FIRST WAVE BIOPHARMA, INC.
10-Ks and 10-Qs
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RAF
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
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[X]
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ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the fiscal year ended December 31, 2019
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or
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file No. 001-37853
AZURRX BIOPHARMA, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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46-4993860
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. employer identification number)
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760 Parkside Avenue
Downstate Biotechnology Incubator, Suite 304
Brooklyn, New York 11226
(Address of principal executive offices)
(646) 699-7855
(Issuer’s telephone number)
Securities registered pursuant
to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common stock, par value $0.0001 per share
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NASDAQ
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Securities registered under Section 12(g) of the Exchange Act:
None
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes [ ]
No [X]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes [
] No [X]
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 [X] No
[ ]
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 [X]
No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
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.
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Large accelerated filer
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[ ]
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Accelerated filer
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[ ]
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Non-accelerated filer
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[X]
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Smaller reporting company
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[X]
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Emerging growth company
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[X]
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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
[X]
The aggregate market value of common stock held by non-affiliates
of the registrant, based on the closing price of a share of the
registrant’s common stock on June 30, 2019, which is the last
business day of the registrant’s most recently completed
second fiscal quarter, as reported by the NASDAQ Capital Market on
such date, was approximately $31.4 million.
There were 27,131,456 shares of the registrant’s common stock
outstanding as of March 30, 2020.
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DRAFT
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AZURRX BIOPHAR
MA, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2019
TABL
E
OF
CONTENTS
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F-1
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K
(“
Annual
Report”
) contains
forward-looking statements that involve substantial risks and
uncertainties. All statements contained in this Annual Report other
than statements of historical facts, including statements regarding
our strategy, future operations, future financial position, future
revenue, projected costs, prospects, plans, objectives of
management and expected market growth, are forward-looking
statements. These statements involve known and unknown risks,
uncertainties and other important factors that may cause our actual
results, performance or achievements to be materially different
from any future results, performance or achievements expressed or
implied by the forward-looking statements.
The
words “anticipate”, “believe”,
“estimate”, “expect”, “intend”,
“may”, “plan”, “predict”,
“project”, “target”,
“potential”, “will”, “would”,
“could”, “should”, “continue”
and similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain
these identifying words. These forward-looking statements include,
among other things, statements about:
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●
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the availability of capital to satisfy our working capital
requirements;
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●
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the accuracy of our estimates regarding expense, future revenue and
capital requirements;
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our plans to develop and commercialize our lead product candidate,
MS1819 and our other product candidates;
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●
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our ability to initiate and complete our clinical trials and to
advance our principal product candidates into additional clinical
trials, including pivotal clinical trials, and successfully
complete such clinical trials;
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●
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regulatory developments in the U.S. and foreign
countries;
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●
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the performance of our third-party contract manufacturer(s),
contract research organization(s) and other third-party
non-clinical and clinical development collaborators and regulatory
service providers;
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●
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our ability to obtain and maintain intellectual property protection
for our core assets;
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●
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the size of the potential markets for our product candidates and
our ability to serve those markets;
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●
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the rate and degree of market acceptance of our product candidates
for any indication once approved;
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●
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the success of competing products and product candidates in
development by others that are or become available for the
indications that we are pursuing;
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●
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the loss of key scientific, clinical and nonclinical development,
regulatory, and/or management personnel, internally or from one of
our third-party collaborators; and
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●
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other risks and uncertainties, including those listed under Part I,
Item 1A., “
Risk
Factors
” of this Annual
Report.
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These forward-looking statements are only
predictions and we may not actually achieve the plans, intentions
or expectations disclosed in our forward-looking statements, so you
should not place undue reliance on our forward-looking statements.
Actual results or events could differ materially from the plans,
intentions and expectations disclosed in the forward-looking
statements we make. We have based these forward-looking statements
largely on our current expectations and projections about future
events and trends that we believe may affect our business,
financial condition and operating results. We have included
important factors in the cautionary statements included in this
Annual Report, particularly in Part I, Item 1A, titled
“
Risk
Factors
” that could cause
actual future results or events to differ materially from the
forward-looking statements that we make. Our forward-looking
statements do not reflect the potential impact of any future
acquisitions, mergers, dispositions, joint ventures or investments
we may make.
You
should read this Annual Report and the documents that we have filed
as exhibits to the Annual Report with the understanding that our
actual future results may be materially different from what we
expect. We do not assume any obligation to update any
forward-looking statements whether as a result of new information,
future events or otherwise, except as required by applicable
law.
ITEM 1.
DESCRIPTION OF BUSINESS
As used in this Annual Report, unless otherwise
stated or the context otherwise requires, references to
“
AzurRx
”, “
Company
”, “
we
”, “
us
”, “
our
” or similar references are to AzurRx
BioPharma, Inc. and its subsidiaries on a consolidated basis.
References to “
AzurRx
BioPharma
” refer to
AzurRx BioPharma, Inc. on an unconsolidated basis. References to
“
AzurRx SAS
” refer to AzurRx SAS, AzurRx
BioPharma’s wholly-owned subsidiary through which we conduct
our European operations.
Overview
AzurRx BioPharma, Inc. (“
AzurRx
”) was incorporated on January 30, 2014 in
the State of Delaware. In June 2014, the Company acquired 100% of
the issued and outstanding capital stock of AzurRx SAS (formerly
“
ProteaBio Europe
SAS
”), a company
incorporated in October 2008 under the laws of France. AzurRx and
its wholly-owned subsidiary, AzurRx SAS (“
ABS
”) (collectively referred to herein as the
“
Company
”).
We
are engaged in the research and development of non-systemic
biologics for the treatment of patients with gastrointestinal
disorders. Non-systemic biologics are non-absorbable drugs that act
locally, i.e. the intestinal lumen, skin or mucosa, without
reaching an individual’s systemic circulation.
We
are currently focused on developing our lead drug product
candidate, MS1819, which is described below:
MS1819
MS1819
is a yeast derived recombinant lipase for exocrine pancreatic
insufficiency (“
EPI
”) associated with cystic
fibrosis (“
CF
”)
and chronic pancreatitis (“
CP
”). A lipase is an enzyme that
breaks up fat molecules. MS1819 is considered recombinant because
it was created from new combinations of genetic material in yeast
called
Yarrowia
lipolytica
.
MS1819 – Phase 2a Chronic Pancreatitis Study
In June
2018, the Company completed an open-label, dose escalation Phase 2a
trial of MS1819 in France, Australia, and New Zealand to
investigate both the safety of escalating doses of MS1819, and the
efficacy of MS1819 through the analysis of each patient’s
coefficient of fat absorption (“
CFA
”) and its change from
baseline. A total of 11 CP patients with EPI were enrolled in the
study and final data indicated a strong safety and efficacy
profile. Although the study was not powered for efficacy, in a
pre-planned analysis, the highest dose (2.2 grams per day) cohort
of MS1819 showed statistically significant and clinically
meaningful increases in CFA compared to baseline with a mean
increase of 21.8% and a p-value of p=0.002 on a per protocol basis.
Maximal absolute CFA response to treatment was up to
62%.
MS1819 – Phase 2 and Phase 2b Cystic Fibrosis Monotherapy
Studies
In
October 2018, the U.S. Food and Drug Administration
(“
FDA
”) cleared
the Company’s Investigational New Drug (“
IND
”) application for MS1819 in
patients with EPI due to CF. In connection with the FDA’s
clearance of the IND, the Company initiated a multi-center Phase 2
OPTION
bridging dose safety
study
in the fourth quarter of 2018 in the United States and
Europe (the “
OPTION
Cross-Over Study
”). The Company targeted enrollment of
30 to 35 patients for the OPTION Cross-Over Study and dosed the
first patients in February 2019. In June 2019, the Company reached
its enrollment target for the study.
On
September 25, 2019, the Company announced positive results from the
OPTION Cross-Over Study. Results showed that the primary efficacy
endpoint of CFA was comparable to the CFA in a prior phase two
study in patients with CP, while using the same dosage of MS1819.
The dosage used in the OPTION Cross-Over Study was 2.2 grams per
day, which was determined in agreement with the FDA as a bridging
dose from the highest safe dose used in the Phase 2a CP dose
escalation study. Although the study was not powered for
statistical significance, the data demonstrated meaningful efficacy
results, with approximately 50% of the patients showing CFAs high
enough to reach non-inferiority with standard porcine enzyme
replacement therapy (“
PERT
”). Additionally, the
coefficient of nitrogen absorption (“
CNA
”) was comparable between the
MS1819 and PERT arms, 93% vs. 97%, respectively, in the OPTION
Cross-Over Study. This important finding confirms that protease
supplementation is not likely to be required with MS1819 treatment.
A total of 32 patients, ages 18 or older, completed the OPTION
Cross-Over Study.
On
October 17, 2019, the Company announced that the Cystic Fibrosis
Foundation Data Safety Monitoring Board (the “
CFF DSMB
”) completed its review
of the Company’s final results of the OPTION Cross-Over Study
and has found no safety concerns for MS1819, and that the CFF DSMB
supports the Company’s plan to proceed to a higher 4.4 gram
dose of MS1819 with enteric capsules in its next planned
multi-center dose escalation Phase 2 OPTION clinical trial (the
“
OPTION 2
Trial
”). In December 2019, the Company submitted the
clinical trial protocol to the existing IND at the
FDA.
The
OPTION 2 Trial design will explore the use of 2.2 gram and 4.4 gram
doses using enteric capsules to ensure higher levels of MS1819
release in the duodenum. The new protocol is currently under review
by the FDA and a response is anticipated in March 2020. The Company
expects to launch the OPTION 2 Trial as early as the second quarter
of 2020, subject to regulatory approval, with completion originally
anticipated by the end of 2020, however, these timelines may be
delayed due to the novel coronavirus ("
COVID-19
") epidemic.
MS1819 – Phase 2 Combination Therapy Study
In
addition to the OPTION Cross-Over Study, the Company launched a
Phase 2 multi-center clinical trial (the “
Combination Trial
”) in Hungary to
investigate MS1819 in combination with PERT, for CF patients who
suffer from severe EPI, but continue to experience clinical
symptoms of fat malabsorption despite taking the maximum daily dose
of PERTs. The Combination Trial is designed to investigate the
safety, tolerability and efficacy of escalating doses of MS1819, in
conjunction with a stable dose of PERTs, in order to increase CFA
and relieve abdominal symptoms in uncontrolled CF
patients.
On
October 15, 2019, the Company announced that it dosed the first
patients in its Combination Trial. This study is designed to
investigate the safety, tolerability and efficacy of escalating
doses of MS1819 (700 mg, 1120 mg and 2240 mg per day,
respectively), in conjunction with a stable dose of porcine PERTs,
in order to increase the CFA and relieve abdominal symptoms. A
combination therapy of PERT and MS1819 has the potential to: (i)
correct macronutrient and micronutrient maldigestion; (ii)
eliminate abdominal symptoms attributable to maldigestion; and
(iii) sustain optimal nutritional status on a normal diet in CF
patients with severe EPI. Planned enrollment is expected to include
approximately 24 CF patients with severe EPI, at clinical trial
sites in Hungary and additional countries in Europe including
Spain, with study completion originally anticipated by the end of
2020, however, this timeline may be delayed due to the COVID-19
epidemic.
We do
not expect to generate revenue from drug candidates that we develop
until we obtain approval for one or more of such drug candidates
and commercialize our product or enter into a collaborative
agreement with a third party. We do not have any products approved
for sale at the present and have never generated revenue from
product sale.
Recent Developments
Coronavirus Disease (COVID-19)
Beginning around
January 2020, the COVID-19 outbreak originating in Wuhan, China
has spread globally
and may
impact the Company’s operations and delay current and
planned clinical trial operations in Europe and the U.S.,
including, but not limited to clinical trial recruitment and
participation. Given the uncertainty of the situation, the duration
of the business disruption and related financial impact cannot be
reasonably estimated at this time. The impact of COVID-19 is
evolving rapidly and its future effects are uncertain. Management
is responding to this crisis, instituting cost-cutting measures and
anticipates the need to secure additional financing in response to
any potential disruptions or delays due to the COVID-19
outbreak.
Continued Nasdaq Listing
On March 23, 2020, the Company received a letter
from the Listing Qualifications Staff of The Nasdaq Stock Market,
LLC ("
Nasdaq
") indicating that, based upon the closing bid
price of the Company's common stock, par value $0.0001 (the
“
Common
Stock
”) for the last 30
consecutive business days, the Company is not currently in
compliance with the requirement to maintain a minimum bid price of
$1.00 per share for continued listing on the Nasdaq Capital Market,
as set forth in Nasdaq Listing Rule 5550(a)(2) (the
"
Notice
").
The
Notice has no immediate effect on the continued listing status of
the Company's Common Stock on the Nasdaq Capital Market, and,
therefore, the Company's listing remains fully
effective.
The
Company will continue to monitor the closing bid price of its
Common Stock and seek to regain compliance with all applicable
Nasdaq requirements within the allotted compliance periods. To
regain compliance, the closing bid price of the Company's Common
Stock must be at least $1.00 per share for 10 consecutive business
days at some point during the period of 180 calendar days from the
date of the Notice, or until September 21, 2020. If the Company
does not regain compliance with the minimum bid price requirement
by September 21, 2020, Nasdaq may grant the Company a second period
of 180 calendar days to regain compliance. To qualify for this
additional compliance period, the Company would be required to meet
the continued listing requirement for market value of publicly held
shares and all other initial listing standards for the Nasdaq
Capital Market, other than the minimum bid price requirement. In
addition, the Company would also be required to notify Nasdaq of
its intent to cure the minimum bid price deficiency. If the Company
does not regain compliance within the allotted compliance periods,
including any extensions that may be granted by Nasdaq, Nasdaq will
provide notice that the Company's Common Stock will be subject to
delisting. The Company would then be entitled to appeal that
determination to a Nasdaq hearings panel. There can be no assurance
that the Company will regain compliance with the minimum bid price
requirement during the 180-day compliance period, secure a second
period of 180 days to regain compliance, or maintain compliance
with the other Nasdaq listing requirements.
LPC Equity Line of Credit
On November 13,
2019, the Company entered into a purchase agreement (the
“
LPC Purchase
Agreement
”), together with a registration rights
agreement (the “
LPC
Registration Rights Agreement
”), with LPC. Under the
terms of the LPC Purchase Agreement, LPC has committed to purchase
up to $15,000,000 of our Common Stock (the “
LPC Equity Line of Credit
”). Upon
execution of the LPC Purchase Agreement, the Company issued LPC
487,168 shares of Common Stock (the “
Commitment Shares
”) as a fee for
its commitment to purchase shares of our Common Stock under the LPC
Purchase Agreement. The remaining shares of our Common Stock that
may be issued under the LPC Purchase Agreement may be sold by the
Company to LPC at our discretion from time-to-time over a 30-month
period commencing after the satisfaction of certain conditions set
forth in the Purchase Agreement, subject to the continued
effectiveness of a registration statement covering such shares of
Common Stock sold to LPC by the Company. The registration statement
was filed with the SEC on December 31, 2019 and was declared
effective on January 14, 2020.
As
of March 30, 2020, the Company has issued 150,000 shares of Common
Stock in connection with the LPC Purchase Agreement, resulting in
gross proceeds to the Company of $144,000.
Amendment to Charter and Approved Reverse Stock Split
On December 19, 2019, at the Company’s
Annual Meeting of Stockholders (“
Annual
Meeting
”), the
Company’s stockholders approved
an amendment to the
Company’s Amended and Restated Certificate of Incorporation
(the “
Charter
”)
to increase the number of authorized shares of Common Stock by
50,000,000 shares to 150,000,000 shares, and to authorize the
Company’s Board of Directors (the “
Board
”) to effect a reverse stock
split of both the issued and outstanding and authorized shares of
Common Stock of the Company, at a specific ratio, ranging from
one-for-two (1:2) to one-for-five (1:5), any time prior to the
one-year anniversary date of the Annual Meeting, with the exact
ratio to be determined by the Board.
The
Company filed a Certificate of Amendment to its Charter with the
Secretary of State of the State of Delaware on December 20, 2019,
to increase the number of authorized shares of Common Stock to
150,000,000 shares.
December 2019 Senior Convertible Promissory Note
Offering
On December 20, 2019, the Company began an
offering of (i) Senior Convertible Promissory Notes (each a
“
Promissory
Note
”, and together, the
“
Promissory
Notes
”) in the principal amount of up to $8.0
million to certain accredited investors (the
“
Note
Investors
”), and (ii) warrants
(“
Note
Warrants
”) to purchase
shares of Common Stock (the “
Promissory Note
Offering
”), each pursuant
to Note Purchase Agreements entered into by and between the Company
and each of the Investors (the “
NPAs
”).
Between December 20, 2019 and January 9, 2020, the
Company issued Promissory Notes to the Note Investors in the
aggregate principal amount of $6,904,000. Each Promissory Note
matures on September 20, 2020, accrues interest at a rate of 9% per
annum, and is convertible, at the option of the holder, into shares
of the Common Stock at a price of $0.97 per share (the
“
Conversion
Shares
”). As additional
consideration for the execution of the NPA, each Investor also
received Warrants to purchase that number of shares of the
Company’s Common Stock equal to one-half of the Conversion
Shares issuable upon conversion of the Notes (the
“
Warrant
Shares
”). The Warrants
have an exercise price of $1.07 per share and expire five years
from the date of issuance.
In connection with the Promissory Note Offering,
ADEC consented to the issuance of the Promissory Notes in the
Promissory Note Offering in consideration for the repayment, in
full, of $554,153 remaining due under the terms of the ADEC Notes
on or before January 2, 2020, net of the payment to ADEC of
$550,000 made by the Company on December 23, 2019 from proceeds
from the issuance of the Notes and a payment of $1.0 million on
December 31, 2019, from the issuance of additional Notes.
On
January 2, 2020, the Company repaid the remaining principal balance
of $450,000 plus outstanding accrued interest of $104,153 on the
ADEC Notes.
Termination of TransChem Sublicense Agreement
Subsequent to December 31, 2019, on March 11,
2020, the Company provided TransChem, Inc.
(“
TransChem
”) with sixty (60) days prior written notice
of its intent to terminate the sublicense agreement dated January
14, 2017 between TransChem and the Company (the
“
TransChem Sublicense
Agreement
”). The
TransChem Sublicense Agreement and the licenses granted thereunder
related to Helicobacter pylori (“
H. pylori
”) 5’methylthioadenosine nucleosidase
inhibitors in preclinical development.
Corporate History
On May 21, 2014, we entered into a stock purchase
agreement (the “
SPA
”) with Protea Biosciences Group, Inc.
(“
Protea
Group
”) and its
wholly-owned subsidiary, Protea Biosciences, Inc.
(“
Protea Sub
” and, together with Protea Group,
“
Protea
”), to acquire 100% of the outstanding
capital stock of AzurRx
SAS
(formerly ProteaBio Europe SAS), a wholly-owned subsidiary of
Protea Sub. On June 13, 2014, we completed the acquisition in
exchange for the payment of $600,000 and the issuance of shares of
our Series A Convertible Preferred Stock
(“
Series
A Preferred
”) convertible
into 33% of our outstanding Common Stock and agreed to make certain
milestone and royalty payments to Protea. Subsequently, on December
14, 2018, we purchased from Protea Group and Protea Sub the rights
to any milestone payments, royalty payments, and transaction value
consideration (see “
Agreements and
Collaborations
-
Protea Asset Sale
and Purchase Agreement”
below
)
.
Product Programs
Our current therapeutic product pipeline consists
of one clinical-stage program and one preclinical-stage program
under development, each of which are described below.
The
Company is focused on developing its MS1819 clinical program and is
currently
assessing its plans for the
continuation of the development of the b-lactamase preclinical
program.
MS1819
MS1819 is the active pharmaceutical ingredient, or
API, derived from
Yarrowia
lipolytica
, an aerobic yeast
naturally found in various foods such as cheese and olive oil that
is widely used as a biocatalyst in several industrial processes.
MS1819 is an acid-resistant secreted lipase naturally produced
by
Yarrowia
lipolytica,
known as LIP2,
that we are developing through recombinant DNA technology for the
treatment of EPI associated with CP and CF. We previously held the
exclusive right to commercialize MS1819 in the U.S. and Canada,
South America (excluding Brazil), Asia (excluding China and Japan),
Australia, New Zealand and Israel pursuant to a sublicense
from
Laboratories Mayoly Spinder (“
Mayoly
”)
under the JDLA (as defined below), which also
granted us joint commercialization rights for Brazil, Italy, China
and Japan. As disclosed under
“License Agreements -
Asset Purchase Agreement with Mayoly”
below, on March 27, 2019, we purchased all rights,
title and interest in and to MS1819 from
Mayoly.
Background
The
pancreas is both an endocrine gland that produces several important
hormones, including insulin, glucagon, and pancreatic polypeptide,
as well as a digestive organ that secretes pancreatic juice
containing digestive enzymes that assist the absorption of
nutrients and digestion in the small intestine.
The
targeted indication of MS1819 is the compensation of EPI, which is
observed when the exocrine functions of the pancreas are below 10%
of normal. The symptomatology of EPI is essentially due to the
deficiency of pancreatic lipase, an enzyme that hydrolyses
triglycerides into monoglycerides and free fatty acids. The
pancreatic lipase enzymatic activity is hardly compensated by
extra-pancreatic mechanisms, because gastric lipase has nearly no
lipolytic activity in the pH range of the intestine. On the other
hand, when they are impaired, the pancreatic amylase and proteases
(enzymes that break up starches and protein,
respectively) activities can be compensated by the salivary
amylase, the intestinal glycosidase, the gastric pepsin, and the
intestinal peptidases, all of which are components of the gastric
juice secreted by the stomach walls. Lipid maldigestion due to
lipase deficiency is responsible for weight loss, steatorrhea
featured by greasy diarrhea, and fat-soluble vitamin deficiencies
(i.e. A, D, E and K vitamins).
CP,
the most common cause of EPI, is a long-standing inflammation of
the pancreas that alters its normal structure and functions. In the
United States, its prevalence rate is of 42 cases per 100,000
inhabitants, resulting in approximately 132,000 cases.
Approximately 60% of patients affected with CP display EPI,
resulting in approximately 80,000 patients requiring substitution
therapy in the U.S. In Western societies, CP is caused by chronic
alcoholic consumption in approximately 55-80% of cases. Other
relatively frequent etiologies include the genetic form of the
disease that is inherited as an autosomal dominant condition with
variable penetrance, pancreatic trauma and idiopathic
causes.
CF, another dominant etiology of EPI, is a severe
genetic disease associated with chronic morbidity and life-span
decrease of most affected individuals. In most Caucasian
populations, CF prevalence is of 7-8 cases per 100,000 inhabitants,
but is less common in other populations, resulting in more than
30,000 affected individuals in the U.S. and more than 70,000
affected individuals worldwide. CF is inherited as monogenic
autosomal recessive disease due to the defect at a single gene
locus that encodes the Cystic Fibrosis Transmembrane Regulator
protein (“
CFTR
”), a regulated chloride channel. Mutation
of both alleles of this chloride channel gene results in the
production of thick mucus, which causes a multisystem disease of
the upper and lower respiratory tracts, digestive system, and the
reproductive tract. The progressive destruction of the pancreas
results in EPI that is responsible for malnutrition and contributes
to significant morbidity and mortality. About 80-90% of patients
with CF develop EPI, resulting in approximately 25,000-27,000
patients in the U.S. that require substitution
therapy.
Current
treatments for EPI stemming from CP and CF rely on porcine (pig
derived) pancreatic enzyme replacement therapies (PERTs), which
have been on the market since the late 1800s. The PERT market is
well established with estimated sales in the U.S. of $1.2 billion
in 2018 in the U.S. and has been growing for the past five years at
a compound annual growth rate of approximately 20%. In spite of
their long-term use, however, PERTs suffer from poor stability,
formulation problems, possible transmission of conventional and
non-conventional infectious agents due to their animal origins, and
possible adverse events at high doses in patients with CF and
limited effectiveness.
History of the Program
In 1998, Mayoly, a European pharmaceutical company
focusing primarily on gastroenterology disorders, launched a
program for the discovery and characterization of novel lipases of
non-animal origin that could be used in replacement therapy for
EPI. The program was conducted in collaboration with INRA
TRANSFERT, a subsidiary of the French academic laboratory, Institut
National de la Recherche Agronomique (National Institute for
Agricultural Research), or INRA. In 2000, Mayoly and INRA
discovered that the yeast
Yarrowia
lipolytica
secreted a
lipase named LIP2. During the ensuing years, Mayoly investigated
the
in
vitro
enzymatic activities
of LIP2 in collaboration with the Laboratory of Enzymology at
Interfaces and Physiology of Lipolysis (
"EIPL"
), a French public-funded research laboratory at
the French National Scientific Research Centre laboratory
(
"CNRS"
), which focuses on the physiology and molecular
aspects of lipid digestion.
Pre-Clinical Program
The
efficacy of MS1819 has been investigated in normal minipigs, which
are generally considered as a relevant model for digestive drug
development when considering their physiological similarities with
humans and their omnivore diet. Experimental pancreatitis was
induced by pancreatic duct ligation, resulting in severe EPI with
baseline CFA around 60% post-ligature. CFA is a measurement
obtained by quantifying the amount of fat ingested orally over a
defined time period and subtracting the amount eliminated in the
stool to ascertain the amount of fat absorbed by the
body. Pigs were treated with either MS1819 or enteric-coated
PERTs, both administered as a single-daily dose.
At doses ranging from 10.5 to 211 mg, MS1819
increased the CFA by +25 to +29% in comparison to baseline
(p<0.05 at all doses), whereas the 2.5 mg dose had milder
activity. Similar efficacy was observed in pigs receiving 100,000 U
lipase of enteric-coated porcine pancreatic extract. These findings
demonstrate the
in vivo
activity of MS1819 in a
relevant
in vivo
model at a level similar to the PERTs at
dosages of 10.5mg or greater. The results of a trial are
statistically significant if they are unlikely to have occurred by
chance. Statistical significance of the trial results is typically
based on widely used, conventional statistical methods that
establish the p-value of the results. A p-value of 0.05 or less is
required to demonstrate statistical significance. As such, these
CFA levels are considered to be statistically
significant.
To date, two non-clinical toxicology studies have
been conducted. Both show that MS1819 lipase is clinically well
tolerated at levels up to 1000mg/kg in rats and 250 mg/kg in
minipigs up to 13 weeks. MS1819 is therefore considered non-toxic
in both rodent and non-rodent species up to a maximum feasible dose
(“
MFD
”) of 1,000 mg/kg/day in the rats over six
months of administration.
Clinical Program
We
believe that there are two principal therapeutic indications for
EPI compensation by MS1819: (i) adult patients with CP, and (ii)
children and adults affected by CF. Because of their different
pathophysiology and clinical presentation, we intend to separately
investigate each of these indications and have determined, based on
market size and expected dose requirements, to pursue the
indication for adults first in CF.
During
2010 and 2011, a phase I/IIa clinical trial of MS1819 was conducted
in conjunction with Mayoly in a single center in France. The study
was an exploratory study mainly designed to investigate the safety
of MS1819-FD (freeze-dried) and was a randomized, double blind,
placebo controlled, parallel clinical trial in 12 patients affected
with CP or pancreatectomy and severe EPI. The primary efficacy
endpoint of the study was defined as the relative change in
steatorrhea (an established surrogate biomarker of EPI correction)
in comparison to baseline. The study found that MS1819 was well
tolerated with no serious adverse events. Only two adverse events
were observed: constipation (two patients out of eight with MS1819)
and hypoglycemia (two patients out of eight with MS1819, and one
patient out of four with placebo). A non-statistically significant
difference of the primary endpoint, possibly due to the small group
size, was found between the two groups both in intention-to-treat,
a group that included three patients who received the in-patient
facility study diet but did not fulfill the protocol’s
inclusion criteria, and per-protocol analysis. This study was
not designed, nor did it aim, to demonstrate statistically
significant changes of CFA or steatorrhea under
MS1819-FD.
We
received regulatory approval in Australia and New Zealand in 2016,
with the addition of a 2018 regulatory approval in France, to
conduct a phase II multi-center dose escalation study of MS1819 in
CP and pancreatectomy. The primary endpoint of this study was to
evaluate the safety of escalating doses of MS1819 in 11 CP
patients. The secondary endpoint was to investigate the efficacy of
MS1819 in these patients by analysis of the CFA and its change from
baseline. On September 24, 2018, we announced that in pre-planned
analyses, both the study’s primary and secondary endpoints
were reached with a statistically significant (p=0.002) improvement
in the CFA of 21.8%, in a per protocol analysis, with the highest
evaluated dose of 2,240 mg/day of MS1819. Statistical significance
of the trial results is typically based on widely used,
conventional statistical methods that establishes the p-value of
the results. A p-value of 0.05 or less is required to demonstrate
statistical significance. As such, these CFA levels are considered
to be statistically significant.
In
October 2018, the U.S. Food and Drug Administration
(“
FDA
”) cleared
the Company’s Investigational New Drug (“
IND
”) application for MS1819 in
patients with EPI due to CF.
On
December 19, 2018, we announced that we initiated the Phase II
OPTION Cross-Over
Study to
investigate MS1819 in CF patients with EPI and on February 20,
2019, we announced that we dosed the first patients. The Phase II
multi-center study investigated the safety, tolerability and
efficacy of MS1819 in a head-to-head comparison against the current
PERT standard of care. Planned enrollment is expected to include
approximately 30 CF patients, who are 18 years of age or older,
with study completion anticipated in 2019. The OPTION
Cross-Over
Study employed a
six-week non-inferiority CFA primary efficacy endpoint comparing
MS1819 to PERTs. In June 2019, the Company reached its enrollment
target.
On
September 25, 2019, the Company announced positive results from the
OPTION Cross-Over Study. Results showed that the primary efficacy
endpoint of CFA was comparable to the CFA in a prior Phase 2 study
in patients with CP, while using the same dosage of MS1819. The
dosage used in the OPTION Cross-Over Study was 2.2 grams per day,
which was determined in agreement with the FDA as a bridging dose
from the highest safe dose used in the Phase 2 CP dose escalation
study. Although the study was not powered for statistical
significance, the data demonstrated meaningful efficacy results,
with approximately 50% of the patients showing CFAs high enough to
reach non-inferiority with standard PERTs. Additionally, the
coefficient of nitrogen absorption (“
CNA
”) was comparable between the
MS1819 and PERT arms, 93% vs. 97%, respectively, in the OPTION
Cross-Over Study. This important finding confirms that protease
supplementation is not likely to be required with MS1819 treatment.
A total of 32 patients, ages 18 or older, completed the OPTION
Cross-Over Study
.
In addition to the OPTION
Cross-Over
Study, in July 2019 the Company
launched a Phase 2 multi-center clinical trial (the
“
Combination
Trial
”) in Hungary to investigate MS1819 in
combination with PERT, for CF patients who suffer from severe EPI,
but continue to experience clinical symptoms of fat malabsorption
despite taking the maximum daily dose of PERTs. The Combination
Trial is designed to investigate the safety, tolerability and
efficacy of escalating doses of MS1819, in conjunction with a
stable dose of PERTs, in order to increase CFA and relieve
abdominal symptoms.
On
October 15, 2019, the Company announced that it dosed the first
patients in its Combination Trial. This study is designed to
investigate the safety, tolerability and efficacy of escalating
doses of MS1819 (700 mg, 1120 mg and 2240 mg per day,
respectively), in conjunction with a stable dose of porcine PERTs,
in order to increase the CFA and relieve abdominal symptoms. A
combination therapy of PERT and MS1819 has the potential to: (i)
correct macronutrient and micronutrient maldigestion; (ii)
eliminate abdominal symptoms attributable to maldigestion; and
(iii) sustain optimal nutritional status on a normal diet in CF
patients with severe EPI. Planned enrollment is expected to include
approximately 24 CF patients with severe EPI, at clinical trial
sites in Hungary and additional countries in Europe, including
Spain, with study completion originally anticipated by the end of
2020, however, this timeline may be delayed due to the COVID-19
epidemic.
On
October 17, 2019, the Company announced that the Cystic Fibrosis
Foundation Data Safety Monitoring Board has completed its review of
the Company’s final results of the OPTION
Cross-Over
Study and has found no safety
concerns for MS1819, and that the group supports the
Company’s plan to proceed to a higher four-gram dose of
MS1819 in its next planned Phase 2 clinical trial.
Our Preclinical B-Lactamase Program
Our b-lactamase program focuses on products with
an enzymatic combination of bacterial origin for the prevention of
hospital-acquired infections and antibiotic-associated diarrhea
(“
AAD
”) by resistant bacterial strains induced by
parenteral administration of several antibiotic classes
(
known as nosocomial
infections)
. Currently, we have
two compounds in pre-clinical development in this program, AZX1101
and AZX1103. Both AZX1101 and AZX1103 are
recombinant
b-lactamase enzyme combinations composed of
several distinct enzymes that break up individual classes of
antibiotic molecules. AZX1103 has shown positive pre-clinical
activity, with degradation of amoxicillin in the presence of
clavulanic acid in the upper gastrointestinal tract in the
Gottingen minipig model. We are currently assessing our plans for
the continuation of the development of the b-lactamase
program.
Agreements and Collaborations
Protea Stock Purchase Agreement
On May 21, 2014, we entered into a Stock Purchase
Agreement (the “
Protea SPA
”) with Protea to acquire 100% of the
outstanding capital stock of ProteaBio Europe (the
“
Protea
Acquisition
”). On June
13, 2014, we completed the Protea Acquisition in exchange for the
payment to Protea of $600,000 and the issuance of shares of our
Series A Preferred convertible into 33% of our outstanding Common
Stock. Pursuant to the Protea SPA, Protea Sub
assigned (i) to Protea Europe all of its rights,
assets, know-how and intellectual property rights in connection
with program PR1101 and those granted under that certain Joint
Research and Development Agreement (the “
JDLA
”), by and among Protea Sub, Protea Europe
and Mayoly, dated March 22, 2010; and (ii) to us all amounts,
together with any right of reimbursement, due to Protea Sub in
connection with outstanding stockholder loans.
Pursuant to the Protea SPA, we were obligated to
pay certain other contingent consideration upon the satisfaction of
certain events, including (a) a one-time milestone payment of $2.0
million due within ten days of receipt of the first approval by the
FDA of a New Drug Application (“
NDA
”) or Biological License Application
(“
BLA
”) for a Business Product (as such term is
defined in the Protea SPA); (b) royalty payments equal to 2.5% of
net sales of Business Product up to $100.0 million and 1.5% of net
sales of Business Product in excess of $100.0 million; and (c) 10%
of the Transaction Value (as defined in the Protea SPA) received in
connection with a sale or transfer of the pharmaceutical
development business of Protea Europe.
Protea Asset Sale and Purchase Agreement
On December 7, 2018, we entered into a purchase
agreement (the “
Protea
Purchase Agreement
”)
with Protea Biosciences Group, Inc. and Protea, its wholly owned
subsidiary, pursuant to which we agreed to purchase the rights to
any milestone payments, royalty payments, and transaction value
consideration due from the Company to the Protea now or in the
future, arising from the Protea SPA (the “
Purchased
Assets
”).
