UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934

For the transition period from   ____________ to  ____________

Commission File Number: 001-12584

SYNTHETIC BIOLOGICS, INC.

(Exact name of Registrant as Specified in Its Charter)

Nevada	13-3808303
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
9605 Medical Center Drive, Suite 270
Rockville, MD	20850
(Address of Principal Executive Offices)	(Zip Code)

(301) 417-4364

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	SYN	NYSE American

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. Yes   ☒     No   ☐

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). Yes   ☒     No  ☐

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	☐
Non-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 by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐       No ☒

As of May 13, 2022, the registrant had 158,437,840 shares of common stock, $0.001 par value per share, outstanding.

SYNTHETIC BIOLOGICS, INC.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In particular, statements contained in this Quarterly Report on Form 10-Q, including but not limited to, statements regarding the timing of our clinical trials, the development and commercialization of our pipeline products, the sufficiency of our cash, our ability to finance our operations and business initiatives and obtain funding for such activities and the timing of any such financing, our future results of operations and financial position, business strategy and plans prospects, or costs and objectives of management for future research, development or operations, are forward-looking statements. These forward-looking statements relate to our future plans, objectives, expectations and intentions and may be identified by words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “seeks,” “goals,” “estimates,” “predicts,” “potential” and “continue” or similar words. Readers are cautioned that these forward-looking statements are based on our current beliefs, expectations and assumptions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under Part II, Item 1A. “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, and those identified under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2022 Therefore, actual results may differ materially and adversely from those expressed, projected or implied in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.

NOTE REGARDING COMPANY REFERENCES

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

NOTE REGARDING TRADEMARKS

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

SYNTHETIC BIOLOGICS, INC.

FORM 10-Q

TABLE OF CONTENTS

		Page
	PART I. FINANCIAL INFORMATION	3
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021	3
	Condensed Consolidated Statements of Operations for the Three Months ended March 31, 2022 and 2021	4
	Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the Three Months ended March 31, 2022 and 2021	5
	Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2022 and 2021	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	41
	PART II. OTHER INFORMATION	41
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.	Defaults Upon Senior Securities	44
Item 4.	Mine Safety Disclosures	44
Item 5.	Other Information	44
Item 6.	Exhibits	44
SIGNATURES		45

2

PART I–FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

Synthetic Biologics, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands except share and par value amounts)

	March 31, 2022		December 31, 2021
Assets
Current Assets
Cash and cash equivalents	$	56,692	$	67,325
Prepaid expenses and other current assets		2,863		1,533
Total Current Assets		59,555		68,858
Non-Current Assets
Property and equipment, net		302		101
Restricted cash		103
Right of use asset		1,338		1,383
In-process research and development		21,869		—
Goodwill		5,809		—
Deposits and other assets		23		23
Total Assets	$	88,999	$	70,365
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable	$	1,354	$	524
Accrued expenses		1,535		1,928
Accrued employee benefits		423		978
Contingent consideration, current portion		7,470		—
Loans Payable-current		68
Operating lease liability		126		124
Total Current Liabilities		10,976		3,554
Non-current Liabilities
Non-current contingent consideration		4,688		—
Loan Payable - Long term		229		—
Deferred tax liabilities, net		3,728		—
Lease liability - Long term		1,351		1,403
Total Liabilities		20,972		4,957
Commitments and Contingencies
Stockholders' Equity (Deficit):
Common stock, $0.001 par value; 200,000,000 shares authorized, 158,440,168 issued and 158,437,840 outstanding at March 31, 2022 and 132,044,866 issued and 132,042,538 outstanding at December 31, 2021		158		132
Additional paid-in capital		343,245		336,560
Accumulated other comprehensive loss		181		—
Accumulated deficit		(275,557)		(271,284)
Total Stockholders' Equity		68,027		65,408
Total Liabilities and Stockholders' Equity	$	88,999	$	70,365

See accompanying notes to unaudited condensed consolidated financial statements.

