UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission
File Number:
(Exact Name of Registrant as Specified in its Charter)
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telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The Stock Market LLC | ||||
| The Stock Market LLC |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
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As of August 8, 2023, the registrant had shares of common stock outstanding.
TABLE OF CONTENTS
| Special Note Regarding Forward-Looking Statements | 3 | |
| PART I. | FINANCIAL INFORMATION | 4 |
| Item 1. | Financial Statements (unaudited) | 4 |
| Condensed Consolidated Balance Sheets | 4 | |
| Condensed Consolidated Statements of Operations | 5 | |
| Condensed Consolidated Statements of Stockholders’ Equity/(Deficit) | 6 | |
| Condensed Consolidated Statements of Cash Flows | 8 | |
| Notes to Unaudited Condensed Consolidated Financial Statements | 9 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 31 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 43 |
| Item 4. | Controls and Procedures | 43 |
| PART II. | OTHER INFORMATION | 45 |
| Item 1. | Legal Proceedings | 45 |
| Item 1A. | Risk Factors | 45 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 45 |
| Item 5. | Other Information | 45 |
| Item 6. | Exhibits | 46 |
| Signatures | 47 | |
| 2 |
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Report”), including the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and such statements are made pursuant to the safe harbor provisions contained therein. These forward-looking statements relate to current expectations and strategies, future operations, future financial positioning, future revenue, projected costs, prospects, current plans, current objectives of management and expected market growth, and involve known and unknown risks, uncertainties and other factors that may cause actual results, levels of activity, performance or achievements to be materially different from expectations, estimates, and projections expressed or implied by these forward-looking statements and, consequently, you should not rely on these forward-looking statements as a guarantee, an assurance, a prediction, or a definitive statement of fact or probability of future events. All statements contained in this Report, other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans and our objectives for future operations, are forward-looking statements. The words “may,” “should,” “could,” “predict,” “potential,” “plan,” “seeks,” “believe,” “will likely result,” “expect,” “continue,” “will continue,” “will,” “will be,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would,” “outlook,” and similar expressions that convey uncertainty of future events or outcomes, or the negative version of those words or phrases or other comparable words or phrases of a future or forward-looking nature, are intended to identify forward-looking statements. The absence of such words does not mean that a statement is not forward-looking.
You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors including those below in this report under the caption “Risk Factors” and in our Annual Report on Form 10-K for the year ended December 31, 2022, under the captions “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors.” These factors and the other risk factors described in our periodic and current reports filed with the SEC from time to time, however, are not necessarily all of the important factors that could cause our actual results, performance, or achievements to differ materially from those expressed in or implied by any of our forward-looking statements.
Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Report. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Report. And, while we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.
The forward-looking statements made in this Report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Report to reflect events or circumstances after the date of this Report or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments.
Unless the context otherwise requires, the terms “Ocean Biomedical, Inc.,” “the Company,” “we,” “our,” “us,” or similar references in this Report refer to Ocean Biomedical, Inc. and its subsidiaries.
| 3 |
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
OCEAN BIOMEDICAL, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
(unaudited)
| June 30, 2023 | December 31, 2022 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Deferred offering costs | ||||||||
| Total current assets | ||||||||
| Backstop Forward Purchase Agreement Asset | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and stockholders’ deficit | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Accrued expenses - related party | ||||||||
| Short-term loans, net of issuance costs | ||||||||
| Total current liabilities | ||||||||
| SPA Warrant | ||||||||
| Ayrton Note Purchase Option | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 8) | ||||||||
| Stockholders’ deficit | ||||||||
| Common stock, $ par value; and shares authorized as of June 30, 2023 and December 31, 2022, respectively, and shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively. | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
See accompanying notes to the unaudited condensed consolidated financial statements
| 4 |
OCEAN BIOMEDICAL, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | $ | $ | $ | $ | ||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income/(expense): | ||||||||||||||||
| Change in fair value of Backstop Forward Purchase Agreement Asset, 2023 Convertible Note, SPA Warrant, and the Ayrton Note Purchase Option | ( | ) | ( | ) | ||||||||||||
| Loss in connection with Backstop Agreement | ( | ) | ||||||||||||||
| Fair value of warrant issuances | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Fair value of non-cash stock issuances | ( | ) | ( | ) | ||||||||||||
| Transaction costs | ( | ) | ( | ) | ||||||||||||
| Loss on extinguishment of debt | ( | ) | ( | ) | ||||||||||||
| Interest expense, including amortization of debt issuance costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other | ( | ) | ( | ) | ||||||||||||
| Total other income/(expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average shares outstanding, basic and diluted | ||||||||||||||||
| Net loss per share, basic and diluted | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
See accompanying notes to the unaudited condensed consolidated financial statements
| 5 |
OCEAN BIOMEDICAL, INC.
Condensed Consolidated Statements of Stockholders’ Equity/(Deficit)
(in thousands)
(unaudited)
| Common | Additional Paid-In |
Accumulated |
Total Stockholders’ |
|||||||||||||||||
| Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||
| Balances at March 31, 2023 | $ | $ | $ | ( |
) | $ | ||||||||||||||
| Net loss | - | ( |
) | ( |
) | |||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||
| Issuance of common stock related to short-term loans | ||||||||||||||||||||
| Shares issued in consideration pursuant to the Marketing Services Agreement | ||||||||||||||||||||
| Shares issued in consideration pursuant to the Common Stock Purchase Agreement | ||||||||||||||||||||
| Issuance of warrants | - | |||||||||||||||||||
| Balances at June 30, 2023 | $ | $ | $ | ( |
) | $ | ( |
) | ||||||||||||
| Balances at March 31, 2022 | $ | $ | $ | ( |
) | $ | ( |
) | ||||||||||||
| Net loss | - | ( |
) | ( |
) | |||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||
| Issuance of warrants | - | |||||||||||||||||||
| Balances at June 30, 2022 | $ | $ | $ | ( |
) | $ | ( |
) | ||||||||||||
| 6 |
OCEAN BIOMEDICAL, INC.