Protea
previously filed for Chapter 11 protection under the United States
Bankruptcy Code on December 1, 2017. On November 27, 2018, we
participated in a bankruptcy auction for the Purchased
Assets and were chosen as the successful bidder at the
conclusion of the auction. On December 10, 2018, the
transaction was approved by Judge Patrick J. Flatley of the United
States Bankruptcy Court for the Northern District of West
Virginia.
On December 14, 2018, we closed the transactions
contemplated by the Protea Purchase Agreement. In accordance with
the terms of the Protea Purchase Agreement,
we purchased the
Purchased Assets
from Protea for an
aggregate purchase price of $1,550,000. We paid $250,000 of the
purchase price in cash, and the remaining $1,300,000 was paid by
the issuance of shares of Common Stock, at a price of $1.77 per
share, resulting in the issuance of 734,463 shares of Common Stock
to Protea.
Mayoly JDLA and Subsequent Asset Purchase Agreement
Effective March 22, 2010, Protea and AzurRx SAS
entered into the JDLA with Mayoly pursuant to which Mayoly
sublicensed certain of its exclusive rights to a genetically
engineered yeast strain cell line on which our MS1819 is based that
derive from a Usage and Cross-Licensing Agreement dated February 2,
2006 (the “
INRA
Agreement
”) between
Mayoly and INRA, in charge of patent management acting for and on
behalf of the National Centre of Scientific Research
(“
CNRS
”) and INRA.
Effective January 1, 2014, Protea entered into an amended and
restated JDLA with Mayoly (the “
Mayoly
Agreement
”), pursuant to
which Protea acquired the exclusive right to Mayoly patents
and technology, with the right to sublicense, develop, manufacture
and commercialize human pharmaceuticals based on the MS1819 lipase
within the following territories: U.S. and Canada, South America
(excluding Brazil), Asia (excluding China and Japan), Australia,
New Zealand and Israel. The JDLA further provided Mayoly the
exclusive right to Protea’s patents and technology, with
the right to sublicense, develop, manufacture and commercialize
human pharmaceuticals based on the MS1819 lipase within the
following territories: Mexico, Europe (excluding Italy, Portugal
and Spain) and any other country not granted to us alone, or
jointly with Mayoly. Prior to the execution of the Mayoly APA,
rights to the following territories were held jointly with Mayoly:
Brazil, Italy, Portugal, Spain, China and Japan. In addition, the
Mayoly Agreement
required
Protea to pay 70% of all development costs and required each of the
parties to use reasonable efforts to:
●
devote
sufficient personnel and facilities required for the performance of
its assigned tasks;
●
make
available appropriately qualified personnel to supervise, analyze
and report on the results obtained in the furtherance of the
development program; and
●
deploy
such scientific, technical, financial and other resources as is
necessary to conduct the development program.
Asset Purchase Agreement with Mayoly
On March 27, 2019, the Company
and Mayoly
entered into an Asset Purchase Agreement and associated Assignment
Agreement and Delegation and Set-off Agreement (together, the
“
Mayoly
APA
”),
pursuant to which the Company purchased all
remaining rights, title and interest in and to MS1819. Upon
execution of the Mayoly APA, the JDLA previously executed by AzurRx
SAS and Mayoly was assigned to the Company. In addition, the
Company
executed a Patent License Agreement with Mayoly
pursuant to which
the Company granted
to Mayoly an exclusive, royalty-bearing right to revenue received
from commercialization of MS1819 within France and Russia. The
Company has exclusive rights to MS1819 in all other global
territories.
In
accordance with the Mayoly APA and related transaction documents,
the Company provided to Mayoly the following
consideration:
(i)
the
Company assumed certain of Mayoly’s liabilities with respect
to MS1819;
(ii)
the
Company assumed all amounts currently owed to AzurRx SAS by Mayoly
under the JDLA;
(iii)
the
Company agreed to pay, within 30 days after the execution of the
Mayoly APA, all amounts incurred by Mayoly for the maintenance of
patents related to MS1819 from January 1, 2019 through the date of
the Mayoly APA;
(iv)
the Company made an initial payment to Mayoly of
€800,000, which amount was paid by the issuance of 400,481
shares of Common Stock at a price of $2.29 per share (the
“
Closing Payment
Shares
”);
and
(v)
the Company agreed to pay to Mayoly an additional
€1,500,000, payable in a mix of cash and shares of Common
Stock as follows (the “
Milestone
Payments
”): (i) on
December 31, 2019, a cash payment of €400,000 and 200,240
shares of Common Stock (the “
2019 Escrow
Shares
”) and (ii) on
December 31, 2020, a cash payment of €350,000 and 175,210
shares of Common Stock (the “
2020 Escrow
Shares
” and, together
with the 2019 Escrow Shares, the “
Escrow
Shares
”).
The Closing Payment Shares and the Escrow Shares
were all issued upon execution of the Mayoly APA;
provided
,
however
, per the terms of the Mayoly APA, the Escrow
Shares will be held in escrow until the applicable Milestone
Payment date, at which time the respective Escrow Shares will be
vested and released to Mayoly (
See
Note 6 to the Consolidated Financial
Statements
).
INRA Agreement
In February 2006, INRA, acting on behalf of CNRS
and INRA entered into a Usage and Cross-licensing Agreement with
Mayoly to specify their respective rights to the use of (i) French
patent application no. FR9810900 (the
"INRA CNRS Patent
Application"
), (ii)
international patent application no. WO2000FR0001148 (the
"Mayoly Patent
Application"
), and (iii) the
technology and know-how associated with both patent
applications.
The
agreement covers extensions of both patent applications.
Specifically, the INRA CNRS Patent Application encompasses
application no. FR9810900 as well as PCT/FR99/02079 with national
phase entry in the U.S. (no. 09/786,048, now US patent 6,582,951),
Canada (no. 2,341,776) and Europe (no. 99.940.267.0, now EP 1 108
043 B1). The Mayoly Patent Application encompasses WO2000FR0001148
with the national phase entered in Europe (now EP 1 276 874
B1).
The agreement provided Mayoly with the world-wide
use in human therapy, nutraceuticals, and cosmetology and provides
INRA with world-wide (i) use of lipase as an enzymatic catalyst
throughout this field, including the production of pharmaceuticals,
and (ii) treatment of the environment, food production processes,
cleaning processes and other fields, excluding human therapies,
nutraceuticals and cosmetology. The agreement provides for shared
use in the production of lipase in the veterinary field (livestock
and pets). As consideration for the agreement, Mayoly agreed to pay
INRA an annual lump sum of €5,000 until marketing. Upon
marketing, Mayoly agreed to pay INRA a lump sum of €100,000
and royalties on net sales of the product. Unless earlier
terminated in accordance with its terms, the agreement with INRA
expires upon the expiration of the patents in each country in which
the license has been granted. The parties may terminate the
agreement in the event the other party breaches its obligations
therein, which termination shall become effective three months
following written notice thereof to the breaching party. The
breaching party shall have the right to cure such breach or default
during such three-month period. U
pon execution of the Mayoly
APA in March 2019, Mayoly transferred the INRA Agreement to the
Company.
TransChem Sublicense
On August 7, 2017, the Company and TransChem
entered into the TransChem Sublicense Agreement pursuant to which
TransChem granted to us an exclusive license to certain patents
(the
“TransChem Licensed
Patents”
) relating to H.
pylori 5’methylthioadenosine nucleosidase inhibitors. We may
terminate the Sublicense Agreement and the licenses granted therein
for any reason and without further liability on 60 days’
notice. Unless terminated earlier, the Sublicense Agreement will
expire upon the expiration of the last Licensed Patents. Upon
execution, we paid an upfront fee to TransChem and agreed to
reimburse TransChem for certain expenses previously incurred in
connection with the preparation, filing, and maintenance of the
Licensed Patents. We also agreed to pay TransChem certain future
periodic sublicense maintenance fees, which fees may be credited
against future royalties. We may also be required to pay TransChem
additional payments and royalties in the event certain
performance-based milestones and commercial sales involving the
Licensed Patents are achieved. The TransChem Licensed Patents will
allow us to develop compounds for treating gastrointestinal, lung
and other infections that are specific to individual bacterial
species.
H. pylori
bacterial infections are a major cause
of chronic gastritis, peptic ulcer disease, gastric cancer and
other diseases.
On
March 11, 2020, the Company provided TransChem with sixty (60) days
prior written notice of its intent to terminate the TransChem
Sublicense Agreement.
Intellectual Property
Our
goal is to obtain, maintain and enforce patent protection for our
product candidates, formulations, processes, methods and any other
proprietary technologies, preserve our trade secrets, and operate
without infringing on the proprietary rights of other parties, both
in the United States and in other countries. Our policy is to
actively seek to obtain, where appropriate, the broadest
intellectual property protection possible for our current product
candidates and any future product candidates, proprietary
information and proprietary technology through a combination of
contractual arrangements and patents, both in the United States and
abroad. However, patent protection may not afford us with complete
protection against competitors who seek to circumvent our
patents.
We
also depend upon the skills, knowledge, experience and know-how of
our management and research and development personnel, as well as
that of our advisors, consultants and other contractors. To help
protect our proprietary know-how, which is not patentable, and for
inventions for which patents may be difficult to enforce, we
currently rely and will in the future rely on trade secret
protection and confidentiality agreements to protect our interests.
To this end, we require all of our employees, consultants, advisors
and other contractors to enter into confidentiality agreements that
prohibit the disclosure of confidential information and, where
applicable, require disclosure and assignment to us of the ideas,
developments, discoveries and inventions important to our
business.
MS1819
The MS1819 program is protected by the following
series of issued patents that we have licensed under the Mayoly
Agreement covering the method for transformation
of
Yarrowia
lipolytica
,
the sequence of the LIP2 enzyme and its production
process:
●
PCT/FR99/02079 patent family (including the
patents EP1108043 B1, and US6582951) “Method for
non-homologous transformation of Yarrowia lipolytica”,
concerns the integration of a gene of interest into the genome of
a
Yarrowia
strain devoid of zeta sequences, by transforming
said strain using a vector bearing zeta sequences. This modified
strain is used for the current production process. This patent has
been issued in the U.S., Canada, and validated in several European
countries, including Austria, Belgium, Switzerland, Cyprus,
Germany, Denmark, Spain, Finland, Great Britain, Greece, Ireland,
France, Italy, Lithuania, Luxembourg, Netherlands, Portugal and
Sweden. This patent expired September 1, 2019;
●
PCT/FR2000/001148 patent family (including the
patent EP1276874 B1) “Cloning and expressing an
acid-resistant extracellular lipase of Yarrowia lipolytica”
describes the coding sequences of acid-resistant extracellular
lipases, in particular Candida
ernobii
or
Yarrowia lipolytica
yeasts and the production of said
lipases in their recombinant form. This patent has been validated
in several European countries, including Italy, France and Great
Britain. This patent expires April 28, 2020;
and
●
PCT/FR2006/001352 patent family (including the
patent EP2035556 and patent US8,334,130 and US8,834,867)
“Method for producing lipase, transformed
Yarrowia lipolytica
cell capable of producing said lipase
and their uses” describes a method for producing
Yarrowia
lipolytica
acid-resistant
recombinant lipase utilizing a culture medium without any products
of animal origin or non-characterized mixtures such as tryptone,
peptone or lactoserum, in addition to its uses. The European
patents expire June 15, 2026, U.S. patent 8,334,130 expires
September 11, 2028, and U.S. patent 8,834,867 expires September 15,
2026.
B-Lactamase Program
To date, we own one patent application covering
different compositions, which has been filed in France. This
application was filed internationally (“
PCT
”) on October 13, 2015 as PCT/FR2015/052756
claiming priority to French patent application 1459935 dated
October 16, 2014. This application was published as WO/2016/059341
titled “Hybrid Proteinaceous Molecule Capable Of Inhibiting
At Least One Antibiotic And Pharmaceutical Composition Containing
It”. At present, all PCT contracting states are
designated. The term of patent protection available is typically 20
years from the filing date of the earliest international (PCT)
application. Patents are territorial rights, meaning that the
rights conferred are only applicable in the country or region in
which a patent has been filed and granted, in accordance with the
law of that country or region. Patent enforcement is only possible
after a patent is granted and before the expiration of the patent
term. Any patent issuing from PCT/FR2015/052756 will expire on
October 13, 2035, unless the patent term is extended pursuant to
specific laws of the granting country.
Manufacturing
MS1819 API is obtained by fermentation in
bioreactors using our engineered and proprietary
Yarrowia
lipolytica
strain. The
proprietary yeast cell line from which the API is derived is kept
at a storage facility maintained by Charles River. MS1819 Drug
Substance is currently manufactured at a contract facility located
in Capua, Italy owned by Olon. MS1819 Drug Product is currently
manufactured at a contract facility located in Reims, France owned
by Delpharm. We believe there are multiple alternative contract
manufacturers capable of producing the product we need for clinical
trials. The Company is in the process of establishing alternative
manufacturers and manufacturing sites for the product; however,
there is no guarantee that the processes are easily reproducible
and transferrable.
Competition
The
pharmaceutical and biotechnology industries are characterized by
rapidly evolving technology and intense competition. Many companies
of all sizes, including major pharmaceutical companies and
specialized biotechnology companies, are engaged in the development
and commercialization of therapeutic agents designed for the
treatment of the same diseases and disorders that we target. Many
of our competitors have substantially greater financial and other
resources, larger research and development staff and more
experience in the regulatory approval process. Moreover, potential
competitors have or may have patents or other rights that conflict
with patents covering our technologies.
With respect to MS1819, we will compete with PERTs
(pancrelipase), a well-established market that is currently
dominated by a few large pharmaceutical companies, including
CREON
®
marketed by AbbVie Inc.,
ZENPEP
®
sold to Nestlé S.A. by Allergan
plc. in January 2020, PANCREAZE
®
marketed by
VIVUS, Inc. and PERTZYE
®
marketed by Chiesi
Farmaceutici S.p.A. There are currently six PERT products that
have been approved by the FDA for sale in the U.S. We believe our
ability to compete in this market, if we are successful in
developing and obtaining regulatory approval to market MS1819, will
depend on our ability (or that of a future corporate partner) to
convince patients, their physicians, healthcare payors and the
medical community of the benefits of using a non-animal based
product to treat EPI, as well as by addressing other shortcomings
associated with PERTs, including a large pill
burden.
Government Regulation and Product Approval
Government
authorities in the United States, at the federal, state and local
level, and other countries extensively regulate, among other
things, the research, development, testing, manufacture, quality
control, approval, labeling, packaging, storage, record-keeping,
promotion, advertising, distribution, post-approval monitoring and
reporting, marketing and export and import of products such as
those we are developing. To date, our internal research and
development efforts have been conducted in France. We expect to
continue to perform substantially all of our basic research
activities in France in order to leverage our human capital
expertise as well as to avail ourselves of tax credits (CIR)
awarded by the French government to research companies that perform
research activities in France. We expect to continue to conduct
early stage development work in France, with late stage development
work, including Phase 2b and Phase 3 clinical trials for MS1819 in
both the United States and Europe, as North America is our
principal target market for MS1819 and any other product candidates
that we may successfully develop.
U.S. Government Regulation
In
the United States, the FDA regulates drugs under the Federal Food,
Drug, and Cosmetic Act, or FDCA, and its implementing regulations,
and biologics under the FDCA and the Public Health Service Act, or
PHSA, and its implementing regulations. FDA approval is required
before any new unapproved drug or dosage form, including a new use
of a previously approved drug, can be marketed in the United
States. Drugs and biologics are also subject to other federal,
state and local statutes and regulations. If we fail to comply with
applicable FDA or other requirements at any time during the drug
development process, clinical testing, the approval process or
after approval, we may become subject to administrative or judicial
sanctions. These sanctions could include the FDA's refusal to
approve pending applications, license suspension or
revocation, withdrawal of an approval, warning letters, product
recalls, product seizures, placement on Import Alerts, debarment of
personnel, employees or officers, total or partial suspension of
production or distribution, injunctions, fines, civil penalties or
criminal prosecution.
The
process required by the FDA before drug candidates may be marketed
in the United States generally involves the following:
●
completion
of
extensive
preclinical laboratory tests, preclinical animal studies, and
toxicity data, all performed in accordance with the good laboratory
practices, or GLP, regulations;
●
submission
to the FDA of an IND, which must become effective before human
clinical studies may begin;
●
approval
by an independent IRB or ethics committee representing each
clinical site before each clinical study may be
initiated;
●
performance
of adequate and well-controlled human clinical studies to establish
the safety and efficacy, or in the case of a biologic, the safety,
purity and potency, of the drug candidate for each proposed
indication;
●
preparation
of and submission to the FDA of a new drug application, or NDA, or
biologics license application, or BLA, after completion of all
pivotal clinical studies;
●
review
of the product application by an FDA advisory committee, where
appropriate and if applicable;
●
a
determination by the FDA within 60 days of its receipt of an
NDA or BLA to file the application for review;
●
satisfactory
completion of an FDA pre-approval inspection of the manufacturing
facilities where the drug candidate is produced to assess
compliance with cGMP; and
●
FDA
review and approval of an NDA or BLA prior to any commercial
marketing or sale of the drug or biologic in the United
States.
An
IND is a request for authorization from the FDA to administer an
investigational new drug product to humans. The central focus of an
IND submission is on the general investigational plan and the
protocol(s) for human studies. The IND also includes results of
animal and in vitro studies assessing the toxicology,
pharmacokinetics, pharmacology and pharmacodynamic characteristics
of the product; chemistry, manufacturing and controls information;
and any available human data or literature to support the use of
the investigational new drug. An IND must become effective before
human clinical studies may begin. An IND will automatically become
effective 30 days after receipt by the FDA, unless before that
time the FDA raises concerns or questions related to the proposed
clinical studies. In such a case, the IND may be placed on clinical
hold and the IND sponsor and the FDA must resolve any outstanding
concerns or questions before clinical studies can begin.
Accordingly, submission of an IND may or may not result in the FDA
allowing clinical studies to commence.
Clinical Studies
Clinical studies involve the administration of the
investigational new drug to human subjects under the supervision of
qualified investigators in accordance with GCPs, which include the
requirement that all research subjects provide their informed
consent for their participation in any clinical study. Clinical
studies are conducted under protocols detailing, among other
things, the objectives of the study, and the parameters to be used
in monitoring safety and the efficacy criteria to be evaluated. A
protocol for each clinical study and any subsequent protocol
amendments must be submitted to the FDA as part of the IND.
Additionally, approval must also be obtained from each clinical
study site's IRB before the studies may be initiated, and the IRB
must monitor the study until completed. There are also requirements
governing the reporting of ongoing clinical studies and clinical
study results to public registries, such as
ClinicalTrials.gov
.
The
clinical investigation of a drug or biologic is generally divided
into three or four phases. Although the phases are usually
conducted sequentially, they may overlap or be
combined.
●
Phase 1. The
drug or biologic is initially introduced into healthy human
subjects or patients with the target disease or condition. These
studies are designed to evaluate the safety, dosage tolerance,
metabolism and pharmacologic actions of the investigational new
drug in humans, the side effects associated with increasing doses,
and if possible, to gain early evidence on
effectiveness.
●
Phase 2. The
drug or biologic is administered to a limited patient population to
evaluate dosage tolerance and optimal dosage, identify possible
adverse side effects and safety risks and preliminarily evaluate
efficacy.
●
Phase 3. The
drug or biologic is administered to an expanded patient population,
generally at geographically dispersed clinical study sites to
generate enough data to statistically evaluate dosage, clinical
effectiveness and safety, to establish the overall benefit-risk
relationship of the investigational product and to provide an
adequate basis for product approval.
●
Phase 4. In
some cases, the FDA may condition approval of an NDA or BLA for a
drug candidate on the sponsor's agreement to conduct additional
clinical studies after approval. In other cases, a sponsor may
commit to conducting or voluntarily conduct additional clinical
studies after approval to gain more information about the drug.
Such post-approval studies are typically referred to as
Phase 4 clinical studies.
A
confirmatory or pivotal study is a clinical study that adequately
meets regulatory agency requirements for the evaluation of a drug
candidate's efficacy and safety such that it can be used to justify
the approval of the product. Generally, pivotal studies are
Phase 3 studies, but the FDA may accept results from
Phase 2 studies if the study design provides a well-controlled
and reliable assessment of clinical benefit, particularly in
situations where there is an unmet medical need and the results are
sufficiently robust. In such cases, FDA may require post-market
studies for safety and efficacy to be conducted for the drug
candidate. The FDA may withdraw the approval if the results
indicate that the approved drug is not safe or
effective.
The
FDA, the IRB or the clinical study sponsor may suspend or terminate
a clinical study at any time on various grounds, including a
finding that the research subjects are being exposed to an
unacceptable health risk. Additionally, some clinical studies are
overseen by an independent group of qualified experts organized by
the clinical study sponsor, known as a data safety monitoring board
or committee. This group provides authorization for whether or not
a study may move forward at designated check points based on access
to certain data from the study. We may also suspend or terminate a
clinical study based on evolving business objectives and/or
competitive climate.
Submission of an NDA or BLA to the FDA
Assuming
successful completion of all required testing in accordance with
all applicable regulatory requirements, detailed investigational
new drug product information is submitted to the FDA in the form of
an NDA or BLA requesting approval to market the product for one or
more indications. Under federal law, the submission of most NDAs
and BLAs is subject to a substantial application user fee.
Applications for orphan drug products are exempted from the NDA and
BLA application user fees.
An NDA or BLA must include all relevant data
available from pertinent preclinical and clinical studies,
including negative or ambiguous results as well as positive
findings, together with detailed information relating to the
product's chemistry, manufacturing, controls and proposed labeling,
among other things. Data can come from company-sponsored clinical
studies intended to test the safety and effectiveness of a use of a
product, or from a number of alternative sources, including studies
initiated
by
investigators. To support marketing approval, the data submitted
must be sufficient in quality and quantity to establish the safety
and effectiveness of the investigational product to the
satisfaction of the FDA.
Once
an NDA or BLA has been submitted, the FDA's goal is to review the
application within ten months after it accepts the application for
filing, or, if the application relates to an unmet medical need in
a serious or life-threatening indication, six months after the FDA
accepts the application for filing. The review process is often
significantly extended by FDA requests for additional information
or clarification.
Before
approving an NDA or BLA, the FDA typically will inspect the
facility or facilities where the product is manufactured. The FDA
will not approve an application unless it determines that the
manufacturing processes and facilities are in compliance with cGMP
requirements and adequate to assure consistent production of the
product within required specifications. Additionally, before
approving an NDA or BLA, the FDA will typically inspect one or more
clinical sites to assure compliance with GCP.
The
FDA is required to refer an application for an investigational drug
or biologic to an advisory committee or explain why such referral
was not made. An advisory committee is a panel of independent
experts, including clinicians and other scientific experts, that
reviews, evaluates and provides a recommendation as to whether the
investigational product application should be approved and under
what conditions. The FDA is not bound by the recommendations of an
advisory committee, but it considers such recommendations carefully
when making decisions and typically follows such
recommendations.
The FDA's Decision on an NDA or BLA
After
the FDA evaluates the NDA or BLA and conducts inspections of
manufacturing facilities, it may issue an approval letter or a
Complete Response Letter. An approval letter authorizes commercial
marketing of the drug or biologic with specific prescribing
information for specific indications. A Complete Response Letter
indicates that the review cycle of the application is complete, and
the application is not ready for approval. A Complete Response
Letter may require additional clinical data and/or an additional
pivotal Phase 3 clinical study(ies), and/or other significant,
expensive and time-consuming requirements related to clinical
studies, preclinical studies or manufacturing. Even if such
additional information is submitted, the FDA may ultimately decide
that the NDA or BLA does not satisfy the criteria for approval. The
FDA could also approve the NDA or BLA with a REMS to mitigate
risks, which could include medication guides, physician
communication plans or elements to assure safe use, such as
restricted distribution methods, patient registries and other risk
minimization tools. The FDA also may condition approval on, among
other things, changes to proposed labeling, development of adequate
controls and specifications or a commitment to conduct one or more
post-market studies or clinical studies. Such post-market testing
may include Phase 4 clinical studies and surveillance to
further assess and monitor the product's safety and effectiveness
after commercialization. The FDA may have the authority to withdraw
its approval if post-market testing fails to verify the approved
drug's clinical benefit, if the applicant does not perform the
required testing with due diligence, or if the any other evidence
demonstrates the approved drug is not safe or effective, among
other reasons. Also, new government requirements, including those
resulting from new legislation, may be established, or the FDA's
policies may change, which could delay or prevent regulatory
approval of our products under development.
Expedited Review and Accelerated Approval
Programs
The FDA has various programs, including fast track
designation, breakthrough therapy designation, accelerated
approval, regenerative medicine advanced therapy and priority
review, that are intended to
expedite the development and approval of new drugs
and biologics that address unmet medical needs in the treatment of
serious or life-threatening diseases and conditions. To be eligible
for a fast track designation, the FDA must determine, based on the
request of a sponsor, that a product is intended to treat a serious
or life-threatening disease or condition and demonstrates the
potential to address an unmet medical need. The FDA may review
sections of the NDA for a fast-track product on a rolling basis
before the complete application is submitted, if the sponsor
provides a schedule for the submission of the sections of the NDA,
the FDA agrees to accept sections of the NDA and determines that
the schedule is acceptable, and the sponsor pays any required user
fees upon submission of the first section of the
NDA.
The
FDA may give a priority review designation to drugs that offer
major advances in treatment or provide a treatment where no
adequate therapy exists. A priority review means that the goal for
the FDA to review an application is six months, rather than the
standard review of ten months under current. These six and
ten-month review periods are measured from the "filing" date rather
than the receipt date for NDAs for new molecular entities, which
typically adds approximately two months to the timeline for review
and decision from the date of submission. Most products that are
eligible for fast-track designation are also likely to be
considered appropriate to receive a priority
review.
In
addition, products studied for their safety and effectiveness in
treating serious or life-threatening illnesses and that provide
meaningful therapeutic benefit over existing treatments may be
eligible for accelerated approval and may be approved on the basis
of adequate and well-controlled clinical studies establishing that
the product has an effect on a surrogate endpoint that is
reasonably likely to predict clinical benefit, or on a clinical
endpoint that can be measured earlier than irreversible morbidity
or mortality, that is reasonably likely to predict an effect on
irreversible morbidity or mortality or other clinical benefit,
taking into account the severity, rarity or prevalence of the
condition and the availability or lack of alternative treatments.
As a condition of approval, the FDA may require a sponsor of a drug
receiving accelerated approval to perform post-marketing studies to
verify and describe the predicted effect on irreversible morbidity
or mortality or other clinical endpoint, and the drug may be
subject to accelerated withdrawal procedures.
Moreover,
under the provisions of the FDA Safety and Innovation Act passed in
July 2012, a sponsor can request designation of a drug candidate as
a "breakthrough therapy." A breakthrough therapy is defined as a
drug or biologic that is intended, alone or in combination with one
or more other drugs or biologics, to treat a serious or
life-threatening disease or condition, and preliminary clinical
evidence indicates that the product may demonstrate substantial
improvement over existing therapies on one or more clinically
significant endpoints, such as substantial treatment effects
observed early in clinical development. Drugs designated as
breakthrough therapies are also eligible for the other expedited
review and approval programs, including accelerated approval,
priority review, regenerative medicine advanced therapy, and
fast-track designation. The FDA must take certain actions, such as
holding timely meetings and providing advice, intended to expedite
the development and review of an application for approval of a
breakthrough therapy.
In addition, the 21
st
Century
Cures Act in 2016 made the Regenerative Medicine Advanced Therapy,
or RMAT, designation available for investigational drugs that are
intended to treat, modify, reverse, or cure a serious condition,
with preliminary clinical evidence indicating that the drug has the
potential for addressing unmet medical needs for such condition.
The RMAT designation is available for cell therapy, therapeutic
tissue engineering products, human cell and tissue products, and
combination products that use such therapies or products. The
advantages of RMAT designation include those of breakthrough and
fast track designations, such as early interactions with FDA and
rolling review of applications, and the drug candidate with the
RMAT designation may be eligible for accelerated approval. Requests
for RMAT designations should be made with the IND application (if
preliminary clinical evidence is available), but no later than the
end-of-phase-2 meeting.
Even
if a product qualifies for one or more of these programs, the FDA
may later decide that the product no longer meets the conditions
for qualification or decide that the time period for FDA review or
approval will not be shortened.
Post-Approval Requirements
Drugs
and biologics marketed pursuant to FDA approvals are subject to
pervasive and continuing regulation by the FDA, including, among
other things, requirements relating to recordkeeping, periodic
reporting, product sampling and distribution, advertising and
promotion and reporting of adverse experiences with the product.
After approval, most changes to the approved product, such as
adding new indications or other labeling claims are subject to
prior FDA review and approval. There also are continuing, annual
user fee requirements.
Manufacturers
are subject to periodic unannounced inspections by the FDA and
state agencies for compliance with cGMP requirements. Changes to
the manufacturing process are strictly regulated and, depending on
the significance of the change, may require prior FDA approval
before being implemented. FDA regulations also require
investigation and correction of any deviations from cGMP and impose
reporting and documentation requirements upon us and any
third-party manufacturers that we may decide to use. Accordingly,
manufacturers must continue to expend time, money and effort in the
area of production and quality control to maintain compliance with
cGMP and other aspects of regulatory compliance.
Discovery
of previously unknown problems with a product or the failure to
comply with applicable requirements may result in restrictions on a
product, manufacturer or holder of an approved NDA or BLA,
including withdrawal or recall of the product from the market or
other voluntary, FDA-initiated or judicial action that could delay
or prohibit further marketing. Also, new government requirements,
including those resulting from new legislation, may be established,
or the FDA's policies may change, which could delay or prevent
regulatory approval of our products under
development.
The
FDA may withdraw approval if compliance with regulatory
requirements and standards is not maintained or if problems occur
after the product reaches the market. Later discovery of previously
unknown problems with a product, including adverse events of
unanticipated severity or frequency, or with manufacturing
processes, or failure to comply with regulatory requirements, may
result in revisions to the approved labeling to add new safety
information; imposition of post-market studies or clinical studies
to assess new safety risks; or imposition of distribution
restrictions or other restrictions under a REMS program. Other
potential consequences include, among other things.
●
restrictions
on the marketing or manufacturing of the
product;
●
complete
withdrawal of the product from the market or product
recalls;
●
fines,
warning letters or holds on post-approval clinical
studies;
●
refusal
of the FDA to approve pending NDAs or BLAs or supplements to
approved NDAs or BLAs, or suspension or revocation of product
licenses or approvals;
●
product
seizure or detention, or refusal to permit the import or export of
products; or
●
injunctions
or the imposition of civil or criminal
penalties.
The
FDA strictly regulates marketing, labeling, advertising and
promotion of products that are placed on the market. Drugs may be
promoted only for the approved indications and in accordance with
the provisions of the approved label. The FDA and other agencies
actively enforce the laws and regulations prohibiting the promotion
of off-label uses, and a company that is found to have improperly
promoted off-label uses may be subject to significant
liability.
Orphan Designation and Exclusivity
Under
the Orphan Drug Act, the FDA may grant orphan designation to a drug
or biologic intended to treat a rare disease or condition, defined
as a disease or condition with a patient population of fewer than
200,000 individuals in the United States, or a patient population
greater than 200,000 individuals in the United States and when
there is no reasonable expectation that the cost of developing and
making available the drug or biologic in the United States will be
recovered from sales in the United States for that drug or
biologic. Orphan drug designation must be requested before
submitting a BLA or NDA. After the FDA grants orphan drug
designation, the generic identity of the therapeutic agent and its
potential orphan use are disclosed publicly by the
FDA.
If
a product that has orphan drug designation subsequently receives
the first FDA approval for a particular active ingredient for the
disease for which it has such designation, the product is entitled
to orphan product marketing exclusivity, which means that the FDA
may not approve any other applications, including a full BLA, to
market the same biologic for the same use or indication for seven
years, except in limited circumstances, such as a showing of
clinical superiority to the product with orphan drug exclusivity or
if FDA finds that the holder of the orphan drug exclusivity has not
shown that it can assure the availability of sufficient quantities
of the orphan drug to meet the needs of patients with the disease
or condition for which the drug was designated. Orphan drug
exclusivity does not prevent the FDA from approving a different
drug or biologic for the same disease or condition, or the same
drug or biologic for a different disease or condition. Among the
other benefits of orphan drug designation are tax credits for
certain research and a waiver of the BLA or NDA application user
fee.
A
designated orphan drug many not receive orphan drug exclusivity if
it is approved for a use that is broader than the indication for
which it received orphan designation. In addition, orphan drug
exclusive marketing rights in the United States may be lost if the
FDA later determines that the request for designation was
materially defective or, as noted above, if the second applicant
demonstrates that its product is clinically superior to the
approved product with orphan exclusivity or the manufacturer of the
approved product is unable to assure sufficient quantities of the
product to meet the needs of patients with the rare disease or
condition.
Biosimilars and Exclusivity
The
Affordable Care Act, signed into law in 2010, includes a subtitle
called the Biologics Price Competition and Innovation Act of 2009,
or BPCIA, which created an abbreviated approval pathway for
biological products that are biosimilar to or interchangeable with
an FDA-licensed reference biological product. To date, only a
handful of biosimilars have been licensed under the BPCIA, although
numerous biosimilars have been approved in Europe. The FDA has
issued several guidance documents outlining an approach to review
and approval of biosimilars.
Biosimilarity,
which requires that there be no clinically meaningful differences
between the biological product and the reference product in terms
of safety, purity and potency, can be shown through analytical
studies, human PK and PD studies, clinical immunogenicity
assessments, animal studies and a clinical study or studies.
Interchangeability requires that a product is biosimilar to the
reference product and the product must demonstrate that it can be
expected to produce the same clinical results as the reference
product in any given patient and, for products that are
administered multiple times to an individual, the biologic and the
reference biologic may be alternated or switched after one has been
previously administered without increasing safety risks or risks of
diminished efficacy relative to exclusive use of the reference
biologic. However, complexities associated with the larger, and
often more complex, structures of biological products, as well as
the processes by which such products are manufactured, pose
significant hurdles to implementation of the abbreviated approval
pathway that are still being worked out by the
FDA.
Under
the BPCIA, an application for a biosimilar product may not be
submitted to the FDA until four years following the date that the
reference product was first licensed by the FDA. In addition, the
approval of a biosimilar product may not be made effective by the
FDA until 12 years from the date on which the reference
product was first licensed. During this 12-year period of
exclusivity, another company may still market a competing version
of the reference product if the FDA approves a full BLA for the
competing product containing that applicant's own preclinical data
and data from adequate and well-controlled clinical studies to
demonstrate the safety, purity and potency of its product. The
BPCIA also created certain exclusivity periods for biosimilars
approved as interchangeable products. At this juncture, it is
unclear whether products deemed "interchangeable" by the FDA will,
in fact, be readily substituted by pharmacies, which are governed
by state pharmacy law.