3

Synthetic Biologics, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share amounts)

(Unaudited)

	For the three months ended March 31,
	2022		2021
Operating Costs and Expenses:
General and administrative	$	1,655	$	1,419
Research and development		2,597		1,118
Total Operating Costs and Expenses		4,252		2,537
Loss from Operations		(4,252)		(2,537)
Other Expense:
Exchange loss		(23)		—
Interest income		2		—
Total Other Expense		(21)		—
Net Loss		(4,273)		(2,537)
Net Loss Attributable to Non-controlling Interest		—		(1)
Net Loss Attributable to Synthetic Biologics, Inc. and Subsidiaries	$	(4,273)	$	(2,536)
Series A Preferred Stock Dividends		—		(24)
Effect of Series A Preferred Stock price adjustment		—		(7,402)
Series B Preferred Stock Dividends		—		(1,497)
Net Loss Attributable to Common Stockholders	$	(4,273)	$	(11,459)
Net Loss Per Share - Basic and Dilutive	$	(0.03)	$	(0.13)
Weighted average number of shares outstanding during the period - Basic and Dilutive		138,201,442		90,807,693
Net Loss		(4,273)		(2,537)
Loss on foreign currency translation		(181)		—
Total comprehensive loss		(4,454)		(2,537)
Comprehensive loss attributable to non-controlling interest		—		(1)
Comprehensive loss attributable to Synthetic Biologics, Inc. and Subsidiaries	$	(4,454)	$	(2,536)

See accompanying notes to unaudited condensed consolidated financial statements.

4

Synthetic Biologics, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders Equity (Deficit)

(In thousands, except share and par value amounts)

	Common Stock $0.001 Par Value			Series B Preferred							Accumulated
											Other		Total
									Accumulated		Comprehensive		Stockholders'
	Shares	Amount		Shares	Amount		APIC		Deficit		income		Equity
Balance at December 31, 2021	132,042,538	$	132	—	$	—	$	336,560	$	(271,284)	$	—	$	65,408
Stock-based compensation	—		—	—		—		112		—		—		112
Issuance of Common Stock for VCN Acquisition	26,395,303		26	—		—		6,573		—		—		6,599
Translation gains (losses)	—		—	—		—		—		—		181		181
Net loss	—		—	—		—		—		(4,273)		—		(4,273)
Balance at March 31, 2022	158,437,841	$	158	—	$	—	$	343,245	$	(275,557)	$	181	$	68,027

	Common Stock $0.001 Par Value			Series B Preferred
											Non-		Total
									Accumulated		Controlling		Stockholders'
	Shares	Amount		Shares	Amount		APIC		Deficit		Interest		Deficit
Balance at December 31, 2020	29,249,925	$	29	3,973	$	2,477	$	240,821	$	(248,094)	$	(2,773)	$	(7,540)
Stock-based compensation	—		—	—		—		101		—		—		101
Stock issued under "at-the-market" offering	78,685,315		79	—		—		65,881		—		—		65,960
Warrants Exercised	11,655,747		12	—		—		8,030		—		—		8,042
Series A Preferred Stock Dividends	—		—	—		—		—		(24)		—		(24)
Effect of Series A Preferred Stock price adjustment	—		—	—		—		7,402		(7,402)		—		—
Conversion of Series A Preferred Stock to Common	8,996,768		9	—		—		12,813		—		—		12,822
Conversion of Series B Preferred Stock to Common	3,454,783		3	(3,973)		(2,477)		3,971		(1,497)		—		—
Net loss	—		—	—		—		—		(2,536)		—		(2,536)
Non-controlling interest	—		—	—		—		—		—		(1)		(1)
Balance at March 31, 2021	132,042,538	$	132	—	$	—	$	339,019	$	(259,553)	$	(2,774)	$	76,824

See accompanying notes to unaudited condensed consolidated financial statements.