Condensed Consolidated Statements of Stockholders’ Equity/(Deficit)
(in thousands)
(unaudited)
| Common | Additional Paid-In | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||
| Balances at December 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Retroactive application of recapitalization | ||||||||||||||||||||
| Adjusted beginning balance | ( | ) | ( | ) | ||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Effect of Business Combination including Backstop Agreement, net of redeemed public shares | ||||||||||||||||||||
| Issuance of common stock pursuant to the Subscription Agreement | ||||||||||||||||||||
| Issuance of common stock for extension loan shares to related party | ||||||||||||||||||||
| Issuance of common stock related to short-term loans | ||||||||||||||||||||
| Shares issued in consideration pursuant to the Marketing Services Agreement | ||||||||||||||||||||
| Shares issued in consideration pursuant to the Common Stock Purchase Agreement | ||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||
| Offering costs | - | ( | ) | ( | ) | |||||||||||||||
| Issuance of warrants | - | |||||||||||||||||||
| Balances at June 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Balances at December 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Retroactive application of recapitalization | ||||||||||||||||||||
| Adjusted beginning balance | ( | ) | ( | ) | ||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||
| Issuance of warrants | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Adjusted balances at June 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements
| 7 |
OCEAN BIOMEDICAL, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| Six
Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Non-cash interest expense | ||||||||
| Non-cash debt issuance costs | ||||||||
| Non-cash stock issuances | ||||||||
| Stock-based compensation | ||||||||
| Loss on issuance of warrants | ||||||||
| Loss on extinguishment of debt | ||||||||
| Loss in connection with Backstop Agreement | ||||||||
| Change in fair value of Backstop Forward Purchase Agreement Asset, 2023 Convertible Note, SPA Warrant, and the Ayrton Note Purchase Option | ||||||||
| Non-cash transaction costs in excess of Business Combination proceeds | ||||||||
| Changes in assets and liabilities: | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Accrued expenses - related party | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities | ||||||||
| Payment to Backstop Parties for Backstop Agreement | ( | ) | ||||||
| Payment to Backstop Parties for Share Consideration | ( | ) | ||||||
| Issuance of common stock pursuant to the Backstop Agreement and Subscription Agreement | ||||||||
| Proceeds from Backstop Agreement | ||||||||
| Proceeds from reverse recapitalization | ||||||||
| Proceeds from short-term loans, net of issuance costs | ||||||||
| Repayments of short-term loans | ( | ) | ||||||
| Expenses paid by related-party shareholder | ||||||||
| Net cash provided by financing activities | ||||||||
| Total change in cash and restricted cash | ||||||||
| Cash and restricted cash at beginning of period | ||||||||
| Cash and restricted cash at end of period | $ | $ | ||||||
| Supplemental disclosure of non-cash financing activities: | ||||||||
| Offering costs not yet paid | $ | $ | ||||||
| Non-cash stock issuances | $ | $ | ||||||
| SPA warrant liability upon issuance | $ | $ | ||||||
See accompanying notes to the unaudited condensed consolidated financial statements
| 8 |
OCEAN BIOMEDICAL, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
1. Description of Business and Going Concern Considerations
Description of Business
Ocean Biomedical, Inc. (“the Company”) is a biopharmaceutical company that is focused on discovering and developing therapeutic products in oncology, fibrosis, and infectious diseases.
Business Combination
On February 14, 2023, Aesther Healthcare Acquisition Corp. (“AHAC”) completed the acquisition of Ocean Biomedical Holdings, Inc. (“Legacy Ocean”) pursuant to the definitive agreement dated August 31, 2022, and as amended on December 5, 2022, (the “Business Combination Agreement”), by and among, AHAC, AHAC Merger Sub Inc., a wholly-owned subsidiary of AHAC, Aesther Healthcare Sponsor, LLC, Legacy Ocean, and Dr. Chirinjeev Kathuria (the “Closing”). Upon Closing, AHAC Merger Sub Inc. merged with and into Legacy Ocean, with Legacy Ocean surviving the merger as a wholly-owned subsidiary of the Company. AHAC changed its name from “Aesther Healthcare Acquisition Corp.” to “Ocean Biomedical, Inc.” and is referred to herein as “the Company.” Unless context otherwise requires, reference to “AHAC” refers to the Company prior to Closing.
The Business Combination was accounted for as a reverse recapitalization with Legacy Ocean as the accounting acquirer and AHAC as the acquired company for accounting purposes. Accordingly, all historical financial information presented in the unaudited condensed consolidated financial statements represents Legacy Ocean and its wholly-owned subsidiaries as Legacy Ocean is the predecessor to the Company. The wholly-owned subsidiaries include: (i) Ocean ChitofibroRx Inc., (ii) Ocean ChitoRx Inc., (iii) Ocean Sihoma Inc., and (iv) Ocean Promise, Inc.
The Company’s common stock and warrants commenced trading on the Nasdaq Stock Market under the symbols “OCEA” and “OCEAW,” respectively, on February 15, 2023. Refer to Note 3, Business Combination and Backstop Agreement, for additional details.
Going Concern Considerations
The accompanying condensed consolidated financial statements are prepared in accordance with U.S. GAAP applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
The
Company had no cash inflows from operating activities for the six months ended June 30, 2023. As of June 30, 2023, the Company had cash of $
The Company will need to raise additional funds in order to advance its research and development programs, operate its business, and meet its future obligations as they come due. Based on the Company’s current operational plans and assumptions, which may not be realized, the Company expects to use the net proceeds from the Backstop Agreement (as defined in Note 3, Business Combination and Backstop Agreement) and future debt and equity financings, including possibly under the Common Stock Purchase Agreement (as defined in Note 3, Business Combination and Backstop Agreement) and the SPA entered into in May 2023 (as defined in Note 7, Senior Secured Convertible Notes) as well as further deferrals of certain of its accrued expenses and contingency payments due upon the closing of future financings to fund operations.
There is no assurance that the Company will be successful in obtaining additional financing on terms acceptable to the Company, if at all, and the Company may not be able to enter into collaborations or other arrangements. If the Company is unable to obtain funding, the Company could be forced to delay, reduce, or eliminate its research and development programs, which could adversely affect its business prospects and its ability to continue operations.
The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
| 9 |
OCEAN BIOMEDICAL, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Impacts of Market Conditions on Our Business
Disruption of global financial markets and a recession or market correction, including the ongoing effects of the COVID-19 pandemic, the ongoing military conflict between Russia and Ukraine and the related sanctions imposed against Russia, and other global macroeconomic factors such as inflation and rising interest rates, could reduce the Company’s ability to access capital, which could in the future negatively affect the Company’s liquidity and could materially affect the Company’s business and the value of its common stock.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. GAAP and stated in U.S. dollars. Any reference in these notes to applicable guidance is meant to refer to the authoritative U.S. GAAP as found in the Accounting Standards Codification and Accounting Standards Updates of the Financial Accounting Standards Board (“FASB”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the balances and results for the periods presented. A description of the Company’s significant accounting policies is included in the Company’s audited consolidated financial consolidated balance sheet as of December 31, 2022. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes in the Company’s 2022 Annual Report on Form 10-K, filed with the SEC on March 31, 2023, and Form 8-K, as amended, originally filed with the SEC on February 15, 2023.
