NeuBase Therapeutics, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Significant Accounting Policies (Policies)

Significant Accounting Policies (Policies)

6 Months Ended

Mar. 31, 2020

The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto as of and for the year ended September 30, 2019 included in the Company’s Annual Report on Form 10-K (the “Annual Report”) filed with the SEC on January 10, 2020. The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with U.S. GAAP for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. In the opinion of management, the accompanying unaudited condensed consolidated financial statements for the periods presented reflect all adjustments, consisting of only normal, recurring adjustments, necessary to fairly state the Company’s financial position, results of operations and cash flows. The unaudited condensed consolidated financial statements for the interim periods are not necessarily indicative of results for the full year. The preparation of these unaudited condensed consolidated financial statements requires the Company to make estimates and judgments that affect the amounts reported in the financial statements and the accompanying notes. The Company’s actual results may differ from these estimates under different assumptions or conditions.

Use of Estimates

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 expenses during the reporting period. The most significant estimates in the Company’s condensed consolidated financial statements relate to the valuation of share-based compensation, the valuation of licenses, the fair value of warrant liabilities and the valuation allowance of deferred tax assets resulting from net operating losses. These estimates and assumptions are based on current facts, historical experience and various other factors 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 and the recording of expenses that are not readily apparent from other sources. The Company assesses and updates estimates each period to reflect current information, such as the economic considerations related to the impact that the novel coronavirus disease (COVID-19) could have on our significant accounting estimates (see Part II, Item 1A – Risk Factors—“Our operations may be adversely affected by the coronavirus outbreak, and we face risks that could impact our business” for further discussion of the effect of the COVID-19 pandemic on our operations). Actual results may differ materially and adversely from these estimates. To the extent there are material differences between the estimates and actual results, the Company’s future results of operations will be affected.

Restatement of Previously Issued Unaudited Financial Statements

As previously disclosed in the Annual Report, the Company determined the accounting treatment and valuations pertaining to the PATrOL™ technology license acquired during the first quarter of fiscal 2019 should be modified. The Annual Report disclosed that the change in accounting treatment and valuations resulted in an increase in total operating expenses of approximately $0.9 million on the Company’s consolidated statements of operations for the fiscal year ended September 30, 2019 and a decrease in intangible assets of approximately $1.5 million on the Company’s consolidated balance sheet as of and for the fiscal year ended September 30, 2019, as well as a decrease in total operating expenses of approximately $0.3 million on the Company’s consolidated statements of operations in connection with the adjustment of the valuation of certain share-based awards for the fiscal year ended September 30, 2019.

License Agreement with Carnegie Mellon University

On December 17, 2018, the Company entered into a License Agreement with Carnegie Mellon University (the “CMU License Agreement”). Under the CMU License Agreement, Carnegie Mellon University (“CMU”) granted the Company an exclusive, worldwide right to the PATrOL™ technology, with patents and patent applications describing composition of matter and uses of the platform.

As partial consideration for the license right, Legacy NeuBase issued and delivered to CMU 820,000 shares of Legacy NeuBase’s common stock, which constituted 8.2% of the then fully-diluted capitalization of Legacy NeuBase. Further, as partial consideration for the license right, Legacy NeuBase issued a warrant to CMU, exercisable only upon the earlier of (i) the day that Legacy NeuBase received cumulative capital funding or revenues equal to $2 million or (ii) 30 days prior to any change of control event that provided for the issuance of shares, for a number of shares of Legacy NeuBase common stock sufficient such that when added to the 820,000 shares of Legacy NeuBase’s common stock, CMU would hold in the aggregate an amount equal to 8.2% of the then fully-diluted capitalization of Legacy NeuBase; provided, however, that for purposes of calculating 8.2%, only the first $2 million of capital funding was considered in the determination of Legacy NeuBase’s fully-diluted capitalization, (the “CMU Warrant”). The CMU Warrant had an aggregate exercise price of $10.00. Under the CMU License Agreement, CMU has preemptive rights with respect to certain future sales of securities by Legacy NeuBase for capital-raising purposes, “piggyback” registration rights and co-sale rights with respect to certain resales of shares of Legacy NeuBase by Legacy NeuBase’s stockholders.

The Company’s unaudited interim condensed financial statements and related disclosures as of, and for the three and six months ended March 31,2019 previously accounted for the acquisition of the PATrOL™ technology license as the acquisition of a license and the license was capitalized as an intangible asset. The fair value of the common stock and warrant consideration transferred for the license was initially estimated using the per share price observed in Legacy NeuBase’s private placement commitments entered into with prospective investors, which was approximately $1.61 per share of Legacy NeuBase common stock. The aggregate value of the capitalized license was approximately $1.5 million.