5

Synthetic Biologics, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	For the Three Months Ended March 31,
	2022		2021
Cash Flows From Operating Activities:
Net loss	$	(4,273)	$	(2,537)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation		112		101
Depreciation		18		33
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		390		(42)
Right of use asset		45		39
Accounts payable		13		(265)
Accrued expenses		(513)		(71)
Accrued employee benefits		(645)		(518)
Lease liability		(49)		(68)
Net Cash Used In Operating Activities		(4,902)		(3,328)
Cash Flows from Investing Activities
Purchase of property and equipment		—		(14)
Cash paid for business combination, net of cash acquired		(3,863)		—
Pre-acquisition loan to VCN		(417)		—
Net Cash Used in Investing Activities		(4,280)		(14)
Cash Flows from Financing Activities
Payment of VCN's CDTI loan		(1,376)
Proceeds from "at the market" stock issuance		—		65,960
Proceeds from issuance of common stock for warrant exercises		—		8,042
Net Cash Provided by Financing Activities		(1,376)		74,002
Effects of FX on cash		28		—
Net increase (decrease) in cash and cash equivalents and restricted cash		(10,530)		70,660
Cash and cash equivalents and restricted at the beginning of this period		67,325		6,227
Cash and cash equivalents and restricted cash at the end of this period	$	56,795	$	76,887
Reconciliation of cash, cash equivalents, and restricted cash reported in the statement of financial position
Cash and cash equivalents	$	56,692	$	76,887
Restricted cash included in other long-term assets		103		—
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows	$	56,795	$	76,887
Supplemental non-cash investing and financing activities:
Fair value of contingent consideration in a business combination	$	12,158	$	—
Fair value of equity issued as consideration in a business combination	$	6,599	$	—
Effective settlement of pre-closing VCN financing	$	417	$	—
Effect of Series A Preferred Stock price adjustment	$	—	$	7,402
Conversion of Series B Preferred Stock	$	—	$	2,477
Deemed dividends for accretion of Series B Preferred Stock discount	$	—	$	1,497
In-kind dividends paid in preferred stock	$	—	$	23

See accompanying notes to unaudited condensed consolidated financial statements.

6

Synthetic Biologics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Organization, Nature of Operations and Basis of Presentation

Description of Business

Synthetic Biologics, Inc. (the “Company” or “Synthetic Biologics”) is a diversified clinical-stage company developing therapeutics in areas of high unmet need. Prior to the Acquisition of VCN, the Company’s focus was on developing therapeutics designed to treat gastrointestinal (GI) diseases in areas which included our lead clinical development candidates: (1) SYN-004 (ribaxamase) which is designed to degrade certain commonly used intravenous (IV) beta-lactam antibiotics within the GI tract to prevent microbiome damage, Clostridioides difficile infection (CDI), overgrowth of pathogenic organisms, the emergence of antimicrobial resistance (AMR), and acute graft-versus-host-disease (aGVHD) in allogeneic hematopoietic cell transplant (HCT) recipients, and (2) SYN-020, a recombinant oral formulation of the enzyme intestinal alkaline phosphatase (IAP) produced under cGMP conditions and intended to treat both local GI and systemic diseases. Upon consummation of the Acquisition of VCN, described in more detail below, the Company is transitioning its strategic focus to oncology through the development of VCN’s new oncolytic adenovirus platform designed for intravenous and intravitreal delivery to trigger tumor cell death, improve access of co-administered cancer therapies to the tumor, and promote a robust and sustained anti-tumor response by the patient’s immune system.

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and notes required by Accounting Principles Generally Accepted in the United States of America (“U.S. GAAP”) for complete financial statements. The accompanying condensed consolidated financial statements include all adjustments, comprised of normal recurring adjustments, considered necessary by management to fairly state the Company’s results of operations, financial position and cash flows. The operating results for the interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2021 Form 10-K. The interim results for the three months ended March 31, 2022 are not necessarily indicative of results for the full year.

The condensed consolidated financial statements are prepared in conformity with U.S. GAAP, which requires the use of estimates, judgments and assumptions that affect the amounts of assets and liabilities at the reporting date and the amounts of revenue and expenses in the periods presented. The Company believes that the accounting estimates employed are appropriate and the resulting balances are reasonable; however, due to the inherent uncertainties in making estimates, actual results may differ from the original estimates, requiring adjustments to these balances in future periods. As of March 31, 2022 the Company has one operating segment (which includes the legacy Company business and the VCN business) and therefore one reporting segment.