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of all intercompany accounts and transactions. The subsidiaries were formed to organize the Company’s therapeutic programs in order to optimize multiple commercialization options and to maximize each program’s value.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting periods. Actual results could differ from those estimates. On an ongoing basis, the Company evaluates its estimates, as applicable, including those related to the fair values of the Company’s common stock and related stock-based compensation and the valuation of (i) the Backstop Forward Purchase Agreement Asset (defined in Note 3, Business Combination and Backstop Agreement) and (ii) the 2023 Convertible Note, SPA Warrant, and Ayrton Note Purchase Option (all defined in Note 7, Senior Secured Convertible Notes). The Company bases its estimates using Company forecasts and future plans, current economic conditions, and information from third-party professionals that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities and recorded amounts of expenses that are not readily apparent from other sources and adjusts those estimates and assumptions when facts and circumstances dictate.
The Company’s results can also be affected by economic, political, legislative, regulatory or legal actions. Economic conditions, such as recessionary trends, inflation, interest rates, changes in regulatory laws and monetary exchange rates, and government fiscal policies, can have a significant effect on operations. The Company could also be affected by civil, criminal, regulatory or administrative actions, claims, or proceedings.
Restricted Cash
The
Company’s restricted cash is comprised of cash that is restricted as to withdrawal or use. Restricted cash as of June 30, 2023
was $
| 10 |
OCEAN BIOMEDICAL, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Concentrations of Credit Risk, Off-balance Sheet Risk and Other Risks
The Company has held minimal cash since its inception and certain of its expenses have been primarily paid for by the proceeds from the issuance of common stock and debt.
The Company has no significant off-balance sheet arrangements, as defined in the rules and regulations of the Securities and Exchange Commission. The Company’s future results of operations involve several other risks and uncertainties. Factors that affect the Company’s future operating results and cause actual results to vary materially from expectations could include, but are not limited to, uncertainty of results of clinical trials and reaching milestones, uncertainty of regulatory approval of the Company’s product candidates, uncertainty of market acceptance of the Company’s product candidates, competition from other products, securing and protecting intellectual property, strategic relationships and dependence on key employees and research partners. The Company’s product candidates require Food and Drug Administration (“FDA”) and other non-U.S. regulatory agencies approval prior to commercial sales. There can be no assurance that any product candidates will receive the necessary approvals. If the Company was denied approval, if approval was delayed, or if approval was unable to be maintained, it could have a materially adverse impact on the Company.
Revenue
The Company has not generated any revenue from any sources since its inception, including from product sales. The Company does not expect to generate any revenue from the sale of products in the foreseeable future. If the Company’s development efforts for its product candidates are successful and result in regulatory approval, or license agreements with third parties, the Company may generate revenue in the future from product sales. However, there can be no assurance as to when revenue will be generated, if at all.
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for research activities, including the development of product candidates. Research and development costs are expensed as incurred. For the three and six months ended June 30, 2023 and 2022, research and development expenses consist of expenses recognized for stock-based compensation and incurred for initial license fees, annual maintenance license fees, and services agreements. Payments associated with licensing agreements to acquire exclusive licenses to develop, use, manufacture and commercialize products that have not reached technological feasibility and do not have alternate commercial use are expensed as incurred.
Deferred Offering Costs
The
Company capitalized certain legal, professional accounting, and other third-party fees associated with equity financings such as the
Business Combination as deferred offering costs until such financings are consummated. After consummation of the equity financings, these
costs are recorded in stockholders’ deficit as a reduction of proceeds generated as a result of the offering. The Company recorded
deferred offering costs of $
Income Taxes and Tax Credits
Income taxes are recorded in accordance with FASB Accounting Standards Codification 740, Income Taxes (“ASC 740”), which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse, and net operating loss (“NOL”) carryforwards and research and development tax credit (“R&D Credit”) carryforwards. Valuation allowances are provided, if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company has recorded a full valuation allowance to reduce its net deferred income tax assets to zero. There is no provision for income taxes because the Company has incurred operating loss and capitalized certain items for income tax purposes since its inception and maintains a full valuation allowance against its net deferred tax assets. In the event the Company were to determine that it would be able to realize some or all its deferred income tax assets in the future, an adjustment to the deferred income tax asset valuation allowance would increase income in the period such determination was made. The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit would more likely than not be realized assuming examination by the taxing authority. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. As of June 30, 2023 and December 31, 2022, the Company had no liability for income tax associated with uncertain tax positions.
| 11 |
OCEAN BIOMEDICAL, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Net loss per share is computed by dividing net loss attributed to common stockholders by the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase, and, if dilutive, the weighted-average number of potential shares of common stock. For the purposes of the diluted net loss per share calculation, common stock warrants, common stock options outstanding, and contingently issuable Earnout Shares (as defined in Note 3, Business Combination and Backstop Agreement) are considered to be potentially dilutive securities for all periods presented, and as a result, diluted net loss per share is the same as basic net loss per share for those periods.
Fair Value Measurements
Certain assets of the Company are carried at fair value under U.S. GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:
| ● | Level 1—Quoted prices in active markets for identical assets or liabilities. | |
| ● | Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data. | |
| ● | Level 3—Unobservable inputs that are supported by little or no market activity that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques. |
The Company’s Backstop Agreement (as defined within and Note 3, Business Combination and Backstop Agreement), 2023 Convertible Note, SPA Warrant, and Ayrton Note Purchase Option, (as defined and discussed in Note 7, Senior Secured Convertible Notes), are carried at fair value, determined according to Level 3 inputs in the fair value hierarchy described above (see Note 4, Fair Value Measurements). The carrying values of accounts payable, accrued expenses, and short-term loans approximate their fair values due to the short-term nature of these liabilities.
Backstop Forward Purchase Agreement Asset
The
Company recorded a Backstop Forward Purchase Agreement Asset on its condensed consolidated balance sheets in connection with the closing
of the Business Combination (as defined in Note 3, Business Combination and Backstop Agreement, and also referred to herein as
the “Backstop Agreement”), which closed on February 15, 2023. The Company concluded that the Backstop Forward Purchase Agreement
Asset should be classified as a derivative and therefore its fair value was initially measured at the closing of the Backstop Agreement and subsequently remeasured at each reporting period. As of June 30, 2023, its fair value was $
2023 Convertible Note, SPA Warrant, and Ayrton Note Purchase Option
As
discussed within Note 7, Senior Secured Convertible Notes, in May 2023 the Company entered into a securities purchase agreement
with an accredited investor for the sale of up to three Senior Secured Convertible Notes (each, a “Note” and collectively,
the “Notes”), which Notes are convertible into shares of the Company’s common stock, in an aggregate principal amount
of up to $
The Company has elected to account for the Notes at fair value under the fair value option, under which the Notes will be initially measured at fair value and subsequently remeasured during each reporting period. Changes in fair value will be reflected within other income/(expense) in the condensed consolidated financial statements, except for the portions, if any, related to the instrument specific credit risk which would be recorded in other comprehensive income.
| 12 |
OCEAN BIOMEDICAL, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Further, the Company concluded that the right to acquire additional Notes is separately exercisable from the 2023 Convertible Note and the SPA Warrant. If and when the additional Notes are issued, the Company will evaluate whether to account for such additional Notes at (a) fair value under the fair value option or (b) an amortized cost. Refer to Note 7, Senior Secured Convertible Notes, for further detail on the terms of the Notes and potential future issuances.