In November 2019, the Company determined that the PATrOL™ technology license did not meet the criteria to be capitalized as it had not achieved regulatory approval, and as the PATrOL™ technology license was the only identified asset in the transaction, the consideration paid for the license should be expensed as in-process research and development. Additionally, the Company engaged a third-party valuation firm to value the Company’s common stock and warrants issued in exchange for the license and the Company identified all components of consideration transferred, including cash consideration of approximately $0.05 million and acquisition costs of approximately $0.04 million. The fair value of Legacy NeuBase common stock and warrants issued in exchange for the license was determined to be approximately $0.8 million and $0.1 million, respectively, based upon a fair value of the Company’s common stock of $1.03 per share.

The consideration paid for the license right is as follows:


Cash consideration	$	54,000
Acquisition costs		43,463
Fair value of common stock		844,600
Fair value of warrant liability issued		104,902
Total consideration	$	1,046,965

The correction of the accounting treatment and valuations associated with the PATrOL™ technology license resulted in a decrease in intangible assets of approximately $1.5 million at March 31, 2019 and an increase in research and development expense- license acquired of approximately $0 and $1.0 million, for the three and six months ended March 31, 2019, respectively.

Share-Based Compensation

In connection with the valuation adjustments to the PATrOL™ technology license consideration, the Company also determined that valuations pertaining to certain share-based awards, due to their proximity to the valuation of the consideration issued in connection with the PATrOL license, should be adjusted as the share-based awards were initially valued using the per share price observed in Legacy NeuBase’s private placement commitments entered into with prospective investors, which was approximately $1.61 per share of Legacy NeuBase common stock.

The fair value of stock option awards granted in the six months ended March 31, 2019 were recalculated using the Black Scholes option pricing model using a per share-price of $1.03 of Legacy NeuBase common stock. The key assumptions used to estimate the fair value of the stock options granted during the six months ended March 31, 2019 included:


		Six Months Ended
		March 31,
		2019
Expected term of options (years)		5.5-6.0
Expected common stock price volatility		76%
Risk-free interest rate		2.5%
Expected dividend yield		—

Additionally, the fair value of restricted stock granted in the three and six months ended March 31, 2019 was recalculated using a per share-price of $1.27 per share of Legacy NeuBase common stock.

The correction of the valuations and timing of recognizing the awards granted resulted in a restatement of share-based compensation expense and a net decrease of approximately $0.1 million and $0.3 million for the three and six months ended March 31, 2019.

Legacy NeuBase Common Stock Valuations

To determine the fair value of Legacy NeuBase’s common stock, the Company considered, among other things, contemporaneous valuations of the Company’s common stock, the Company’s business, financial condition and results of operations, including related industry trends affecting its operations; the likelihood of achieving a liquidity event, such as an initial public offering, or IPO, or sale, given prevailing market conditions; the lack of marketability of the Company’s common stock; the market performance of comparable publicly traded companies; and U.S. and global economic and capital market conditions.

Restated Amounts

The following tables set forth the effects of the foregoing restatement adjustments on affected line items within the Company’s previously issued unaudited statement of operations for the three and six months ended March 31, 2019, unaudited balance sheet as of March 31, 2019 and unaudited statement of cash flows for the six months ended March 31, 2019. These tables also include adjustments for certain other immaterial items including the correction of the amortization of the convertible note discount.

Statement of Operations


	For the Three Months Ended March 31, 2019								For the Six Months Ended March 31, 2019
	As Previously Reported		Adjustments		As Restated		As Previously Reported			Adjustments		As Restated

General and administrative expenses	$	2,019,087	$	(104,719)	$	1,914,368	$	2,639,779		$	(303,401)	$	2,336,378
Research and development expenses		37,881		(4,755)		33,126		92,340			(54,338)		38,002
Research and development expenses- license acquired		—		—		—		—			1,046,965		1,046,965
Depreciation and amortization		18,350		(18,350)		—		18,350			(18,350)		—
Total operating expenses		2,075,318		(127,824)		1,947,494		2,750,469			670,876		3,421,345
Loss from operations		(2,075,318)		127,824		(1,947,494)		(2,750,469)			(670,876)		(3,421,345)
Interest expense		(10,298)		(33,316)		(43,614)		(14,819)			(43,432)		(58,251)
Change in fair value of warrant liabilities		—		(38,702)		(38,702)		—			(38,702)		(38,702)
Total other expenses	$	(10,298)	$	(72,018)	$	(82,316)	$	(14,819)		$	(82,134)	$	(96,953)
Net loss		(2,085,616.00)		55,806	$	(2,029,810.00)		(2,765,288.00)			(753,010.00)	$	(3,518,298.00)
Basic and diluted loss per common share (1)		(0.32)				(0.33)		(0.47)					(0.59)
Weighted average shares outstanding (1):
Basic and diluted		6,459,887				6,074,600		5,881,593					5,967,807