Business Combination

The Company accounts for acquisitions using the acquisition method of accounting, which requires that all identifiable assets acquired, and liabilities assumed be recorded at their estimated fair values. The excess of the fair value of purchase consideration over the fair values of identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions. Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from acquired patented technology. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

7

Synthetic Biologics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

1. Organization, Nature of Operations and Basis of Presentation – (continued)

As a result of the acquisition of VCN (see Note 2), the Company has two intangible assets, in-process research and development (“IPR&D”) and goodwill. The IPR&D and goodwill are deemed to have indefinite lives and therefore not amortized.

IPR&D

IPR&D assets represent the fair value assigned to technologies that the Company acquires, which at the time of acquisition have not reached technological feasibility and have no alternative future use. IPR&D assets are considered to have indefinite-lives until the completion or abandonment of the associated research and development projects. If and when development is complete, which generally occurs upon regulatory approval and the ability to commercialize products associated with the IPR&D assets, these assets are then deemed to have definite lives and are amortized based on their estimated useful lives at that point in time. If development is terminated or abandoned, the Company may have a full or partial impairment charge related to the IPR&D assets, calculated as the excess of carrying value of the IPR&D assets over fair value.

During the period that the assets are considered indefinite-lived, they are tested for impairment on an annual basis on October 1, or more frequently if the Company becomes aware of any events occurring or changes in circumstances that could indicate an impairment. The impairment test consists of a comparison of the estimated fair value of the IPR&D with its carrying amount. If the carrying amount exceeds the fair value, an impairment charge is recognized in an amount equal to that excess. No impairment of the IPR&D asset was identified during the March 2022 period after the acquisition.

Goodwill

The Company tests the carrying amounts of goodwill for recoverability on an annual basis on October 31 or more frequently if events or changes in circumstances indicate that the asset might be impaired.  The Company performs a one-step test in its evaluation of the carrying value of goodwill if qualitative factors determine it is necessary to complete a goodwill impairment test. In the evaluation, the fair value of the relevant reporting unit is determined and compared to its carrying value. If the fair value is greater than the carrying value, then the carrying value is deemed to be recoverable, and no further action is required. If the fair value estimate is less than the carrying value, goodwill is considered impaired for the amount by which the carrying amount exceeds the reporting unit’s fair value, and a charge is reported in impairment of goodwill in the Company’s consolidated statements of operations. As of March 31, 2022, the Company has determined that it has one reporting unit.  The Company has not identified any events or changes in circumstances that indicate the existence of potential impairment of goodwill during the three months ended March 31, 2022.

Contingent Consideration

Consideration paid in a business combination may include potential future payments that are contingent upon the acquired business achieving certain milestones in the future (“contingent consideration”). Contingent consideration liabilities are measured at their estimated fair value as of the date of acquisition, with subsequent changes in fair value recorded in the consolidated statements of operations. The Company estimates the fair value of the contingent consideration as of the acquisition date using the estimated future cash outflows based on the probability of meeting future milestones. The milestone payments will be made upon the achievement of clinical and commercialization milestones as well as single low digit royalty payments and payments upon receipt of sublicensing income. Subsequent to the date of acquisition, the Company reassesses the actual consideration earned and the probability-weighted future earn-out payments at each balance sheet date. Any adjustment to the contingent consideration liability will be recorded in the consolidated statements of operations. Contingent consideration liabilities expected to be settled within 12 months after the balance sheet date are presented in current liabilities, with the non-current portion recorded under long term liabilities in the consolidated balance sheets.

8

Synthetic Biologics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

1. Organization, Nature of Operations and Basis of Presentation – (continued)

Recent Accounting Pronouncements and Developments

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 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. This ASU amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity and improves and amends the related earnings per share guidance for both Subtopics. The ASU will be effective for annual reporting periods after December 15, 2023 and interim periods within those annual periods and early adoption is permitted in annual reporting periods ending after December 15, 2020. The Company is currently assessing the impact of ASU 2020-06 on its consolidated financial statements.