In addition, the Company determined that the SPA Warrant was (i) freestanding from the 2023 Convertible Note and (ii) classified as a derivative liability. Accordingly, upon issuance the SPA Warrant was measured at fair value with an offset to cash proceeds from the 2023 Convertible Note, with the remainder recorded to other income/(expense) on the condensed consolidated statements of operations. The Company will reassess the classification of the SPA Warrant at each reporting period and record any changes to fair value as necessary.
In addition to the liabilities recorded for the 2023 Convertible Note and the SPA Warrant, the Company also recorded a liability for the purchase option within the SPA in favor of the investor (the “Ayrton Note Purchase Option”), which gives the investor, at its option through 2025, the right to purchase from the Company additional Notes (up to the sum of the aggregate principal amount) at one or more additional closings. The initial fair value of the liability was recorded to other income/(expense) on the condensed consolidated statements of operations and will be remeasured at each reporting period.
Emerging Growth Company
The Jumpstart Our Business Startups Act of 2012 permits an “emerging growth company” to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. The Company has elected to not “opt out” of this provision and, as a result, the Company will adopt new or revised accounting standards at the time private companies adopt the new or revised accounting standard and will do so until such time that the Company either (i) irrevocably elects to “opt out” of such extended transition period or (ii) no longer qualify as an emerging growth company.
Recently Adopted Accounting Pronouncements
In August 2020, the FASB issued Accounting Standard Update (“ASU”) No. 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40) — Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible instruments, amends the guidance on derivative scope exceptions for contracts in an entity’s own equity, and modifies the guidance on diluted earnings per share calculations as a result of these changes. The Company early adopted ASU 2020-06 as of January 1, 2023, using a modified retrospective approach, noting the Company’s prior instruments would not be impacted by this adoption. The Company utilized the updated derivative guidance when accounting for the 2023 Convertible Note (as defined in Note 7, Senior Secured Convertible Notes).
3. Business Combination and Backstop Agreement
Business Combination
On February 14, 2023, the Company consummated its Business Combination pursuant to the terms of the Business Combination Agreement.
Upon consummation of the Business Combination and other transactions, the following occurred:
| ● | AHAC changed its name from “Aesther Healthcare Acquisition Corp.” to “Ocean Biomedical, Inc.” and is referred to herein as “the Company.” Unless the context otherwise requires, references to “AHAC” herein refer to the Company prior to Closing. | |
| ● | AHAC
issued approximately shares, with an aggregate value equal to $ | |
| ● | The
shares of AHAC Class B common stock held by Aesther Healthcare Sponsor, LLC
(the “Sponsor”) were | |
| ● | The Backstop Parties (as defined below within Backstop Agreement) purchased shares of AHAC’s Class A common stock prior to the Closing that are subject to the backstop agreement (these shares, referred to as the “Recycled Shares,” and the backstop agreements, referred to as the “Backstop Agreement,” are both defined below). | |
| ● | AHAC issued an additional shares of Class A common stock to the Sponsor for obtaining extensions beyond the September 2022 deadline to complete an initial business combination. | |
| ● | The
Backstop Parties purchased shares of AHAC’s Class A common stock in the open market for an aggregate purchase price
of $ |
| 13 |
OCEAN BIOMEDICAL, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
| ● | The
Company issued to Second Street Capital, LLC (“Second Street Capital”), Legacy Ocean’s lender, three warrants (the
“Converted Ocean Warrants”) exercisable to acquire that number of shares of the Company’s common stock equal to
the economic value of the Legacy Ocean warrants previously issued to Second Street Capital in exchange for the termination of the
Legacy Ocean warrants. The Converted Ocean Warrants are exercisable for a total of | |
| ● | The Company issued to Polar (as defined below) newly issued shares of its common stock that are subject to the forward purchase provisions of the Backstop Agreement. | |
| ● | Each share of AHAC’s Class A common stock was automatically reclassified into one share of the Company’s common stock, including the remaining shares of AHAC Class A common stock that were not redeemed. |
The following table reconciles the elements of the Business Combination to the unaudited condensed consolidated statements of stockholders’ equity/(deficit) and cash flows for the six months ended June 30, 2023:
| (in thousands) | ||||
| Cash from AHAC trust, net of redemptions | $ | |||
| Issuance costs from business combination | ( | ) | ||
| Net impact on total stockholders’ equity | ||||
| Non-cash offering costs | ||||
| Net impact on cash provided by financing activities | $ | |||
Earnout Shares
In
addition, pursuant to Business Combination Agreement, Legacy Ocean’s stockholders prior to the Closing (the “Legacy Ocean
Stockholders”) are entitled to receive from the Company, in the aggregate, up to an additional 19,000,000 shares of the Company’s
common stock (the “Earnout Shares”) as follows:
The Company has concluded that the Earnout Shares represent a freestanding equity-linked financial instrument as the arrangement (i) can be indexed to the Company’s stock and (ii) meets all of the criteria for equity classification within ASC 815-40. The Company performed the two-step analysis described within ASC 815-40-15 to determine indexation and noted that while the arrangement does contain contingencies, these contingencies are based on the market for the Company’s stock and do not preclude indexation.
Upon Closing, the fair value of the Earnout Shares was accounted for as a deemed dividend as of the closing date. Since the entries to recognize the fair value of the Earnout Shares offset within additional paid-in capital, there is no inherent impact to the condensed consolidated financial statements. Since the Earnout Shares are contingent on the Company’s stock price, there will be no impact to outstanding shares and will not represent participating securities until the time at which the contingencies have been met.
Backstop Agreement
On
August 31, 2022, in connection with the execution of the Business Combination Agreement, AHAC and Legacy Ocean entered into an OTC Equity
Prepaid Forward Transaction with Vellar Opportunity Fund SPV LLC– Series 3 (“Vellar”) (as amended, the “Backstop
Agreement”). Pursuant to the terms of the Backstop Agreement and its subsequent amendments, Vellar agreed to purchase up to
shares of AHAC’s Class A common stock in the open market in exchange for up to $
| 14 |
OCEAN BIOMEDICAL, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
On February 13, 2023, AHAC, Vellar and Legacy Ocean entered into an assignment and novation agreement with Meteora Special Opportunity Fund I, LP, Meteora Select Trading Opportunities Master, LP and Meteora Capital Partners, LP (collectively “Meteora”) (the “Meteora Agreement”), pursuant to which Vellar assigned its obligation to purchase shares of the Company’s common stock under the Backstop Agreement to Meteora. In addition, on February 13, 2023, AHAC, Vellar and Legacy Ocean entered into an assignment and novation agreement with Polar Multi-Strategy Master Fund (“Polar” and, collectively with Vellar and Meteora, the “Backstop Parties”) (the “Polar Agreement”) pursuant to which Vellar assigned its obligations to shares of common stock of the Company to be purchased under the Backstop Agreement to Polar.