(1) As previously reported, basic and diluted loss per common share has been adjusted to reflect the Ohr Acquisition.

Balance Sheet


	March 31, 2019
	As Previously Reported		Adjustments		As Restated
Assets
Intangible assets, net	$	1,471,024	$	(1,471,024)	$	—
Total Assets		1,967,699		(1,471,024)		496,675
Liabilities
Accounts payable		626,289		1,208		627,497
Warrant liabilities		164,429		(20,825)		143,604
Convertible notes payable		850,000		42,224		892,224
Total Liabilities		1,640,718		22,607		1,663,325
Stockholders' equity (deficit)
Additional paid-in capital (1)		3,133,553		(740,621)		2,392,932
Accumulated deficit		(2,807,240)		(753,010)		(3,560,250)
Total stockholders' equity (deficit)		326,981		(1,493,631)		(1,166,650)
Total liabilities and stockholders' equity (deficit)	$	1,967,699	$	(1,471,024)	$	496,675

(1) As previously reported, additional paid-in capital has been adjusted to reflect the Ohr Acquisition.

Statement of Cash Flows


	For the six months ended March 31, 2019
		As Previously Reported		Adjustments		As Restated
Cash flows from operating activities:
Net loss	$	(2,765,288)	$	(753,010)	$	(3,518,298)
Adjustments to reconcile net loss to net cash
used in operating activities
Stock-based compensation		1,807,735		(260,261)		1,547,474
Amortization of intangible assets		18,350		(18,350)		—
Research and development expense - license acquired		—		1,046,965		1,046,965
Change in fair value of warrant liabilities		—		38,702		38,702
Non-cash amortization on convertible notes		—		42,224		42,224
Non-cash interest expense on convertible notes		—		16,027		16,027
Changes in operating assets and liabilities
Prepaid expenses and other current assets		—		(2,531)		(2,531)
Accounts payable and accrued expenses		584,792		(14,819)		569,973
Net cash used in operating activities		(354,411)		94,947		(259,464)
Cash flows from investing activities
Purchase of equipment		(31,650)		—		(31,650)
Security deposit		(2,532)		2,532		—
Payment of transaction costs for licenses acquired		—		(43,463)		(43,463)
Cash paid for license acquired		—		(54,000)		(54,000)
Net cash used in investing activities		(34,182)		(94,931)		(129,113)
Cash flows from financing activities
Proceeds from convertible notes payable		600,000		—		600,000
Proceeds from common stock issued for cash		1,500		(26)		1,474
Repurchase of common stock		(14)		—		(14)
Proceeds from prefunded warrant		—		10		10
Net used in financing activities		601,486		(16)		601,470
Net decrease in cash and cash equivalents		212,893		—		212,893
Cash and cash equivalents, beginning of period		249,600		—		249,600
Cash and cash equivalents, end of period	$	462,493	$	—	$	462,493

Non-cash investing and financing activities:
Issuance of common stock for research and
development expense- licenses acquired		1,324,945		(480,345)		844,600
Fair value of warrant liability issued for research and development
expense- licenses acquired		164,429		(59,527)		104,902

Fair Value Measurements

Fair value measurements are based on the premise that fair value is an exit price representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the following three-tier fair value hierarchy has been used in determining the inputs used in measuring fair value:

Level 1 – Quoted prices in active markets for identical assets or liabilities on the reporting date.

Level 2 – Pricing inputs are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Pricing inputs are generally unobservable and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require management’s judgment or estimation of assumptions that market participants would use in pricing the assets or liabilities. The fair values are therefore determined using factors that involve considerable judgment and interpretations, including but not limited to private and public comparables, third-party appraisals, discounted cash flow models, and fund manager estimates.

Financial instruments measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Management’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The use of different assumptions and/or estimation methodologies may have a material effect on estimated fair values. Accordingly, the fair value estimates disclosed or initial amounts recorded may not be indicative of the amount that the Company or holders of the instruments could realize in a current market exchange.