Impairment of Long-Lived Assets

Long-lived assets include property, equipment and right-of-use assets. In accordance with ASC 360, Property, Plant and Equipment (“ASC 360”), management reviews the Company’s long-lived assets for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. The Company determines the extent to which an asset may be impaired based upon its expectation of the asset’s future usability as well as whether there is reasonable assurance that the future cash flows associated with the asset will be in excess of its carrying amount. If the total of the expected undiscounted future cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and the carrying value of the asset. As a result, no impairment charges were recorded during the three months ended March 31, 2022 and 2021.

2. BUSINESS COMBINATION

Summary

On March 10, 2022, the Company completed the acquisition of all the outstanding shares of VCN Biosciences S.L. (the “VCN Shares”) from the shareholders of VCN. VCN is a private, clinical-stage biopharmaceutical company developing new oncolytic adenoviruses for the treatment of cancer. VCN’s lead product candidate, VCN-01, is being studied in clinical trials for pancreatic cancer and retinoblastoma. VCN-01 is designed to be administered systemically, intratumorally or intravitreally, either as a monotherapy or in combination with standard of care, to treat a wide variety of cancer indications. VCN-01 is designed to replicate selectively and aggressively within tumor cells, and to degrade the tumor stroma barrier that serves as a significant physical and immunosuppressive barrier to cancer treatment. Degrading the tumor stroma has been shown to improve access to the tumor by the virus and additional therapies such as chemo- and immuno-therapies. Importantly, degrading the stroma exposes tumor antigens, turning “cold” tumors “hot” and enabling a sustained anti-tumor immune response. VCN has the rights to four exclusive patents for proprietary technologies, as well as technologies developed in collaboration with the Virotherapy Group of the Catalan Institute of Oncology (ICO-IDIBELL) and with Hospital Sant Joan de Deu (HSJD), with a number of additional patents pending. As consideration for the purchase of the VCN Shares, the Company paid $4,700,000 to Grifols Innovation and New Technologies Limited the owner of approximately 86% of the equity of VCN, and issued to the remaining sellers and certain key employees and consultants of VCN 26,395,303 shares of its common stock In addition to the consideration described above, under the terms of the Purchase Agreement, the Company assumed up to $2,400,000 of existing liabilities of VCN and has agreed to make cash payments of up to $70.25 million to Grifols upon the achievement of certain clinical and commercialization milestones.

In anticipation of the Acquisition, prior to the Closing, the Company loaned VCN $417,000 to help finance the costs of certain of VCN’s research and development activities. At the Closing, VCN and Grifols entered into a sublease agreement for the sublease by VCN of laboratory and office space as well as a transitional services agreement. As a Purchase post-Closing covenant, Synthetic has agreed to commit to fund VCN’s research and development programs, including but not limited to VCN01 in a pancreatic ductal adenocarcinoma PDAC phase 2 trial, VCN01 in a retinoblastoma (RB) phase 2/3 trial and necessary G&A within a budgetary plan of approximately $27.8 million.

9

Synthetic Biologics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

2. BUSINESS COMBINATION - (continued)

As of March 31, 2022, the fair value of the contingent consideration was $12.2 million. Total consideration including cash, restricted shares and contingent consideration was valued at $23.9 million.

Purchase consideration consisted of the following:

Cash paid at Closing	$	4,700
Receivable from VCN "effectively settled"		417
FV of common shares issued		6,599
FV of contingent consideration		12,159
	$	23,874

We acquired VCN due to its proven track record of being a research and development growth engine capable of fueling sustainable growth, to expand our research and development pipeline, and to diversify our potential future revenue opportunities.

The preliminary allocation of the fair value of the VCN acquisition is shown in the table below.

	Estimated fair value
	($in thousands)
Cash and cash equivalents	$	837
Receivables		1,707
Property and equipment		216
In-process research and development intangible asset		21,703
Goodwill		5,765
Other assets		—
Deferred tax assets (liabilities), net		(3,699)
Accounts payable		(814)
Accrued expenses		(113)
Accrued employee benefits		(90)
Loan Payable-current		(67)
Other long-term liabilities		(1,570)
Total purchase consideration	$	23,875

The above allocation of the purchase price is based upon certain preliminary valuations and other analyses that have not been finalized as of the date of this filing. Any changes in the estimated fair values of the purchase consideration and of the net assets recorded for this business combination upon the finalization of more detailed analyses of the facts and circumstances that existed at the date of the transaction may change the amount and allocation of the purchase price. As such, the purchase price amount and allocations for this transaction are preliminary estimates including in-process research and development, goodwill and contingent consideration, which may be subject to change within the measurement period.

