, 2014 was $1.3 million compared to $103,000 for the three months ended June 30, 2013, an increase of $1.2 million. The increase in general and administrative expense was primarily due to increased compensation expenses, particularly associated with new employee compensation, ongoing accounting and legal services, including those legal services associated with the registration statement covering the resale of the shares of common stock and the shares of common stock underlying the warrants issued in the 2013 Private Placement, as well as shares of common stock underlying the warrants issued in connection with our formation, the merger of Holdings and BioPharma and the private placement of warrants, compliance and intellectual property filings. Comparison of six months ended June 30, 2014 and 2013 Six months ended June 30, Increase 2014 2013 (Decrease) (In thousands) Expenses: Research and development $ 2,192 $ 290 $ 1,902 General and administrative 2,357 166 2,191 Operating Expenses $ 4,549 $ 456 $ 4,093 Research and Development expenses. Research and development expense for the six months ended June 30, 2014 was $2.2 million, compared to $290,000 for the six months ended June 30, 2013, an increase of $1.9 million. The increase in research and development expense was primarily due to an increase in activities for the development of the manufacturing process for MAT9001, preclinical studies and build out of our R&D infrastructure. -33- General and Administrative expenses. General and administrative expense for the six months ended June 30, 2014 was $2.4 million compared to $166,000 for the six months ended June 30, 2013, an increase of $ 2.2 million. The increase in general and administrative expense was primarily due to increased compensation expenses, particularly associated with new employee compensation, ongoing accounting and legal services, including those legal services associated with the registration statement for resale covering the resale of the shares of common stock and the shares of common stock underlying the warrants issued in the 2013 Private Placement, as well as shares of common stock underlying the warrants issued in connection with our formation, the merger of Holdings and BioPharma and the private placement of warrants, compliance and intellectual property filings. As noted previously, in terms of operating expenses (particularly compensation expenses), 2013 represents a partial year (i.e. start-up year), hence 2014 will show increased expenses due to a full year of operations in both Research and Development, and General and Administrative expenses. Sources of Liquidity We have funded our operations since inception through private placements of preferred stock and our common stock and common stock warrants. As of June 30, 2014, we raised a total of $14.0 million in net proceeds from sales of our equity securities. As of June 30, 2014, we had cash and cash equivalents totaling $6.6 million. 2013 Private Placement In July and August 2013, we completed the 2013 Private Placement, under which we sold an aggregate of 15,000,000 shares of our common stock and warrants to purchase an aggregate of 7,500,000 shares of our common stock with an exercise price of $2.00 per share, which warrants are exercisable for a period of five years from the initial closing date. Aegis Capital Corp. acted as the Placement Agent for the 2013 Private Placement (the "Placement Agent"). The gross proceeds to us from the 2013 Private Placement were $15.0 million. Warrant Private Placement Contemporaneously with the initial closing of the 2013 Private Placement, we sold 500,000 Private Placement Warrants to Herbert Conrad, our chairman of the board, for a purchase price of $0.04 per warrant. The Private Placement Warrants have an exercise price of $2.00 per share. The Private Placement Warrants were offered to all preferred stockholders of Matinas BioPharma prior to the Merger, and only Mr. Conrad exercised the offer. -34- Cash Flows The following table sets forth the primary sources and uses of cash for each of the period set forth below: Six months ended June 30, 2014 2013 Cash used in operating activities $ (3,935 ) $ (435 Cash used in investing activities (258 ) - Cash provided by financing activities - 472 Net increase/(decrease) in cash and cash equivalents $ (4,193 ) $ 37 Operating Activities We have incurred significant costs in the area of research and development, including manufacturing, analytical, regulatory and other development costs, as the manufacturing process for our product was being developed. However, we will have significantly increased development costs in conducting preclinical and human studies, regulatory filing activities, and preparation of the IND and NDA for MAT9001 as well as costs for continued development and validation of the manufacturing process for MAT9001. We also expect significantly increased development costs associated with our MAT8800 discovery program. We also expect our general and administrative expenses to increase as we expand our administrative, compliance, legal and investor relations activities, increase our activities in developing and maintaining our intellectual property and establish our company as a publicly traded company. Net cash used in operating activities was approximately $3.9 million for the six months ended June 30, 2014 and $435,000 for the six months ended June 30, 2013. The increase in cash used in operating activities for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 was primarily due to higher development costs in connection with development of the manufacturing process, preclinical costs, compensation/infrastructure expenses and the costs in connection with fund raising activities and compliance. We expect that there will be a significant increase in cash used in our operating activities during 2014, as we move MAT9001 forward, as well as incur full