A
biological product can also obtain pediatric market exclusivity in
the United States. Pediatric exclusivity, if granted, adds six
months to existing exclusivity periods and patent terms. This
six-month exclusivity, which runs from the end of other exclusivity
protection or patent term, may be granted based on the voluntary
completion of a pediatric study in accordance with an FDA-issued
"Written Request" for such a study.
The
BPCIA is complex and continues to be interpreted and implemented by
the FDA. In addition, recent government proposals have sought to
reduce the 12-year reference product exclusivity period. Other
aspects of the BPCIA, some of which may impact the BPCIA
exclusivity provisions, have also been the subject of recent
litigation. As a result, the ultimate impact, implementation, and
impact of the BPCIA is subject to significant
uncertainty.
Hatch-Waxman Amendments and Exclusivity
Section 505
of the FDCA describes three types of marketing applications that
may be submitted to the FDA to request marketing authorization for
a new drug. A Section 505(b)(1) NDA is an application that
contains full reports of investigations of safety and efficacy. A
505(b)(2) NDA is an application that contains full reports of
investigations of safety and efficacy but where at least some of
the information required for approval comes from investigations
that were not conducted by or for the applicant and for which the
applicant has not obtained a right of reference or use from the
person by or for whom the investigations were conducted. This
regulatory pathway enables the applicant to rely, in part, on the
FDA's prior findings of safety and efficacy for an existing
product, or published literature, in support of its application.
Section 505(j) establishes an abbreviated approval process for
a generic version of approved drug products through the submission
of an ANDA. An ANDA provides for marketing of a generic drug
product that has the same active ingredients, dosage form,
strength, route of administration, labeling, performance
characteristics and intended use, among other things, to a
previously approved product. ANDAs are termed "abbreviated" because
they are generally not required to include preclinical (animal) and
clinical (human) data to establish safety and efficacy. Instead,
generic applicants must scientifically demonstrate that their
product is bioequivalent to, or performs in the same manner as, the
innovator drug through in vitro, in vivo or other testing. The
generic version must deliver the same amount of active ingredients
into a subject's bloodstream in the same amount of time as the
innovator drug and can often be substituted by pharmacists under
prescriptions written for the reference listed drug. In seeking
approval for a drug through an NDA, applicants are required to list
with the FDA each patent with claims that cover the applicant's
drug or a method of using the drug. Upon approval of a drug, each
of the patents listed in the application for the drug is then
published in the Orange Book. Drugs listed in the Orange Book can,
in turn, be cited by potential competitors in support of approval
of an ANDA or 505(b)(2) NDA.
Upon submission of an ANDA or a 505(b)(2) NDA, an
applicant must certify to the FDA that (1) no patent
information on the drug product that is the subject of the
application has been submitted to the FDA; (2) such patent has
expired; (3) the date on which such patent expires; or
(4) such patent is invalid or will not be infringed upon by
the manufacture, use or sale of the drug product for
which
the application is
submitted. Generally, the ANDA or 505(b)(2) NDA cannot be approved
until all listed patents have expired, except where the ANDA or
505(b)(2) NDA applicant challenges a listed patent through the last
type of certification, also known as a paragraph IV
certification. If the applicant does not challenge the listed
patents, or indicates that it is not seeking approval of a patented
method of use, the ANDA or 505(b)(2) NDA application will not be
approved until all of the listed patents claiming the referenced
product have expired.
If
the ANDA or 505(b)(2) NDA applicant has provided a
Paragraph IV certification to the FDA, the applicant must send
notice of the Paragraph IV certification to the NDA and patent
holders once the application has been accepted for filing by the
FDA. The NDA and patent holders may then initiate a patent
infringement lawsuit in response to the notice of the
paragraph IV certification. If the paragraph IV
certification is challenged by an NDA holder or the patent owner(s)
asserts a patent challenge to the paragraph IV certification,
the FDA may not approve that application until the earlier of
30 months from the receipt of the notice of the
paragraph IV certification, the expiration of the patent, when
the infringement case concerning each such patent was favorably
decided in the applicant's favor or settled, or such shorter or
longer period as may be ordered by a court. This prohibition is
generally referred to as the 30-month stay. In instances where an
ANDA or 505(b)(2) NDA applicant files a paragraph IV
certification, the NDA holder or patent owner(s) regularly take
action to trigger the 30-month stay, recognizing that the related
patent litigation may take many months or years to
resolve.
The
FDA also cannot approve an ANDA or 505(b)(2) application until all
applicable non-patent exclusivities listed in the Orange Book for
the branded reference drug have expired. For example, a
pharmaceutical manufacturer may obtain five years of non-patent
exclusivity upon NDA approval of a new chemical entity, or NCE,
which is a drug containing an active moiety that has not been
approved by FDA in any other NDA. An "active moiety" is defined as
the molecule responsible for the drug substance's physiological or
pharmacologic action. During that five-year exclusivity period, the
FDA cannot accept for filing (and therefore cannot approve) any
ANDA seeking approval of a generic version of that drug or any
505(b)(2) NDA that relies on the FDA's approval of the drug,
provided that that the FDA may accept an ANDA four years into the
NCE exclusivity period if the ANDA applicant also files a
Paragraph IV certification.
A
drug, including one approved under Section 505(b)(2), may
obtain a three-year period of exclusivity for a particular
condition of approval, or change to a marketed product, such as a
new formulation for a previously approved product, if one or more
new clinical studies (other than bioavailability or bioequivalence
studies) was essential to the approval of the application and was
conducted/sponsored by the applicant. Should this occur, the FDA
would be precluded from approving any ANDA or 505(b)(2) application
for the protected modification until after that three-year
exclusivity period has run. However, unlike NCE exclusivity, the
FDA can accept an application and begin the review process during
the exclusivity period.
Other Healthcare Laws and Compliance
Requirements
Pharmaceutical
companies are subject to additional healthcare regulation and
enforcement by the federal government and by authorities in the
states and foreign jurisdictions in which they conduct their
business. Such laws include, without limitation, state and federal
anti-kickback, fraud and abuse, false claims, privacy and security
and physician sunshine laws and regulations. If their operations
are found to be in violation of any of such laws or any other
governmental regulations that apply, they may be subject to
penalties, including, without limitation, civil and criminal
penalties, damages, fines, the curtailment or restructuring of
operations, exclusion from participation in federal and state
healthcare programs and individual imprisonment.
Coverage and Reimbursement
Sales
of any product depend, in part, on the extent to which such product
will be covered by third-party payors, such as federal, state and
foreign government healthcare programs, commercial insurance and
managed healthcare organizations and the level of reimbursement for
such product by third-party payors. Decisions regarding the extent
of coverage and amount of reimbursement to be provided are made on
a plan-by-plan basis. These third-party payors are increasingly
reducing reimbursements for medical products, drugs and services.
In addition, the U.S. government, state legislatures and foreign
governments have continued implementing cost-containment programs,
including price controls, restrictions on coverage and
reimbursement and requirements for substitution of generic
products. Adoption of price controls and cost-containment measures,
and adoption of more restrictive policies in jurisdictions with
existing controls and measures, could further limit sales of any
product. Decreases in third-party reimbursement for any product or
a decision by a third-party payor not to cover a product could
reduce physician usage and patient demand for the product and also
have a material adverse effect on sales. Even after FDA approves a
product, failure to have the product covered by third-party payors
may have material adverse effect on sales. Federal and state
governments continue to promulgate new policies and regulations;
such policies and regulations may have material adverse effect on
sales. These laws and regulations may restrict, prohibit, or
preventing us from implementing a wide range of pricing,
discounting, marketing, promotion, sales commission, incentive
programs, and other business activities. No uniform policy of
coverage and reimbursement among third-party payors exists in the
United States. Such payors often rely upon Medicare coverage policy
establishing their coverage and reimbursement policies. However,
each payor makes independent and separate decisions regarding the
extent of coverage and amount of reimbursement to be
provided.
Healthcare Reform
In
March 2010, former President Obama signed the Affordable Care Act,
which substantially changed the way healthcare is financed by both
governmental and private insurers in the United States, and
significantly affected the pharmaceutical industry. The Affordable
Care Act contains a number of provisions, including those governing
enrollments in federal healthcare programs, reimbursement
adjustments and fraud and abuse changes. Additionally, the
Affordable Care Act increases the minimum level of Medicaid rebates
payable by manufacturers of brand name drugs from 15.1% to 23.1%;
requires collection of rebates for drugs paid by Medicaid managed
care organizations; requires manufacturers to participate in a
coverage gap discount program, under which they must agree to offer
50% point-of-sale discounts off negotiated prices of applicable
brand drugs to eligible beneficiaries during their coverage gap
period, as a condition for the manufacturer's outpatient drugs to
be covered under Medicare Part D; and imposes a non-deductible
annual fee on pharmaceutical manufacturers or importers who sell
"branded prescription drugs" to specified federal government
programs.
Since its enactment, there have been judicial and
Congressional challenges to certain aspects of the Affordable Care
Act, and we expect there will be additional challenges and
amendments to the Affordable Care Act in the future. Other
legislative changes have been proposed and adopted since the
Affordable Care Act was enacted, including aggregate reductions of
Medicare payments to providers of 2% per fiscal year and reduced
payments to several types of Medicare providers. Moreover, there
has recently been heightened governmental scrutiny over the manner
in which manufacturers set prices for their marketed products,
which has resulted in several Congressional inquiries and proposed
bills designed to, among other things, bring more transparency to
product pricing, review the relationship between pricing and
manufacturer patient programs, and reform government program
reimbursement methodologies for drug products. Individual states in
the United States have also become increasingly active in
implementing regulations designed to control pharmaceutical product
pricing, including price or patient reimbursement constraints,
discounts, restrictions on certain product access and
marketing
cost disclosure
and transparency measures, and, in some cases, proposing to
encourage importation from other countries and bulk
purchasing.
Foreign Corrupt Practices Act
Our
business activities may be subject to the Foreign Corrupt Practices
Act, or FCPA, and similar anti-bribery or anti-corruption laws,
regulations or rules of other countries in which we operate. The
FCPA generally prohibits offering, promising, giving, or
authorizing others to give anything of value, either directly or
indirectly, to a non-U.S. government official in order to influence
official action, or otherwise obtain or retain business. The FCPA
also requires public companies to make and keep books and records
that accurately and fairly reflect the transactions of the
corporation and to devise and maintain an adequate system of
internal accounting controls. Our business is heavily regulated and
therefore involves significant interaction with public officials,
including officials of non-U.S. governments. Additionally, in many
other countries, the health care providers who prescribe
pharmaceuticals are employed by their government, and the
purchasers of pharmaceuticals are government entities; therefore,
our dealings with these prescribers and purchasers are subject to
regulation under the FCPA. There is no certainty that all of our
employees, agents, suppliers, manufacturers, contractors, or
collaborators, or those of our affiliates, will comply with all
applicable laws and regulations, particularly given the high level
of complexity of these laws. Violations of these laws and
regulations could result in fines, criminal sanctions against us,
our officers, or our employees, the closing down of facilities,
including those of our suppliers and manufacturers, requirements to
obtain export licenses, cessation of business activities in
sanctioned countries, implementation of compliance programs, and
prohibitions on the conduct of our business. Any such violations
could include prohibitions on our ability to offer our products in
one or more countries as well as difficulties in manufacturing or
continuing to develop our products, and could materially damage our
reputation, our brand, our international expansion efforts, our
ability to attract and retain employees, and our business,
prospects, operating results, and financial condition.
European Union Drug Development
In
the European Union, our drug candidates may also be subject to
extensive regulatory requirements. As in the United States,
medicinal products can only be marketed if a marketing
authorization from the competent regulatory agencies has been
obtained.
Similar
to the United States, the various phases of preclinical and
clinical research in the European Union are subject to significant
regulatory controls. Clinical trials of medicinal products in the
European Union must be conducted in accordance with European Union,
national regulations and international standards for good clinical
practice, or GCP.
Clinical
trials are currently governed by EU Clinical Trials Directive
2001/20/EC that set out common rules for the control and
authorization of clinical trials in the European
Union.
To
improve the current system, Regulation (EU) No 536/2014 on clinical
trials on medicinal products for human use was adopted in 2014. The
Regulation aims at harmonizing and streamlining the clinical trials
authorization process, simplifying adverse event reporting
procedures, improving the supervision of clinical trials, and
increasing their transparency, notably via a clinical trial
information system set up by the EMA. The new Regulation expressly
provides that it will not be applied before six months after the
publication of a notice delivered by the European Commission on the
European Union clinical trial portal and database. As such notice
requires a successful (partial) audit of the database and as that
database is still under development, there is no scheduled
application date yet. Pursuant to the transitory provisions of the
new regulation, the Clinical Trials Directive 2001/20/EC will still
apply for three years after the implementation of the European
Union clinical trial portal and database. Thus, the sponsor
has the possibility to choose between the requirements of the
directive and the regulation for a period of three years from the
entry into force of the regulation.
European Union Drug Review and Approval
In
the EEA (which is comprised of the 28 Member States of the European
Union plus Norway, Iceland and Liechtenstein), medicinal products
can only be commercialized after obtaining a Marketing
Authorization, or MA. MAs may be granted either centrally
(Community MA) or nationally (National MA).
The
Community MA is issued centrally by the European Commission through
the Centralized Procedure, based on the opinion of the CHMP of the
EMA and is valid throughout the entire territory of the EEA. The
Centralized Procedure is mandatory for certain types of products
such as orphan medicinal products and medicinal products containing
a new active substance indicated for the treatment of
neurodegenerative disorders. The Centralized Procedure is optional
for products containing a new active substance not yet authorized
in the EEA, or for products that constitute a significant
therapeutic, scientific or technical innovation or which are in the
interest of public health in the European Union.
National
MAs are issued nationally by the competent authorities of the
Member States of the EEA and only cover their respective territory.
National MAs are available for products not falling within the
mandatory scope of the Centralized Procedure. We do not foresee
that any of our current drug candidates will be suitable for a
National MA as they fall within the mandatory criteria for the
Centralized Procedure. Therefore, our drug candidates will be
approved through Community MAs.
Under
the above-described procedures, before granting the MA, the EMA or
the competent authorities of the Member States of the EEA make an
assessment of the risk-benefit balance of the product on the basis
of scientific criteria concerning its quality, safety and
efficacy.
The paediatric use marketing authorisation, or
PUMA, is a dedicated marketing authorization for medicinal products
indicated exclusively for use in the pediatric population, with, if
necessary, an age-appropriate formulation. Pursuant to Regulation
(EC) No. 1901/2006 (The “
Paediatric
Regulation
”), all PUMA
applications for marketing authorization for new medicines must
include to be valid, in addition to the particulars and documents
referred to in Directive 2001/83/EC, the results of all studies
performed and details of all information collected in compliance
with a pediatric investigation plan agreed between regulatory
authorities and the applicant, unless the medicine is exempt
because of a deferral or waiver of the
EMA.
Before the EMA is able to begin its assessment of
a Community MA application, it will validate that the applicant has
complied with the agreed pediatric investigation plan. The
applicant and the EMA may, where such a step is adequately
justified, agree to modify a pediatric investigation plan to assist
validation. Modifications are not always possible; may take longer
to agree than the period of validation permits; and may still
require the applicant to withdraw its marketing authorization
application and to conduct additional non-clinical and clinical
studies. Products that are granted a MA on the basis of the
pediatric clinical trials conducted in accordance with the
Pediatric Investigation Plan, or PIP, are eligible for a six-month
extension of the protection under a supplementary protection
c
ertificate (if any is in
effect at the time of approval) or, in the case of orphan medicinal
products, a two-year extension of the orphan market exclusivity.
This pediatric reward is subject to specific conditions and is not
automatically available when data in compliance with the PIP are
developed and submitted.
Orphan Drugs
In
the European Union, Regulation (EC) No 141/2000 of the European
Parliament and of the Council of December 16, 1999 on orphan
medicinal products, as amended, states that a drug shall be
designated as an orphan drug if its sponsor can establish that the
three following cumulative conditions are met:
●
the
product is intended for the diagnosis, prevention or treatment of a
life-threatening or chronically debilitating
condition;
●
the
prevalence of the conditions is not more than five in ten thousand
persons in the European Union when the application is made, or that
it is intended for the diagnosis, prevention or treatment of a
life-threatening, seriously debilitating or serious and chronic
condition in the European Union and that without incentives it is
unlikely that the marketing of the drug in the European Union would
generate sufficient return to justify the necessary investment;
and
●
that
there is no satisfactory method of diagnosis, prevention or
treatment of the condition in question that has been authorized in
the European Union or, if such method exists, that the drug will be
of significant benefit to those affected by that
condition.
Pursuant
to Regulation (EC) No. 847/2000 of April 27, 2000 laying
down the provisions for implementation of the criteria for
designation of a medicinal product as an orphan medicinal product
and definitions of the concepts "similar medicinal product" and
"clinical superiority", an application for the designation of a
drug as an orphan drug must be submitted at any stage of
development of the drug before filing of a MA
application.
The
European Union offers incentives to encourage the development of
designated orphan medicines (protocol assistance, fee reductions,
etc.) and provides opportunities for market exclusivity. Pursuant
to abovementioned Regulation (EC) No. 141/2000, products
receiving orphan designation in the European Union can obtain
market exclusivity for a certain number of years in the European
Union following the marketing approval.
If
a Community MA in respect of an orphan drug is granted, regulatory
authorities will not, for a period of usually ten years,
accept another application for a MA, or grant a MA or accept an
application to extend an existing MA, for the same therapeutic
indication, in respect of a similar drug. This period may however
be reduced to six years if, at the end of the fifth year, it is
established, in respect of the drug concerned, that the
above-mentioned criteria for orphan drug designation are no longer
met, in other words, when it is shown on the basis of available
evidence that the product is sufficiently profitable not to justify
maintenance of market exclusivity.
Pursuant
to Regulation No. 1901/2006, for orphan medicinal products,
instead of an extension of the supplementary protection
certificate, the ten-year period of orphan market exclusivity
should be extended to 12 years if the requirement for data on
use in the pediatric population is fully met (i.e. when the
request contains the results of all studies carried out under the
approved PIP and when the declaration attesting the conformity of
the request to this PIP is included in the MA).
Notwithstanding
the foregoing, a MA may be granted, for the same therapeutic
indication, to a similar drug if:
●
the
holder of the MA for the original orphan drug has given its consent
to the second applicant;
●
the
holder of the MA for the original orphan drug is unable to supply
sufficient quantities of the drug; or
●
the
second applicant can establish in the application that the second
drug, although similar to the orphan drug already authorized, is
safer, more effective or otherwise clinically
superior.
The
abovementioned Regulation (EC) No. 141/2000 provides for other
incentives regarding orphan medicinal products.
Post-Approval Controls
The
holder of a MA must comply with EU requirements applicable to
manufacturing, marketing, promotion and sale of medicinal products.
In particular, the holder of the MA must establish and maintain a
pharmacovigilance system and appoint an individual qualified person
for pharmacovigilance, or QPPV, who is responsible for oversight of
that system and who will reside and operate in the EU. Key
obligations include safety expedited reporting of suspected serious
adverse reactions and submission of periodic safety update reports,
or PSURs.
All
new MAs must include a risk management plan, or RMP, to submit to
the EMA, describing the risk management system that the company
will put in place and documenting measures to prevent or minimize
the risks associated with the product. The regulatory authorities
may also impose specific obligations as a condition of the MA. Such
risk-minimization measures or post-authorization obligations may
include additional safety monitoring, more frequent submission of
PSURs, or the conduct of additional clinical trials or
post-authorization safety studies. RMPs and PSURs are routinely
available to third parties requesting access, subject to limited
redactions. All advertising and promotional activities for the
product must be consistent with the approved summary of product
characteristics, and therefore all off-label promotion is
prohibited. Direct-to-consumer advertising of prescription
medicines is also prohibited in the European Union. Although
general requirements for advertising and promotion of medicinal
products are established under EU directives, the details are
governed by regulations in each EU Member State and can differ from
one country to another.
Reimbursement
The
European Union provides options for its Member States to restrict
the range of medicinal products for which their national health
insurance systems provide reimbursement and to control the prices
of medicinal products for human use. A Member State may approve a
specific price for the medicinal product, or it may instead adopt a
system of direct or indirect controls on the profitability of the
company placing the medicinal product on the market. For example,
in France, effective market access will be supported by agreements
with hospitals and products may be reimbursed by the Social
Security Fund. The price of medicines covered by national health
insurance is negotiated with the Economic Committee for Health
Products, or CEPS. There can be no assurance that any country that
has price controls or reimbursement limitations for pharmaceutical
products will allow favorable reimbursement and pricing
arrangements for any of our drug candidates. Historically, products
launched in the European Union do not follow price structures of
the United States and generally prices tend to be significantly
lower.
Other European Regulatory Matters
French Regulatory Framework for Clinical Development
In
France, Directive No. 2001/20/EC has been implemented in
French national law, establishing a system of prior authorization
and requiring a prior favorable opinion from an ethics
committee.
Parties to a clinical trial agreement, or CTA,
must use a CTA template (“unique agreement” or
convention unique) to organize the conduct of interventional
clinical trials with commercial purpose,
as
well as specific
template exhibits to this agreement. Once concluded, the CTA is
communicated for information by the sponsor to the French national
board of physicians (Ordre national des médecins) without
delay.
The
processing of personal data collected during clinical trials has to
comply with the Regulation (EU) 2016/679 of the European
Parliament and of the Council of April 27, 2016 and Law No
2018-493 of June 20, 2018 on the protection of personal data,
implementing the Regulation (EU) 2016/679 requirements.
Regarding automatic processing operations for the purpose of
research or clinical studies, formalities have to be completed
before the French data protection authority, the Commission
Nationale de l'Informatique et des Libertés, or CNIL, so as to
obtain the authorization to process personal data. However, there
are simplified standards.
Law
No. 2011-2012 of December 29, 2011, or Loi Bertrand,
aimed at strengthening the health safety of medicinal and health
products, as amended (and its implementing decrees), introduced
into French law provisions regarding transparency of fees received
by some healthcare professionals from health product industries,
i.e. companies manufacturing or marketing health products
(Article L.1453-1 of the French Public Health Code). These
provisions have been recently extended and redefined by Decree
No. 2016-1939 of December 28, 2016, which clarified
French "Sunshine" regulations. The decree notably provides that
companies manufacturing or marketing health care products
(medicinal products, medical devices, etc.) in France shall
publicly disclose (mainly on a specific public website available
at: https://www.entreprises-transparence.sante.gouv.fr) the
advantages and fees paid to healthcare professionals amounting to
€10 or above, as well as the agreements concluded with the
latter, along with detailed information about each agreement (the
precise subject matter of the agreement, the date of signature of
the agreement, its end date, the total amount paid to the
healthcare professional, etc.). Another declaration must also be
filed to the competent healthcare professional body. Law
No. 2011-2012 also reinforced the French anti-gift rules and
Order No. 2017-49 of January 19, 2017 amended the law and
expanded the scope of the general prohibition of payments from
pharmaceutical and device manufacturers to healthcare professionals
to broadly cover any company manufacturing or marketing health
products, regardless of whether or not payment for the products is
reimbursed under the French social security system (new
Articles L. 1453-3 et seq. of the French Public Health
Code). It also changed the procedure related to the prior
submission to the national or departmental board of the relevant
healthcare professional body. Moreover, the penalties incurred for
non-compliance with the requirements of the Anti-Gift Law will be
doubled to a fine of up to €750,000. The changes of the
anti-gift rules will only enter into force after the publication of
implementing measures.
Employees
As
of December 31, 2019, we had ten full-time employees, of whom
four were employed by AzurRx SAS and located in France and six were
employed by us and located in our offices in the United
States.
Available Information
As a public company, we are required to file our
annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, proxy statements on Schedule 14A and
other information (including any amendments) with the Securities
and Exchange Commission (the “
SEC
”). The SEC maintains an Internet site that
contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the
SEC. You can find our SEC filings at the SEC’s website
at
www.sec.gov
.
Our Internet address is
www.azurrx.com
as well as
www.azurrx.us
and
www.azurrx.fr
.
Information contained on our website is not part of this Annual
Report. Our SEC filings (including any amendments) will be made
available free of charge on
www.azurrx.com
,
as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC.
We
are subject to various risks that could have a negative effect on
us and our financial condition. These risks could cause actual
operating results to differ from those expressed in certain
“forward looking statements” contained in this Annual
Report as well as in other communications.
Risks Related to Our Business and Industry
We are a clinical stage biopharmaceutical company and have a
limited operating history upon which to base an investment
decision.
We
are a clinical stage biopharmaceutical company. Since inception, we
have engaged primarily in research and development activities of
MS1819 and our other product candidates, have not generated any
revenue from product sales and have incurred significant net
losses. We have not demonstrated our ability to perform the
functions necessary for the successful commercialization of any
product candidates. The successful commercialization of any of our
products will require us to perform a variety of functions,
including:
●
continuing
to undertake pre-clinical development and clinical
trials;
●
participating
in regulatory approval processes;
●
formulating
and manufacturing products; and
●
conducting
sales and marketing activities.
Our
operations to date have been limited to organizing and staffing,
acquiring, developing and securing the proprietary rights for, and
undertaking pre-clinical development and clinical trials of MS1819
and our other product candidates. These operations provide a
limited basis for our stockholders and prospective investors to
assess our ability to complete development of or commercialize
MS1819 or any other product candidates and the advisability of
investing in our securities.
We
have incurred significant operating losses and negative cash flows
from operations since inception, had negative working capital at
December 31, 2019 of approximately $877,000 and had an accumulated
deficit at December 31, 2019 of approximately $62.7 million. We are
dependent on obtaining, and are continuing to pursue, the necessary
funding from outside sources, including obtaining additional
funding from the sale of securities in order to continue our
operations. Although we entered into the LPC Equity Line of Credit
for up to $15 million, we are actively working to obtain additional
funding. We cannot make any assurances that additional financings
will be available to us and, if available, completed on a timely
basis, on acceptable terms or at all. If we are unable to complete
an equity and/or debt offering, or otherwise obtain sufficient
financing when and if needed, it would negatively impact our
business and operations, which would likely cause the price of our
Common Stock to decline or ultimately force us to cease our
operations.
Our product candidates are at an early stage of development and may
not be successfully developed or commercialized.
We
have no products approved for sale. Our lead product candidate,
MS1819, is in the early stages of clinical development and our
other product candidates are still in preclinical phase. Our
product candidates will require substantial further capital
expenditures, development, testing, and regulatory clearances prior
to commercialization. The development and regulatory approval
process take several years, and it is not likely that any such
products, even if successfully developed and approved by the FDA or
any comparable foreign regulatory authority, would be commercially
available until at least 2022 or beyond. Of the large number of
drugs in development, only a small percentage successfully
completes the regulatory approval process and is commercialized.
Accordingly, even if we are able to obtain the requisite financing
to fund our development programs, we cannot assure you that our
product candidates will be successfully developed or
commercialized. Our failure to develop, manufacture or receive
regulatory approval for or successfully commercialize any of our
product candidates, could result in the failure of our business and
a loss of all of your investment in our company.
Any product candidates we advance into and through clinical
development are subject to extensive regulation, which can be
costly and time consuming, cause unanticipated delays or prevent
the receipt of the required approvals to commercialize our product
candidates.
The
clinical development, manufacturing, labeling, storage,
record-keeping, advertising, promotion, import, export, marketing
and distribution of our product candidates are subject to extensive
regulation by the FDA in the United States and by comparable health
authorities in foreign markets, including Health Canada’s
Therapeutic Products Directorate, or the TPD, and the European
Medicines Agency, or the EMA. In the United States, we are not
permitted to market our product candidates until we receive
approval of an NDA (New Drug Application) or BLA (Biologic License
Application) from the FDA. The process of obtaining such approval
is expensive, often takes many years and can vary substantially
based upon the type, complexity and novelty of the products
involved. In addition to the significant clinical testing
requirements, our ability to obtain marketing approval for these
product candidates depends on obtaining the final results of
required non-clinical testing, including characterization of the
manufactured components of our product candidates and validation of
our manufacturing processes. The FDA may determine that our product
manufacturing processes, testing procedures or facilities are
insufficient to justify approval. Approval policies or regulations
may change, and the FDA has substantial discretion in the
pharmaceutical approval process, including the ability to delay,
limit or deny approval of a product candidate for many reasons.
Despite the time and expense invested in clinical development of
product candidates, regulatory approval is never
guaranteed.
The
FDA, the TPD and/or the EMA can delay, limit or deny approval of a
product candidate for many reasons, including, but not limited
to:
●
disagreement
with the design or implementation of our clinical
trials;
●
failure
to demonstrate to their satisfaction that a product candidate is
safe and effective for any indication;
●
failure
to accept clinical data from trials which are conducted outside
their jurisdiction;
●
the
results of clinical trials may not meet the level of statistical
significance required for approval;
●
we
may be unable to demonstrate that a product candidate’s
clinical and other benefits outweigh its safety risks;
●
such
agencies may disagree with our interpretation of data from
preclinical studies or clinical trials;
●
failure
to approve the manufacturing processes or facilities of third-party
manufacturers with which we or our collaborators contract for
clinical and commercial supplies; or
●
changes
in the approval policies or regulations of such agencies may
significantly change in a manner rendering our clinical data
insufficient for approval.
Any
delay in obtaining, or inability to obtain, applicable regulatory
approvals would prevent us from commercializing our product
candidates.
If we encounter difficulties enrolling patients in our clinical
trials, our clinical development activities could be delayed or
otherwise adversely affected.
We
may experience difficulties in patient enrollment in our clinical
trials for a variety of reasons. The timely completion of
clinical trials in accordance with their protocols depends, among
other things, on our ability to enroll a sufficient number of
patients who remain in the trial until its conclusion. The
enrollment of patients depends on many factors,
including:
●
the
patient eligibility criteria defined in the protocol;
●
the
size of the patient population;
●
the
proximity and availability of clinical trial sites for prospective
patients;
●
the
design of the trial;
●
our
ability to recruit clinical trial investigators with the
appropriate competencies and experience;
●
our
ability to obtain and maintain patient consents; and
●
the
risk that patients enrolled in clinical trials will drop out of the
trials before completion.
Our
clinical trials will compete with other clinical trials for product
candidates that are in the same therapeutic areas as our product
candidates. This competition will reduce the number and types
of patients and qualified clinical investigators available to us,
because some patients who might have opted to enroll in our trials
may instead opt to enroll in a trial being conducted by one of our
competitors or clinical trial sites may not allow us to conduct our
clinical trial at such site if competing trials are already being
conducted there. Since the number of qualified clinical
investigators is limited, we expect to conduct some of our clinical
trials at the same clinical trial sites that some of our
competitors use, which will reduce the number of patients who are
available for our clinical trials in such clinical trial
site. We may also encounter difficulties finding a clinical
trial site at which to conduct our trials.
Delays
in patient enrollment may result in increased costs or may affect
the timing or outcome of our planned clinical trials, which could
prevent completion of these clinical trials and adversely affect
our ability to advance the development of our product
candidates.
Because the results of preclinical studies and early clinical
trials are not necessarily predictive of future results, any
product candidate we advance into clinical trials may not have
favorable results in later clinical trials, if any, or receive
regulatory approval.
Pharmaceutical
development has inherent risk. We will be required to demonstrate
through well-controlled clinical trials that our product candidates
are effective with a favorable benefit-risk profile for use in
their target indications before we can seek regulatory approvals
for their commercial sale. Our lead product candidate, MS1819, has
only completed two phase II clinical trials in two separate
indications (one Phase II in CF patients and one Phase II in CP
patients). Success in pre-clinical studies or early clinical
trials does not mean that later clinical trials will be successful,
as product candidates in later-stage clinical trials may fail to
demonstrate sufficient safety or efficacy despite having progressed
through initial clinical testing. We also may need to conduct
additional clinical trials that are not currently anticipated.
Companies frequently suffer significant setbacks in advanced
clinical trials, even after earlier clinical trials have shown
promising results.
Any product candidate we advance into and through clinical trials
may cause unacceptable adverse events or have other properties that
may delay or prevent their regulatory approval or commercialization
or limit their commercial potential.
Unacceptable
adverse events caused by MS1819 and our other product candidates in
clinical trials could cause us or regulatory authorities to
interrupt, delay or halt clinical trials and could result in the
denial of regulatory approval by the FDA or other regulatory
authorities for any or all targeted indications and markets. This,
in turn, could prevent us from commercializing the affected product
candidate and generating revenues from its sale. We have not
yet completed testing of any of our product candidates for the
treatment of the indications for which we intend to seek product
approval in humans, and we currently do not know the extent of
adverse events, if any, that will be observed in patients who
receive any of our product candidates. If any of our product
candidates cause unacceptable adverse events in clinical trials, we
may not be able to obtain regulatory approval or commercialize such
product or, if such product candidate is approved for marketing,
future adverse events could cause us to withdraw such product from
the market.
Delays in the commencement or completion of our clinical trials
could result in increased costs and delay our ability to pursue
regulatory approval and commercialization of our product
candidates.
Although
we commenced an ongoing Phase II clinical trial for MS1819 in 2019
and plan to commence the OPTION 2 Trial in 2020, the commencement
and completion of clinical trials can be delayed for a variety of
reasons, including delays in:
●
obtaining
regulatory clearance to commence a clinical trial;
●
identifying,
recruiting and training suitable clinical
investigators;
●
reaching agreement on acceptable terms with
prospective clinical research organizations (“
CROs
”) and trial sites, the terms of which can
be subject to extensive negotiation, may be subject to modification
from time to time and may vary significantly among different CROs
and trial sites;
●
obtaining
sufficient quantities of investigational product (IP) for our
product candidates for use in clinical trials;
●
obtaining Institutional Review Board
(“
IRB
”) or ethics committee approval to conduct a
clinical trial at a prospective site;
●
identifying, recruiting and enrolling patients to
participate in a clinical trial, including delays and/or
interruptions resulting
from geo-political actions, disease or public health epidemics,
such as the coronavirus, or natural disasters
;
●
retaining
patients who have initiated a clinical trial but may withdraw due
to adverse events from the therapy, insufficient efficacy, fatigue
with the clinical trial process or personal issues;
●
retaining
patients who may not follow the clinical trial protocols due to
factors, including the coronavirus epidemic; and
●
availability
of funds.
Any delays in the commencement of our clinical
trials will delay our ability to pursue regulatory approval for our
product candidates. In addition, many of the factors that cause, or
lead to, a delay in the commencement of clinical trials may also
ultimately lead to the denial of regulatory approval of a product
candidate.
If we encounter difficulties enrolling patients in our clinical
trials, our clinical development activities could be delayed or
otherwise adversely affected.
The
timely completion of clinical trials in accordance with their
protocols depends, among other things, on our ability to enroll a
sufficient number of patients who remain in the trial until its
conclusion. We may experience difficulties in patient enrollment in
our clinical trials for a variety of reasons, including the size
and nature of the patient population and the patient eligibility
criteria defined in the protocol, competition from competing
companies, and natural disasters or public health epidemics, such
as the coronavirus impacting the U.S., Europe and
elsewhere.