The net assets were recorded at their estimated fair value. In valuing acquired assets and liabilities, fair value estimates were based primarily on future expected cash flows, market rate assumptions for contractual obligations, and appropriate discount rates. In connection with the acquisition, we recognized $21.7 million of indefinite-lived in-process research and development intangible assets.

Goodwill is considered an indefinite-lived asset and relates primarily to intangible assets that do not qualify for separate recognition, such as the assembled workforce and synergies between the entities. Goodwill of $5.8 million was established as a result of the Acquisition.

VCN operations recorded a net loss of $197,000 from the date of acquisition through March 31, 2022.

10

Synthetic Biologics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

2. BUSINESS COMBINATION - (continued)

Pro Forma Consolidated Financial Information (unaudited)

The following unaudited pro forma consolidated financial information summarizes the results of operations for the periods indicated as if the VCN acquisition had been completed as of January 1, 2021.

	Quarter Ended March 31,
(in thousands)	2022		2021
Net revenues	$	—	$	—
Net loss	$	(4,796)	$	(2,699)

Transaction Costs

In conjunction with the Acquisition, the Company incurred approximately $1.2 million and 0.2 million in 2021 and 2022, respectively, in transaction costs, which were expensed as general, and administrative expense in the consolidated statement of operations.

3. Goodwill and Intangibles

Goodwill of $5.8 million and in-process R&D of $21.7 million were recorded in connection with the acquisition of VCN, as described in Note 2. The Company will perform an annual impairment test unless condition exist where an interim impairment analysis is necessary. This analysis requires significant judgments, including primarily the estimation of future development costs, the probability of success in various phases of its development programs, potential post-launch cash flows and a risk-adjusted weighted average cost of capital.

The following table provides the Company’s goodwill as of March 31, 2022. There was no goodwill impairment during the quarter ended March 31, 2022.

	Goodwill
Balance at December 31, 2021	$	—
Goodwill from Acquisition of VCN		5,765
Goodwill impairment loss		—
Effects of exchange rates		44
Balance at March 31, 2022	$	5,809

The following table provides the Company’s in-process R&D as of March 31, 2022. There was no change in in-process R&D during the quarter ended March 31, 2022.

	In-process
	R&D
Balance at December 31, 2021	$	—
Acquired IPR&D -		21,703
In-process R&D impairment loss		—
Effects of exchange rates		166
Balance at March 31, 2022	$	21,869

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Synthetic Biologics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

4. Fair Value of Financial Instruments

Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement, defines fair value as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is  determined based upon assumptions that market participants would use in pricing an asset or liability. Fair value measurements are rated on a three-tier hierarchy as follows:

● Level 1 inputs: Quoted prices (unadjusted) for identical assets or liabilities in active markets;

● Level 2 inputs: Inputs, other than quoted prices, included in Level 1 that are observable either directly or indirectly; and

● Level 3 inputs: Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.

In many cases, a valuation technique used to measure fair value includes inputs from multiple levels of the fair value hierarchy described above. The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy.

The carrying amounts of the Company’s short-term financial instruments, including cash and cash equivalents, other current assets, accounts payable and accrued liabilities approximate fair value due to the relatively short period to maturity for these instruments.

In connection with the acquisition of VCN, we may pay up to $70.2 million in additional consideration related to the achievement of certain milestones, including regulatory filings completed noted in Note 3. The discounted cash flow method used to value this contingent consideration includes inputs of not readily observable market data, which are Level 3 inputs. As of the March 10, 2022 acquisition date, the contingent consideration had a fair value of $12.2 million. The fair value of the contingent consideration was $12.2 million as of March 31, 2022 and is reflected as current accrued contingent consideration of $7.5 million and non-current contingent consideration liability of $4.7 million in the consolidated balance sheet.