Further, the Backstop Agreement grants the Backstop Parties the right to purchase additional shares from the Company (the “Additional Shares” and, together with the Recycled Shares, the “Backstop Shares”) up to an amount equal to the difference between the number of Recycled Shares (defined below) and the maximum number of shares of .
The Company agreed to purchase the unsold portion of the Backstop Shares from the Backstop Parties on a forward basis upon the “Maturity Date” (as amended, the third anniversary of the closing of the Business Combination, subject to certain acceleration provisions). The purchase price payable by the Company includes a prepayment in the amount of the redemption price per share (the “Prepayment”) from the proceeds released from the trust account related to those shares.
On February 14, 2023, (i) pursuant to the Backstop Agreement, the Backstop Parties purchased shares of AHAC’s Class A common stock for $ per share (the “Recycled Shares”) and (ii) pursuant to Polar’s exercise of its right to purchase Additional Shares, AHAC, Legacy Ocean and Polar entered into a subscription agreement pursuant to which Polar purchased newly issued shares of the Company’s common stock at a per share purchase price of approximately $ (the “Polar Subscription”). Under the Backstop Agreement, the Additional Shares are subject to the same terms as the Recycled Shares, including with regard to repayment and repurchase.
Subsequent
to Closing, the Prepayment amount was equal to $
The Company measures the fair value of the Prepayment on a recurring basis, with its current fair value recorded on the condensed consolidated balance sheets and any fair value adjustment recorded within other income/(expense) in the condensed consolidated statements of operations. Refer to Note 4, Fair Value Measurements, for further detail.
At
any time prior to the Maturity Date, and in accordance with the terms of the Backstop Agreement, the Backstop Parties may elect an optional
early termination to sell some or all of the Recycled Shares and Additional Shares. If the Backstop Parties sell any shares prior to
the Maturity Date, the pro-rata portion of the Prepayment amount will be paid back to the Company. As of June 30, 2023, the Backstop
Parties have sold shares, for which the Company has received net
proceeds of $
On
May 23, 2023 the Company received an Equity Prepaid Forward Transaction - Valuation Date Notice (“Notice”) from Vellar
stating that due to the Company’s alleged failure to timely register the shares held by Vellar, Vellar has the right to
terminate the Backstop Agreement as to their portion of the shares and Vellar is claiming it is entitled to receive Maturity
Consideration (as defined in the Backstop Agreement) equal to $
| 15 |
OCEAN BIOMEDICAL, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Common Stock Purchase Agreement
Subsequent
to the Business Combination, the Company is subject to the terms and conditions of (i) a common stock purchase agreement, dated September
7, 2022 (the “Common Stock Purchase Agreement”) and (ii) a registration rights agreement, dated September 7, 2022 (the “White
Lion Registration Rights Agreement”), that AHAC entered into with White Lion Capital LLC (“White Lion”). Pursuant
to the Common Stock Purchase Agreement, the Company has the right from time to time at its option to sell to White Lion up to $
In accordance with ASC 815, Derivatives and Hedging, the Company has determined that the right to sell additional shares represents a freestanding put option, and as such, the financial instrument was classified as a derivative asset with a nominal fair value.
In
consideration for the commitments of White Lion to purchase Equity Line Shares, the Common Stock Purchase Agreement included initial
commitment shares to White Lion, which had a fair value of $
Sponsor Promissory Notes
Upon
consummation of the Business Combination, the Company assumed two of AHAC’s loans, totaling $
In connection with the assumption of AHAC’s loans and pursuant to the terms of the Business Combination Agreement described above, the Company issued shares of its common stock to the Sponsor as consideration for providing the loans to the Company (the “Sponsor Extension Shares”). In addition, pursuant to the terms of an amendment entered into prior to the paydown of the loans, the Company issued a total of shares of its common stock in exchange for extensions of the maturity date.
The
Company recognized a loss on extinguishment of debt of $
Deferred Underwriting Commissions
At
Closing, the underwriters for AHAC’s initial public offering (“IPO”) agreed to defer payment of $
| 16 |
OCEAN BIOMEDICAL, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
4. Fair Value Measurements
The following tables present information about the Company’s financial assets measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values:
| Fair Value Hierarchy | ||||||||||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Financial assets: | ||||||||||||||||
| Backstop Forward Purchase Agreement Asset | $ | $ | $ | $ | ||||||||||||
| Total financial assets | $ | $ | $ | $ | ||||||||||||
| Financial liabilities: | ||||||||||||||||
| 2023 Convertible Note | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
| SPA Warrant | ( | ) | ( | ) | ||||||||||||
| Ayrton Note Purchase Option | ( | ) | ( | ) | ||||||||||||
| Total financial liabilities | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
During the three and six months ended June 30, 2023, there were no transfers between Level 1, Level 2, and Level 3.
Valuation of Backstop Forward Purchase Agreement Asset
The valuation of the Backstop Forward Purchase Agreement Asset was previously determined using a binomial lattice option pricing model. During the second quarter of 2023, the Company elected to utilize a Monte-Carlo simulation on a prospective basis, noting no material changes to the presentation of the fair values at inception and as of the end of the first quarter of 2023. The key inputs and assumptions used in the Monte-Carlo Simulation, including volatility, expected term, expected future stock price, and various simulated paths, were utilized to estimate the fair value of the associated asset. The value of the Backstop Forward Purchase Agreement Asset was calculated as the average present value over 50,000 simulated paths. The Company will continue to measure the fair value at each reporting period, with subsequent fair values to be recorded within other income/(expense) in its condensed consolidated statements of operations.
The following table summarizes some of the significant inputs and assumptions used in the Monte-Carlo simulation:
| Estimated Volatility | Expected future stock price | Risk-free rate | ||||||||||
| Backstop Forward Purchase Agreement Asset | % | $ | -$ | % | ||||||||
Valuation of the 2023 Convertible Note and SPA Warrant
The Company utilized a Monte-Carlo simulation at inception to value the 2023 Convertible Note and SPA Warrant. The Monte-Carlo simulation is calculated as the average present value over all simulated paths. The key inputs and assumptions used in the Monte-Carlo Simulation, including volatility, estimated market yield, risk-free rate, the probability of various scenarios, including subsequent placement and change in control, and various simulated paths, were utilized to estimate the fair value of the associated liabilities. The value of the 2023 Convertible Note and SPA Warrant was calculated as the average present value over 50,000 simulated paths. The Company will continue to measure the fair value at each reporting period, with subsequent fair values to be recorded within other income/(expense) in the Company’s condensed consolidated statements of operations.