Our
clinical trials will likely compete with other clinical trials for
drug candidates that are in the same therapeutic areas as our drug
candidates, and this competition will reduce the number and types
of patients available to us, because some patients who might have
opted to enroll in our trials may instead opt to enroll in a trial
being conducted by one of our competitors. Because the number of
qualified clinical investigators and clinical trial sites is
limited, we expect to conduct some of our clinical trials at the
same clinical trial sites that some of our competitors may use,
which will reduce the number of patients who are available for our
clinical trials at such clinical trial sites. Even if we are able
to enroll a sufficient number of patients in our clinical trials,
delays in patient enrollment may result in increased costs or may
affect the timing or outcome of the planned clinical trials, which
could delay or prevent completion of these trials and adversely
affect our ability to advance the development of MS1819 and our
other product candidates.
We face risks related to health epidemics and outbreaks, including
the coronavirus, which could significantly disrupt our clinical
trials.
In
December 2019, a novel strain of coronavirus that causes COVID-19
was reported to have surfaced in Wuhan, China and spread globally.
The duration and the geographic impact of the business disruption
and related financial impact resulting from the coronavirus
epidemic cannot be reasonably estimated at this time and our
business could be adversely impacted by the effects. We are
currently conducting the Phase II Combination Trial in Hungary and
expect to open sites in Spain and/or other countries in Europe. We
anticipate commencing the Phase II OPTION 2 Trial in the United
States and Europe, including Poland, subject to regulatory
authorization. Enrollment of patients in these clinical trials and
future clinical trials in these regions may be delayed due to the
outbreak of coronavirus. Additionally, patient management and
compliance with our clinical trial protocols in these clinical
trials may be affected due to the outbreak of coronavirus,
including missed or delayed site visits for testing and follow-up
screenings, which could impact trials results, cause patients to
become ineligible and further extend patient
enrollment.
In
addition, we rely on independent clinical investigators, contract
research organizations and other third-party service providers to
assist us in managing, monitoring and otherwise carrying out our
preclinical studies and clinical trials, and the outbreak may
affect their ability to devote sufficient time and resources to our
programs. We also rely on third party suppliers and contract
manufacturers to produce the drug product we utilize in our
clinical trials, and the outbreak may cause delays in delivery of
APIs and drug product. As a result, the expected timeline for data
readouts of our clinical trials and certain regulatory filings may
be negatively impacted, which would adversely affect our
business.
We may be required to suspend, repeat or terminate our clinical
trials if they are not conducted in accordance with regulatory
requirements, the results are negative or inconclusive or the
trials are not well designed.
Regulatory
agencies, IRBs or data safety monitoring boards may at any time
recommend the temporary or permanent discontinuation of our
clinical trials or request that we cease using investigators in the
clinical trials if they believe that the clinical trials are not
being conducted in accordance with applicable regulatory
requirements, or that they present an unacceptable safety risk to
participants. Clinical trials must be conducted in accordance
with current cGCPs or other applicable foreign government
guidelines governing the design, safety monitoring, quality
assurance and ethical considerations associated with clinical
studies. Clinical trials are subject to oversight by the FDA,
other foreign governmental agencies and IRBs at the study sites
where the clinical trials are conducted. In addition, clinical
trials must be conducted with product candidates produced in
accordance with applicable cGMPs, which are the FDA’s
regulations governing the design, monitoring and control of
manufacturing processes and facilities. Clinical trials may be
suspended by the FDA, other foreign governmental agencies, or us
for various reasons, including:
●
deficiencies
in the conduct of the clinical trials, including failure to conduct
the clinical trial in accordance with regulatory requirements or
clinical protocols;
●
deficiencies
in the clinical trial operations or trial sites;
●
the
product candidate may have unforeseen adverse side
effects;
●
deficiencies
in the trial design necessary to demonstrate efficacy;
●
fatalities
or other adverse events arising during a clinical trial due to
medical problems that may not be related to clinical trial
treatments;
●
the
product candidate may not appear to be more effective than current
therapies; or
●
the
quality or stability of the product candidate may fall below
acceptable standards.
If
we elect or are forced to suspend or terminate a clinical trial for
MS1819 or of any other product candidates, the commercial prospects
for that product candidate will be harmed and our ability to
generate product revenue from that product candidate may be delayed
or eliminated. Furthermore, any of these events could prevent
us or our partners from achieving or maintaining market acceptance
of the affected product candidate and could substantially increase
the costs of commercializing our product candidates, and impair our
ability to generate revenue from the commercialization of these
product candidates either by us or by our collaboration
partners.
The approval processes of regulatory authorities are lengthy, time
consuming, expensive and inherently unpredictable. If we are unable
to obtain approval for our product candidates from applicable
regulatory authorities, we will not be able to market and sell
those product candidates in those countries or regions and our
business will be substantially harmed.
The
time required to obtain approval by the FDA and comparable foreign
authorities is unpredictable, but typically takes many years
following the commencement of clinical trials and depends upon
numerous factors, including the substantial discretion of the
regulatory authorities. We have not submitted an NDA or similar
filing or obtained regulatory approval for any product candidate in
any jurisdiction and it is possible that none of our existing
product candidates or any product candidates we may seek to develop
in the future will ever obtain regulatory approval.
MS1819
and our other product candidates could fail to receive regulatory
approval for many reasons, including any one or more of the
following:
●
the
FDA or comparable foreign regulatory authorities may disagree with
the design or implementation of our clinical trials;
●
we
may be unable to demonstrate to the satisfaction of the FDA or
comparable foreign regulatory authorities that a product candidate
is safe and effective for its proposed indication;
●
the
results of clinical trials may not meet the level of statistical
significance required by the FDA or comparable foreign regulatory
authorities for approval;
●
we
may be unable to demonstrate that a product candidate’s
clinical and other benefits outweigh its safety risks;
●
the
FDA or comparable foreign regulatory authorities may disagree with
our interpretation of data from preclinical studies or clinical
trials;
●
the
data collected from clinical trials of our product candidates may
not be sufficient to support the submission of an NDA, BLA or other
submission or to obtain regulatory approval in the United States or
elsewhere;
●
the
FDA or comparable foreign regulatory authorities may fail to hold
to previous agreements or commitments;
●
the
FDA or comparable foreign regulatory authorities may fail to
approve the manufacturing processes or facilities of third-party
manufacturers with which we contract for clinical and commercial
supplies;
●
the
FDA or comparable foreign regulatory authorities may fail to
approve our product candidates;
●
invest
significant additional cash in each of the above activities;
and;
●
the
approval policies or regulations of the FDA or comparable foreign
regulatory authorities may significantly change in a manner
rendering our clinical data insufficient for approval.
The
time and expense of the approval process, as well as the
unpredictability of clinical trial results and other contributing
factors, may result in our failure to obtain regulatory approval to
market, in one or more jurisdictions, MS1819 or future product
candidates, which would significantly harm our business, results of
operations and prospects.
We intend to rely on third-party collaborators to market and sell
our products. Our third-party collaborators may not have the
resources to pursue approvals, which in turn could severely limit
our potential markets and ability to generate revenue.
In
order to market and sell our products in any jurisdiction, we or
our third-party collaborators must obtain separate marketing
approvals in that jurisdiction and comply with its regulatory
requirements. The approval procedure can vary drastically among
countries, and each jurisdiction may impose different testing and
other requirements to obtain and maintain marketing approval.
Further, the time required to obtain those approvals may differ
substantially among jurisdictions. Approval by the FDA or an
equivalent foreign authority does not ensure approval by regulatory
authorities in any other countries or jurisdictions. As a result,
the ability to market and sell a product candidate in more than one
jurisdiction can involve significant additional time, expense and
effort to undertake separate approval processes, and could subject
us and our collaborators to the numerous and varying post-approval
requirements of each jurisdiction governing commercial sales,
manufacturing, pricing and distribution of MS1819 and our other
product candidates. We or any third parties with whom we may
collaborate may not have the resources to pursue those approvals,
and we or they may not be able to obtain any approvals that are
pursued. The failure to obtain marketing approval for MS1819 and
our other product candidates in foreign jurisdictions could
severely limit their potential markets and our ability to generate
revenue.
In
addition, even if we were to obtain regulatory approval in one or
more jurisdictions, regulatory authorities may approve MS1819 and
our other product candidates for fewer or more limited indications
than we request, may not approve the prices we may propose to
charge for our products, may grant approval contingent on the
performance of costly post-marketing clinical trials, or may
approve a product candidate with labeling that does not include the
claims necessary or desirable for the successful commercialization
of that product candidate. Any of the foregoing circumstances could
materially harm the commercial prospects for MS1819 and our other
product candidates.
Our product candidates may cause undesirable side effects or have
other properties that could delay or prevent their regulatory
approval, limit the commercial profile of the approved labeling, or
result in significant negative consequences following marketing
approval, if any.
Results
of current and future clinical trials of MS1819 and our other
product candidates could reveal a high and/or unacceptable severity
and frequency of these or other side effects. In such an event, our
trials could be suspended or terminated, and the FDA or comparable
foreign regulatory authorities could order us to cease further
development of, or deny approval of, our product candidates for any
or all targeted indications. Further, any observed drug-related
side effects could affect patient recruitment or the ability of
enrolled patients to complete the trial or result in potential
product liability claims. Any of these occurrences could materially
harm our business, financial condition and prospects.
Additionally,
if MS1819 and our other product candidates receive marketing
approval, and we or others later identify undesirable side effects
caused by our products, a number of potentially significant
negative consequences could result, including:
●
regulatory
authorities may withdraw approvals of such product;
●
regulatory
authorities may require additional warnings in the product’s
labeling;
●
we
may be required to create a medication guide for distribution to
patients that outlines the risks of such side effects;
●
we
could be sued and held liable for harm caused to patients;
and;
●
our
reputation may suffer.
Any
of these events could prevent us from achieving or maintaining
market acceptance of the particular product, if approved, and could
significantly harm our business, results of operations and
prospects
If we are unable to execute our sales and marketing strategy for
our products and are unable to gain market acceptance, we may be
unable to generate sufficient revenue to sustain our
business.
We
are a clinical-stage biopharmaceutical company and have yet to
begin to generate revenue from MS1819 and our other product
candidates. Our product candidates are in an early stage of
clinical development, and, if we obtain marketing approval for any
of products in the future, which we anticipate would not occur for
several years, if at all.
Although
we believe that MS1819 represents a promising commercial
opportunity, we may never gain significant market acceptance and
therefore may never generate substantial revenue or profits for us.
We will need to establish a market for MS1819 and our other product
candidates and build that market through physician education,
awareness programs and the publication of clinical data. Gaining
acceptance in medical communities requires, among other things,
publication in leading peer-reviewed journals of results from our
studies. The process of publication in leading medical journals is
subject to a peer review process and peer reviewers may not
consider the results of our studies sufficiently novel or worthy of
publication. Failure to have our studies published in peer-reviewed
journals could limit the adoption of MS1819 or our other product
candidates. Our ability to successfully market our product
candidates that we may develop will depend on numerous factors,
including:
●
the
FDA or comparable foreign regulatory authorities may disagree with
the design or implementation of our clinical trials;
●
the
inability to demonstrate that the clinical and other benefits of a
product candidate outweigh any safety or other perceived
risks;
●
conducting
clinical utility studies of our product candidates to demonstrate
economic usefulness to providers and payers;
●
whether
our current or future partners, support our offerings;
●
the
success of the sales force and marketing effort;
●
whether
healthcare providers believe our product candidates provide
clinical utility; and
●
whether
private health insurers, government health programs and other
third-party payers will cover our product candidates.
Because we license some of our product candidates from third
parties, any dispute with our licensors or non-performance by us or
by our licensors may adversely affect our ability to develop and
commercialize the applicable product candidates.
Some
of our product candidates, including MS1819, including related
intellectual property rights, were licensed from third parties.
Under the terms of our license agreements, the licensors generally
have the right to terminate such agreements in the event of a
material breach by us. Our licenses require us to make annual,
milestone or other payments prior to commercialization of any
product and our ability to make these payments depends on our
ability to generate cash in the future. These agreements generally
require us to use diligent and reasonable efforts to develop and
commercialize the product candidate.
If
there is any conflict, dispute, disagreement or issue of
non-performance between us and our licensing partner regarding our
rights or obligations under the license or other agreements,
including any conflict, dispute or disagreement arising from our
failure to satisfy payment obligations under such agreement, our
ability to develop and commercialize the affected product candidate
may be adversely affected. Any loss of our rights under our license
agreements could delay or completely terminate our product
development efforts for the affected product
candidate.
We may form or seek strategic alliances or enter into additional
licensing arrangements in the future, and we may not realize the
benefits of such alliances or licensing arrangements.
From
time to time, we may form or seek strategic alliances, create joint
ventures or collaborations or enter into additional licensing
arrangements with third parties that we believe will complement or
augment our development and commercialization efforts with respect
to MS1819 and our other product candidates and any future product
candidates that we may develop. Any of these relationships may
require us to incur non-recurring and other charges, increase our
near and long-term expenditures, issue securities that dilute our
existing stockholders or disrupt our management and
business. These relationships also may result in a delay in
the development of MS1819 and our other product candidates if we
become dependent upon the other party and such other party does not
prioritize the development of our product candidates relative to
its other development activities. In addition, we face
significant competition in seeking appropriate strategic partners
and the negotiation process is time-consuming and
complex. Moreover, we may not be successful in our efforts to
establish a strategic partnership or other alternative arrangements
for our product candidates because they may be deemed to be at too
early of a stage of development for collaborative effort and third
parties may not view our product candidates as having the requisite
potential to demonstrate safety and efficacy. If we license
products or businesses, we may not be able to realize the benefit
of such transactions if we are unable to successfully integrate
them with our existing operations and company culture. We
cannot be certain that, following a strategic transaction or
license, we will achieve the revenue or specific net income that
justifies such transaction. We rely completely on third parties to
manufacture our preclinical and clinical pharmaceutical supplies
and expect to continue to rely on third parties to produce
commercial supplies of our product candidates, and our dependence
on third party suppliers could adversely impact our
business.
We rely completely on third parties to manufacture our preclinical
and clinical pharmaceutical supplies and expect to continue to rely
on third parties to produce commercial supplies of any approved
product candidate, and our dependence on third party suppliers
could adversely impact our business.
We
rely on third parties to manufacture our lead product candidate,
MS1819. The proprietary yeast strain used to manufacture MS1819 API
is located in a storage facility maintained by Charles River
Laboratories in Malvern, Pennsylvania. The drug substance
manufacturing for MS1819 is conducted by DSM Capua SPA in Italy and
we intend to use Delpharm SAS to make the drug product for MS1819
for the OPTION 2 Trial and beyond. We are completely dependent
on these third parties for product supply and our MS1819
development programs would be adversely affected by a significant
interruption in our ability to receive such materials. We have
not yet entered into long-term manufacturing or supply agreements
with any third parties. Furthermore, our third-party suppliers will
be required to maintain compliance with cGMPs and will be subject
to inspections by the FDA or comparable regulatory authorities in
other jurisdictions to confirm such compliance. In the event that
the FDA or such other authorities determine that our third-party
suppliers have not complied with cGMP, our clinical trials could be
terminated or subjected to a clinical hold until such time as we
are able to obtain appropriate replacement material. Any
delay, interruption or other issues that arise in the manufacture,
packaging, or storage of our products as a result of a failure of
the facilities or operations of our third-party suppliers to pass
any regulatory agency inspection could significantly impair our
ability to develop and commercialize our products.
We
do not expect to have the resources or capacity to commercially
manufacture any of our proposed products, if approved, and will
likely continue to be dependent upon third party manufacturers. Our
dependence on third parties to manufacture and supply us with
clinical trial materials and any approved products may adversely
affect our ability to develop and commercialize our products on a
timely basis or at all.
We rely on third parties to conduct our clinical trials. If these
third parties do not meet our deadlines or otherwise conduct the
trials as required, our clinical development programs could be
delayed or unsuccessful and we may not be able to obtain regulatory
approval for or commercialize our product candidates when expected
or at all.
We
do not have the ability to conduct all aspects of our preclinical
testing or clinical trials ourselves. We use contract research
organizations (CROs) to conduct our planned clinical trials and
will rely upon such CROs, as well as medical institutions, clinical
investigators and consultants, to conduct our trials in accordance
with our clinical protocols. Our CROs, investigators and other
third parties will play a significant role in the conduct of these
trials and the subsequent collection and analysis of data from the
clinical trials.
There
is no guarantee that any CROs, investigators and other third
parties upon which we rely for administration and conduct of our
clinical trials will devote adequate time and resources to such
trials or perform as contractually required. If any of these third
parties fail to meet expected deadlines, fail to adhere to our
clinical protocols or otherwise perform in a substandard manner,
our clinical trials may be extended, delayed or terminated. If any
of our clinical trial sites terminate for any reason, we may
experience the loss of follow-up information on patients enrolled
in our ongoing clinical trials unless we are able to transfer the
care of those patients to another qualified clinical trial site. In
addition, principal investigators for our clinical trials may serve
as scientific advisors or consultants to us from time to time and
receive cash or equity compensation in connection with such
services. If these relationships and any related compensation
result in perceived or actual conflicts of interest, the integrity
of the data generated at the applicable clinical trial site may be
jeopardized.
We will face intense competition and may not be able to compete
successfully.
We
operate in highly competitive segments of the biotechnology and
biopharmaceutical markets. We face competition from many different
sources, including commercial pharmaceutical and biotechnology
enterprises, academic institutions, government agencies, and
private and public research institutions. MS1819 and our other
product candidates, if successfully developed and approved, will
compete with established therapies, as well as new treatments that
may be introduced by our competitors. Many of our competitors have
significantly greater financial, product development, manufacturing
and marketing resources than us. Large pharmaceutical companies
have extensive experience in clinical testing and obtaining
regulatory approval for drugs. We also may compete with these
organizations to recruit management, scientists and clinical
development personnel. Smaller or early-stage companies may also
prove to be significant competitors, particularly through
collaborative arrangements with large and established companies.
New developments, including the development of other biological and
pharmaceutical technologies and methods of treating disease, occur
in the pharmaceutical and life sciences industries at a rapid pace.
Developments by competitors may render our product candidates
obsolete or noncompetitive. We will also face competition from
these third parties in recruiting and retaining qualified
personnel, establishing clinical trial sites and patient
registration for clinical trials and in identifying and
in-licensing new product candidates.
Our success will depend upon intellectual property, proprietary
technologies and regulatory market exclusivity periods, and we may
be unable to protect our intellectual property.
Our
success will depend, in large part, on obtaining and maintaining
patent protection and trade secret protection for MS1819 and our
other product candidates and their formulations and uses, as well
as successfully defending these patents against third-party
challenges. If we or our licensors fail to appropriately prosecute
and maintain patent protection for our product candidates, our
ability to develop and commercialize these product candidates may
be adversely affected and we may not be able to prevent competitors
from making, using and selling competing products. This failure to
properly protect the intellectual property rights relating to these
product candidates could have a material adverse effect on our
financial condition and results of operations.
The patent application process is subject to numerous risks and
uncertainties, and there can be no assurance that we or our
partners will be successful in protecting our product candidates by
obtaining and defending patents. These risks and uncertainties
include the following:
●
patent
applications may not result in any patents being
issued;
●
patents
that may be issued or in-licensed may be challenged, invalidated,
modified, revoked, circumvented, found to be unenforceable, or
otherwise may not provide any competitive advantage;
●
our
competitors, many of which have substantially greater resources
than we or our partners and many of which have made significant
investments in competing technologies, may seek, or may already
have obtained, patents that will limit, interfere with, or
eliminate our ability to make, use, and sell our potential
products;
●
there
may be significant pressure on the United States government and
other international governmental bodies to limit the scope of
patent protection both inside and outside the United States for
disease treatments that prove successful as a matter of public
policy regarding worldwide health concerns;
●
countries
other than the United States may have patent laws less favorable to
patentees than those upheld by United States courts, allowing
foreign competitors a better opportunity to create, develop, and
market competing products; and
●
we
may be involved in lawsuits to protect or enforce our patents or
the patents of our licensors, which could be expensive, time
consuming and unsuccessful.
In
addition to patents, we and our partners also rely on trade secrets
and proprietary know-how. Although we have taken steps to protect
our trade secrets and unpatented know-how, including entering into
confidentiality agreements with third parties, and confidential
information and inventions agreements with employees, consultants
and advisors, third parties may still obtain this information or
come upon this same or similar information independently. We may
become subject to claims that we or consultants, advisors or
independent contractors that we may engage to assist us in
developing MS1819, and our other product candidates have wrongfully
or inadvertently disclosed to us or used trade secrets or other
proprietary information of their former employers or their other
clients.
We intend to rely on market exclusivity periods that may not be or
remain available to us.
We
intend to rely on our ability to obtain and maintain a regulatory
period of market exclusivity for any of our biologic product
candidates, including MS1819 that are successfully developed and
approved for commercialization. Although this period in the United
States is currently 12 years from the date of marketing approval,
reductions to this period have been proposed. This exclusivity
period in Europe is currently 10 years from the date of marketing
approval by the EMA. Once any regulatory period of exclusivity
expires, depending on the status of our patent coverage and the
nature of the product, we may not be able to prevent others from
marketing products that are biosimilar to or interchangeable with
our products, which would materially adversely affect
us.
If we are unable to establish sales and marketing capabilities or
fail to enter into agreements with third parties to market,
distribute and sell any products we may successfully develop, we
may not be able to effectively market and sell any such products
and generate product revenue.
We
do not currently have the infrastructure for the sales, marketing
and distribution of any of our product candidates, and must build
this infrastructure or arrange for third parties to perform these
functions in order to commercialize any products that we may
successfully develop. The establishment and development of a sales
force, either by us or jointly with a partner, or the establishment
of a contract sales force to market any products we may develop
will be expensive and time-consuming and could delay any product
launch. If we, or our partners, are unable to establish sales and
marketing capability or any other non-technical capabilities
necessary to commercialize any products we may successfully
develop, we will need to contract with third parties to market and
sell such products. We may not be able to establish arrangements
with third-parties on acceptable terms, if at all.
If any product candidate that we successfully develop does not
achieve broad market acceptance among physicians, patients,
healthcare payors and the medical community, the revenues that it
generates from their sales will be limited.
Even
if MS1819 and our other product candidates receive regulatory
approval, they may not gain market acceptance among physicians,
patients, healthcare payors and the medical community. Coverage and
reimbursement of our product candidates by third-party payors,
including government payors, generally is also necessary for
commercial success. The degree of market acceptance of any approved
products will depend on a number of factors,
including:
●
the
efficacy and safety as demonstrated in clinical
trials;
●
the
clinical indications for which the product is
approved;
●
acceptance
by physicians, major operators of hospitals and clinics and
patients of the product as a safe and effective
treatment;
●
acceptance
of the product by the target population;
●
the
potential and perceived advantages of product candidates over
alternative treatments;
●
the
safety of product candidates seen in a broader patient group,
including its use outside the approved indications;
●
the
cost of treatment in relation to alternative
treatments;
●
the
availability of adequate reimbursement and pricing by third parties
and government authorities;
●
relative
convenience and ease of administration;
●
the
prevalence and severity of adverse events;
●
the
effectiveness of our sales and marketing efforts; and
●
unfavorable
publicity relating to the product.
If
any product candidate is approved but does not achieve an adequate
level of acceptance by physicians, hospitals, healthcare payors and
patients, we may not generate sufficient revenue from these
products and may not become or remain profitable.
We may incur substantial product liability or indemnification
claims relating to the use of our product candidates.
We
face an inherent risk of product liability exposure based on the
use of MS1819 and our other product candidates in human clinical
trials, or, if obtained, following marketing approval and
commercialization. Claims could be brought against us if use or
misuse of one of our product candidates causes, or merely appears
to have caused, personal injury or death. Although we have and
intend to maintain product liability insurance relating to our
clinical trials, our coverage may not be sufficient to cover claims
that may be made against us and we may be unable to maintain such
insurance. Any claims against us, regardless of their merit, could
severely harm our financial condition, strain our management and
other resources or destroy the prospects for commercialization of
the product which is the subject of any such claim. We are unable
to predict if we will be able to obtain or maintain product
liability insurance for any products that may be approved for
marketing. Additionally, we have entered into various agreements
where we indemnify third parties for certain claims relating to the
testing and use of our product candidates. These indemnification
obligations may require us to pay significant sums of money for
claims that are covered by these indemnifications.
We
cannot predict all of the possible harms or side effects that may
result from the use of our products and, therefore, the amount of
insurance coverage we currently hold, or that we or our
collaborators may obtain, may not be adequate to protect us from
any claims arising from the use of our products that are beyond the
limit of our insurance coverage. If we cannot protect against
potential liability claims, we or our collaborators may find it
difficult or impossible to commercialize our products, and we may
not be able to renew or increase our insurance coverage on
reasonable terms, if at all. The marketing, sale and use of our
products and our planned future products could lead to the filing
of product liability claims against us if someone alleges that our
products failed to perform as designed. A product liability or
professional liability claim could result in substantial damages
and be costly and time-consuming for us to defend.
Any
product liability or professional liability claim brought against
us, with or without merit, could increase our insurance rates or
prevent us from securing insurance coverage. Additionally, any
product liability lawsuit could damage our reputation, result in
the recall of products, or cause current partners to terminate
existing agreements and potential partners to seek other partners,
any of which could impact our results of operations.
If we use biological and hazardous materials in a manner that
causes injury, we could be liable for damages.
Our
activities may require the controlled use of potentially harmful
biological materials, hazardous materials and chemicals and may in
the future require the use of radioactive compounds. We cannot
eliminate the risk of accidental contamination or injury to
employees or third parties from the use, storage, handling or
disposal of these materials. In the event of contamination or
injury, we could be held liable for any resulting damages, and any
liability could exceed our resources or any applicable insurance
coverage we may have. Additionally, we are subject on an
ongoing basis to federal, state and local laws and regulations
governing the use, storage, handling and disposal of these
materials and specified waste products. The cost of compliance
with these laws and regulations might be significant and could
negatively affect our operating results. In the event of an
accident or if we otherwise fail to comply with applicable
regulations, we could lose our permits or approvals or be held
liable for damages or penalized with fines.
We have benefited from certain non-reimbursable subsidies from the
French government that if terminated or reduced may restrict our
ability to successfully develop, manufacture and commercialize our
drug candidates.
We
have benefited from certain tax advantages, including, for example,
the research tax credit (Crédit d'Impôt Recherche), or
CIR. The CIR is a French tax credit aimed at stimulating research
and development. The CIR can be offset against French corporate
income tax due and the portion in excess (if any) may be refunded
at the end of a three fiscal-year period (or, sooner, for smaller
companies such as ours). The CIR is calculated based on our claimed
amount of eligible research and development expenditures in France.
The French tax authority with the assistance of the Research and
Technology Ministry may audit each research and development program
in respect of which a CIR benefit has been claimed and assess
whether such program qualifies in its view for the CIR benefit. The
French tax authorities may challenge our eligibility to, or our
calculation of certain tax reductions and/or deductions in respect
of our research and development activities and, should the French
tax authorities be successful, we may be liable for additional
corporate income tax, and penalties and interest related thereto,
or we may not obtain the refunds for which we have applied, which
could have a significant impact on our results of operations and
future cash flows. Furthermore, if the French Parliament decides to
eliminate, or reduce the scope or the rate of, the CIR benefit,
either of which it could decide to do at any time, our results of
operations could be adversely affected.
Due to the significant resources required for the development of
our drug candidates, we must prioritize development of certain drug
candidates and/or certain disease indications. We may expend our
limited resources on candidates or indications that do not yield a
successful product and fail to capitalize on drug candidates or
indications that may be more profitable or for which there is a
greater likelihood of success.
We plan to develop a pipeline of drug candidates to treat
gastrointestinal ("GI") and other diseases. Due to the significant
resources required for the development of drug candidates, we must
focus our attention and resources on specific diseases and/or
indications and decide which drug candidates to pursue and the
amount of resources to allocate to each. We are currently focusing
our resources on the development of our lead product candidate,
MS1819, for the treatment of exocrine pancreatic insufficiency
("EPI") associated with cystic fibrosis ("CF") and chronic
pancreatitis ("CP").
Our
decisions concerning the allocation of research, development,
collaboration, management and financial resources toward particular
drug candidates or therapeutic areas may not lead to the
development of any viable commercial product and may divert
resources away from better opportunities. Similarly, any decision
to delay, terminate or collaborate with third parties in respect of
certain programs or product candidates may subsequently prove to be
suboptimal and could cause us to miss valuable opportunities. If we
make incorrect determinations regarding the viability or market
potential of any of our programs or product candidates or misread
trends in the GI, CF, CP, or biotechnology industry, our business,
financial condition and results of operations could be materially
adversely affected. As a result, we may fail to capitalize on
viable commercial products or profitable market opportunities, be
required to forego or delay pursuit of opportunities with other
product candidates or other diseases and indications that may later
prove to have greater commercial potential than those we choose to
pursue, or relinquish valuable rights to such product candidates
through collaboration, licensing or other royalty arrangements in
cases in which it would have been advantageous for us to invest
additional resources to retain development and commercialization
rights.
If we fail to attract and retain key management and clinical
development personnel, we may be unable to successfully develop or
commercialize our product candidates.
We
are dependent on our management team and clinical development
personnel and our success will depend on their continued service,
as well as our ability to attract and retain highly qualified
personnel. In particular, the continued development of our senior
management team which now includes James Sapirstein, our President
and Chief Executive Officer, Daniel Schneiderman, our Chief
Financial Officer, and James Pennington, our Chief Medical Officer,
is critical to our success. The market for the services of
qualified personnel in the biotechnology and pharmaceutical
industries are highly competitive. The loss of service of any
member of our senior management team or key personnel could
prevent, impair or delay the implementation of our business plan,
the successful conduct and completion of our planned clinical
trials and the commercialization of any product candidates that we
may successfully develop. We do not carry key man insurance for any
member of our senior management team.
We use biological materials and may use hazardous materials, and
any claims relating to improper handling, storage or disposal of
these materials could be time consuming or costly.
We
may use hazardous materials, including chemicals and biological
agents and compounds, that could be dangerous to human health and
safety or the environment. Our operations also produce hazardous
waste products. Federal, state and local laws and regulations
govern the use, generation, manufacture, storage, handling and
disposal of these materials and wastes. Compliance with applicable
environmental laws and regulations may be expensive, and current or
future environmental laws and regulations may impair our product
development efforts. In addition, we cannot entirely eliminate the
risk of accidental injury or contamination from these materials or
wastes. We do not carry specific biological or hazardous waste
insurance coverage and our property and casualty, and general
liability insurance policies specifically exclude coverage for
damages and fines arising from biological or hazardous waste
exposure or contamination. Accordingly, in the event of
contamination or injury, we could be held liable for damages or
penalized with fines in an amount exceeding our resources, and our
clinical trials or regulatory approvals could be
suspended.
Although
we maintain workers’ compensation insurance to cover us for
costs and expenses, we may incur due to injuries to our employees
resulting from the use of hazardous materials, this insurance may
not provide adequate coverage against potential liabilities. We do
not maintain insurance for environmental liability or toxic tort
claims that may be asserted against us in connection with our
storage or disposal of biological or hazardous
materials.
In
addition, we may incur substantial costs in order to comply with
current or future environmental, health and safety laws and
regulations. These current or future laws and regulations may
impair our research, development or production efforts. Failure to
comply with these laws and regulations also may result in
substantial fines, penalties or other sanctions.
If we or our partners are sued for infringing intellectual property
rights of third parties, it will be costly and time consuming, and
an unfavorable outcome in that litigation would have a material
adverse effect on our business.
Our
success also depends upon our ability and the ability of any of our
future collaborators to develop, manufacture, market and sell our
product candidates without infringing the proprietary rights of
third parties. Numerous United States and foreign issued patents
and pending patent applications, which are owned by third parties,
exist in the fields in which we are developing products, some of
which may be directed at claims that overlap with the subject
matter of our intellectual property. Because patent applications
can take many years to issue, there may be currently pending
applications, unknown to us, which may later result in issued
patents that our product candidates or proprietary technologies may
infringe. Similarly, there may be issued patents relevant to our
product candidates of which we are not aware.
There
is a substantial amount of litigation involving patent and other
intellectual property rights in the biotechnology and
biopharmaceutical industries generally. If a third-party claims
that we or any of our licensors, suppliers or collaborators
infringe the third party’s intellectual property rights, we
may have to:
●
obtain
licenses, which may not be available on commercially reasonable
terms, if at all;
●
abandon
an infringing product candidate or redesign our products or
processes to avoid infringement;
●
pay
substantial damages, including the possibility of treble damages
and attorneys’ fees, if a court decides that the product or
proprietary technology at issue infringes on or violates the third
party’s rights;
●
pay
substantial royalties, fees and/or grant cross licenses to our
technology; and/or
●
defend
litigation or administrative proceedings which may be costly
whether we win or lose, and which could result in a substantial
diversion of our financial and management resources.
Healthcare reform and restrictions on reimbursements may limit our
financial returns.
Our
ability or the ability of our collaborators to commercialize any of
our product candidates that we successfully develop may depend, in
part, on the extent to which government health administration
authorities, private health insurers and other organizations will
reimburse consumers for the cost of these products. These third
parties are increasingly challenging both the need for and the
price of new drug products. Significant uncertainty exists as to
the reimbursement status of newly approved therapeutics. Adequate
third-party reimbursement may not be available for our product
candidates to enable us or our collaborators to maintain price
levels sufficient to realize an appropriate return on their and our
investments in research and product development.
Changes in healthcare law and implementing regulations, including
government restrictions on pricing and reimbursement, as well as
healthcare policy and other healthcare payor cost-containment
initiatives, may negatively impact our ability to generate
revenues.
The potential pricing and reimbursement environment for MS1819 and
our other product candidates and any future products may change in
the future and become more challenging due to, among other reasons,
policies advanced by the current or any new presidential
administration, federal agencies, healthcare legislation passed by
Congress, or fiscal challenges faced by all levels of government
health administration authorities.
If we or any of our independent contractors, consultants,
collaborators, manufacturers, vendors or service providers fail to
comply with healthcare laws and regulations, we or they could be
subject to enforcement actions, which could result in penalties and
affect our ability to develop, market and sell our product
candidates and may harm our reputation.