The fair value of financial instruments measured on a recurring basis is as follows:

	As of March 10, 2022
Description	Total		Level 1	Level 2	Level 3
Liabilities:
Contingent consideration	$	12,159	—	—	$	12,159

	As of March 31, 2022
Description	Total		Level 1	Level 2	Level 3
Liabilities:
Contingent consideration	$	12,159	—	—	$	12,159

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Synthetic Biologics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

4. Fair Value of Financial Instruments – (continued)

The recurring Level 3 fair value measurements of contingent consideration for which a liability is recorded include the following significant unobservable inputs:

	As of March 10, 2022
	Valuation	Significant	Weighted Average
	Methodology	Unobservable Input	(range, if applicable)
Contingent Consideration	Probability weighted	Milestone dates	2022-2027
	income approach
		Discount rate	7.3% to 8.6%
		Weighted Average Discount rate	7.77%
		Probability of Occurrence (periodic for each Milestone)	9.9% to 82.4%
		Probability of occurrence (cumulative through each Milestone)	5.1% to 62.8%

	As of March 31, 2022
	Valuation	Significant	Weighted Average
	Methodology	Unobservable Input	(range, if applicable)
Contingent Consideration	Probability weighted	Milestone dates	2022-2027
	income approach
		Discount rate	7.1% to 8.7%
		Weighted Average Discount rate	7.78%
		Probability of Occurrence (periodic for each Milestone)	9.9% to 82.4%
		Probability of occurrence (cumulative through each Milestone)	5.1% to 62.8%

5. Selected Balance Sheet Information

Prepaid expenses and other current assets (in thousands)

	March 31,		December 31,
	2022		2021
Receivable from prior owner	$	1,594	$	—
Prepaid insurances		557		803
Prepaid clinical research organizations		266		458
Prepaid consulting, subscriptions and other expenses		217		272
VAT receivable		127		—
Prepaid manufacturing expenses		102		—
Total	$	2,863	$	1,533

Prepaid clinical research organizations (CROs) expense is classified as a current asset. The Company makes payments to the CROs based on agreed upon terms that include payments in advance of study services. Receivable from prior VCN owner includes amounts due related to research and development tax rebates, VAT and corporate taxes.

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Synthetic Biologics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

5. Selected Balance Sheet Information – (continued)

Property and equipment, net (in thousands)

	March 31,		December 31,
	2022		2021
Computers and office equipment	$	1,348	$	827
Leasehold improvements		94		94
Software		15		11
		1,456		932
Less: accumulated depreciation and amortization		(1,154)		(831)
Total	$	302	$	101

Accrued expenses (in thousands)

	March 31,		December 31,
	2022		2021
Accrued clinical consulting services	$	1,008	$	696
Accrued vendor payments		305		1,028
Accrued manufacturing costs		126		204
Vat payable		91		—
Other accrued expenses		5		—
Total	$	1,535	$	1,928

Accrued employee benefits (in thousands)

	March 31,		December 31,
	2022		2021
Accrued bonus expense	$	225	$	886
Accrued vacation expense		115		92
Accrued compensation expense		83		—
Total	$	423	$	978

6. Stock-Based Compensation

Stock Incentive Plans

On March 20, 2007, the Company’s Board of Directors approved the 2007 Stock Incentive Plan (the “2007 Stock Plan”) for the issuance of up to 71,429 shares of common stock to be granted through incentive stock options, nonqualified stock options, stock appreciation rights, dividend equivalent rights, restricted stock, restricted stock units and other stock-based awards to officers, other employees, directors and consultants of the Company and its subsidiaries. This plan was approved by the stockholders on November 2, 2007. The exercise price of stock options under the 2007 Stock Plan was determined by the compensation committee of the Board of Directors and could be equal to or greater than the fair market value of the Company’s common stock on the date the option is granted. The total number of shares of stock with respect to which stock options and stock appreciation rights may be granted to any one employee of the Company or a subsidiary during any one-year period under the 2007 stock plan shall not exceed 7,143. Options become exercisable over various periods from the date of grant and generally expire ten years after the grant date. As of March 31, 2022, there were 5,145 options issued and outstanding under the 2007 Stock Plan.