The following table summarizes some of the significant inputs and assumptions used in the Monte-Carlo simulation:
| Estimated Volatility | Range of Probabilities | Risk-free rate | ||||||||||
| 2023 Convertible Note | % | % | % | |||||||||
| SPA Warrant | % | % | % | |||||||||
Valuation of the Ayrton Note Purchase Option
The Company utilized the Black-Scholes Merton model to value the Ayrton Note Purchase Option. The key inputs and assumptions used in the Black-Scholes Merton Model, including volatility and risk-free rate, were utilized to estimate the fair value of the associated liability. The Company will continue to measure the fair value at each reporting period, with subsequent fair values to be recorded within other income/(expense) in the Company’s condensed consolidated statements of operations.
The following table summarizes some of the significant inputs and assumptions used in the Black-Scholes Merton model:
| Estimated Volatility | Risk-free rate | |||||||
| Ayrton Note Purchase Option | % | % | ||||||
| 17 |
OCEAN BIOMEDICAL, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
The following table provides a roll forward of the aggregate fair values of the Company’s Backstop Forward Purchase Agreement Asset, the 2023 Convertible Note, SPA Warrant, and Ayrton Note Purchase Option for which fair value is determined using Level 3 inputs:
| Level 3 Rollforward (in thousands) | Backstop Forward Purchase Agreement Asset | 2023 Convertible Note | SPA Warrant | Ayrton Note Purchase Option |
||||||||||||
| Balances as of January 1, 2023 | $ | $ | $ | $ | ||||||||||||
| Initial fair value measurement | ||||||||||||||||
| Changes in fair value | ( | ) | ||||||||||||||
| Balance as of March 31, 2023 | ||||||||||||||||
| Proceeds from Backstop Agreement | ( | ) | ||||||||||||||
| Initial fair value measurement | ( | ) | ( | ) | ( |
) | ||||||||||
| Changes in fair value | ( | ) | ( | ) | ( | ) | ( |
) | ||||||||
| Balance as of June 30, 2023 | $ | $ | ( | ) | $ | ( | ) | $ | ( |
) | ||||||
5. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following:
| (in thousands) | June 30, 2023 | December 31, 2022 | ||||||
| Accounts payable and accrued expenses: | ||||||||
| Accounting and legal fees | $ | $ | ||||||
| Research and development | ||||||||
| Other | ||||||||
| Total accounts payable and accrued expenses | $ | $ | ||||||
6. Short-term Loan Agreements
Short-term Loan Agreements
As of June 30, 2023 and December 31, 2022, the Company had the following short-term loan balances:
| June 30, 2023 | December 31, 2022 | |||||||
| Short-term loans: | ||||||||
| Second Street Loan | $ | $ | ||||||
| Second Street Loan 2 | ||||||||
| March Second Street Loan | ||||||||
| McKra Loan | ||||||||
| Underwriter Promissory Note | ||||||||
| 2023 Convertible Note | ||||||||
| Less: issuance costs remaining to be amortized | ( | ) | ( | ) | ||||
| Short-term loans, net of issuance costs | $ | $ | ||||||
Second Street Capital Loans
Second Street Loan
In
February 2022, the Company entered into a loan agreement (the “Second Street Loan”) with Second Street Capital, pursuant
to which the Company borrowed $
| 18 |
OCEAN BIOMEDICAL, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Second Street Loan 2
In
April 2022, the Company entered into a second loan agreement with Second Street Capital (the “Second Street Loan 2”) to borrow
$
March Second Street Loan
In
March 2023, the Company entered into a new loan agreement with Second Street Capital (the “March Second Street Loan” and
together with the Second Street Loan and Second Street Loan 2, the “Second Street Loans”) pursuant to which the Company could
borrow up to $
Second Street Capital Loan Amendments
In
connection with amendments to the Second Street Loans, an additional
The most recent amendment, effective as of May 2023, included the following terms:
| (i) | Upon execution of the amendment, the Company paid the remainder of outstanding fees due. | |
| (ii) | Within
5 business days of the receipt of the first Additional Closing (as defined within the Securities
Purchase Agreement, discussed in Note 7, Senior Secured Convertible Notes), the Company
is required to pay $ | |
| (iii) | Within
5 business days of the second Additional Closing (as defined within the Securities Purchase
Agreement), the Company is required to pay $ | |
| (iv) | In
the event the Company raises additional equity through financing arrangements of at least
$ | |
| (v) | In exchange for the amendment, the Company issued shares of its common stock to Second Street Capital. The fair value of the shares issued are recorded in the Company’s condensed consolidated statements of operations as a loss on debt extinguishment. |
Second Street Capital Loans – Interest Expense
During
the three months ended June 30, 2023 and 2022, the Company recognized $
McKra Investments III Loan
In
March 2023, the Company entered into a Loan Agreement with McKra Investments III (“McKra”) pursuant to which the Company
borrowed $
The McKra Loan was amended, effective in May 2023, including the following terms:
| (i) | Upon execution of the amendment, the Company paid the remainder of outstanding fees due. |
| 19 |
OCEAN BIOMEDICAL, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
| (ii) | Within
5 business days of the receipt of the first Additional Closing (as defined within the Securities
Purchase Agreement, discussed in Note 7, Senior Secured Convertible Notes), the Company
is required to pay $ | |
| (iii) | Within
5 business days of the second Additional Closing (as defined in Note 7, Senior Secured
Convertible Notes), the Company is required to pay $ | |
| (iv) | In
the event the Company raises additional equity through financing arrangements of at least
$ | |
| (vi) | As consideration for entering into the amendment, the Company issued shares of its common stock to McKra. The fair value of the shares issued are recorded in the Company’s condensed consolidated statements of operations as a loss on debt extinguishment. |
During
the three and six months ended June 30, 2023, the Company recognized $
Underwriter Promissory Note
For a discussion of an outstanding note due to the underwriters in AHAC’s IPO, see Note 3, Business Combination and Backstop Agreement.