We
are subject to federal, state, and foreign healthcare laws and
regulations pertaining to fraud and abuse and patients’
rights. These laws and regulations include:
●
the
U.S. federal healthcare program anti-kickback law, which prohibits,
among other things, persons and entities from soliciting, receiving
or providing remuneration, directly or indirectly, to induce either
the referral of an individual for a healthcare item or service, or
the purchasing or ordering of an item or service, for which payment
may be made under a federal healthcare program such as Medicare or
Medicaid;
●
the
U.S. federal false claims and civil monetary penalties laws, which
prohibit, among other things, individuals or entities from
knowingly presenting or causing to be presented, claims for payment
by government funded programs such as Medicare or Medicaid that are
false or fraudulent, and which may apply to us by virtue of
statements and representations made to customers or third
parties;
●
the U.S. federal Health Insurance Portability and
Accountability Act (“
HIPAA
”), which prohibits, among other things,
executing a scheme to defraud healthcare
programs;
●
HIPAA,
as amended by the Health Information Technology for Economic and
Clinical Health Act, or HITECH, imposes requirements relating to
the privacy, security, and transmission of individually
identifiable health information, and requires notification to
affected individuals and regulatory authorities of certain breaches
of security of individually identifiable health
information;
●
the
federal Physician Payment Sunshine Act, which requires certain
manufacturers of drugs, devices, biologics and medical supplies to
report annually to the Centers for Medicare & Medicaid
Services, or CMS, information related to payments and other
transfers of value to physicians, other healthcare providers and
teaching hospitals, and ownership and investment interests held by
physicians and other healthcare providers and their immediate
family members, which is published in a searchable form on an
annual basis; and
●
state
laws comparable to each of the above federal laws, such as, for
example, anti-kickback and false claims laws that may be broader in
scope and also apply to commercial insurers and other non-federal
payors, requirements for mandatory corporate regulatory compliance
programs, and laws relating to patient data privacy and
security.
If
our operations are found to be in violation of any such health care
laws and regulations, we may be subject to penalties, including
administrative, civil and criminal penalties, monetary damages,
disgorgement, imprisonment, the curtailment or restructuring of our
operations, loss of eligibility to obtain approvals from the FDA,
or exclusion from participation in government contracting,
healthcare reimbursement or other government programs, including
Medicare and Medicaid, any of which could adversely affect our
financial results. Although effective compliance programs can
mitigate the risk of investigation and prosecution for violations
of these laws, these risks cannot be entirely eliminated. Any
action against us for an alleged or suspected violation could cause
us to incur significant legal expenses and could divert our
management’s attention from the operation of our business,
even if our defense is successful. In addition, achieving and
sustaining compliance with applicable laws and regulations may be
costly to us in terms of money, time and resources.
We will need to grow the size of our organization, and we may
experience difficulties in managing this growth.
As
of December 31, 2019, we had ten employees. As our development
and commercialization plans and strategies develop, we expect to
need additional managerial, operational, research and development,
sales, marketing, financial and other personnel. Future growth
would impose significant added responsibilities on members of
management, including:
●
identifying,
recruiting, integrating, maintaining and motivating additional
employees;
●
managing
our internal development efforts effectively, including the
clinical, FDA and international regulatory review process for our
product candidates, while complying with our contractual
obligations to contractors and other third parties;
and
●
improving
our operational, financial and management controls, reporting
systems and procedures.
Our
future financial performance and our ability to commercialize our
product candidates will depend, in part, on our ability to
effectively manage any future growth, and our management may also
have to divert a disproportionate amount of its attention away from
day-to-day activities in order to devote a substantial amount of
time to managing these growth activities.
We
currently rely, and for the foreseeable future will continue to
rely, in substantial part on certain independent organizations,
advisors and consultants to provide certain services, including
certain aspects of regulatory approval, clinical management and
manufacturing. There can be no assurance that the services of
independent organizations, advisors and consultants will continue
to be available to us on a timely basis when needed, or that we can
find qualified replacements. In addition, if we are unable to
effectively manage our outsourced activities or if the quality or
accuracy of the services provided by consultants is compromised for
any reason, our clinical trials may be extended, delayed or
terminated, and we may not be able to obtain regulatory approval of
our product candidates or otherwise advance our
business. There can be no assurance that we will be able to
manage our existing consultants and contractors or find other
competent outside contractors and consultants on economically
reasonable terms, or at all.
If
we are not able to effectively expand our organization by hiring
new employees and expanding our groups of consultants and
contractors, we may not be able to successfully implement the tasks
necessary to further develop and commercialize our product
candidates and, accordingly, may not achieve our research,
development and commercialization goals.
We are subject to U.S. and foreign anti-corruption and anti-money
laundering laws with respect to our operations and non-compliance
with such laws can subject us to criminal and/or civil liability
and harm our business.
We
are subject to the U.S. Foreign Corrupt Practices Act of 1977, as
amended, or the FCPA, the U.S. domestic bribery statute contained
in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT
Act, and possibly other state and national anti-bribery and
anti-money laundering laws in countries in which we conduct
activities. Anti-corruption laws are interpreted broadly and
prohibit companies and their employees, agents, third-party
intermediaries, joint venture partners and collaborators from
authorizing, promising, offering, or providing, directly or
indirectly, improper payments or benefits to recipients in the
public or private sector. We engage third-party investigators,
CROs, and other consultants to design and perform preclinical
studies of our drug candidates and will do the same for any
clinical trials. Also, once a drug candidate has been approved and
commercialized, we may engage third-party intermediaries to promote
and sell our products abroad and/or to obtain necessary permits,
licenses, and other regulatory approvals. We or our third-party
intermediaries may have direct or indirect interactions with
officials and employees of government agencies or state-owned or
affiliated entities. We can be held liable for the corrupt or other
illegal activities of these third-party intermediaries, our
employees, representatives, contractors, collaborators, partners,
and agents, even if we do not explicitly authorize or have actual
knowledge of such activities.
Noncompliance
with anti-corruption and anti-money laundering laws could subject
us to whistleblower complaints, investigations, sanctions,
settlements, prosecution, other enforcement actions, disgorgement
of profits, significant fines, damages, other civil and criminal
penalties or injunctions, suspension and/or debarment from
contracting with certain persons, the loss of export privileges,
reputational harm, adverse media coverage, and other collateral
consequences. If any subpoenas, investigations, or other
enforcement actions are launched, or governmental or other
sanctions are imposed, or if we do not prevail in any possible
civil or criminal litigation, our business, results of operations
and financial condition could be materially harmed. In addition,
responding to any action will likely result in a materially
significant diversion of management's attention and resources and
significant defense and compliance costs and other professional
fees. In certain cases, enforcement authorities may even cause us
to appoint an independent compliance monitor which can result in
added costs and administrative burdens.
Significant disruptions of information technology systems or
breaches of data security could materially adversely affect our
business, results of operations and financial
condition.
We
collect and maintain information in digital form that is necessary
to conduct our business, and we are increasingly dependent on
information technology systems and infrastructure to operate our
business. In the ordinary course of our business, we collect, store
and transmit large amounts of confidential information, including
intellectual property, proprietary business information and
personal information. It is critical that we do so in a secure
manner to maintain the confidentiality and integrity of such
confidential information. We have established physical, electronic
and organizational measures to safeguard and secure our systems to
prevent a data compromise, and rely on commercially available
systems, software, tools, and monitoring to provide security for
our information technology systems and the processing, transmission
and storage of digital information. We have also outsourced
elements of our information technology infrastructure, and as a
result a number of third-party vendors may or could have access to
our confidential information. Our internal information technology
systems and infrastructure, and those of our current and any future
collaborators, contractors and consultants and other third parties
on which we rely, are vulnerable to damage from computer viruses,
malware, natural disasters, terrorism, war, telecommunication and
electrical failures, cyber-attacks or cyber-intrusions over the
Internet, attachments to emails, persons inside our organization,
or persons with access to systems inside our
organization.
The
risk of a security breach or disruption, particularly through
cyber-attacks or cyber-intrusion, including by computer hackers,
foreign governments and cyber-terrorists, has generally increased
as the number, intensity and sophistication of attempted attacks
and intrusions from around the world have increased. In addition,
the prevalent use of mobile devices that access confidential
information increases the risk of data security breaches, which
could lead to the loss of confidential information or other
intellectual property. The costs to us to mitigate network security
problems, bugs, viruses, worms, malicious software programs and
security vulnerabilities could be significant, and while we have
implemented security measures to protect our data security and
information technology systems, our efforts to address these
problems may not be successful, and these problems could result in
unexpected interruptions, delays, cessation of service and other
harm to our business and our competitive position. If such an event
were to occur and cause interruptions in our operations, it could
result in a material disruption of our product development
programs. For example, the loss of clinical trial data from
completed or ongoing or planned clinical trials could result in
delays in our regulatory approval efforts and significantly
increase our costs to recover or reproduce the data. Moreover, if a
computer security breach affects our systems or results in the
unauthorized release of personally identifiable information, our
reputation could be materially damaged.
In
addition, such a breach may require notification to governmental
agencies, the media or individuals pursuant to various federal and
state privacy and security laws, if applicable, including the
Health Insurance Portability and Accountability Act of 1996, as
amended by the Health Information Technology for Clinical Health
Act of 2009, and its implementing rules and regulations, as well as
regulations promulgated by the Federal Trade Commission and state
breach notification laws.
Under
the EU regulation and notably the General Data Protection
Regulation, or GDPR, No. 2016/679, which entered into force on
May 25, 2018 and is applicable personal data that we process
in relation to our presence in the EU, the offering of products or
services to individuals in the EU or the monitoring of the behavior
of individuals in the EU, we have also a legal responsibility to
report personal data breaches to the competent supervisory
authority. The EU data protection regulation includes a broad
definition and a short deadline for the notification of personal
data breaches, which may be difficult to implement in practice and
requires that we implement robust internal processes. Under this
regulation, we have to report personal data breaches to the
competent supervisory authority within 72 hours of the time we
become aware of a breach "unless the personal data breach is
unlikely to result in a risk to the right and freedoms of natural
persons" (Article 33 of the GDPR). In addition, the GDPR
requires that we communicate the breach to the Data Subject if the
breach is "likely to result in a high risk to the rights and
freedoms of natural persons" (Article 34 of the GDPR). In
order to fulfil these requirements, we have to implement specific
internal processes to be followed in case of a personal data
breach, which will allow us to (a) contain and recover the
breach, (b) assess the risk to the data subjects,
(c) notify, and possibly communicate the breach to the data
subjects, (d) investigate and respond to the breach. The
performance of these processes implies substantial costs in
resources and time.
Moreover,
as we may rely on third parties that will also process as processor
the data for which we are a data controller—for example, in
the context of the manufacturing of our drug candidates or for the
conduct of clinical trials, we must contractually ensure that
strict security measures, as well as appropriate obligations
including an obligation to report in due delay any security
incident are implemented, in order to allow us fulfilling our own
regulatory requirements.
We
would also be exposed to a risk of loss or litigation and potential
liability for any security breach on personal data for which we are
data controller. The costs of above-mentioned processes together
with legal penalties, possible compensation for damages and any
resulting lawsuits arising from a breach may be extensive and may
have a negative impact on reputation and materially adversely
affect our business, results of operations and financial
condition.
Our employees and independent contractors, including principal
investigators, consultants, commercial collaborators, service
providers and other vendors may engage in misconduct or other
improper activities, including noncompliance with regulatory
standards and requirements, which could have an adverse effect on
our results of operations.
We are exposed to the risk that our employees and
independent contractors, including principal investigators,
consultants, any future commercial collaborators, service providers
and other vendors may engage in misconduct or other illegal
activity. Misconduct by these parties could include intentional,
reckless and/or negligent conduct or other unauthorized activities
that violate the laws and regulations of the FDA, EMA and other
similar regulatory bodies, including those laws that require the
reporting of true, complete and accurate information to such
regulatory bodies; manufacturing standards; healthcare fraud and
abuse, data privacy laws and other similar laws; or laws that
require the true, complete and accurate reporting of financial
information or data. Activities subject to these laws also involve
the improper use or misrepresentation of information obtained in
the course of clinical trials, the creation of fraudulent data in
our preclinical studies or clinical trials, or illegal
misappropriation of product, which could result in regulatory
sanctions and cause serious harm to our reputation. It is not
always possible to identify and deter misconduct by employees and
other third parties, and the precautions we take to detect and
prevent this activity may not be effective in controlling unknown
or unmanaged risks or losses or in protecting us from governmental
investigations or other actions or lawsuits stemming from a failure
to be in compliance with such laws or regulations. In addition, we
are subject to the risk that a person or government could allege
such fraud or other misconduct, even if none occurred. If any such
actions are instituted against us, and we are not successful in
defending ourselves or asserting our rights, those actions could
have a significant impact on our business and financial results,
including, without limitation, the imposition of significant civil,
criminal and administrative penalties, damages, monetary fines,
disgorgements, possible exclusion from participation in
governmental healthcare programs, individual imprisonment, other
sanctions, contractual damages, reputational harm, diminished
profits and future earnings and curtailment of our operations, any
of which could adversely affect our ability to operate
our
business and our results of operations.
Our Ability to Compete May Decline If We Do Not Adequately Protect
Our Proprietary Rights.
Our
success depends on obtaining and maintaining proprietary rights to
our drug candidates for the treatment of age-related diseases, as
well as successfully defending these rights against third-party
challenges. We will only be able to protect our drug candidates,
and their uses from unauthorized use by third parties to the extent
that valid and enforceable patents, or effectively protected trade
secrets, cover them. Our ability to obtain patent protection for
our drug candidates is uncertain due to a number of factors,
including:
●
we
may not have been the first to make the inventions covered by
pending patent applications or issued patent
●
we
may not have been the first to file patent applications for our
drug candidates or the compositions we developed or for their
uses;
●
others
may independently develop identical, similar or alternative
products or compositions and uses thereof;
●
our
disclosures in patent applications may not be sufficient to meet
the statutory requirements for patentability;
●
any
or all of our pending patent applications may not result in issued
patents;
●
we
may not seek or obtain patent protection in countries that may
eventually provide us a significant business
opportunity;
●
any
patents issued to us may not provide a basis for commercially
viable products, may not provide any competitive advantages, or may
be successfully challenged by third parties;
●
our
compositions and methods may not be patentable;
●
hers may design around our patent claims to
produce competitive products which fall outside of the scope of our
patents;
●
others
may identify prior art or other bases which could invalidate our
patents.
Even
if we have or obtain patents covering our drug candidates or
compositions, we may still be barred from making, using and selling
our drug candidates or technologies because of the patent rights of
others. Others may have filed, and in the future may file, patent
applications covering compositions or products that are similar or
identical to ours. There are many issued U.S. and foreign patents
relating to chemical compounds and therapeutic products, and some
of these relate to compounds we intend to commercialize. These
could materially affect our ability to develop our drug candidates
or sell our products if approved. Because patent applications can
take many years to issue, there may be currently pending
applications unknown to us that may later result in issued patents
that our drug candidates or compositions may infringe. These patent
applications may have priority over patent applications filed by
us.
Obtaining
and maintaining a patent portfolio entails significant expense and
resources. Part of the expense includes periodic maintenance fees,
renewal fees, annuity fees, various other governmental fees on
patents and/or applications due in several stages over the lifetime
of patents and/or applications, as well as the cost associated with
complying with numerous procedural provisions during the patent
application process. We may or may not choose to pursue or maintain
protection for particular inventions. In addition, there are
situations in which failure to make certain payments or
noncompliance with certain requirements in the patent process can
result in abandonment or lapse of a patent or patent application,
resulting in partial or complete loss of patent rights in the
relevant jurisdiction. If we choose to forgo patent protection or
allow a patent application or patent to lapse purposefully or
inadvertently, our competitive position could
suffer.
In
addition, it is unclear at this time what Brexit's impact will have
on our intellectual property rights and the process for obtaining
and defending such rights. It is possible that certain intellectual
property rights, such as trademarks, granted by the EU will cease
being enforceable in the UK absent special arrangements to the
contrary. With regard to existing patent rights, the effect of
Brexit should be minimal considering enforceable patent rights are
specific to the UK, whether arising out of the European Patent
Office or directly through the UK patent office.
Legal
actions to enforce our proprietary rights (including patents and
trademarks) can be expensive and may involve the diversion of
significant management time. In addition, these legal actions could
be unsuccessful and could also result in the invalidation of our
patents or trademarks or a finding that they are unenforceable. We
may or may not choose to pursue litigation or other actions against
those that have infringed on our patents or trademarks, or used
them without authorization, due to the associated expense and time
commitment of monitoring these activities. If we fail to protect or
to enforce our intellectual property rights successfully, our
competitive position could suffer, which could harm our results of
operations.
Risks Relating to our Finances, Capital Requirements and Other
Financial Matters
We are a clinical stage biopharmaceutical company with a history of
operating losses that are expected to continue and we are unable to
predict the extent of future losses, whether we will generate
significant revenues or whether we will achieve or sustain
profitability.
We
are a company in the clinical stage of pharmaceutical development
and our prospects must be considered in light of the uncertainties,
risks, expenses and difficulties frequently encountered by
companies in their early stages of operations. We have generated
operating losses since our inception, including losses of
approximately $15.2 million and $13.5 million for the years ended
December 31, 2019 and 2018, respectively. We expect to make
substantial expenditures and incur increasing operating costs in
the future and our accumulated deficit will increase significantly
as we expand development and clinical trial activities for MS1819
and our other product candidates. Our losses have had, and are
expected to continue to have, an adverse impact on our working
capital, total assets and stockholders’ equity. Because of
the risks and uncertainties associated with product development, we
are unable to predict the extent of any future losses, whether we
will ever generate significant revenues or if we will ever achieve
or sustain profitability.
We
have incurred significant operating losses and negative cash flows
from operations since inception, had negative working capital at
December 31, 2019 of approximately $877,000 and had an accumulated
deficit at December 31, 2019 of approximately $62.7 million. We are
dependent on obtaining, and are continuing to pursue, the necessary
funding from outside sources, including obtaining additional
funding from the sale of securities, in order to continue our
operations. Without adequate funding, we may not be able to meet
our obligations. We believe these conditions raise substantial
doubt about our ability to continue as a going
concern.
We have certain senior convertible promissory notes outstanding, in
the total principal amount of approximately $6.9 million plus
accrued interest thereon. If we are unable to pay the senior
convertible promissory notes when due, or otherwise restructure the
senior convertible promissory notes, we will be in
default.
Between
December 20, 2019 and January 9, 2020, the Company issued senior
convertible promissory notes in the aggregate principal amount of
$6,904,000. The senior convertible promissory notes are due on
September 20, 2020 and accrue interest at a rate of 9% per annum.
In the event we do not have the cash resources to pay the
convertible promissory notes when due, such notes will be in
default. Our ability to repay or to refinance our indebtedness
depends on our future performance and ability to raise additional
sources of cash, which is subject to economic, financial,
competitive and other factors beyond our control. If we are unable
to generate sufficient cash to service our indebtedness, we may be
required to adopt one or more alternatives, such as restructuring
our debt or obtaining additional equity capital on terms that may
be onerous or highly dilutive or selling assets. If we desire to
refinance our indebtedness, our ability to do so will depend on the
capital markets and our financial condition at such time. We may
not be able to engage in any of these activities or engage in these
activities on desirable terms, which could result in a default on
our debt obligations. As a result, our business, financial
condition and future prospects could be negatively
impacted.
We will need substantial additional funding and may be unable to
raise capital when needed, which would force us to delay, curtail
or eliminate one or more of our research and development programs
or commercialization efforts.
Our
operations have consumed substantial amounts of cash since
inception. During the years ended December 31, 2019 and 2018, we
incurred research and development expense of approximately $8.7
million and $5.8 million, respectively. We expect to continue to
spend substantial amounts on product development, including
conducting clinical trials for MS1819 and our other product
candidates and purchasing clinical trial materials from our
suppliers. We will require substantial additional funds to support
our continued research and development activities, as well as the
anticipated costs of preclinical studies and clinical trials,
regulatory approvals and potential commercialization. We could
spend our available financial resources much faster than we
currently expect.
Until
such time, if ever, as we can generate a sufficient amount of
product revenue and achieve profitability, we expect to seek to
finance future cash needs through equity and/or debt financings or
corporate collaboration and licensing arrangements. We currently
have no other commitments or agreements relating to any of these
types of transactions and we cannot be certain that additional
funding will be available on acceptable terms, or at all. If we are
unable to raise additional capital, we will have to delay, curtail
or eliminate one or more of our research and development
programs.
Raising additional funds by issuing securities or through licensing
or lending arrangements may cause dilution to our existing
stockholders, restrict our operations or require us to relinquish
proprietary rights.
To
the extent that we raise additional capital by issuing equity
securities, the share ownership of existing stockholders will be
diluted. Any future debt financing may involve covenants that
restrict our operations, including limitations on our ability to
incur liens or additional debt, pay dividends, redeem our stock,
make certain investments and engage in certain merger,
consolidation or asset sale transactions, among other restrictions.
In addition, if we raise additional funds through licensing
arrangements, it may be necessary to relinquish potentially
valuable rights to our product candidates or grant licenses on
terms that are not favorable to us.
Our debt agreements contain restrictions that limit our flexibility
in operating our business.
Our
outstanding senior convertible promissory notes were issued
pursuant to note purchase agreements, which together impose certain
operating and financial restrictions. These covenants may limit our
ability and the ability of our subsidiaries, under certain
circumstances, to, among other things:
●
incur
additional indebtedness;
●
create
or incur liens;
●
sell
or transfer assets; and
●
pay
dividends and distributions.
These
also contain certain customary affirmative covenants and events of
default.
As
a result of the covenants and restrictions contained in our
existing debt agreements, we are limited in how we conduct our
business, and we may be unable to raise additional debt to compete
effectively or to take advantage of new business opportunities. The
terms of any future indebtedness we may incur could include more
restrictive covenants. We cannot guarantee that we will be able to
maintain compliance with these covenants in the future and, if we
fail to do so, that we will be able to obtain waivers from our
noteholders and/or amend the covenants.
Our
failure to comply with the restrictive covenants described above as
well as others contained in our future debt instruments from time
to time could result in an event of default, which, if not cured or
waived, could result in our being required to repay these
borrowings before their maturity dates. In addition, any event of
default or declaration of acceleration under one debt instrument
could also result in an event of default under one or more of our
other debt instruments. If we are unable to repay, refinance or
restructure our indebtedness, the holders of such debt could
proceed against that indebtedness and trigger a default. If we are
forced to refinance these borrowings on less favorable terms or if
we are unable to repay, refinance or restructure such indebtedness,
our financial condition and results of operations could be
adversely affected.
Risks Associated with our Capital Stock
If we fail to comply with the continued listing requirements of the
Nasdaq Capital Market, our Common Stock may be delisted and the
price of our Common Stock and our ability to access the capital
markets could be negatively impacted.
On March 23, 2020, we were notified by the Nasdaq
Stock Market, LLC (
"Nasdaq"
) that we were not in compliance with the minimum
bid price requirements set forth in Nasdaq Listing Rule
5550(a)(2) for continued listing on the Nasdaq Capital
Market. Nasdaq Listing Rule 5550(a)(2) requires listed
securities to maintain a minimum bid price of $1.00 per share, and
Nasdaq Listing Rule 5810(c)(3)(A) provides that a failure to meet
the minimum bid price requirement exists if the deficiency
continues for a period of 30 consecutive business days. The
notification provided that we had 180 calendar days, or until
September 21, 2020, to regain compliance with Nasdaq Listing
Rule 5550(a)(2). To regain compliance, the bid price of our Common
Stock must have a closing bid price of at least $1.00 per share for
a minimum of 10 consecutive business days. If we do not regain
compliance by September 21, 2020, an additional 180 days may
be granted to regain compliance, so long as we meet
the Nasdaq Capital Market continued listing requirements
(except for the bid price requirement) and
notify Nasdaq in writing of our intention to cure the
deficiency during the second compliance period. If we do not
qualify for the second compliance period or fail to regain
compliance during the second 180-day period,
then Nasdaq will notify us of its determination to delist
our Common Stock, at which point we will have an opportunity to
appeal the delisting determination to a hearings
panel.
No
assurance can be given that we will continue to meet applicable
Nasdaq continued listing standards. Failure to meet applicable
Nasdaq continued listing standards could result in a delisting of
our Common Stock, which could materially reduce the liquidity of
our Common Stock and result in a corresponding material reduction
in the price of our Common Stock. In addition, delisting could harm
our ability to raise capital through alternative financing sources
on terms acceptable to us, or at all, and may result in the
inability to advance our drug development programs, potential loss
of confidence by investors and employees, and fewer business
development opportunities.
The limited
public market for our securities may adversely affect an
investor’s ability to liquidate an investment in
us.
Although
our Common Stock is currently listed on the Nasdaq Capital Market,
there is limited trading activity. We can give no assurance
that an active market will develop, or if developed, that it will
be sustained. If an investor acquires shares of our Common
Stock, the investor may not be able to liquidate our shares should
there be a need or desire to do so.
The market price of our Common Stock may be volatile and may
fluctuate in a way that is disproportionate to our operating
performance.
Our stock price may experience substantial
volatility as a result of a number of factors,
including:
●
sales
or potential sales of substantial amounts of our Common
Stock;
●
delay
or failure in initiating or completing pre-clinical or clinical
trials or unsatisfactory results of these trials;
●
announcements
about us or about our competitors, including clinical trial
results, regulatory approvals or new product
introductions;
●
developments
concerning our licensors or product manufacturers;
●
litigation
and other developments relating to our patents or other proprietary
rights or those of our competitors;
●
conditions
in the pharmaceutical or biotechnology industries;
●
governmental
regulation and legislation;
●
variations
in our anticipated or actual operating results;
●
change
in securities analysts’ estimates of our performance, or our
failure to meet analysts’ expectations; foreign currency
values and fluctuations; and
●
overall
economic conditions.
Many
of these factors are beyond our control. The stock markets in
general, and the market for pharmaceutical and biotechnological
companies in particular, have historically experienced extreme
price and volume fluctuations. These fluctuations often have been
unrelated or disproportionate to the operating performance of these
companies. These broad market and industry factors could reduce the
market price of our Common Stock, regardless of our actual
operating performance.
We have never paid and do not intend to pay cash dividends. As
a result, capital appreciation, if any, will be your sole source of
gain.
We
have never paid cash dividends on any of our capital stock and we
currently intend to retain future earnings, if any, to fund the
development and growth of our business. In addition, the terms
of existing and future debt agreements may preclude us from paying
dividends. As a result, capital appreciation, if any, of our
Common Stock will be your sole source of gain for the foreseeable
future.
Provisions in our restated certificate of incorporation, our
restated by-laws and Delaware law might discourage, delay or
prevent a change in control of our company or changes in our
management and, therefore, depress the trading price of our Common
Stock.
Provisions
of our restated certificate of incorporation, our restated by-laws
and Delaware law may have the effect of deterring unsolicited
takeovers or delaying or preventing a change in control of our
company or changes in our management, including transactions in
which our stockholders might otherwise receive a premium for their
shares over then current market prices. In addition, these
provisions may limit the ability of stockholders to approve
transactions that they may deem to be in their best interests.
These provisions include:
●
the
inability of stockholders to call special meetings;
and
●
the
ability of our board of directors to designate the terms of and
issue new series of preferred stock without stockholder approval,
which could include the right to approve an acquisition or other
change in our control or could be used to institute a rights plan,
also known as a poison pill, that would work to dilute the stock
ownership of a potential hostile acquirer, likely preventing
acquisitions that have not been approved by our board of
directors.
In
addition, Section 203 of the Delaware General Corporation Law
prohibits a publicly-held Delaware corporation from engaging in a
business combination with an interested stockholder, generally a
person which together with its affiliates owns, or within the last
three years, has owned 15% of our voting stock, for a period of
three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination
is approved in a prescribed manner.
The
existence of the foregoing provisions and anti-takeover measures
could limit the price that investors might be willing to pay in the
future for shares of our Common Stock. They could also deter
potential acquirers of our company, thereby reducing the likelihood
that you could receive a premium for your Common Stock in an
acquisition.
We are eligible to be treated as an “emerging growth
company”, as defined in the JOBS Act, and we cannot be
certain if the reduced disclosure requirements applicable to
emerging growth companies will make our Common Stock less
attractive to investors.
We are an “emerging growth company”,
as defined in the Jumpstart Our Business Startups Act of 2012 (the
“
JOBS
Act
”). For as long as we
continue to be an emerging growth company, we may take advantage of
exemptions from various reporting requirements that are applicable
to other public companies that are not emerging growth companies,
including (i) not being required to comply with the auditor
attestation requirements of Section 404 of the Sarbanes-Oxley Act,
(ii) reduced disclosure obligations regarding executive
compensation in our periodic reports and proxy statements, and
(iii) exemptions from the requirements of holding a nonbinding
advisory vote on executive compensation and stockholder approval of
any golden parachute payments not previously approved. We could be
an emerging growth company for up to five years, although
circumstances could cause us to lose that status earlier, including
if the market value of our Common Stock held by non-affiliates
exceeds $700.0 million as of any June 30 before that time
or if we have total annual gross revenue of $1.0 billion or more
during any fiscal year before that time, after which, in each case,
we would no longer be an emerging growth company as of the
following December 31 or, if we issue more than $1.0 billion in
non-convertible debt during any three-year period before that time,
we would cease to be an emerging growth company
immediately.
Under
the JOBS Act, emerging growth companies can also delay adopting new
or revised accounting standards until such time as those standards
apply to private companies. We have irrevocably elected not to
avail ourselves of this exemption from new or revised accounting
standards and, therefore, will be subject to the same new or
revised accounting standards as other public companies that are not
emerging growth companies.
If securities or industry analysts do not publish research or
reports about our business, if they adversely change their
recommendations regarding our shares or if our results of
operations do not meet their expectations, our share price and
trading volume could decline.
The
trading market for our shares is influenced by the research and
reports that industry or securities analysts publish about us or
our business. We do not have any control over these analysts. If
one or more of these analysts cease coverage of our company or fail
to publish reports on us regularly, we could lose visibility in the
financial markets, which in turn could cause our share price or
trading volume to decline. Moreover, if one or more of the analysts
who cover us downgrade our stock, or if our results of operations
do not meet their expectations, our share price could
decline.
ITEM 1B.
U
NRESOLVED
STAFF
C
OMMENTS
None.
Facilities
Our
executive offices are located in approximately 687 square feet of
office space at 760 Parkside Avenue, Downstate Biotechnology
Incubator, Suite 304, Brooklyn, NY 11226 that we occupy under a
lease agreement that expired on December 31, 2019, and has
been extended on a month to month basis, with the option for
multiple year renewals. Our U.S. clinical operations office is
located in approximately 1,990 square feet of office space at 22320
Foothill Boulevard, Suite 200, Hayward, CA 94541 that we occupy
under a lease expiring on May 31, 2020. The scientific
research and development operations of AzurRx SAS are conducted at
approximately 4,520 square feet of office space located at 290
chemin de Saint Dionisy, Jardin des Entreprises, 30980 Langlade,
France, that we occupy under a nine-year lease expiring in December
2020.
ITEM 3.
LEGAL
P
ROCEEDINGS
As
of the date hereof, we know of no material, existing or pending
legal proceedings against us, nor are we the plaintiff in any
material proceedings or pending litigation. There are no
proceedings in which any of our directors, executive officers or
affiliates, or any registered or beneficial stockholder, is an
adverse party or has a material interest adverse to our
interest. From time to time, we may be subject to various
claims, legal actions and regulatory proceedings arising in the
ordinary course of business.
None.
ITEM 5.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our
Common Stock is listed on the Nasdaq Capital Market, or Nasdaq,
under the symbol “AZRX”.
Holders
At
March 27, 2020, there were 27,131,456 shares of our Common Stock
issued and outstanding and approximately 98 stockholders of
record.
Securities Authorized for Issuance Under Equity Compensation
Plans
The
following table provides information as of December 31, 2019
regarding equity compensation plans approved by our security
holders and equity compensation plans that have not been approved
by our security holders:
|
Plan category
|
Number of securities to be issued upon exercise of outstanding
options, warrants and rights
|
Weighted-average exercise price of outstanding options,
warrants and rights
|
Number of securities remaining available for future issuance under
equity compensation plans (excluding securities reflected in column
(a))
|
|
|
(a)
|
(b)
|
(c)
|
|
Equity
compensation plans approved by security holders
(1)
|
1,677,500
|
$
2.30
|
1,274,819
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
|
-
|
-
|
-
|
|
|
|
|
|
|
Total
|
1,677,500
|
$
2.30
|
1,274,819
|
|
(1)
|
632,667 shares are reserved under the 2014 Plan, subject to the
issuance of restricted stock and
RSUs
.
|
Transfer Agent
The
transfer agent for our Common Stock is Colonial Stock Transfer, 66
Exchange Place, 1st Floor, Salt Lake City, Utah 84111, Tel: (801)
355-5740.
Unregistered Sales of Equity Securities
On October 8, 2019, the Company issued its Chief
Executive Officer (i) ten-year stock options to purchase 300,000
shares of Common Stock with a strike price of $0.52, subject to
milestone-based vesting, and (ii) restricted stock units
("
RSUs
") to purchase 200,000 shares of Common stock,
subject to milestone and market- based vesting.
On November 13, 2019, the Company entered into a
purchase agreement (the “
LPC Purchase
Agreement
”), together
with a registration rights agreement (the
“
LPC
Registration Rights Agreement
”), with LPC. Under the terms of the LPC
Purchase Agreement, LPC has committed to purchase up to $15,000,000
of our Common Stock (the “
LPC Equity Line of
Credit
”). Upon execution
of the LPC Purchase Agreement, the Company issued LPC 487,168
shares of Common Stock (the “
Commitment
Shares
”) as a fee for its
commitment to purchase shares of our Common Stock under the LPC
Purchase Agreement.
Between
December 20, 2019 and January 9, 2020, pursuant to a private
placement with accredited investors, the Company issued (i) senior
convertible promissory notes in the aggregate principal amount of
$6,904,000, convertible into shares of Common Stock at $0.97 per
share, and (ii) five-year warrants to purchase an aggregate of
3,558,795 shares of Common Stock, with an exercise price of $1.07
per share, resulting in net proceeds to the Company of
approximately $6,234,600. Additionally, the Company issued
five-year warrants to purchase an aggregate of 444,108 shares of
Common Stock, with an exercise price equal to $1.21 per share to
the placement agent and/or their designees.
On
December 31, 2019, the Company issued an aggregate of 30,000 shares
of Common Stock to its outside members of its Board as payment of
Board fees.
On
December 31, 2019, the Company issued 30,837 shares of Common Stock
to a consultant as payment of $33,750 of accounts
payable.
On
December 31, 2019, the Company issued 97,403 shares of Common Stock
to a consultant for services provided.
On
January 2, 2020, the Company issued its our Chief Financial Officer
ten-year stock options to purchase 335,006 shares of Common Stock
with a strike price of $1.03 subject to time-based
vesting.
On
March 4, 2020, the Company issued 75,000 shares of Common Stock to
a consultant for services provided.
On
March 11, 2020, the Company issued an aggregate of 105,937 shares
of Common Stock to its outside members of its Board for the
settlement of accounts payable in the aggregate amount of
$131,149.
ITEM 6.
S
ELECTED
FINANCIAL
DATA
As
an “emerging growth company” as defined by the rules
and regulations of the SEC, we are not required to provide this
information.
You should read the following discussion and analysis in
conjunction with our financial statements, including the notes
thereto contained in this Annual Report. This discussion contains
forward-looking statements that involve risks, uncertainties and
assumptions. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of a
variety of certain factors, including those set forth under
“Risk Factors Associated with Our Business” and
elsewhere in this Annual Report.