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Synthetic Biologics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

6. Stock-Based Compensation – (continued)

On November 2, 2010, the Board of Directors and stockholders adopted the 2010 Stock Incentive Plan (“2010 Stock Plan”) for the issuance of up to 85,714 shares of common stock to be granted through incentive stock options, nonqualified stock options, stock appreciation rights, dividend equivalent rights, restricted stock, restricted stock units and other stock-based awards to officers, other employees, directors and consultants of the Company and its subsidiaries. On October 22, 2013, the stockholders approved and adopted an amendment to the Company’s 2010 Stock Plan to increase the number of shares of Company’s common stock reserved for issuance under the Plan from 85,714 to 171,429; on May 15, 2015, increased the number of shares from 171,429 to 228,572; on August 25, 2016, increased the number of shares from 228,572 to 400,000; on September 7, 2017, increased the number of shares from 400,000 to 500,000; on September 24, 2018 increased the number of shares from 500,000 to 1,000,000; and on September 5, 2019, increased the number of shares from 1,000,000 to 4,000,000. The exercise price of stock options under the 2010 Stock Plan is determined by the compensation committee of the Board of Directors and may be equal to or greater than the fair market value of the Company’s common stock on the date the option is granted. Options become exercisable over various periods from the date of grant and expire between five and ten years after the grant date. As of March 31, 2022, there were 2,434,237 options issued and outstanding under the 2010 Stock Plan.

On September 17, 2020, the stockholders approved and adopted the 2020 Stock Incentive Plan (“2020 Stock Plan”) for the issuance of up to 4,000,000 shares of Common Stock to be granted through incentive stock options, nonqualified stock options, stock appreciation rights, dividend equivalent rights, restricted stock, restricted stock units and other stock-based awards to officers, other employees, directors and consultants of the Company and its subsidiaries. As of March 31, 2022, there were 3,668,333 options issued and outstanding under the 2010 Stock Plan.

In the event of an employee’s termination, the Company will cease to recognize compensation expense for that employee. Stock forfeitures are recognized as incurred. There is no deferred compensation recorded upon initial grant date. Instead, the fair value of the stock-based payment is recognized over the stated vesting period.

The Company has applied fair value accounting for all stock-based payment awards since inception. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model. There were no options granted during the three months ended March 31, 2022 and 2021.

Expected dividends —The Company has never declared or paid dividends on its common stock and has no plans to do so in the foreseeable future.

Expected volatility—Volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The expected volatility assumption is derived from the historical volatility of the Company’s common stock over a period approximately equal to the expected term.

Risk-free interest rate—The assumed risk free rate used is a zero coupon U.S. Treasury security with a maturity that approximates the expected term of the option.

Expected life of the option—The period of time that the options granted are expected to remain unexercised. Options granted during the year have a maximum term of seven years. The Company estimates the expected life of the option term based on the weighted average life between the dates that options become fully vested and the maximum life of options granted.

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

● immediate vesting,

● in full on the one-year anniversary date of the grant date,

● half vesting immediately and the remaining over three years,

15

Synthetic Biologics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

6. Stock-Based Compensation – (continued)

● quarterly over three years,

● annually over three years,

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

● one-half immediate vesting and the remaining over nine months,

● one-quarter immediate vesting and the remaining over three years,

● one-quarter immediate vesting and the remaining over 33 months,

● monthly over one year, and

● monthly over three years.

16

Synthetic Biologics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

6. Stock-Based Compensation – (continued)

A summary of stock option activity for the three months ended March 31, 2022 and the year ended December 31, 2021 is as follows:

		Weighted		Weighted Average	Aggregate
		Average Exercise		Remaining	Intrinsic
	Options	Price		Contractual Life	Value
Balance - December 31, 2020	3,997,418	$	2.35	6.09 years	$	—
Granted	2,260,000		0.33
Exercised	—		—
Expired	(2,143)		45.15
Forfeited	—		—
Balance - December 31, 2021	6,255,275		1.61	5.58 years		—
Granted	—		—
Exercised	—		—
Expired	(2,413)		75.60
Forfeited	(145,417)		0.36
Balance - March 31, 2022 - outstanding	6,107,715	$	1.61	5.26 years	$	—