7. Senior Secured Convertible Notes
Senior Secured Convertible Notes
In
May 2023, the Company entered into a Securities Purchase Agreement (the “SPA”) with an accredited investor (the
“Investor”) for the sale of up to three Senior Secured Convertible Notes (each, a “Note” and collectively,
the “Notes”), which Notes are convertible into shares of the Company’s common stock, in an aggregate principal
amount of up to $
The
interest rate applicable to each Note is, as of any date of determination, the lesser of
All
or any portion of the principal amount of each Note, plus accrued and unpaid interest is convertible at any time, in whole or in part,
at the noteholder’s option, into shares of the Company’s common stock at an initial fixed conversion price of $
The Notes provide for certain events of default, including, among other things, any breach of the covenants described in the SPA and any failure of Dr. Chirinjeev Kathuria to be the chairman of our Board of Directors. In connection with an event of default, the noteholders may require the Company to redeem all or any portion of the Notes, at a premium set forth in the SPA.
The
Company is subject to certain customary affirmative and negative covenants regarding the rank of the Notes, the incurrence of indebtedness,
the existence of liens, the repayment of indebtedness and the making of investments, the payment of cash in respect of dividends, distributions
or redemptions, the transfer of assets, the maturity of other indebtedness, and transactions with affiliates, among other customary matters.
The Company is also subject to financial covenants requiring that (i) the amount of the Company’s available cash equals or exceeds
$
| 20 |
OCEAN BIOMEDICAL, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
The Company has elected to account for the Notes at fair value under the fair value option, under which the Notes will be initially measured at fair value and subsequently re-measured during each reporting period. Changes in fair value will be reflected within other income/(expense) in the condensed consolidated financial statements, except for the portions, if any, related to the instrument specific credit risk which would be recorded in other comprehensive income.
Further, the Company concluded that the right to acquire additional Notes is separately exercisable from the 2023 Convertible Note and the SPA Warrant. If and when the additional Notes are issued, the Company will evaluate whether to account for such additional Notes at (a) fair value under the fair value option or (b) an amortized cost.
In
addition, the Company determined that the SPA Warrant was (i) freestanding from the 2023 Convertible Note and (ii) classified as a derivative
liability. Accordingly, upon issuance the SPA Warrant was measured at fair value with an offset to cash proceeds from the 2023 Convertible
Note, with the remainder of $
In
addition to the liabilities recorded for the 2023 Convertible Note and the SPA Warrant, the Company also recorded a liability for the
Ayrton Note Purchase Option, which gives the Investor, at its option through 2025, the right to purchase from the Company additional Notes (up to the sum of the aggregate
principal amount) at one or more Additional Closings. The initial recognition of this liability was measured at fair value utilizing the Black-Scholes Merton
model and the fair value of $
8. Commitments and Contingencies
Litigation
Heller v. Ocean Biomedical, Inc. et al., Case No. 1:23cv212. On May 23, 2023, Jonathan Heller (“Heller”) filed a civil action against the Company, Poseidon Bio LLC, Chirinjeev Kathuria and Elizabeth Ng (collectively, the “Defendants”) in the District Court of Rhode Island. Heller has asserted claims alleging that he is entitled to earned salary and various other payments following his resignation from the Company. On July 27, 2023, Defendants filed their Answer and Affirmative Defenses. Defendants intend to vigorously defend against Heller’s claims. Given the early stage of this matter and the uncertainty inherent in litigation and investigations, the Company does not currently believe it is (i) probable to incur losses or (ii) possible to develop estimates of reasonably possible losses (or a range of possible losses) for this matter.
License Fees
The Company entered into license agreements with its academic research institution partners. Under these license agreements, the Company is required to make annual fixed license maintenance fee payments. The Company is also required to make payments upon successful completion and achievement of certain milestones as well as royalty payments upon sales of products covered by such licenses. The payment obligations under the license and collaboration agreements are contingent upon future events such as achievement of specified development, clinical, regulatory, and commercial milestones. As the timing of these future milestone payments are not known, the Company has not included these fees in the condensed consolidated balance sheets as of June 30, 2023 and December 31, 2022.
For further discussion on license fees recorded during the period, refer to Note 13, License Agreements.
Contingent Compensation and Other Contingent Payments
The
Company currently has approximately $
These amounts will not be paid if the contingencies do not occur. Since the payment of obligations under the employment agreements are contingent upon these future events, which are not considered probable as such future events are deemed outside of the Company’s control, the Company has not included these amounts in its condensed consolidated balance sheets.
Directors and Officers Liability Insurance
On
February 14, 2023, the Company obtained directors and officers liability (“D&O”) insurance that includes (i) a one-year
run-off policy for AHAC’s directors and officers that provides coverage for claims that arise out of wrongful acts that allegedly
occurred prior to the date of the Business Combination and (ii) a standard one-year policy for the Company’s directors and officers
that provides coverage for claims made by stockholders or third parties for alleged wrongdoing. The total annual premiums for the policies
are approximately $
| 21 |
OCEAN BIOMEDICAL, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
9. Equity
Common Stock
The holders of common stock of the Company are entitled to dividends when and if declared by the Company’s Board of Directors. The holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. As of June 30, 2023, the Company had authorized shares of common stock with a par value of $ per share. As of December 31, 2022, the Company had authorized shares of common stock with a par value of $ per share.
As of June 30, 2023 and December 31, 2022, the Company’s common stock issued and outstanding consisted of the following:
| Common Stock Outstanding (1) | ||||||||
| June 30, 2023 | December 31, 2022 | |||||||
| Legacy Ocean equity holders | ||||||||
| Retroactive application of recapitalization | ||||||||
| Adjusted Legacy Ocean equity holders | ||||||||
| Non-redeemed public stockholders | ||||||||
| Recycled Shares (2) | ||||||||
| Share Consideration Shares (2) | ||||||||
| Polar Subscription shares (2) | ||||||||
| Sponsor Extension Shares | ||||||||
| Sponsor shares | ||||||||
| Sponsor loan amendment shares (3) | ||||||||
| Other shares | ||||||||
| Commitment shares (4) | ||||||||
| Total | ||||||||
| (1) | ||
| (2) | ||
| (3) | ||
| (4) |
Profit Interests in Poseidon
Legacy Ocean’s founder and then sole stockholder was issued shares of Legacy Ocean’s common stock (“Founders Shares”) upon the formation of Legacy Ocean on January 2, 2019. After inception and prior to the Business Combination, the majority of the Founders Shares were contributed to Poseidon Bio, LLC (“Poseidon”), with Poseidon subsequently granting Class A and Class B profit interests to Legacy Ocean’s founder and other certain executive and employees, respectively, and resulting in Legacy Ocean’s founder holding 100% of the voting power of Poseidon. Further, after inception and prior to the Business Combination, Legacy Ocean implemented reverse stock splits which are appropriately reflected as applicable to the condensed consolidated financial statements.