Critical Accounting Policies and Estimates
This Management’s Discussion and Analysis of
Financial Condition and Results of Operations is based on our
financial statements, which have been prepared in accordance with
generally accepted accounting principles generally accepted in the
United States of America (“
GAAP
”). The preparation of financial
statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements
and the reported amount of revenue and expense during the reporting
period. In our consolidated financial statements, estimates are
used for, but not limited to, valuation of financial instruments
and intangible assets, fair value of long-lived assets and
contingent consideration, deferred taxes and valuation allowance,
and the depreciable lives of long-lived assets.
On
an ongoing basis, we evaluate these estimates and assumptions,
including those described below. We base our estimates on
historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. These estimates
and assumptions form the basis for making judgments about the
carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results could differ from
those estimates. Due to the estimation processes involved, the
following summarized accounting policies and their application are
considered to be critical to understanding our business operations,
financial condition and operating results.
Stock-Based Compensation
We
account for share-based payment awards issued to employees and
members of our Board by measuring the fair value of the award on
the date of grant and recognizing this fair value as stock-based
compensation using a straight-line basis over the requisite service
period, generally the vesting period. For awards issued
to non-employees, the measurement date is the date when the
performance is complete or when the award vests, whichever is the
earliest. Accordingly, non-employee awards are remeasured at each
reporting period until the final measurement date. The fair value
of the award is recognized as stock-based compensation over the
requisite service period, generally the vesting
period.
Debt and Equity Instruments
We
analyze debt and equity instruments for various features that would
generally require either bifurcation and derivative accounting, or
recognition of a debt discount or premium under authoritative
guidance.
Detachable
warrants issued in conjunction with debt are measured at their
relative fair value, if they are determined to be equity
instrument, or their fair value, if they are determined to be
liability instruments, and recorded as a debt
discount.
Conversion
features that are in the money at the commitment date constitute a
beneficial conversion feature that is measured at its intrinsic
value and recognized as debt discount or deemed dividend. Debt
discount is amortized as interest expense over the maturity period
of the debt using the effective interest method.
Intangible Assets
Our
definite-lived intangible assets had a carrying value of
approximately $3,407,000 and $570,000, at December 31, 2019, and
2018, respectively. These assets include patents, in-process
research and development and license agreements. These intangible
assets were recorded at historical cost and are stated
net of accumulated amortization.
The
patents, in-process research and development and licenses are
amortized over their remaining estimated useful lives, ranging from
5 to 12 years, based on the straight-line method. The
estimated useful lives directly impact the amount of amortization
expense recorded for these assets on a quarterly and annual
basis.
In
addition, we test for impairment of definite-lived intangible
assets when events or circumstances indicate that the carrying
value of the assets may not be recoverable. Judgment is used in
determining when these events and circumstances arise. If we
determine that the carrying value of the assets may not be
recoverable, judgment and estimates are used to assess the fair
value of the assets and to determine the amount of any impairment
loss. No events or circumstances arose in the years ended
December 31, 2019 and 2018 that would indicate that the carrying
value of any of our definite-lived intangible assets may not be
recoverable.
Goodwill
Goodwill
relates to the acquisition of ProteaBio Europe during 2014 and
represents the excess of the total purchase consideration over the
fair value of acquired assets and assumed liabilities, using the
purchase method of accounting. Goodwill is not amortized but is
subject to periodic review for impairment. As a result, the amount
of goodwill is directly impacted by the estimates of the fair
values of the assets acquired and liabilities assumed.
In
addition, goodwill will be reviewed annually, and whenever events
or changes in circumstances indicate that the carrying amount of
the goodwill might not be recoverable. Judgment is used in
determining when these events and circumstances arise. We perform
our review of goodwill on our one reporting unit. If we determine
that the carrying value of the assets may not be recoverable,
judgment and estimates are used to assess the fair value of the
assets and to determine the amount of any impairment
loss.
The
carrying value of goodwill at December 31, 2019 and 2018 was
approximately $1,887,000 and $1,925,000, respectively. If actual
results are not consistent with our estimates or assumptions, we
may be exposed to an impairment charge that could be
material.
Income Taxes
We
use the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax
rates and laws that are expected to be in effect when the
differences are expected to reverse. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
the period that such tax rate changes are enacted. The measurement
of a deferred tax asset is reduced, if necessary, by a valuation
allowance if it is more likely than not that some portion or all of
the deferred tax asset will not be realized.
We
use a recognition threshold and a measurement attribute for
the financial statement recognition and measurement of tax
positions taken or expected to be taken in a tax return. For those
benefits to be recognized, a tax position must be
more-likely-than-not to be sustained upon examination by taxing
authorities. We have not identified any uncertain income tax
positions that could have a material impact to the consolidated
financial statements. We are subject to taxation in various U.S.
and foreign jurisdictions and remain subject to examination by
taxing jurisdictions for the calendar year 2014 and all subsequent
periods due to the availability of net operating loss
carryforwards. To the extent we prevail in matters for which a
liability has been established or are required to pay amounts in
excess of our established liability, our effective income tax rate
in a given financial statement period could be materially affected.
An unfavorable tax settlement generally would require use of our
cash and may result in an increase in our effective income tax rate
in the period of resolution. A favorable tax settlement may reduce
our effective income tax rate and would be recognized in the period
of resolution.
Our
effective income tax rate may be affected by changes in tax
law, our level of earnings, and the results of tax
audits.
Although
we believe that the judgments and estimates discussed herein are
reasonable, actual results could differ, and we may be exposed to
losses or gains that could be material.
Jumpstart Our Business Startups Act of 2012
On
April 5, 2012, the JOBS Act was enacted. The JOBS Act provides
that an “emerging growth company” can take advantage of
the extended transition period provided in Section 7(a)(2)(B)
of the Securities Act for complying with new or revised accounting
standards.
Financial Operations Overview
Revenue
To date, we have not generated any revenue
from
product sales or otherwise. In the future, we expect
that we will seek to generate revenue primarily from product sales,
but we may also generate non-product revenue from sources
including, but not limited to, research funding, development and
milestone payments, and royalties on future product sales in
connection with any out-license or other strategic relationships
and/or government grants
we may
establish.
Our product candidates are
at an early stage of development and may never be successfully
developed or commercialized.
Research and Development Expense
Conducting
R&D is central to our business. Historically, the majority of
our R&D expenses have been focused on the development of
MS1819. R&D expense consists primarily of:
●
employee-related
expense, which include salaries and benefits, and rent
expense;
●
license
fees and annual payments related to in-licensed products and the
reimbursement of related intellectual property;
●
expense
incurred under agreements with clinical research organizations
(CROs), investigative sites and consultants and contractors that
conduct or provide other services relating to our clinical trials
and a substantial portion of our preclinical and research
activities;
●
the
cost of acquiring drug supply and clinical trial materials from
third party manufacturers; and
●
amortization
of intangible assets, including patents, in-process research and
development and license agreements.
We expect to continue to incur substantial expense
related to our R&D activities for the foreseeable future as we
focus our efforts on the clinical development of MS1819. Since
product candidates in later stages of clinical development
generally have higher development costs than those in earlier
stages of clinical development, primarily due to the increased size
and duration of later stage clinical trials, and chemistry,
manufacturing and controls (“
CMC
”) efforts, we expect that our R&D
expense will increase in the future. In addition, if our product
development efforts are successful, we expect to incur substantial
costs to prepare for potential commercialization of any late-stage
product candidates and, in the event MS1819 or one or more of our
other product candidates receives regulatory approval, to
potentially fund the launch and sales and marketing efforts of the
product.
We do
not record or maintain information regarding costs incurred in
R&D on a program or project specific basis. Our R&D
staff, outside consultants, contractors and CROs are deployed
across several programs and/or indications. Additionally, many
of our costs are not attributable to individual programs and/or
indications. Therefore, we believe that allocating costs on
the basis of time incurred by our employees does not accurately
reflect the actual costs of a project.
General and Administrative Expense
G&A expense consists principally of
personnel-related costs, including stock-based compensation,
legal fees relating to both intellectual property and corporate
matters, accounting and audit related costs, insurance, corporate
communications and investor relations expense, information
technology and internet related costs, office and facility rents
and related expense, and fees for consulting and other professional
services
, and other general operating
expense not otherwise included in R&D.
We
anticipate G&A expense will remain flat to slightly down in
fiscal year ending December 31, 2020 reflecting cost cutting
measures offset by increases to insurance and business development
efforts, however we expect increasing costs in future periods
associated with:
●
support
of our expanded R&D and commercialization activities;
intellectual
property, patent and corporate legal expense
;
insurance
;
●
increased
professional fees and other costs associated with the compliance
with the Exchange Act, the Sarbanes-Oxley Act and stock exchange
regulatory requirements and compliance;
●
business
development, including potential partnership and/or collaboration
agreements and financing activities;
●
an
expanding infrastructure, including information technology
administration;
●
corporate
communications and investor relations; and
●
the
hiring of additional personnel and consultants, among other
expenses.
Liquidity and Capital Resources
We
have experienced net losses and negative cash flows from operations
since our inception. As of December 31, 2019, we had cash and cash
equivalents of approximately $175,796, negative working capital of
approximately $877,000, and had sustained cumulative losses
attributable to common stockholders of approximately $62.7 million.
Subsequent to December 31, 2019, we have raised aggregate net
proceeds of approximately $3,384,930. We have not yet achieved
profitability and anticipate that we will continue to incur net
losses for the foreseeable future. We expect that our expenses
will continue to grow and, as a result, we will need to generate
significant product revenues to achieve profitability. We may never
achieve profitability. As such, we are dependent on obtaining, and
are continuing to pursue, the necessary funding from outside
sources, including obtaining additional funding from the sale of
securities in order to continue our operations. Without adequate
funding, we may not be able to meet our obligations. We believe
these conditions raise substantial doubt about our ability to
continue as a going concern.
The
impact of the COVID-19 epidemic is evolving rapidly and its future
effects are uncertain, we anticipate we will need to raise
additional capital
through additional
equity and/or debt financings
, including the LPC Equity Line
of Credit in response to any potential disruptions or delays due to
COVID-19, as well as the potential to restructure and/or extend our
Convertible Notes.
We have funded our operations to date primarily
through the completion of our initial public offering in October
2016 (“
IPO
”), the issuance of debt and convertible
debt securities, as well as the issuance of Common Stock in various
private placement transactions and public offerings. We expect to
incur substantial expenditures in the foreseeable future for the
development of MS1819 and any other product candidates. We will
require additional financing to develop, prepare regulatory filings
and obtain regulatory approvals, fund operating losses, and, if
deemed appropriate, establish manufacturing, sales and marketing
capabilities.
In
June and July of 2017, we issued a 12% senior secured original
issue discount convertible debenture, resulting in gross proceeds
of $1,000,000, and in net offering proceeds of $915,000. In
addition, in June and July of 2017, we issued units of Common Stock
and warrants resulting in net offering proceeds of approximately
$4,645,000, and in January 2018 we received proceeds of $2,239,617
from the exercise of repriced warrants.
On May
3, 2018, we completed the May 2018 Public Offering, an underwritten
public offering of 4,160,000 shares of Common Stock at a public
offering price per share of $2.50, resulting in gross proceeds of
$10.4 million with associated expenses of approximately $800,000.
The May 2018 Public Offering was completed pursuant to the terms of
an underwriting agreement executed by the Company and Oppenheimer
on May 1, 2018. After deducting the underwriting discount paid to
Oppenheimer, legal fees, and other offering expenses payable by the
Company, the Company received net proceeds of approximately $9.6
million.
On
February 14, 2019, we sold and issued two Senior Convertible Notes
to ADEC, resulting in gross proceeds to the Company of $2.0
million.
In
April 2019, we completed the April 2019 Public Offering, a public
offering of 1,294,930 shares of Common Stock at a public offering
price of $2.13 per share, resulting net proceeds of approximately
$2.5 million, after deducting the selling agent fees and other
offering expenses payable by the Company. The April 2019 Public
Offering was completed pursuant to our effective shelf registration
statement on Form S-3 (File No. 333-226065) and the prospectus
supplement filed on April 2, 2019.
On May 9, 2019, we completed the May 2019 Public
Offering, a public offering of 1,227,167 shares of Common Stock at
a public offering price of $2.35 per share, resulting net proceeds
of approximately $2.55 million, after deducting the selling agent
fees and other offering expenses payable by the Company. The May
2019 Public Offering was completed pursuant to our effective shelf
registration statement on Form S-3 (File No. 333-226065) and the
prospectus supplement filed on May 9, 2019.
On
July 17, 2019, we completed the July 2019 Public Offering, a
public offering of 5,000,000 shares of Common Stock at a
public offering price of $1.00 per share, resulting in net proceeds
of approximately $4.5 million, after deducting the underwriting
discount, and other offering expenses payable by the Company. The
July 2019 Public Offering was conducted pursuant to our effective
shelf registration statement on Form S-3 (File
No. 333-231954), filed with the SEC on June 5, 2019, and
declared effective on June 25, 2019, including the base prospectus
dated June 4, 2019 included therein and the related prospectus
supplement filed on July 19, 2019.
Between December 20, 2019 and January 9, 2020, we
issued Senior Convertible Promissory Notes to certain investors in
the aggregate principal amount of $6,904,000. Each Promissory Note
matures on September 20, 2020, accrues interest at a rate of 9% per
annum, and is convertible, at the option of the holder, into shares
of Common Stock at a price of $0.97 per share (the
“
Promissory
Note
Conversion
Shares
”). As additional
consideration for the purchase of the Promissory Notes, each
Investor also received Common Stock purchase warrants (the
“
Note
Warrants
”) to purchase
that number of shares of Common Stock equal to one-half of
the
Promissory Note
Conversion Shares issuable upon
conversion of the Promissory Notes. The Note Warrants have an
exercise price of $1.07 per share and expire five years from the
date of issuance.
Subsequent to December 31, 2019,
in
February 2020, we issued 150,000 shares of Common Stock in
connection with the LPC Purchase Agreement, resulting in gross
proceeds to the Company of $144,000.
We
expect to incur substantial expenditures in the foreseeable future
for the development of MS1819 and our other product candidates. We
will require additional financing to develop our product
candidates, run clinical trials, prepare regulatory filings and
obtain regulatory approvals, fund operating losses, and, if deemed
appropriate, establish manufacturing, sales and marketing
capabilities. Our current financial condition raises substantial
doubt about our ability to continue as a going concern. Our failure
to raise capital as and when needed would have a material adverse
impact on our financial condition, our ability to meet our
obligations, and our ability to pursue our business strategies. We
will seek funds through additional equity and/or debt financings,
collaborative or other arrangements with corporate sources, or
through other sources of financing.
Although
we are primarily focused on the development of MS1819, we are also
opportunely focused on expanding our product pipeline through
collaborations, and also through acquisitions of products and
companies. We are continually evaluating potential asset
acquisitions and business combinations. To finance such
acquisitions, we might raise additional equity capital, incur
additional debt, or both.
Cash Flows for the Years Ended December 31, 2019 and
2018
At
December 31, 2019, we had $175,796 in cash and cash equivalents,
compared to $1,114,343 at December 31, 2018.
Net
cash used in operating activities for the year ended December 31,
2019 was $14,033,496, as compared to $10,869,320 for the year ended
December 31, 2018, representing an increase in cash used of
approximately $3,164,176. This increase was mainly due to increased
operating expenses primarily related to clinical trials expense, a
reduction in accounts payable and accrued expenses, increased
stock-based compensation and stock expense and the elimination of
warrant modification expense, offset by decreases in other
receivables, amortization, accreted interest on convertible debt
and debt discount and prepaid expenses.
Net cash used in operating activities for the year
ended December 31, 2019 primarily reflected our net loss of
$15,177,686
plus
adjustments to reconcile net loss to net cash used in operating
activities of depreciation and amortization expense of $1,020,046,
non-cash stock-based compensation of $574,335, non-cash restricted
stock granted to employees and directors of $607,597, non-cash
Common Stock granted to consultants of $210,000, non-cash debt
discount - warrants of $313,364, non-cash interest on convertible
debt of $112,543, and the write off of fixed assets of $7,296.
Changes in assets and liabilities are due to an increase in other
receivables of $749,859 due primarily to the French R&D tax
credit normally received in the following year not yet received for
2018 and to increased billings to Mayoly, an decrease in prepaid
expense of $85,681 due primarily to the expensing of prepaid
insurance, a decrease in deposits of $3,900 due to the return of a
refundable deposit, offset by an increase in accounts payable and
accrued expense of $420,788 due primarily to increased R&D
expenses.
Net cash used in operating activities for the year
ended December 31, 2018 was $10,869,320, which primarily reflected
our net loss of $13,533,617
plus
adjustments to reconcile net loss to net cash used in operating
activities of depreciation and amortization expense of $798,446,
non-cash fair value adjustment of the contingent consideration of
$210,000, non-cash stock-based compensation of $1,441,475, non-cash
restricted stock granted to employees and directors of $1,038,822,
non-cash restricted stock granted/accrued to consultants of
$360,771, non-cash debt discount - warrants on a 12% Senior Secured
Original Issue Discount Convertible Debenture issued to Lincoln
Park in April 2017 of $97,837, and a non-cash warrant modification
expense of $428,748. Changes in assets and liabilities are due to
an increase in other receivables of $2,187,903 due primarily to the
billings to our research partner Mayoly, an decrease in prepaid
expense of $243,330 due primarily to the expensing of prepaid
insurance, an increase in deposits of $15,001 due to a new office
space lease for the startup of U.S. R&D, and a decrease in
interest payable of $7,192, offset by an decrease in accounts
payable and accrued expense of $741,624 due primarily to increased
R&D expenses.
Net cash used in investing activities for the year
ended December 31, 2019 was $24,098, which consisted of the
purchase of property and equipment. Net cash used in investing
activities for the year ended December 31, 2018 was $305,473, which
consisted of the cash portion of the purchase of Protea assets from
bankruptcy of $250,000 and the purchase of property and equipment
of $55,473.
Net cash provided by financing activities for the
year ended December 31, 2019 was $13,144,979,
compared to
$11,712,128 for the year
December 31,
2018, representing an increase of $1,432,851.
Net
cash provided by financing activities for the year ended December
31, 2019 consisted of $9,476,749 from the sale of Common
Stock in our April, May, and July 2019 Public Offerings, $4,967,308
from the issuance of the convertible debt in the ADEC Note Offering
and the December 2019 Promissory Note Offering, and $498,783 from
the proceeds of a note payable related to the financing of our
D&O insurance, and $61,590 received from a stockholder in
relation to a warrant modification offset by issuance of Common
Stock in connection with the exercise of certain repriced warrants
in May 2018, offset by repayments of convertible debt of $1,550,000
related to the ADEC Notes and repayment of a note payable of
$309,451.
Net
cash provided by financing activities for the year ended December
31, 2018 consisted of $2,324,742 from the issuance of
Common Stock in connection with the exercise of certain repriced
warrants in January 2018, $9,578,063 from the sale of Common Stock
offered in our May 2018 Public Offering, $286,203 from the proceeds
of the issuance of a note payable offset by repayments of
convertible debt of $286,529 and repayment of a note payable of
$190,351.
Consolidated Results of Operations for the Years Ended December 31,
2019 and 2018
Revenues
.
We have not yet achieved revenue-generating status
from any of our product candidates. Since inception, we have
devoted substantially all of our time and efforts to developing
MS1819. As a result, we did not have any revenue during the
years ended December 31, 2019 and 2018,
respectively.
Research and Development Expense.
R&D expense was $8,680,669 for the
year ended December 31, 2019, as compared to $5,771,405 for the
year ended December 31, 2018. This represents an increase of
$2,909,264, or approximately 50% for the year ended December 31,
2019 as compared to the year ended December 31, 2018.
Stock-based compensation for stock options, stock expense for
employees and consultants and depreciation and amortization was
$361,739, $475,259, and $956,169, respectively, for the year ended
December 31, 2019, as compared to $0, $0, and $736,243,
respectively for the year ended December 31, 2018. Excluding
non-cash stock-based compensation, stock expense and depreciation
and amortization, cash R&D expenses increased by $2,214,078, or
approximately 44% to $7,249,240
for
the year ended December 31, 2019, from $5,035,163 for the year
ended December 31, 2018.
The
increase in R&D cash spending was primarily due to increased
direct clinical trial costs of $4,075,949 related to the OPTION
Cross-Over Study and the Combination Study, increased consulting
expenses of $317,613, increased personnel costs of $316,688, offset
by a net decrease of $2,062,105 related to R&D expenses in
relation to Mayoly, decreased R&D tax credit of $418,038 and
decreased licensing fees of $108,841. We expect cash R&D
expense to increase in the next fiscal year as we progress clinical
trials and CMC activities in connection with the continued
development of MS1819.
General and Administrative Expense.
G&A expense was $6,063,078 for the
year ended December 31, 2019, as compared to $7,450,366 for the
year ended December 31, 2018. This represents a decrease of
$1,387,288, or approximately 19% for the year ended December 31,
2019 as compared to the year ended December 31, 2018.
Stock-based compensation for stock options, stock expense for
employees and consultants, depreciation and amortization, and loss
on disposal of assets was $212,596, $494,071, $20,813 and $7,296,
respectively, for the year ended December 31, 2019, as compared to
$1,441,475, $1,234,542, $15,291 and $0, respectively for the year
ended December 31, 2018. Excluding non-cash stock-based
compensation, stock expense, depreciation and amortization, and
loss on disposal of assets, cash G&A expenses increased by
$997,994, or approximately 23% to $5,328,302
for the year ended December 31, 2019, from
$4,330,308 for the year ended December 31,
2018.
The
increase in G&A cash spending was primarily due to increased
legal expenses of $523,400, the loss due to cyber-related fraud of
$367,908 that was not present in the same period in 2018, increased
public company and corporate communications, including investor
relations of $167,632, increased insurance of $99,765, and
increased directors fees of $35,000, offset by decreased personnel
costs of $148,730, decreased office expenses of $37,468 and
decreased travel and entertainment of $35,477. We expect cash
G&A expense to remain relatively flat to slightly down in the
next fiscal year as management instituted cost cutting measures
related to public company and corporate communications, including
investor relations, the termination of the TransChem Sublicense
Agreement and related intellectual property legal expenses and
one-time and transaction-related costs are expected to be offset by
increases to D&O and corporate insurance, outside consulting
fees related to business development efforts and information
technology security expenses.
Fair
value adjustment of our contingent consideration was $0 and
$210,000, respectively, for the years ended December 31, 2019 and
2018. The difference in fair value adjustments in year ended
December 31, 2019 as compared to the same period in 2018 is due
primarily to the contingent consideration being eliminated in
2018.
Other Expense.
Interest expense for the year ended December 31,
2019 was $433,939 as compared to $101,846 for the year ended
December 31, 2018. The increased interest expense is due to
amortization of debt discount and accrued interest related to the
convertible debt issued in 2019.
Net
Loss. As a result of the factors above, our net loss increased by
$1,644,069 to $15,177,686 for the year ended December 31, 2019 as
compared to $13,533,617 for the year ended December 31,
2018.
Off-Balance Sheet Items
As
of December 31, 2019, we had the following contractual obligations
over the periods indicated:
|
Contractual Obligation
|
Total
|
2020
|
2021
|
2022
|
2023
|
2024
|
|
Operating
Leases
(1)
|
$
87,008
|
$
87,008
|
$
-
|
$
-
|
$
-
|
$
-
|
|
License
Agreements
(2)
|
$
475,000
|
$
50,000
|
$
50,000
|
$
100,000
|
$
125,000
|
$
150,000
|
|
(1)
|
Only includes basic rent payments for our Hayward, CA property
through May 31, 2020 and for our French property through December
31, 2020. Additional monthly payments under the lease
agreements shall include tax payments and operational
costs.
|
|
(2)
|
Only includes annual maintenance fees for the TransChem Sublicense
Agreement.
|
An
emerging growth company is not required to provide the information
required by this item.
ITEM
8. FINA
NCIAL
STATEMENTS
The
audited consolidated financial statements of AzurRx BioPharma,
Inc., including the notes thereto, together with the report thereon
of Mazars USA LLP, the Company’s independent registered
public accounting firm, are included in this Annual Report as a
separate section beginning on page F-1.
None.
|
Evaluation of disclosure controls and procedures.
|
As required by Rule 13a-15(b) under the Securities
Exchange Act of 1934, as amended
(the “
Exchange
Act
”) our Chief Executive
Officer (“
CEO
”) and our Chief Financial Officer
(“
CFO
”) conducted an evaluation as of the end of
the period covered by this Annual Report on Form 10-K, of the
effectiveness of our disclosure controls and procedures as defined
in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on
that evaluation, our CEO and our CFO each concluded that our
disclosure controls and procedures are effective to provide
reasonable assurance that information required to be disclosed in
the reports that we file or submit under the Exchange Act, (i) is
recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules
and forms and (ii) is accumulated and communicated to our
management, including our CEO and our CFO, as appropriate to allow
timely decisions regarding required disclosure.
|
Management’s Annual Report on Internal Control over Financial
Reporting.
|
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting as such term is
defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our
internal control over financial reporting is a process designed
under the supervision of our principal executive officer and
principal financial officer to provide reasonable assurance
regarding the reliability of financial reporting and preparation of
our financial statements for external purposes in accordance with
generally accepted accounting principles.
Due
to its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements and, even when
determined to be effective, can only provide reasonable, not
absolute, assurance with respect to financial statement preparation
and presentation. Projections of any evaluation of
effectiveness to future periods are subject to risk that controls
may become inadequate as a result of changes in conditions or
deterioration in the degree of compliance.
Under the supervision and with the participation
of our management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
based on the framework in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (“
COSO
”) issued in May 2013 and related COSO
guidance. Based on our evaluation under this framework, our
internal control over financial reporting was effective based upon
those criteria.
This
report does not include an attestation report of the
Company’s independent registered public accounting firm
regarding internal control over financial
reporting. Management’s report was not subject to
attestation by the independent registered public accounting firm
pursuant to rules of the SEC that permit the Company to provide
only management’s report in this Annual Report on Form
10-K.
Changes in Internal Controls over Financial Reporting.
Other than the revision to its controls and procedures to require
additional procedures where vendors request any changes to payment
instructions, which revision was necessitated as a result of the
discovery of a cyber-related fraud in August 2019, there were no
changes in our internal control over financial reporting identified
in management’s evaluation pursuant to Rules 13a-15(d) or
15d-15(d) of the Exchange Act during the period covered by this
Annual Report on Form 10-K that materially affected, or are
reasonably likely to materially affect, our internal control over
financial reporting.
None.
P
ART III
|
ITEM 10.
|
D
IRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE
|
The
information required by this item will be incorporated by reference
from our definitive proxy statement, to be filed with the
Securities and Exchange Commission on or before April 30,
2020.
|
ITEM 11.
|
EXECUTIVE COMPENSATION
|
The
information required by this item will be incorporated by reference
from our definitive proxy statement, to be filed with the
Securities and Exchange Commission on or before April 30,
2020.
|
ITEM 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The
information required by this item will be incorporated by reference
from our definitive proxy statement, to be filed with the
Securities and Exchange Commission on or before April 30,
2020.
|
ITEM 13.
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The
information required by this item will be incorporated by reference
from our definitive proxy statement, to be filed with the
Securities and Exchange Commission on or before April 30,
2020.
|
ITEM 14.
|
PRINCIPAL ACCOUNTING FEES AND SERVICES
|
The
information required by this item will be incorporated by reference
from our definitive proxy statement, to be filed with the
Securities and Exchange Commission on or before April 30,
2020.
PA
RT IV
|
Exhibit No.
|
|
Description
|
|
|
|
|
|
|
Underwriting
Agreement (Incorporated by reference from Exhibit 1.1 filed with
Current Report on Form 8-K, filed May 4, 2018).
|
|
|
|
Underwriting
Agreement, dated July 17, 2019 (Incorporated by reference from
Exhibit 1.1 filed with Current Report on Form 8-K, filed July 22,
2019).
|
|
|
|
Amended
and Restated Certificate of Incorporation of the Registrant
(Incorporated by reference from Exhibit 3.1 filed with Registration
Statement on Form S-1, filed July 13, 2016).
|
|
|
|
Amended
and Restated Bylaws of the Registrant (Incorporated by reference
from Exhibit 3.2 filed with Registration Statement on Form S-1,
filed July 13, 2016).
|
|
|
|
Certificate
of Amendment to Certificate of Incorporation of the Registrant
(Incorporated by reference from Exhibit 3.1 filed with Current
Report on Form 8-K, filed December 30, 2019).
|
|
|
|
Form
of Common Stock Certificate (Incorporated by reference from Exhibit
4.1 filed with Amendment No 1. to Registration Statement on Form
S-1, filed July 29, 2016).
|
|
|
|
Form
of Investor Warrant (Incorporated by reference from Exhibit 4.2
filed with Registration Statement on Form S-1, filed July 13,
2016).
|
|
|
|
Form
of Underwriter Warrant (Incorporated by reference from Exhibit 4.3
filed with Amendment No 1. to Registration Statement on Form S-1,
filed July 29, 2016).
|
|
|
|
Form
of Underwriter Warrant (Incorporated by reference from Exhibit 4.1
filed with Current Report on Form 8-K, filed May 4,
2018).
|
|
|
|
Form
of Selling Agent Warrant (Incorporated by reference from Exhibit
4.1 filed with Current Report on Form 8-K, filed April 3,
2019).
|
|
|
|
Form
of Selling Agent Warrant (Incorporated by reference from Exhibit
4.1 filed with Current Report on Form 8-K, filed May 14,
2019).
|
|
|
|
Form
of Wainwright Warrant (Incorporated by reference from Exhibit 4.1
filed with Current Report on Form 8-K, filed July 22,
2019).
|
|
|
|
Stock
Purchase Agreement dated May 21, 2014 between the Registrant,
Protea Biosciences Group, Inc. and its wholly-owned subsidiary,
Protea Biosciences, Inc (Incorporated by reference from Exhibit
10.1 filed with Registration Statement on Form S-1, filed July 13,
2016.
|
|
|
|
Amended
and Restated AzurRx BioPharma, Inc. 2014 Omnibus Equity Incentive
Plan (Incorporated by reference from Exhibit 10.3 filed with
Registration Statement on Form S-1, filed July 13,
2016).
|
|
|
|
Employment Agreement
between the Registrant and Mr. Spoor (Incorporated by reference
from Exhibit 10.4 filed with Registration Statement on Form S-1,
filed July 13, 2016).
|
|
|
|
Securities
Purchase Agreement dated April 11, 2017 between the Registrant and
Lincoln Park Capital Fund, LLC (Incorporated by reference from
Exhibit 10.1 filed with Current Report on Form 8-K, filed April 12,
2017).
|
|
|
|
Form
of Series A Warrant dated April 11, 2017 between the Registrant and
Lincoln Park Capital Fund, LLC (Incorporated by reference from
Exhibit 10.3 filed with Current Report on Form 8-K, filed April 12,
2017).
|
|
|
|
Registration
Rights Agreement dated April 11, 2017 between the Registrant and
Lincoln Park Capital Fund, LLC (Incorporated by reference from
Exhibit 10.4 filed with Current Report on Form 8-K, filed April 12,
2017).
|
|
|
|
Form
of Securities Purchase Agreement dated June 5, 2017 (Incorporated
by reference from Exhibit 10.1 filed with Current Report on Form
8-K, filed June 9, 2017).
|
|
|
Form
of Registration Rights Agreement dated June 5, 2017 (Incorporated
by reference from Exhibit 10.2 filed with Current Report on Form
8-K, filed April 12, 2017).
|
|
|
|
Form
of Series A Warrant, dated June 5, 2017 (Incorporated by reference
from Exhibit 10.3 filed with Current Report on Form 8-K, filed June
9, 2017).
|
|
|
|
Form
of Series A-1 Warrant, dated June 5, 2017 (Incorporated by
reference from Exhibit 10.4 filed with Current Report on Form 8-K,
filed June 9, 2017).
|
|
|
|
Sublicense
Agreement dated August 7, 2017 by and between the Registrant and
TransChem, Inc. (Incorporated by reference from Exhibit 10.1 filed
with Current Report on Form 8-K, filed August 11,
2017).
|
|
|
|
Employment
Agreement between the Registrant and Mr. Shenouda (Incorporated by
reference from Exhibit 10.1 filed with Current Report on Form 8-K,
filed October 2, 2017).
|
|
|
|
Modification
to 12% Senior Secured Original Issue Discount Convertible
Debenture, dated November 10, 2017 (Incorporated by reference from
Exhibit 10.1 filed with Quarterly Report on Form 10-Q, filed
November 13, 2017).
|
|
|
|
Asset
Sale and Purchase Agreement, dated December 7, 2018, by and between
Protea Biosciences Group, Inc., Protea Biosciences, Inc. and AzurRx
Biopharma, Inc. (Incorporated by reference from Exhibit 10.1 filed
with Current Report on Form 8-K, filed December 13,
2018).
|
|
|
|
Note
Purchase Agreement, dated February 14, 2019 (Incorporated by
reference from Exhibit 10.1 filed with Current Report on Form 8-K,
filed February 20, 2019).
|
|
|
|
Senior
Convertible Note A, dated February 14, 2019 (Incorporated by
reference from Exhibit 10.2 filed with Current Report on Form 8-K,
filed February 20, 2019).
|
|
|
|
Senior
Convertible Note B, dated February 14, 2019 (Incorporated by
reference from Exhibit 10.3 filed with Current Report on Form 8-K,
filed February 20, 2019).
|
|
|
|
Pledge
Agreement, dated February 14, 2019 (Incorporated by reference from
Exhibit 10.4 filed with Current Report on Form 8-K, filed February
20, 2019).
|
|
|
|
Warrant
Amendment, dated February 14, 2019 (Incorporated by reference from
Exhibit 10.5 filed with Current Report on Form 8-K, filed February
20, 2019).
|
|
|
|
Registration
Rights Agreement, dated February 14, 2019 (Incorporated by
reference from Exhibit 10.6 filed with Current Report on Form 8-K,
filed February 20, 2019).
|
|
|
|
Asset Purchase Agreement,
by and between AzurRx BioPharma,
Inc., AzurRx BioPharma SAS
and Laboratoires Mayoly Spindler SAS, dated March
27, 2019 (Incorporated by reference from Exhibit 10.25 filed with
Annual Report on Form 10-K, filed April 1, 2019).
|
|
|
|
Patent
License Agreement, by and between AzurRx BioPharma, Inc.
and Laboratoires Mayoly Spindler SAS, dated March
27, 2019 (Incorporated by reference from Exhibit 10.26 filed with
Annual Report on Form 10-K, filed April 1, 2019).
|
|
|
|
Selling
Agent Agreement, by and between AzurRx BioPharma, Inc. and
Alexander Capital, L.P., dated April 1, 2019 (Incorporated by
reference from Exhibit 10.1 filed with Current Report on Form 8-K,
filed April 3, 2019).
|
|
|
|
Selling
Agent Agreement, by and between AzurRx BioPharma, Inc. and
Alexander Capital, L.P., dated May 9, 2019 (Incorporated by
reference from Exhibit 10.1 filed with Current Report on Form 8-K,
filed April 3, 2019).
|
|
|
|
Employment
Agreement by and between AzurRx BioPharma, Inc. and James
Sapirstein, dated October 8, 2019 (Incorporated by reference from
Exhibit 10.1 filed with Current Report on Form 8-K, filed October
11, 2019).
|
|
|
|
Securities
Purchase Agreement, dated November 13, 2019 (Incorporated by
reference from Exhibit 10.1 filed with Current Report on Form 8-K,
filed November 14, 2019).
|
|
|
|
Registration
Rights Agreement, dated November 13, 2019 (Incorporated by
reference from Exhibit 10.2 filed with Current Report on Form 8-K,
filed November 14, 2019).
|
|
|
|
Form
of Note Purchase Agreement (Incorporated by reference from
Exhibit 10.1 filed with Current Report on Form 8-K, filed December
30, 2019).
|
|
|
|
Form of
Senior Convertible Promissory Note (Incorporated by reference from
Exhibit 10.2 filed with Current Report on Form 8-K, filed December
30, 2019).
|
|
|
Form
of Warrant (Incorporated by reference from Exhibit 10.3 filed with
Current Report on Form 8-K, filed December 30, 2019).
|
|
|
|
Form
of Registration Rights Agreement (Incorporated by reference from
Exhibit 10.4 filed with Current Report on Form 8-K, filed December
30, 2019).
|
|
|
|
Employment
Agreement by and between AzurRx BioPharma, Inc. and Daniel
Schneiderman, dated January 1, 2020 (Incorporated by reference from
Exhibit 10.1 filed with Current Report on Form 8-K, filed January
6, 2020).
|
|
|
|
Code
of Ethics of AzurRx BioPharma, Inc. Applicable To Directors,
Officers And Employees (Incorporated by reference from Exhibit 14.1
filed with Registration Statement on Form S-1, filed July 13,
2016).
|
|
|
|
Subsidiaries
of the Registrant (Incorporated by reference from Exhibit 21.1
filed with Registration Statement on Form S-1, filed July 13,
2016).
|
|
|
|
Consent
of Mazars USA LLP, dated March 30, 2020, filed
herewith.
|
|
|
|
Certification
of CEO as Required by Rule 13a-14(a)/15d-14, filed
herewith.
|
|
|
|
Certification
of CFO as Required by Rule 13a-14(a)/15d-14, filed
herewith.
|
|
|
|
Certification
of CEO and CFO as Required by Rule 13a-14(a) and Rule 15d-14(b) (17
CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of
the United States Code, filed herewith.
|
|
|
|
|
|
|
101.INS
|
|
XBRL
Instance Document
|
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema
|
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase
|
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase
|
|
101.LAB
|
|
XBRL
Taxonomy Extension Label Linkbase
|
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase
|
+
Confidential
treatment has been granted with respect to portions of this
exhibit.