The following tables present the Company’s fair value hierarchy for its warrant liabilities measured at fair value on a recurring basis at March 31, 2020 and September 30, 2019:


	Fair Value Measurements
	as of March 31, 2020
	(Level 1)		(Level 2)		(Level 3)		Total
Liabilities
Warrant liabilities	$	—		—	$	1,120,533	$	1,120,533

	Fair Value Measurements
	as of September 30, 2019
	(Level 1)		(Level 2)		(Level 3)		Total
Liabilities
Warrant liabilities	$	—		—	$	496,343	$	496,343

The fair value of the warrant liabilities were determined using the Black-Scholes option pricing model. The following assumptions were used in determining the fair value of the warrant liabilities :



		As of
		March 31,
		2020
Common stock price volatility		89.6% - 92.5%
Risk-free interest rate		0.23%
Remaining contractual term (years)		1.7- 2.0
Expected dividend yield		-

The change in fair value of the warrant liabilities for the three and six months ended March 31,2020 and 2019 is as follows:


Fair value as of September 30, 2019	$	496,343
Change in fair value		694,134
Fair value as of December 31, 2019		1,190,477
Change in fair value		(69,944)
Fair value as of March 31, 2020	$	1,120,533

Fair value as of September 30, 2018	$	—
Warrants issued in connection with license acquired		104,902
Fair value as of December 31, 2018		104,902
Change in fair value		38,702
Fair value as of March 31, 2019	$	143,604

As of March 31, 2020 and September 30, 2019, the recorded values of cash and cash equivalents, accounts payable and the insurance note payable approximate fair value due to the short-term nature of these instruments.

Stock-Based Compensation

Stock-based Compensation

The Company expenses stock-based compensation to employees, non-employees and board members over the requisite service period based on the estimated grant-date fair value of the awards and actual forfeitures. The Company accounts for forfeitures as they occur. Stock-based awards with graded-vesting schedules are recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award. The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model, and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. All stock-based compensation costs are recorded in general and administrative or research and development costs in the consolidated statements of operations based upon the underlying individual’s role at the Company.

Operating Leases

Effective October 1, 2019, the Company determines if an arrangement is a lease at inception. Operating leases are included in operating right-of-use (“ROU”) assets and operating lease liabilities on the consolidated balance sheets. Prior to October 1, 2019, the Company recorded rent expense associated with its operating lease on a straight-line basis over the term of the lease.

Lease ROU assets and operating lease liabilities are initially recognized based on the present value of the future minimum lease payments over the lease term at commencement date calculated using the Company’s incremental borrowing rate applicable to the lease asset, unless the implicit rate is readily determinable. ROU assets also include any lease payments made at or before lease commencement and exclude any lease incentives received. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Leases with a term of 12 months or less are not recognized on the Company’s condensed consolidated balance sheet. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Company accounts for lease and non-lease components as a single lease component for all its leases.

As of March 31, 2020, the Company’s leases had original terms of less than 12 months. The Company does not recognize ROU assets and lease liabilities that arise from leases with an original term of 12 months or less. Rather, the Company recognizes the lease expense on a straight-line basis over the term of the lease.

Net Loss Per Share

Basic net loss per share is computed by dividing net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during each period. Diluted net loss per share includes the effect, if any, from the potential exercise or conversion of securities, such as convertible debt, warrants and stock options that would result in the issuance of incremental shares of common stock. In computing the basic and diluted net loss per share applicable to common stockholders, the weighted average number of shares remains the same for both calculations due to the fact that when a net loss exists, dilutive shares are not included in the calculation as the impact is anti-dilutive.

The following potentially dilutive securities outstanding as of March 31, 2020 and 2019 have been excluded from the computation of diluted weighted average shares outstanding, as they would be anti-dilutive:


	As of March 31,
	2020	2019
Common stock purchase options	6,506,966	3,337,406
Unvested restricted stock	3,125	1,433,472
Common stock purchase warrants	715,939	101,847
Convertible notes	—	638,138
Total	7,226,030	5,510,863

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-2, Leases. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The Company adopted this new lease standard on October 1, 2019 using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The adoption of the new lease standard did not have an impact on the Company’s condensed consolidated financial statements as the Company did not have any leases with original terms longer than 12 months.

Recent Accounting Pronouncements

In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes" ("ASU 2019-12"), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company plans to evaluate the impact of this standard on its consolidated financial statements and related disclosures.