These profit interests grants in the Company’s controlling shareholder were deemed to be transactions incurred by the shareholder and within the scope of ASC 718, Stock Compensation. As a result, the related transactions by the shareholder were pushed down into the Company’s condensed consolidated financial statements. As of June 30, 2023, Legacy Ocean’s founder held % of the voting power and % of the equity interests in Poseidon. The related stock-based compensation recognized is discussed below.
| 22 |
OCEAN BIOMEDICAL, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Stock Options
2022 Stock Option and Incentive Plan
The Company’s Board of Directors (“the Board”) approved and adopted the 2022 Stock Option and Incentive Plan and Form of Non-Qualified Stock Option Agreement for Non-Employee Directors (the “Incentive Plan”) prior to the Closing of the Business Combination.
The maximum number of shares of common stock that may be initially issued or transferred pursuant to awards under the Incentive Plan equals shares (the “Share Limit”). The Share Limit will automatically increase on the first trading day in January of each calendar year during the term of the Incentive Plan, with the first such increase to occur in January 2024, by an amount equal to the lesser of (i) three percent (3%) of the total number of shares of common stock issued and outstanding on December 31 of the immediately preceding calendar year or (ii) such number of shares of common stock as may be established by the Board.
The Incentive Plan authorizes stock options, stock appreciation rights, and other forms of awards granted or denominated in the Company’s common stock or units of the Company’s common stock, as well as cash bonus awards. The Incentive Plan retains flexibility to offer competitive incentives and to tailor benefits to specific needs and circumstances. Any award may be structured to be paid or settled in cash. Any awards under the Incentive Plan (including awards of stock options and stock appreciation rights) may be fully-vested at grant or may be subject to time- and/or performance-based vesting requirements.
The Incentive Plan does not limit the authority of the Board or any committee to grant awards or authorize any other compensation, with or without reference to the Company’s common stock, under any other plan or authority. The Board may amend or terminate the Incentive Plan at any time and in any manner. Stockholder approval for an amendment will be required only to the extent then required by applicable law or deemed necessary or advisable by the Board. Unless terminated earlier by the Board and subject to any extension that may be approved by stockholders, the authority to grant new awards under the Incentive Plan will terminate on the tenth anniversary of its establishment.
Stock Options to Non-Employee Directors
Under the Non-employee Director Compensation Policy, upon initial election or appointment to the Board, each new non-employee director will be granted under the Incentive Plan a one-time grant of a non-statutory stock option to purchase shares of its common stock on the date of such director’s election or appointment to the Board, issuable under the incentive plan. These will vest in substantially equal monthly installments over three years, subject to the director’s continued service as a member of the Board through each applicable vesting date.
On
February 15, 2023, options were granted to each of the non-employee directors at a strike price of $
The estimated fair value of a non-statutory stock option to purchase common stock on the grant date was $ per share and was determined using the Black-Scholes Merton model. The stock-based compensation recorded for the three and six months ended June 30, 2023 was $ and $, respectively, was recorded within general and administrative expense in the Company’s condensed consolidated statements of operations, as discussed below. The total unrecognized compensation related to unvested stock option awards granted was $ which the Company expects to recognize over a weighted-average period of approximately years.
2022 Employee Stock Purchase Plan
The Board approved and adopted the 2022 Employee Stock Purchase Plan (the “ESPP”) prior to the Closing of the Business Combination.
Subject to adjustment, shares of common stock are available for purchase pursuant to the exercise of options under the ESPP. Shares to be delivered upon exercise of options under the ESPP may be authorized but unissued stock, treasury stock, or stock acquired in an open-market transaction. Subject to certain requirements and exceptions, all individuals classified as employees on the payroll records of the Company or its subsidiaries are eligible to participate in anyone or more of the offerings under the ESPP.
The ESPP allows eligible employees to purchase shares of common stock during specified offering periods, with such offering periods not to exceed 27 months. During each offering period, eligible employees will be granted an option to purchase shares of common stock on the last business day of the offering period. The purchase price of each share of common stock issued pursuant to the exercise of an option under the ESPP on an exercise date will be 85% (or such greater percentage as specified by the administrator of the ESPP) of the lesser of: (a) the fair market value of a share of common stock date the option is granted, which will be the first day of the offering period, and (b) the fair market value of a share of common stock on the exercise date, which will the last business day of the offering period.
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OCEAN BIOMEDICAL, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
The Board has discretion to amend the ESPP to any extent and in any manner it may deem advisable, provided that any amendment that would be treated as the adoption of a new plan for purposes of Section 423 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”) will require stockholder approval. The Board may suspend or terminate the ESPP at any time.
Stock-Based Compensation
The Company recognizes stock-based compensation costs for equity-based compensation awards granted to employees, nonemployees, and directors in accordance with GAAP. The Company estimates the fair value and the resulting amounts using the Black-Scholes option-pricing model. The fair value is recognized on a straight-line basis over the requisite service periods but accelerated to the extent that grants vest sooner than on a straight-line basis. Forfeitures are accounted for as they occur and requires management to make a number of other assumptions, the volatility of the underlying shares, the risk-free interest rate and expected dividends. Expected volatility is based on the historical share volatility of a set of comparable publicly traded companies over a period of time equal to the expected term of the grant or option.
Stock-based compensation for the three and six months ended June 30, 2023 consisted of costs related to (i) stock options granted to non-employee directors in the first quarter of 2023 and (ii) warrants issued to advisors and consultants, as discussed below. Stock-based compensation for the three and six months ended June 30, 2022 solely consisted of costs related to the profit interests in Poseidon. The following table summarizes the allocation of stock-based compensation for the stock options, warrants, and Class B profit interests for the three and six months ended June 30, 2023 and 2022, respectively:
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| (in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Stock-based compensation: | ||||||||||||||||
| Research and development (1) | $ | $ | $ | $ | ||||||||||||
| General and administrative (2) | ||||||||||||||||
| Total stock-based compensation | $ | $ | $ | $ | ||||||||||||
| (1) | ||
| (2) |
As discussed above, as of June 30, 2023, there was $ of unamortized stock-based compensation, to be recognized over a weighted-average period of approximately years.
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OCEAN BIOMEDICAL, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
10. Warrants
As of June 30, 2023 and December 31, 2022, the following warrants to purchase common stock were outstanding:
| June 30, 2023 | ||||||||||||||||||
| Issuance Date | Number of Shares Issuable | Exercise Price | Classification | Expiration | ||||||||||||||
| Lender/Name | ||||||||||||||||||
| $ | (2) | |||||||||||||||||
| $ | ||||||||||||||||||
| $ | ||||||||||||||||||
| $ | ||||||||||||||||||
| $ | ||||||||||||||||||
| $ | ||||||||||||||||||
| $ | ||||||||||||||||||
| $ | ||||||||||||||||||
| (4) | $ | |||||||||||||||||
| (4) | ||||||||||||||||||