#
Certain
portions of this exhibit (indicated by “[*****]”) have
been omitted as the Company has determined (i) the omitted
information is not material and (ii) the omitted information would
likely cause harm to the Company if publicly
disclosed.
In
accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, there unto duly
authorized.
|
|
AZURRX BIOPHARMA, INC.
|
|
March 30, 2020
|
By:
/s/
James Sapirstein
Name: James
Sapirstein
Title: President and
Chief Executive Officer
By:
/s/ Daniel Schneiderman
Name: Daniel
Schneiderman
Title: Chief Financial
Officer
|
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed by the following persons on
behalf of the registrant and in the capacities held on the dates
indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/
James Sapirstein
|
|
President, Chief Executive Officer and Director
|
|
March 30, 2020
|
|
James Sapirstein
|
|
(principal executive officer)
|
|
|
|
|
|
|
|
|
|
/s/
Daniel Schneiderman
|
|
Chief Financial Officer
|
|
March 30, 2020
|
|
Daniel Schneiderman
|
|
(principal financial officer and accounting officer)
|
|
|
|
|
|
|
|
|
|
/s/
Edward J. Borkowski
|
|
Chair of the Board of Directors
|
|
March 30, 2020
|
|
Edward J. Borkowski
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Charles J. Casamento
|
|
Director
|
|
March 30, 2020
|
|
Charles J. Casamento
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Alastair Riddell
|
|
Director
|
|
March 30, 2020
|
|
Alastair Riddell
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Vern L. Schramm
|
|
Director
|
|
March 30, 2020
|
|
Vern L. Schramm
|
|
|
|
|
|
Johan
(Thijs) M. Spoor
|
|
Director
|
|
March 30, 2020
|
|
Johan (Thijs) M. Spoor
|
|
|
|
|
Azur
R
x BioPharma,
Inc.
Index to Consolidated Financial Statements
|
|
Page
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2019 and 2018
|
F-3
|
|
|
|
|
Consolidated
Statements of Operations and Comprehensive Loss for the years
ended December 31, 2019 and 2018
|
F-4
|
|
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity for the
years ended December 31, 2019 and 2018
|
F-5
|
|
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2019 and
2018
|
F-6
|
|
|
|
|
Notes
to the Consolidated Financial Statements
|
F-7
|
REPORT OF INDEPENDENT
RE
GISTERED PUBLIC ACCOUNTING
FIRM
To the
Stockholders and the Board of Directors of AzurRx BioPharma,
Inc.
Opinion on the Consolidated Financial Statements
We have
audited the accompanying consolidated balance sheets of AzurRx
BioPharma, Inc. (the
“Company”
) as of December
31, 2019 and 2018, and the related consolidated statements of
operations and comprehensive loss, changes in stockholders’
equity, and cash flows for the years then ended, and the related
notes (collectively referred to as the “consolidated
financial statements”). In our opinion, the consolidated
financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2019 and 2018,
and the results of their operations and their cash flows for the
years then ended, in conformity with accounting principles
generally accepted in the United States of
America.
Emphasis of a Matter
The
accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 1 to the consolidated financial statements, the
Company has incurred significant operating losses and negative cash
flows from operations since inception. The Company also had an
accumulated deficit of approximately $62.7 million at December 31,
2019. The Company is dependent on obtaining necessary funding from
outside sources, including obtaining additional funding from the
sale of securities in order to continue their operations. These
conditions raise substantial doubt about its ability to continue as
a going concern. Management’s plans regarding those matters
also are described in Note 1. The consolidated financial statements
do not include any adjustments that might result from the outcome
of this uncertainty.
Basis for Opinion
These
consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements
based on our audits. We are a public accounting firm registered
with the Public Accounting Oversight Board (United States)
(“PCAOB”
) and
are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due
to error or fraud. The Company is not required to have, nor were we
engaged to perform an audit of the Company's internal control over
financial reporting. As part of our audits we are required to
obtain an understanding of internal control over financial
reporting, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits
provide a reasonable basis for our opinion.
/s/ Mazars USA LLP
We have
served as the Company’s auditor since 2015.
New
York, New York
March
30, 2020
AZURRX BIOPHA
RMA, INC.
Consolidated Balance Sheets
|
|
December 31, 2019
|
December 31, 2018
|
|
ASSETS
|
|
|
|
Current
Assets:
|
|
|
|
Cash
and cash equivalents
|
$
175,796
|
$
1,114,343
|
|
Other
receivables
|
2,637,303
|
3,172,676
|
|
Prepaid
expense
|
595,187
|
512,982
|
|
Total Current Assets
|
3,408,286
|
4,800,001
|
|
|
|
|
|
Property,
equipment, and leasehold improvements, net
|
77,391
|
128,854
|
|
|
|
|
|
Other
Assets:
|
|
|
|
In
process research & development, net
|
-
|
258,929
|
|
License
agreements, net
|
-
|
311,548
|
|
Patents,
net
|
3,407,084
|
-
|
|
Goodwill
|
1,886,686
|
1,924,830
|
|
Operating
lease right-of-use assets
|
82,386
|
-
|
|
Deposits
|
41,047
|
45,233
|
|
Total Other Assets
|
5,417,203
|
2,540,540
|
|
|
|
|
|
TOTAL ASSETS
|
$
8,902,880
|
$
7,469,395
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
Current
Liabilities:
|
|
|
|
Accounts
payable and accrued expense
|
$
1,754,682
|
$
2,070,396
|
|
Accounts
payable and accrued expense - related party
|
533,428
|
670,095
|
|
Note
payable
|
444,364
|
255,032
|
|
Convertible
debt
|
1,076,938
|
-
|
|
Other
current liabilities
|
476,224
|
-
|
|
Total Current Liabilities
|
4,285,636
|
2,995,523
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
DEFICIT
|
|
|
|
|
|
|
|
Convertible
preferred stock - Par value $0.0001 per share; 10,000,000 shares
authorized, and 0 shares issued and outstanding at December 31,
2019 and 2018, respectively; liquidation preference approximates
par value
|
-
|
-
|
|
Common
stock - Par value $0.0001 per share; 150,000,000 and 100,000,000
shares authorized at December 31, 2019 and 2018, respectively;
26,800,519 and 17,704,925 shares issued and outstanding at December
31, 2019 and December 31, 2018, respectively.
|
2,680
|
1,771
|
|
Additional
paid-in-capital
|
68,575,851
|
53,139,259
|
|
Accumulated
deficit
|
(62,694,732
)
|
(47,517,046
)
|
|
Accumulated
other comprehensive loss
|
(1,266,555
)
|
(1,150,112
)
|
|
Total stockholders' deficit
|
4,617,244
|
4,473,872
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
|
$
8,902,880
|
$
7,469,395
|
See accompanying notes to consolidated financial
statements
AZURRX BIOPH
ARMA, INC.
Consolidated Statements of Operations and Comprehensive
Loss
|
|
Year ended
|
|
|
|
December 31, 2019
|
December 31, 2018
|
|
|
|
|
|
Revenue
|
$
-
|
$
-
|
|
Total
Revenue
|
-
|
-
|
|
|
|
|
|
Operating
Expense
|
|
|
|
Research
& development
|
8,680,669
|
5,771,405
|
|
General
& administrative
|
6,063,078
|
7,450,366
|
|
Fair
value adjustment, contingent consideration
|
-
|
210,000
|
|
Total
Operating Expense
|
14,743,747
|
13,431,771
|
|
|
|
|
|
Other
Expenses (income)
|
|
|
|
Interest
expense
|
433,939
|
101,846
|
|
Total
Other Expense (Income)
|
433,939
|
101,846
|
|
|
|
|
|
Net Loss
|
$
(15,177,686
)
|
$
(13,533,617
)
|
|
|
|
|
|
Other
comprehensive (loss):
|
|
|
|
Foreign
currency translation adjustment
|
(116,443
)
|
(194,397
)
|
|
Total
comprehensive loss
|
$
(15,294,129
)
|
$
(13,728,014
)
|
|
|
|
|
|
Net
loss per share, basic and diluted
|
$
(0.68
)
|
$
(0.88
)
|
|
Weighted
average of shares outstanding, basic and diluted
|
22,425,564
|
15,439,310
|
See accompanying notes to consolidated financial
statements
AZURRX B
IOPHARMA,
INC.
Consolidated Statements of Changes in Stockholders'
Equity
|
|
Convertible Preferred Stock
|
Common Stock
|
Paid-in
|
Subscription
|
Accumulated
|
Accumulated Other
Comprehensive
|
Total
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Receivable
|
Deficit
|
Loss
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2018 #
|
-
|
$
-
|
12,042,574
|
$
1,205
|
$
37,669,601
|
$
(1,071,070
)
|
$
(33,983,429
)
|
$
(955,715
)
|
$
1,660,592
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued from public offering
|
-
|
-
|
4,160,000
|
416
|
9,577,647
|
-
|
-
|
-
|
9,578,063
|
|
Common
stock issued to consultants
|
-
|
-
|
118,818
|
12
|
360,759
|
-
|
-
|
-
|
360,771
|
|
Common
stock issued for warrant exercises
|
-
|
-
|
503,070
|
50
|
1,253,623
|
1,071,070
|
-
|
-
|
2,324,743
|
|
Common
stock issued for purchase of Protea assets from
bankruptcy
|
-
|
-
|
734,463
|
73
|
1,299,926
|
-
|
-
|
-
|
1,299,999
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
1,441,475
|
-
|
-
|
-
|
1,441,475
|
|
Restricted
common stock granted to employees and directors
|
-
|
-
|
120,000
|
12
|
1,038,810
|
-
|
-
|
-
|
1,038,822
|
|
Convertible
debt converted into common stock
|
-
|
-
|
26,000
|
3
|
68,670
|
-
|
-
|
-
|
68,673
|
|
Warrant
modification
|
-
|
-
|
-
|
-
|
428,748
|
-
|
-
|
-
|
428,748
|
|
Foreign
currency translation adjustment
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(194,397
)
|
(194,397
)
|
|
Net
loss
|
-
|
-
|
|
-
|
-
|
-
|
(13,533,617
)
|
-
|
(13,533,617
)
|
|
Balance at December 31, 2018
|
-
|
$
-
|
17,704,925
|
$
1,771
|
$
53,139,259
|
$
-
|
$
(47,517,046
)
|
$
(1,150,112
)
|
$
4,473,872
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued from public offerings
|
-
|
-
|
7,522,097
|
752
|
9,475,997
|
-
|
-
|
-
|
9,476,749
|
|
Common
stock issued to consultants
|
-
|
-
|
190,398
|
19
|
209,981
|
-
|
-
|
-
|
210,000
|
|
Common
stock issued to Mayoly for patents
|
-
|
-
|
775,931
|
77
|
1,740,882
|
-
|
-
|
-
|
1,740,959
|
|
Common
stock issued to Lincoln Park for Equity Purchase
agreement
|
-
|
-
|
487,168
|
49
|
(49
)
|
-
|
-
|
-
|
-
|
|
Warrants
issued in association with convertible debt issuances
|
-
|
-
|
-
|
-
|
1,081,673
|
-
|
-
|
-
|
1,081,673
|
|
Beneficial
conversion feature on convertible debt issuances
|
-
|
-
|
-
|
-
|
1,359,284
|
-
|
-
|
-
|
1,359,284
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
574,335
|
-
|
-
|
-
|
574,335
|
|
Restricted
common stock granted to employees and directors
|
-
|
-
|
120,000
|
12
|
607,579
|
-
|
-
|
-
|
607,591
|
|
Warrant
modification
|
-
|
-
|
-
|
-
|
325,320
|
-
|
-
|
-
|
325,320
|
|
Received
from stockholder in relation to warrant modification
|
-
|
-
|
-
|
-
|
61,590
|
-
|
-
|
-
|
61,590
|
|
Foreign
currency translation adjustment
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(116,443
)
|
(116,443
)
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(15,177,686
)
|
-
|
(15,177,686
)
|
|
Balance at December 31, 2019
|
-
|
$
-
|
26,800,519
|
$
2,680
|
$
68,575,851
|
$
-
|
$
(62,694,732
)
|
$
(1,266,555
)
|
$
4,617,244
|
See accompanying notes to consolidated financial
statements
AZURRX BIOPHA
RMA, INC.
Consolidated Statements of Cash Flows
|
|
Year ended
|
|
|
|
December 31, 2019
|
December 31, 2018
|
|
|
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
Net
loss
|
$
(15,177,686
)
|
$
(13,533,617
)
|
|
Adjustments
to reconcile net loss to net
|
|
|
|
cash
used in operating activities:
|
|
|
|
Depreciation
|
63,096
|
61,909
|
|
Amortization
|
956,950
|
736,537
|
|
Fixed
assets written off
|
7,296
|
-
|
|
Fair
value adjustment, contingent consideration
|
-
|
210,000
|
|
Stock-based
compensation
|
574,335
|
1,441,475
|
|
Restricted
common stock granted to employees and directors
|
607,591
|
1,038,822
|
|
Common
stock granted to consultants
|
210,000
|
360,771
|
|
Accreted
interest on convertible debt
|
112,543
|
-
|
|
Accreted
interest on debt discount - warrants
|
313,364
|
97,837
|
|
Warrant
modification
|
-
|
428,748
|
|
Net
changes in assets and liabilities:
|
|
|
|
Other
receivables
|
(749,859
)
|
(2,187,903
)
|
|
Prepaid
expense
|
(85,681
)
|
(243,330
)
|
|
Right
of use assets
|
(82,234
)
|
-
|
|
Deposits
|
3,900
|
(15,001
)
|
|
Accounts
payable and accrued expense
|
(420,788
)
|
741,624
|
|
Interest
payable
|
-
|
(7,192
)
|
|
Other
liabilities
|
(366,329
)
|
-
|
|
Net Cash used in Operating Activities
|
(14,033,502
)
|
(10,869,320
)
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
Purchase
of property and equipment
|
(24,098
)
|
(55,473
)
|
|
Purchase
of Protea assets from bankruptcy
|
-
|
(250,000
)
|
|
Net Cash used in Investing Activities
|
(24,098
)
|
(305,473
)
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
Proceeds
from issuances of common stock, net
|
9,476,749
|
11,902,805
|
|
Proceeds
from issuances of convertible debt, net
|
4,967,308
|
-
|
|
Repayments
of convertible debt
|
(1,550,000
)
|
(286,529
)
|
|
Received
from stockholder in relation to warrant modification
|
61,590
|
-
|
|
Proceeds
of note payable
|
498,783
|
286,203
|
|
Repayments
of note payable
|
(309,451
)
|
(190,351
)
|
|
Net Cash provided by Financing Activities
|
13,144,979
|
11,712,128
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
(921,621
)
|
537,335
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
(25,926
)
|
3,537
|
|
|
|
|
|
Cash
and cash equivalents:
|
|
|
|
Cash
at the beginning of the year
|
1,114,343
|
573,471
|
|
Cash at the end of the year
|
$
175,796
|
$
1,114,343
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Activities:
|
|
|
|
Cash
paid for interest
|
$
8,032
|
$
4,010
|
|
|
|
|
|
Supplemental
Disclosure of Non-cash Financing Activities:
|
|
|
|
Common
stock issued for purchase of Protea assets from bankruptcy that
extinguished contingent consideration
|
$
-
|
$
1,300,000
|
|
Common
stock issued for patents purchased from Mayoly
|
$
1,740,959
|
$
-
|
|
Warrant
modification related to convertible debt issuance
|
$
325,320
|
$
-
|
See accompanying notes to consolidated financial
statements
Note 1 - The Company and Basis of Presentation
The Company
AzurRx BioPharma, Inc. (“
AzurRx
” or “
Parent
”) was incorporated on January 30, 2014 in
the State of Delaware. In June 2014, the Company acquired 100% of
the issued and outstanding capital stock of AzurRx SAS (formerly
“
ProteaBio Europe
SAS
”), a company
incorporated in October 2008 under the laws of France. Parent and
its wholly-owned subsidiary, AzurRx SAS (“
ABS
”), are collectively referred to as the
“
Company
”.
The Company is engaged in the research and
development of non-systemic biologics for the treatment of patients
with gastrointestinal disorders. Non-systemic biologics are
non-absorbable drugs that act locally, i.e. the intestinal lumen,
skin or mucosa, without reaching an individual’s systemic
circulation. The Company is focused on the development of its lead
product candidate, MS1819 for the treatment of exocrine pancreatic
insufficiency (“
EPI
”) associated with chronic pancreatitis
(“
CP
”) and cystic fibrosis
(“
CF
”).
MS1819 – Phase 2a Chronic Pancreatitis Study
In June
2018, the Company completed an open-label, dose escalation Phase 2a
trial of MS1819 in France, Australia, and New Zealand to
investigate both the safety of escalating doses of MS1819, and the
efficacy of MS1819 through the analysis of each patient’s
coefficient of fat absorption (“
CFA
”) and its change from
baseline. A total of 11 CP patients with EPI were enrolled in the
study and final data indicated a strong safety and efficacy
profile. Although the study was not powered for efficacy, in a
pre-planned analysis, the highest dose (2.2 grams per day) cohort
of MS1819 showed statistically significant and clinically
meaningful increases in CFA compared to baseline with a mean
increase of 21.8% and a p-value of p=0.002 on a per protocol basis.
Maximal absolute CFA response to treatment was up to
62%.
MS1819 – Phase 2 and Phase 2b Cystic Fibrosis Monotherapy
Studies
In
October 2018, the FDA cleared the Company’s Investigational
New Drug (“
IND
”) application for MS1819 in
patients with EPI due to CF. In connection with the FDA’s
clearance of the IND, the Company initiated a multi-center Phase 2
OPTION
bridging dose safety
study
in the fourth quarter of 2018 in the United States and
Europe (the “
OPTION
Cross-Over Study
”). The Company targeted enrollment of
30 to 35 patients for the OPTION Cross-Over Study and dosed the
first patients in February 2019. In June 2019, the Company reached
its enrollment target for the study.
On
September 25, 2019, the Company announced positive results from the
OPTION Cross-Over Study. Results showed that the primary efficacy
endpoint of CFA was comparable to the CFA in a prior phase two
study in patients with CP, while using the same dosage of MS1819.
The dosage used in the OPTION Cross-Over Study was 2.2 grams per
day, which was determined in agreement with the FDA as a bridging
dose from the highest safe dose used in the Phase 2a CP dose
escalation study. Although the study was not powered for
statistical significance, the data demonstrated meaningful efficacy
results, with approximately 50% of the patients showing CFAs high
enough to reach non-inferiority with standard porcine enzyme
replacement therapy (“
PERT
”). Additionally, the
coefficient of nitrogen absorption (“
CNA
”) was comparable between the
MS1819 and PERT arms, 93% vs. 97%, respectively, in the OPTION
Cross-Over Study. This important finding confirms that protease
supplementation is not likely to be required with MS1819 treatment.
A total of 32 patients, ages 18 or older, completed the OPTION
Cross-Over Study.
On
October 17, 2019, the Company announced that the Cystic Fibrosis
Foundation Data Safety Monitoring Board (the “
CFF DSMB
”) completed its review
of the Company’s final results of the OPTION Cross-Over Study
and has found no safety concerns for MS1819, and that the CFF DSMB
supports the Company’s plan to proceed to a higher 4.4 gram
dose of MS1819 with enteric capsules in its next planned
multi-center dose escalation Phase 2 OPTION clinical trial (the
“
OPTION 2
Trial
”). In December 2019, the Company submitted the
clinical trial protocol to the existing IND at the
FDA.
The
OPTION 2 Trial design will explore the use of 2.2 gram and 4.4 gram
doses using enteric capsules to ensure higher levels of MS1819
release in the duodenum. The new protocol is currently under review
by the FDA and a response is anticipated in March 2020. The Company
expects to launch the OPTION 2 Trial as early as the second quarter
of 2020, subject to regulatory approval, with completion originally
anticipated by the end of 2020, however, these timelines may be
delayed due to the COVID-19 epidemic.
MS1819 – Phase 2 Combination Therapy Study
In
addition to the OPTION Cross-Over Study, the Company launched a
Phase 2 multi-center clinical trial (the “
Combination Trial
”) in Hungary to
investigate MS1819 in combination with PERT, for CF patients who
suffer from severe EPI, but continue to experience clinical
symptoms of fat malabsorption despite taking the maximum daily dose
of PERTs. The Combination Trial is designed to investigate the
safety, tolerability and efficacy of escalating doses of MS1819, in
conjunction with a stable dose of PERTs, in order to increase CFA
and relieve abdominal symptoms in uncontrolled CF
patients.
On
October 15, 2019, the Company announced that it dosed the first
patients in its Combination Trial. This study is designed to
investigate the safety, tolerability and efficacy of escalating
doses of MS1819 (700 mg, 1120 mg and 2240 mg per day,
respectively), in conjunction with a stable dose of porcine PERTs,
in order to increase the CFA and relieve abdominal symptoms. A
combination therapy of PERT and MS1819 has the potential to: (i)
correct macronutrient and micronutrient maldigestion; (ii)
eliminate abdominal symptoms attributable to maldigestion; and
(iii) sustain optimal nutritional status on a normal diet in CF
patients with severe EPI. Planned enrollment is expected to include
approximately 24 CF patients with severe EPI, at clinical trial
sites in Hungary and additional countries in Europe, including
Spain, with study completion originally anticipated by the end of
2020, however, this timeline may be delayed due to the COVID-19
epidemic.
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles in the United States of America
(“
GAAP
”).
The
financial statements for the years ended December 31, 2019 and 2018
include the accounts of AzurRx and its wholly-owned subsidiary,
AzurRx SAS. Intercompany transactions and balances have been
eliminated upon consolidation.
The
accompanying consolidated financial statements have been prepared
as if the Company will continue as a going concern. The Company has
incurred significant operating losses and negative cash flows from
operations since inception, had negative working capital at
December 31, 2019 of approximately $877,000, and had an accumulated
deficit of approximately $62.7 million at December 31, 2019. The
Company is dependent on obtaining, and continues to pursue,
additional working capital funding from the sale of securities and
debt in order to continue to execute its development plan and
continue operations. Without adequate working capital, the Company
may not be able to meet its obligations and continue as a going
concern. These conditions raise substantial doubt about the
Company’s ability to continue as a going concern. Management
plans to raise additional capital through additional equity and/or
debt financings, including the LPC Equity Line of Credit (see Note
11). The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Note 2 - Significant Accounting Policies and Recent Accounting
Pronouncements
Use of Estimates
The accompanying consolidated
financial statements are prepared in conformity with GAAP and
include certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
(including goodwill, intangible assets and contingent
consideration), and the reported amounts of revenue and expense
during the reporting period, including contingencies. Accordingly,
actual results may differ from those estimates
Cash and Cash Equivalents
The
Company considers all highly liquid investments with maturities of
three months or less from date of purchase to be cash equivalents.
All cash balances were highly liquid at December 31, 2019 and 2018,
respectively.
Concentrations of Credit Risk
Financial
instruments that potentially expose the Company to concentrations
of credit risk consist of cash. The Company primarily maintains its
cash balances with financial institutions in federally insured
accounts in the U.S. The Company may from time to time have cash in
banks in excess of FDIC insurance limits. At December 31, 2019 and
2018, the Company had $0 and $754,261, respectively, in one account
in the U.S. in excess of these limits. The Company has not
experienced any losses to date resulting from this practice. The
Company mitigates its risk by maintaining the majority of its cash
and equivalents with high quality financial
institutions.
The
Company also has exposure to foreign currency risk as its
subsidiary in France has a functional currency in
Euros.
Cyber-Related Fraud
On
August 8, 2019, management was advised that it was a victim of a
cyber-related fraud whereby a hacker impersonated one of the
Company’s key vendors to redirect payments, totaling
$418,765. The Company, including the Audit Committee, completed its
investigation and is reviewing all available avenues of recovery,
including from the Company’s financial institution to recover
the payments. As of September 30, 2019, the Company had recovered
$50,858 from its financial institution but management is unable to
determine the probability of recovering anything further from the
cyber-related fraud. Therefore, as of December 31, 2019, the
Company recorded a loss of $367,908 which is included in general
and administrative (“
G&A
”) expense. As a result of
the cyber-related fraud, the Company has instituted additional
controls and procedures and all employees have now undergone
cybersecurity training.
Debt Instruments
Detachable
warrants issued in conjunction with debt are measured at their
relative fair value, if they are determined to be equity
instrument, or their fair value, if they are determined to be
liability instruments, and recorded as a debt
discount. Conversion features that are in the money at
the commitment date constitute a beneficial conversion feature that
is measured at its intrinsic value and recognized as debt discount.
Debt discount is amortized as interest expense over the maturity
period of the debt using the effective interest method. Contingent
beneficial conversion features are recognized when the contingency
has been resolved.
Debt Issuance Costs
Debt
issuance costs are recorded as a direct reduction of the carrying
amount of the related debt. Debt issuance costs are amortized over
the maturity period of the related debt instrument using the
effective interest method.
Equity-Based Payments to Non-Employees
Equity-based
payments to non-employees are measured at fair value on the grant
date per ASU No. 2018-07, Improvements to Nonemployee Share-Based
Payment Accounting.
Fair Value Measurements
The
Company follows Accounting Standards Codification
(“ASC”
) Topic 820-10, Fair
Value Measurements and Disclosures
(“ASC 820”
), which among
other things, defines fair value, establishes a consistent
framework for measuring fair value and expands disclosure for each
major asset and liability category measured at fair value on either
a recurring or nonrecurring basis. Fair value is an exit price,
representing the amount that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants. As such, fair value is a market-based
measurement that should be determined based on assumptions that
market participants would use in pricing an asset or
liability.
As a
basis for considering such assumptions, a three-tier fair value
hierarchy has been established, which prioritizes the inputs used
in measuring fair value as follows:
Level
1: Observable inputs such as quoted prices (unadjusted) in active
markets for identical assets or liabilities;
Level
2: Inputs, other than the quoted prices in active markets, that are
observable either directly or indirectly; and
Level
3: Unobservable inputs in which there is little or no market data,
which require the reporting entity to develop its own assumptions,
which reflect those that a market participant would
use.
In
certain cases, the inputs used to measure fair value may fall into
different levels of the fair value hierarchy. In such cases, an
instrument’s level within the fair value hierarchy is based
on the lowest level of input that is significant to the overall
fair value measurement. The Company’s assessment of the
significance of a particular input to the fair value measurement in
its entirety requires judgment and considers factors specific to
the financial instrument.
The
Company recognizes transfers between levels as if the transfers
occurred on the last day of the reporting period.
Foreign Currency Translation
For
foreign subsidiaries with operations denominated in a foreign
currency, assets and liabilities are translated to U.S. dollars,
which is the functional currency, at period end exchange rates.
Income and expense items are translated at average rates of
exchange prevailing during the periods presented. Gains and losses
from translation adjustments are accumulated in a separate
component of stockholders’ equity.
Goodwill and Intangible Assets
Goodwill represents
the excess of the purchase price of the acquired business over the
fair value of amounts assigned to assets acquired and liabilities
assumed. Goodwill and other intangible assets with indefinite
useful lives are reviewed for impairment annually or more
frequently if events or circumstances indicate impairment may be
present. Any excess in carrying value over the estimated fair value
is charged to results of operations. The Company has not recognized
any impairment charges through December 31, 2019.
Intangible
assets subject to amortization consist of in process research and
development, license agreements, and patents reported at the fair
value at date of the acquisition less accumulated amortization.
Amortization expense is provided using the straight-line method
over the estimated useful lives of the assets as
follows:
Patents
7.2 years
In
Process Research &
Development
12 years
License
Agreements
5 years
Impairment of Long-Lived Assets
The
Company periodically evaluates its long-lived assets for potential
impairment in accordance with ASC Topic 360, Property, Plant and
Equipment
(“ASC
360”
). Potential impairment is assessed when there is
evidence that events or changes in circumstances indicate that the
carrying amount of an asset may not be recovered. Recoverability of
these assets is assessed based on undiscounted expected future cash
flows from the assets, considering a number of factors, including
past operating results, budgets and economic projections, market
trends and product development cycles. If impairments are
identified, assets are written down to their estimated fair value.
The Company has not recognized any impairment charges through
December 31, 2019.
Income Taxes
Income
taxes are recorded in accordance with ASC 740, Accounting for
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. The Company determines its deferred tax assets and
liabilities based on differences between financial reporting and
tax bases of assets and liabilities, which are measured using the
enacted tax rates and laws that will be in effect when the
differences are expected to reverse. 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 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 will more likely than not be realized. 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. At December 31, 2019 and 2018, the Company does not
have any significant uncertain tax positions. All tax years are
still open for audit.
Leases
Effective January
1, 2019, the Company adopted Accounting Standards Update
(“
ASU
”) No.
2016-02, “Leases”. This ASU requires substantially all
leases be recorded on the balance sheet as right of use assets and
lease obligations. The Company adopted the ASU using a modified
retrospective adoption method at January 1, 2019, as outlined in
ASU No. 2018-11, “Leases - Targeted Improvements”.
Under this method of adoption, there is no impact to the
comparative consolidated statement of operations and consolidated
balance sheet. The Company determined that there was no
cumulative-effect adjustment to beginning retained earnings on the
consolidated balance sheet. In addition, the Company elected the
package of practical expedients permitted under the transition
guidance within the new standard, which among other things, allowed
carryforward of historical lease classifications. Adoption of this
standard did not materially impact the Company’s results of
operations and had no impact on the consolidated statement of cash
flows.
Research and Development
Research and
development (“
R&D
”) costs are charged to
operations when incurred and are included in operating expense.
R&D costs consist principally of compensation of employees and
consultants that perform the Company’s research activities,
the fees paid to maintain the Company’s licenses, and the
payments to third parties for manufacturing drug supply and
clinical trials, and amortization of intangible
assets.
Stock-Based Compensation
The
Company’s board of directors (the “
Board
”) and stockholders have
adopted and approved the Amended and Restated 2014 Omnibus Equity
Incentive Plan which took effect on May 12, 2014. The Company
accounts for its stock-based compensation awards to employees and
Board members in accordance with ASC Topic 718,
Compensation—Stock Compensation
(“ASC 718”
). ASC 718
requires all stock-based payments to employees and Board members,
including grants of employee stock options, to be recognized in the
statements of operations by measuring the fair value of the award
on the date of grant and recognizing this fair value as stock-based
compensation using a straight-line method over the requisite
service period, generally the vesting period.
For
awards with performance conditions that affect their vesting, such
as the occurrence of certain transactions or the achievement of
certain operating or financial milestones, recognition of fair
value of the award occurs when vesting becomes
probable.
The
Company estimates the grant date fair value of stock option awards
using the Black-Scholes option-pricing model. The use of the
Black-Scholes option-pricing model requires management to make
assumptions with respect to the expected term of the option, the
expected volatility of the Common Stock consistent with the
expected life of the option, risk-free interest rates and expected
dividend yields of the Common Stock.
Sublicense Agreement
As more
fully discussed in Note 15, the Company entered into a sublicense
agreement with TransChem, Inc. (“
TransChem
”), pursuant to which
TransChem granted the Company an exclusive license to certain
patents and patent applications. Any payments made to TransChem in
connection with this sublicence agreement are recorded as research
and development expense.
Subsequent Events
The
Company considered events or transactions occurring after the
balance sheet date but prior to the date the consolidated financial
statements are available to be issued for potential recognition or
disclosure in its consolidated financial statements.
Recent Accounting Pronouncements
In
January 2017, the FASB issued guidance to simplify the subsequent
measurement of goodwill impairment. The new guidance eliminates the
two-step process that required identification of potential
impairment and a separate measure of the actual impairment.
Goodwill impairment charges, if any, would be determined by
reducing the goodwill balance by the difference between the
carrying value and the reporting unit’s fair value
(impairment loss is limited to the carrying value). This standard
is effective for annual or any interim goodwill impairment tests
beginning after December 15, 2019.
Note
3 -
Fair Value
Disclosures
Fair
value is the price that would be received from the sale of an asset
or paid to transfer a liability assuming an orderly transaction in
the most advantageous market at the measurement date. GAAP
establishes a hierarchical disclosure framework that prioritizes
and ranks the level of observability of inputs used in measuring
fair value.