year costs associated with our compensation expenses and corporate infrastructure. Investing Activities Net cash used in investing activities was $258,000 for the six months ended June 30, 2014 and $0 for the six months ended June 30, 2013. The cash used in investing activities for the six months ended June 30, 2014 was primarily the purchase of scientific laboratory equipment. Financing Activities Net cash provided by financing activities was $0 for the six months ended June 30, 2014 and net cash provided by financing activities was $472,000 for the six months ended June 30, 2013. The cash provided by financing activities for the six months ended June 30, 2013 was primarily due to proceeds received from issuance of redeemable convertible preferred stock. -35- Funding Requirements and Other Liquidity Matters MAT9001 is still in a development stage and our MAT8800 discovery program is in a very early stage. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. We anticipate that our expenses will increase substantially if and as we: · receive acceptance by the FDA of our IND for MAT9001 in patients with severe hypertriglyceridemia; · initiate human trials of MAT9001; · continue non-clinical studies of MAT9001; · initiate our Phase III clinical program for MAT9001; · enter into manufacturing and supply agreements for MAT9001; · seek to identify additional indications for MAT9001; · seek to identify product candidates under our MAT8800 discovery program; · maintain, leverage and expand our intellectual property portfolio for MAT9001 and MAT8800; · acquire or in-license other products and technologies; · add operational, financial and management information systems and personnel, including personnel to support our product development and future compliance and/or commercialization efforts; · seek marketing approval for MAT9001for the currently planned or any additional indication; · commence non-clinical and preclinical studies of product candidates in our MAT8800 discovery program; and · establish a sales and marketing infrastructure to commercialize MAT9001 in the United States. We expect that our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditures requirements through January 2015 and will allow us to file our IND for MAT9001 and potentially initiate a special protocol assessment with the FDA for our MAT9001 Phase III clinical program for MAT9001. We will need additional financing to initiate and conduct our intended Phase III clinical program for MAT9001, file additional patent applications and enhance our intellectual property position for MAT9001 and MAT8800, validate the manufacturing processes at our various suppliers and prepare for submission of an NDA for MAT9001, and conduct preclinical work in order to identify product candidates under our MAT8800 discovery program. We have based this estimate on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Significant additional funds may be required to initiate and complete our Phase III clinical program for MAT9001 if the FDA does not agree with our intended regulatory pathway under Section 505(b)(2) of the Act and to initiate and complete those preclinical and human trials deemed necessary or advisable for product candidates selected pursuant to our MAT8800 discovery program. If the FDA does not agree with our streamlined regulatory and clinical approach for our intended Phase III trial to support a NDA filing for MAT9001 under Section 505(b)(2) of the Act, we believe that we will need at least $20.0 to $60.0 million of additional capital following to complete our Phase III clinical program and submit a NDA under Section 505(b)(1) of the Act if so required by the FDA. -36- Until the time we can generate substantial product revenues from commercializing MAT9001, if ever, we expect to finance our cash needs through a combination of private and public equity offerings, debt financings, collaborations, strategic alliances and/or licensing arrangements. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends and could increase our expenses and require that our assets secure such debt. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with pharmaceutical partners, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs, MAT9001, product candidates emerging from MAT8800 or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market MAT9001 and any product candidates under MAT8800 that we would otherwise prefer to develop and market ourselves. Contractual Obligations and Commitments On November 1, 2013, we entered into a seven year lease for office space in Bedminster, New Jersey. The commencement date and first obligation to pay rent is June 2014, with annual rent beginning at approximately $152,000 per year, increasing to $174,000 in the final year. In December 2013, the Company entered into an agreement to lease laboratory space for one year commencing January 1, 2014 in Monmouth Junction, New Jersey. Base rent for the year ended December 31, 2014 will be approximately $25,000. We may enter into contracts in the normal course of business with clinical research organizations for clinical trials and clinical supply manufacturing and with vendors for preclinical research studies, research supplies and other services and products for operating purposes. These contracts generally provide for termination on notice, and therefore we believe that our non-cancelable obligations under these agreements are not material. As of June 30, 2014, we had no material Contractual Obligations or Commitments that will affect our future liquidity. -37- Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules, such as relationships with unconsolidated entities or financial partnerships, which are often referred to as structured finance or special purpose entities, established for the purpose of facilitating financing transactions that are not required to be reflected on our balance sheets. |