As of
December 31, 2019, and 2018, the fair value of the Company's
financial instruments were as follows:
|
|
|
Fair Value Measured at Reporting Date Using
|
|
||
|
|
Carrying Amount
|
Level 1
|
Level 2
|
Level 3
|
Fair Value
|
|
At
December 31, 2019:
|
|
|
|
|
|
|
Cash
|
$
175,796
|
$
-
|
$
175,796
|
$
-
|
$
175,796
|
|
Other
receivables
|
$
2,637,303
|
$
-
|
$
-
|
$
2,637,303
|
$
2,637,303
|
|
Note
payable
|
$
444,364
|
$
-
|
$
-
|
$
444,364
|
$
444,364
|
|
Convertible
debt
|
$
1,076,938
|
$
-
|
$
-
|
$
1,076,938
|
$
1,076,938
|
|
|
|
|
|
|
|
|
At
December 31, 2018:
|
|
|
|
|
|
|
Cash
|
$
1,114,343
|
$
-
|
$
1,114,343
|
$
-
|
$
1,114,343
|
|
Other
receivables
|
$
3,172,676
|
$
-
|
$
-
|
$
3,172,676
|
$
3,172,676
|
|
Note
payable
|
$
255,032
|
$
-
|
$
-
|
$
255,032
|
$
255,032
|
At
December 31, 2019, the fair value of other receivables approximates
carrying value as these consist primarily of French R&D tax
credits that are normally received the following year.
At
December 31, 2018, the fair value of other receivables approximates
carrying value as these consist primarily of French R&D tax
credits that are normally received the following year and amounts
due from the Company’s former collaboration partner, Mayoly
(see Note 14).
The
fair value of the note payable in connection with the financing of
directors and officer’s liability insurance approximates
carrying value due to the terms of such instruments and applicable
interest rates.
The
convertible debt is based on its fair value less unamortized debt
discount plus accrued interest through the date of reporting (see
Note 9).
Note
4 - Other Receivables
As of
December 31, 2019, and 2018, other receivables consisted of the
following:
|
|
December 31,
|
December 31,
|
|
|
2019
|
2018
|
|
R&D
tax credits
|
$
2,566,281
|
$
2,162,373
|
|
Other
|
71,022
|
1,010,303
|
|
Total
other receivables
|
$
2,637,303
|
$
3,172,676
|
At
December 31, 2019, the research and development (
“R&D”
) tax credits were
comprised of the 2017, 2018, and 2019 refundable tax credits for
research conducted in France. At December 31, 2018, the R&D tax
credits were comprised of the 2017 and 2018 refundable tax credits
for research conducted in France. The French tax authorities have
examined the tax credits for the years 2016 through 2018, which is
in the normal course of business. In February 2020, the Company
received the 2018 refundable tax credit of approximately
$1,130,000.
At
December 31, 2019, Other consisted of amounts due from U.S. R&D
tax credits. At December 31, 2018, Other consisted primarily of
amounts due from the Company’s former collaboration partner,
Mayoly.
Note 5 - Property, Equipment and Leasehold
Improvements
As of
December 31, 2019, and 2018, property, equipment and leasehold
improvements consisted of the following:
|
|
December 31,
|
December 31,
|
|
|
2019
|
2018
|
|
Laboratory
equipment
|
$
193,661
|
$
190,406
|
|
Computer
equipment
|
74,836
|
75,417
|
|
Office
equipment
|
36,703
|
37,262
|
|
Leasehold
improvements
|
35,711
|
29,163
|
|
Total
property, plant and equipment
|
340,911
|
332,248
|
|
Less
accumulated depreciation
|
(263,520
)
|
(203,394
)
|
|
Property,
plant and equipment, net
|
$
77,391
|
$
128,854
|
Depreciation
expense for the years ended December 31, 2019 and 2018 was $63,096
and $61,909, respectively.
For the
year ended December 31, 2019, $42,283 of depreciation is included
in research and development (“
R&D
”) expense and $20,813 of
depreciation is included in general and administrative
(“
G&A
”)
expense.
For the
year ended December 31, 2018, $49,316 of depreciation has been
reclassified to R&D expense and $12,593 of depreciation remains
in G&A expense.
Note
6 - Intangible Assets and Goodwill
Patents
Pursuant to the
Mayoly APA entered into on March 27, 2019, in which the Company
purchased all remaining rights, title and interest in and to MS1819
(see Note 14) from Mayoly, the Company recorded Patents in the
amount of $3,802,745 as follows:
|
Common
stock issued at signing to Mayoly, subject to vesting
|
$
1,740,959
|
|
Due
to Mayoly at 12/31/19 - €400,000
|
449,280
|
|
Due
to Mayoly at 12/31/20 - €350,000
|
393,120
|
|
Assumed
Mayoly liabilities and forgiveness of Mayoly debt
|
1,219,386
|
|
|
|
|
|
$
3,802,745
|
As of
December 31, 2019, and 2018, intangible assets were as
follows:
|
|
December 31,
|
December 31,
|
|
|
2019
|
2018
|
|
In
process research and development
|
$
-
|
$
416,600
|
|
Less
accumulated amortization
|
-
|
(157,671
)
|
|
In
process research and development, net
|
$
-
|
$
258,929
|
|
|
|
|
|
License
agreements
|
$
-
|
$
3,398,702
|
|
Less
accumulated amortization
|
-
|
(3,087,154
)
|
|
License
agreements, net
|
$
-
|
$
311,548
|
|
|
|
|
|
Patents
|
$
3,802,745
|
$
-
|
|
Less
accumulated amortization
|
(395,661
)
|
-
|
|
Patents,
net
|
$
3,407,084
|
$
-
|
Amortization
expense for the years ended December 31, 2019, and 2018 was
$779,895 and $736,537, respectively.
For the
year ended December 31, 2019, $779,895 of amortization is included
R&D expense and $0 of amortization is included in G&A
expense. Amortization expense for the year ended December 31, 2019
included $384,234 from in process research and development and
license agreements written off as a result of the Mayoly
APA.
For the
year ended December 31, 2018, $785,852 of amortization has been
reclassified to R&D expense and $0 of amortization remains in
G&A expense. Amortization expense for the year ended December
31, 2018 included $736,537 from in process research and development
and license agreements written off as a result of the Mayoly
APA.
As of
December 31, 2019, amortization expense related to patents is
expected to be approximately $527,548 for each of the next five
years (2020 through 2024).
As
of December 31, 2019, and 2018, goodwill was as
follows:
|
|
Goodwill
|
|
Balance
at January 1, 2018
|
$
2,016,240
|
|
Foreign
currency translation
|
(91,410
)
|
|
Balance
at December 31, 2018
|
1,924,830
|
|
Foreign
currency translation
|
(38,144
)
|
|
Balance
at December 31, 2019
|
$
1,886,686
|
Note 7 - Accounts Payable and Accrued Expense
As of
December 31, 2019, and 2018, accounts payable and accrued expense
consisted of the following:
|
|
December 31,
|
December 31,
|
|
|
2019
|
2018
|
|
Trade
payables
|
$
1,683,505
|
$
1,532,110
|
|
Accrued
expense
|
71,177
|
285,061
|
|
Accrued
payroll
|
-
|
253,225
|
|
Total
accounts payable and accrued expense
|
$
1,754,682
|
$
2,070,396
|
Note
8 - Note Payable
On
December 5, 2019, the Company entered into a 9-month financing
agreement for its directors and officer’s liability insurance
in the amount of $498,783 that bears interest at an annual rate of
5.461%. Monthly payments, including principal and interest, are
$56,689 per month. The balance due under this financing agreement
at December 31, 2019 was $444,364.
On
December 14, 2018, the Company entered into a 9-month financing
agreement for its directors and officer’s liability insurance
in the amount of $286,203 that bears interest at an annual rate of
5.99%. Monthly payments, including principal and interest, are
$32,599 per month. The balance due under this financing agreement
at December 31, 2018 was $255,032.
Note
9 – Convertible Debt
The ADEC Note Offering
On February
14, 2019, the Company entered into a Note Purchase Agreement (the
“ADEC NPA”
)
with ADEC Private Equity Investments, LLC (
“ADEC”
), pursuant to which
the Company issued to ADEC two Senior Convertible Notes
(
“Note A”
and
“Note B,”
respectively, each an
“ADEC
Note,”
and together, the
“ADEC Notes”
), in the
principal amount of $1,000,000 per ADEC Note, resulting in gross
proceeds to the Company of $2,000,000 (the “
ADEC Note Offering
”). ADEC is
controlled by a significant stockholder of the
Company.
The
ADEC Notes accrue interest at a rate of 10% per annum;
provided, however
, that in the event
the Company elects to repay the full balance due under the terms of
both ADEC Notes prior to December 31, 2019, then the interest rate
will be reduced to 6% per annum. Interest is payable at the time
all outstanding principal amounts owed under each ADEC Note is
repaid. The ADEC Notes mature on the earlier to occur of (i) the
tenth business day following the receipt by ABS of certain tax
credits that the Company expects to receive prior to July 2019 in
the case of Note A (the
“2019 Tax Credit”
) and July
2020 in the case of Note B (the
“2020 Tax Credit”
),
respectively, or (ii) December 31, 2019 in the case of Note A and
December 31, 2020 in the Case of Note B (the
“Maturity Dates”
). As a
condition to entering into the ADEC NPA, ABS and ADEC also entered
into a Pledge Agreement, pursuant to which ABS agreed to pledge an
interest in each of the 2019 Tax Credit and 2020 Tax Credit to ADEC
in order to guarantee payment of all amounts due under the terms of
the ADEC Notes.
Each of
the ADEC Notes is convertible, at ADEC’s option, into shares
of Common Stock, at a conversion price equal to $2.50 per share;
provided
,
however
, that pursuant to the term of
the ADEC Notes, ADEC may not convert all or a portion of the ADEC
Notes if such conversion would result in the significant
stockholder and/or entities affiliated with him beneficially owning
in excess of 19.99% of the shares of Common Stock issued and
outstanding immediately after giving effect to the issuance of the
shares issuable upon conversion of the ADEC Notes (the
“
ADEC Note Conversion
Shares
”).
As
additional consideration for entering into the ADEC NPA, the
Company entered into a warrant amendment agreement, whereby the
Company agreed to reduce the exercise price of 1,009,565
outstanding warrants previously issued by the Company to ADEC and
its affiliates (the
“ADEC
Warrants”
) to $1.50 per share (the “
ADEC Warrant Amendment
”). The
ADEC Warrant Amendment does not alter any other terms of the ADEC
Warrants. The ADEC Warrant Amendment resulted in a debt discount of
$325,320 that is accreted to additional interest expense over the
lives of the ADEC Notes.
In
connection with the above transaction, the Company also entered
into a registration rights agreement with ADEC. The registration
statement was filed with the Securities and Exchange Commission
(“
SEC
”) on
April 25, 2019.
During
the year ended December 31, 2019, the Company recognized $311,116
of interest expense related to the ADEC Notes, including
amortization of debt discount of $206,963 related to the ADEC
Warrant Amendment.
In
December 2019, the Company repaid $1,550,000 principal amount of
the ADEC Notes and in January 2020 repaid the remaining principal
balance of $450,000 plus outstanding accrued interest of
$104,153.
December 2019 Senior Convertible Promissory Note
Offering
On
December 20, 2019, the Company began an offering of (i) Senior
Convertible Promissory Notes (each a “
Promissory Note
,” and together,
the “
Promissory
Notes
”) in the principal amount of up to $8.0 million
to certain accredited investors (the “
Note Investors
”), and (ii)
warrants (“
Note
Warrants
”) to purchase shares of Common Stock, each
pursuant to Note Purchase Agreements entered into by and between
the Company and each of the Investors (the “
Promissory
NPAs”) (the
“
Promissory Note
Offering
”).
On
December 20, 2019, December 24, 2019, December 30, 2019, and
December 31, 2019, the Company issued Promissory Notes to the Note
Investors in the aggregate principal amount of $3,386,300. The
Promissory Notes mature on September 20, 2020, accrue interest at a
rate of 9% per annum, and are convertible, at the sole option of
the holder, into shares of Common Stock (the “
Promissory Note Conversion
Shares
”) at a price of $0.97 per share (the
“
Conversion
Option
”). The Promissory Notes may be prepaid by the
Company at any time prior to the maturity date in cash without
penalty or premium (the “
Prepayment Option
”).
As
additional consideration for the execution of the Promissory NPA,
each Note Investor also received Note Warrants to purchase that
number of shares of Common Stock equal to one-half (50%) of the
Promissory Note Conversion Shares issuable upon conversion of the
Promissory Notes (the “
Warrant Shares
”). The Note
Warrants have an exercise price of $1.07 per share and expire five
years from the date of issuance. The Company and each Note Investor
executed a Registration Rights Agreement (the “
RRA
”), pursuant to which the
Company agreed to file a registration statement. The Company filed
a registration statement with the SEC on February 7, 2020 covering
the Promissory Note Conversion Shares and Warrant
Shares.
In
connection with the four closings in December 2019 of the
Promissory
Note
Offering, the Company paid aggregate placement agent fees of
$338,630, which fees were based on (i) 9% of the aggregate
principal amount of the Promissory Notes issued to the Note
Investors introduced by the placement agent, and (ii) a
non-accountable expense allowance of 1% of the gross proceeds from
the Promissory
Note
Offering. In addition, the placement agent was issued warrants,
containing substantially the same terms and conditions as the Note
Warrants, to purchase an aggregate of 244,372 shares of Common
Stock (the “
Placement Agent
Warrants
”), representing 7% of the Promissory Note
Conversion Shares issuable upon conversion of the Promissory Notes
issued to the Note Investors. The Placement Agent Warrants have an
exercise price of $1.21 per share and expire five years from the
date of issuance.
The
Company determined the Prepayment Option feature represents a
contingent call option. The Company evaluated the Prepayment Option
in accordance with ASC 815-15-25. The Company determined that the
Prepayment Option feature is clearly and closely related to the
debt host instrument and is not an embedded derivative requiring
bifurcation. Additionally, the Company determined the Conversion
Option represents an embedded call option. The Company evaluated
the Conversion Option in accordance with ASC 815-15-25. The Company
determined that the Conversion Option feature meets the scope
exception from ASC 815 and is not an embedded derivative requiring
bifurcation.
The
Company evaluated the Promissory Notes for a beneficial conversion
feature in accordance with ASC 470-20. The Company determined that
at each commitment date the effective conversion price was below
the closing stock price (market value), and the Convertible Notes
contained a beneficial conversion feature.
Pursuant to the
December 2019 closings of the Promissory Note Offering, the
principal amount of $3,386,300 was first allocated based on the
relative fair value of the Promissory Notes and the Note Warrants.
The fair value of the Note Warrants amounted to $912,648. Then the
beneficial conversion feature was calculated, which amounted to
$1,359,284. The Company incurred debt issuance costs of $588,017
related to the offering. The initial carrying value of the
Promissory Notes issued amounted to $526,351.
During
the year ended December 31, 2019, the Company recognized $114,791
of interest expense related to these Promissory Notes, including
amortization of debt discount related to the value of the Note
Warrants of $33,669, amortization of the beneficial conversion
feature of $51,529, amortization of debt discount related to debt
issuance costs of $21,203, and accrued interest expense of
$8,390.
As of
December 31, 2019, and 2018, convertible debt consisted of the
following:
|
|
Total
|
Promissory Notes
|
ADEC Notes
|
Total
|
|
|
December 31,
|
December 31,
|
December 31,
|
December 31,
|
|
|
2019
|
2019
|
2019
|
2018
|
|
Convertible
debt
|
$
3,836,300
|
$
3,386,300
|
$
450,000
|
$
-
|
|
Unamortized
debt discount - revalued warrants
|
(118,356
)
|
-
|
(118,356
)
|
-
|
|
Unamortized
debt discount - warrants
|
(878,979
)
|
(878,979
)
|
-
|
-
|
|
Unamortized
debt discount - BCF
|
(1,307,755
)
|
(1,307,755
)
|
-
|
-
|
|
Unamortized
debt discount - debt issuance costs
|
(566,815
)
|
(566,815
)
|
-
|
-
|
|
Accrued
interest
|
112,543
|
8,390
|
104,153
|
-
|
|
Total
convertible debt
|
$
1,076,938
|
$
641,141
|
$
435,797
|
$
-
|
LPC OID Debenture
On
April 11, 2017, the Company entered into a Note Purchase Agreement
with Lincoln Park Capital Fund, LLC (
“LPC”
), pursuant to which
the Company issued a 12% Senior Secured Original Issue Discount
Convertible Debenture (the
“OID Debenture”
) to
LPC.
On July
11, 2018, the Company paid off the remaining amount of $286,529 due
under the terms of this OID Debenture.
For the
year ended December 31, 2018, the Company recorded $97,837 of
interest expense related to the amortization of the debt discount
and beneficial conversion feature related to the warrant features
of the OID Debenture.
Note
10 – Other Liabilities
As of
December 31, 2019, and 2018, other liabilities consisted of the
following:
|
|
December 31,
|
December 31,
|
|
|
2019
|
2018
|
|
Due
to Mayoly
|
$
392,989
|
$
-
|
|
Lease
liabilities
|
83,235
|
-
|
|
|
$
476,224
|
$
-
|
Note 11 –
Equity, Common Stock and Incentive
Plan
On
December 19, 2019, the Company held its Annual Meeting of
Stockholders (the “
Annual
Meeting
”), whereby, the shareholders approved, among
others, the following proposals: (i) amending the Company’s
Certificate of Incorporation to increase the authorized shares of
its Common Stock to 150,000,000 shares from 100,000,000 shares, and
(ii) amending the Company’s Charter to authorize the Board to
effect a reverse stock split of both the issued and outstanding and
authorized shares of Common Stock, at a specific ratio, ranging
from one-for-two (1:2) to one-for-five (1:5), any time prior to the
one-year anniversary date of the Annual Meeting, with the exact
ratio to be determined by the Board (the “
Reverse Split
”). As of December
31, 2019, the Board had not elected to effect a Reverse
Split.
Common Stock
The
Company had 26,800,519 and 17,704,925 shares of its Common Stock
issued and outstanding at December 31, 2019 and 2018,
respectively.
The
holders of our Common Stock are entitled to one vote per share. In
addition, the holders of our Common Stock will be entitled to
receive ratably such dividends, if any, as may be declared by our
Board out of legally available funds;
however
, the current policy of our
Board is to retain earnings, if any, for operations and growth.
Upon liquidation, dissolution or winding-up, the holders of our
Common Stock will be entitled to share ratably in all assets that
are legally available for distribution.
2014 Equity Incentive Plan
The
Company’s Board and stockholders adopted and approved the
Amended and Restated 2014 Omnibus Equity Incentive Plan (the
“
2014 Plan
”),
which took effect on May 12, 2014. The 2014 Plan allows for the
issuance of securities, including stock options to employees, Board
members and consultants. The number of shares of Common Stock
reserved for issuance under the 2014 Plan shall not exceed ten
percent (10%) of the issued and outstanding shares of Common Stock
on an as converted basis (the “
As Converted Shares
”) on a
rolling basis. For calculation purposes, the As Converted Shares
shall include all shares of Common Stock and all shares of Common
Stock issuable upon the conversion of outstanding preferred stock
and other convertible securities but shall not include any shares
of Common Stock issuable upon the exercise of options, or other
convertible securities issued pursuant to the 2014 Plan. The number
of authorized shares of Common Stock reserved for issuance under
the 2014 Plan shall automatically be increased concurrently with
the Company’s issuance of fully paid and non- assessable
shares of As Converted Shares. Shares shall be deemed to have been
issued under the 2014 Plan solely to the extent actually issued and
delivered pursuant to an award.
The
Company issued an aggregate of 1,193,500 and 539,000 stock options,
during the years ended December 31, 2019 and 2018, respectively,
under the 2014 Plan (see Note 13). As of December 31, 2019, there
were an aggregate of 3,584,986 total shares available under the
2014 Plan, of which 1,677,500 are issued and outstanding, 632,667
shares are reserved subject to issuance of restricted stock and
RSUs and 1,274,819 shares are available for potential issuances.
The Company may issue securities outside of the 2014
Plan.
Series A Convertible Preferred Stock
Pursuant to a stock
purchase agreement with the Protea Group, on June 13, 2014, the
Company issued 100 shares of Series A Convertible Preferred Stock
(
“Series A
Preferred”
). At December 31, 2019 and 2018, there were
no Series A Preferred outstanding and all terms of the Series A
Preferred are still in effect.
The
terms of the Series A Preferred are described below:
Voting
The
Series A Preferred holders are entitled to vote, together with the
holders of Common Stock as one class, on all matters to which
holders of Common Stock shall be entitled to vote, in the same
manner and with the same effect as the Common Stock holders with
the same number of votes per share that equals the number of shares
of Common Stock into which the Series A Preferred is convertible at
the time of such vote.
Dividends
The
holders of the Series A Preferred shall be entitled to receive
dividends, when, as, and if declared by the board of directors,
ratably with any declaration or payment of any dividend on Common
Stock. To date there have been no dividends declared or paid by the
board of directors.
Liquidation
The
holders of the Series A Preferred shall be entitled to receive,
before and in preference to, any distribution of any assets of the
Company to the holders of Common Stock, an amount equal to $0.0001
per share, plus any declared but unpaid dividends. The liquidation
preference approximates par value as of December 31, 2019 and 2018,
respectively.
Conversion
The
Series A Preferred was initially convertible into 33% of the issued
and outstanding shares of Common Stock on a fully diluted basis,
assuming the conversion, exercise, or exchange for shares of Common
Stock of all convertible securities issued and outstanding
immediately prior to such conversion, including the Series A
Preferred stock, all outstanding warrants and options, and all
outstanding convertible debt, notes, debentures, or any other
securities which are convertible, exercisable, or exchangeable for
shares of Common Stock. The Series A Preferred was convertible at
the holder’s option any time commencing on the one-year
anniversary of the initial issuance date. The Series A Preferred
was subject to mandatory conversion at any time commencing on the
one-year anniversary of the initial issuance date upon the vote or
written consent by the holders of a majority of the Series A
Preferred then outstanding or upon the occurrence of certain
triggering events, including a public offering coupled with an
equity-linked financing with an offering price that values the
Company prior to consummation of such financing at not less than
$12,000,000 and the aggregate gross proceeds to the Company (before
deduction of underwriting discounts and registration expense) are
not less than $6,000,000. On November 11, 2015, the Company and the
Protea Group agreed that the Series A Preferred would be
convertible into 2,439,365 shares of Common Stock. During the year
ended December 31, 2016, Protea Group converted all shares of
Series A Preferred into Common Stock.
LPC Equity Line of Credit
On
November 13, 2019, the Company entered into a purchase agreement
(the “
LPC Purchase
Agreement
”), together with a registration rights
agreement (the “
LPC
Registration Rights Agreement
”), with LPC. Under the
terms of the LPC Purchase Agreement, LPC has committed to purchase
up to $15,000,000 of our Common Stock (the “
LPC Equity Line of Credit
”). Upon
execution of the LPC Purchase Agreement, the Company issued LPC
487,168 shares of Common Stock (the “
Commitment Shares
”) as a fee for
its commitment to purchase shares of our Common Stock under the LPC
Purchase Agreement. The remaining shares of our Common Stock that
may be issued under the LPC Purchase Agreement may be sold by the
Company to LPC at our discretion from time-to-time over a 30-month
period commencing after the satisfaction of certain conditions set
forth in the Purchase Agreement, subject to the continued
effectiveness of a registration statement covering such shares of
Common Stock sold to LPC by the Company (see “Recent
Developments” above). The registration statement was filed
with the SEC on December 31, 2019 and was declared effective on
January 14, 2020.
U
nder the LPC Purchase Agreement, on any business
day over the term of the LPC Purchase Agreement, the Company has
the right, in its sole discretion, to present LPC with a purchase
notice (each, a “
Purchase
Notice
”) directing LPC to
purchase up to 150,000 shares of Common Stock per business day (the
“
Regular
Purchase
”). In each case,
LPC’s maximum commitment in any single Regular Purchase may
not exceed $1,000,000. The LPC Purchase Agreement provides for a
purchase price per Purchase Share (the “
Purchase
Price
”) equal to the
lesser of:
|
●
|
the lowest sale price of Common Stock on the purchase date;
and;
|
|
|
|
|
●
|
the average of the three lowest closing sale prices for the Common
Stock during the ten consecutive business days ending on the
business day immediately preceding the purchase date of such
shares;
|
In addition, on any date on which the Company
submits a Purchase Notice to LPC, the Company also has the right,
in its sole discretion, to present LPC with an accelerated purchase
notice (each, an “
Accelerated Purchase
Notice
”) directing LPC to
purchase an amount of stock (the “
Accelerated
Purchase
”) equal to up to
the lesser of (i) three times the number of shares purchased
pursuant to such Regular Purchase; and (ii) 30% of the aggregate
shares of Common Stock traded during all or, if certain trading
volume or market price thresholds specified in the LPC Purchase
Agreement are crossed on the applicable Accelerated Purchase date,
the portion of the normal trading hours on the applicable
Accelerated Purchase date prior to such time that any one of such
thresholds is crossed (such period of time on the applicable
Accelerated Purchase Date, the “
Accelerated Purchase
Measurement Period
”),
provided that LPC will not be required to buy shares pursuant to an
Accelerated Purchase Notice that was received by LPC on any
business day on which the last closing trade price of Common Stock
on the Nasdaq Capital Market (or alternative national exchange) is
below $0.25 per share. The purchase price per share for each such
Accelerated Purchase will be equal to the lesser
of:
|
●
|
97% of the volume weighted average price of the Company’s
common stock during the applicable Accelerated Purchase Measurement
Period on the applicable Accelerated Purchase date;
and
|
|
|
|
|
●
|
the closing sale price of Common Stock on the applicable
Accelerated Purchase Date.
|
The Company may also direct LPC on any business
day on which an Accelerated Purchase has been completed and all of
the shares to be purchased thereunder have been properly delivered
to LPC in accordance with the LPC Purchase Agreement, to purchase
an amount of stock (the “
Additional Accelerated
Purchase
”) equal to up to
the lesser of (i) three times the number of shares purchased
pursuant to such Regular Purchase; and (ii) 30% of the aggregate
number of shares of Common Stock traded during a certain portion of
the normal trading hours on the applicable Additional Accelerated
Purchase date as determined in accordance with the Purchase
Agreement (such period of time on the applicable Additional
Accelerated Purchase date, the “
Additional Accelerated
Purchase Measurement Period
”), provided that the closing price of the
Company’s common stock on the business day immediately
preceding such business day is not below $0.25 per share.
Additional Accelerated Purchases will be equal to the lower
of:
|
●
|
97% of the volume weighted average price of the Company’s
common stock during the applicable Additional Accelerated Purchase
Measurement Period on the applicable Additional Accelerated
Purchase date; and
|
|
|
|
|
●
|
the closing sale price of Common Stock on the applicable Additional
Accelerated Purchase.
|
Common Stock Issuances
2019 Issuances
During
the year ended December 31, 2019, pursuant to the Mayoly APA, the
Company issued Mayoly 400,481 shares of Common Stock (the
“
Closing Payment
Shares
”) as part of the closing payment on March 27,
2019 with a grant date fair value of $917,101, that was recognized
as part of stockholders’ equity.
During
the year ended December 31, 2019, the Company issued an aggregate
of 92,995 shares of its Common Stock to consultants as payment of
$135,000 of accounts payable and 97,403 shares of its Common Stock
to a consultant with a grant date fair value of $75,000 for
services provided.
During
the year ended December 31, 2019, the Company issued an aggregate
of 120,000 shares of its Common Stock to outside members of its
Board as payment of Board fees with an aggregate grant date fair
value of $173,400, that was recorded as part of G&A
expense.
April 2019 Registered Direct Public Offering
In
April 2019, the Company completed a public offering of 1,294,930
shares of Common Stock at a public offering price of $2.13 per
share, resulting in net proceeds of approximately $2,500,000, after
deducting the selling agent fees and other offering expense payable
by the Company (the “
April
2019 Public Offering
”). The April 2019 Public Offering
was completed pursuant to our effective shelf registration
statement on Form S-3 (File No. 333-226065) and the prospectus
supplement filed on April 2, 2019.
In
connection with the April 2019 Public Offering, the Company entered
into a selling agent agreement, pursuant to which the Company paid
(i) a cash fee equal to 7% of the aggregate gross proceeds of the
April 2019 Public Offering, and (ii) issued warrants to purchase an
aggregate of 38,848 shares of Common Stock (the “
April 2019 Selling Agent
Warrants
”), an amount equal to 3% of the aggregate
number of shares of Common Stock sold in the April 2019 Public
Offering (see Note 12).
May 2019 Registered Direct Public Offering
In May
2019, the Company completed a second public offering of 1,227,167
shares of Common Stock at a public offering price of $2.35 per
share, resulting in net proceeds of approximately $2,550,000, after
deducting the selling agent fees and other offering expense payable
by the Company (the “
May
2019 Public Offering
”). The May 2019 Public Offering
was completed pursuant to our effective shelf registration
statement on Form S-3 (File No. 333-226065) and the prospectus
supplement filed on May 9, 2019.
In
connection with the May 2019 Public Offering, the Company entered
into a selling agent agreement, pursuant to which the Company (i)
paid a cash fee equal to 7.0% of the aggregate gross proceeds of
the May 2019 Public Offering, and (ii) issued warrants to purchase
up to an aggregate of 36,815 shares of Common Stock (the
“
May 2019 Selling Agent
Warrants
”), an amount equal to 3.0% of the aggregate
number of shares of Common Stock sold in the May 2019 Public
Offering (see Note 12).
July 2019 Underwritten Public Offering
In July
2019, the Company completed an underwriting public offering of
5,000,000 shares of Common Stock at a public offering price of
$1.00 per share, resulting in net proceeds of approximately
$4,500,000, after deducting the underwriting discount, and other
offering expense payable by the Company (the “
July 2019 Public Offering
”). The
July 2019 Public Offering was conducted pursuant to our effective
shelf registration statement on Form S-3 (File No. 333-231954),
filed with the Securities and Exchange Commission (the
“
SEC
”) on June
5, 2019, and declared effective on June 25, 2019, including the
base prospectus dated June 4, 2019 included therein and the related
prospectus supplement filed on July 19, 2019.
In
connection with the July 2019 Public Offering, the Company entered
into an underwriting agreement, pursuant to which the Company (i)
paid an cash fee equal to 7.0% of the aggregate gross proceeds of
the July 2019 Public Offering, and (ii) issued warrants to purchase
up to an aggregate of 200,000 shares of Common Stock (the
“
May 2019 Underwriting
Warrants
”), an amount equal to 3.0% of the aggregate
number of shares of Common Stock sold in the July 2019 Public
Offering (see Note 12).
Purchase Agreement with Lincoln Park Capital Fund, LLC
In connection with
entering into the LPC Purchase Agreement on November 13, 2019, the
Company issued LPC 487,168 shares of Common Stock (the
“
Commitment
Shares
”) as a fee for its commitment to purchase
shares of our Common Stock under the LPC Purchase Agreement. The
Commitment Shares had a grant date fair value of $297,172 and had
no effect on expenses or stockholders’
equity.
2018 Issuances
During
the year ended December 31, 2018, the Company issued an aggregate
of 120,000 shares of its Common Stock to outside members of its
Board as payment of Board fees with an aggregate grant date fair
value of $306,300, that was recorded as part of G&A
expense.
Restricted Stock and Restricted Stock Units
During
the year ended December 31, 2019, pursuant to the Mayoly APA, the
Company issued Mayoly 200,240 shares of restricted Common Stock
that vested on December 31, 2019 and 175,210 shares of restricted
Common Stock that vest on December 31, 2020. During the year ended
December 31, 2019, the Company recognized $823,858 as part of
stockholders’ equity.
During the year ended December 31, 2019, the
Company issued James Sapirstein, its new Chief Executive Officer a
restricted stock unit (“
RSU
”) for 200,000 shares of Common Stock
subject to milestone-based vesting with a grant date fair value of
$104,000. These RSUs will vest as follows: (i) 100,000 shares upon
the first commercial sale in the United States of MS1819, and (ii)
100,000 shares upon the total market capitalization of the Company
exceeding $1.0 billion for 20 consecutive trading days. The Company
will recognize the expense related to these milestones when the
milestones become probable.
During
the year ended December 31, 2019, an aggregate of 188,333 unvested
shares of restricted Common Stock that were issued to former
executives were canceled with a total grant date fair value of
approximately $499,832 due to their resignations from the
Company.
During
the year ended December 31, 2019, an aggregate of 92,167 unvested
shares of restricted Common Stock, subject to milestone-based
vesting, vested with a total grant date fair value of $280,187.
58,833 of these 92,167 restricted shares of Common Stock with a
total grant date fair value of $178,852 vested during the year
ended December 31, 2019 due to the Company dosing the first
patients in the OPTION Cross-Over Study for MS1819 in CF patients.
33,334 of these 138,835 restricted shares of Common Stock having a
total grant date fair value of $101,335 vested during the year
ended December 31, 2019 due to the Company completing enrollment in
the OPTION Cross-Over Study for MS1819 in CF patients. The Company
recognized $280,187 as stock expense during the year ended December
31, 2019 for the vesting of these shares of restricted Common
Stock.
During
the year ended December 31, 2019, an aggregate of 48,668 unvested
shares of restricted Common Stock, subject to time-based vesting,
vested with a total grant date fair value of $154,004. The Company
recognized $154,004 as stock expense during the year ended December
31, 2019 for the vesting of these shares of restricted Common
Stock.
As
of December 31, 2019, the Company had an aggregate unrecognized
restricted Common Stock expense of $154,689, of which $50,689 will
be recognized over the average remaining vesting term of 0.65 years
and $104,000 will be recognized when vesting of certain milestones
will be probable.
During
the year ended December 31, 2018, an aggregate of 51,000 shares of
restricted Common Stock were granted and accrued to employees with
a total grant date fair value of $155,040.
During
the year ended December 31, 2018, 100,000 shares of restricted
Common Stock were granted and accrued to Johan (Thijs) Spoor, the
former Chief Executive Officer, subject to milestone-based vesting
with a total grant date fair value of $304,000.
During
the year ended December 31, 2018, 100,000 shares of restricted
Common Stock were granted and accrued to Johan (Thijs) Spoor, the
former Chief Executive Officer, subject to time-based vesting over
three years with a grant date fair value of $304,000.
During
the year ended December 31, 2018, The Company issued an aggregate
of 192,067 shares of restricted Common Stock were granted or
accrued to employees and consultants with a total grant date fair
value of $682,271.
During
the year ended December 31, 2018, 5,000 shares of restricted Common
Stock were canceled with a grant date fair value of
$15,200.
During
the year ended December 31, 2018, an aggregate of 315,235 shares of
restricted Common Stock vested with a total grant date fair value
of $1,093,293. An aggregate of 158,833 of these shares of
restricted Common Stock with a total grant date fair value of
$603,852 vested due to the Company achieving certain clinical
milestones for MS1819.
Note
12 - Warrants
For
the year ended December 31, 2019, in connection with the December
2019 closings of the Promissory Note Offering, the Company issued
Note Warrants to investors to purchase an aggregate of 1,745,538
shares of Common Stock with the issuance of the Promissory Notes as
referenced in Note 9. These Note Warrants were issued between
December 20, 2019 and December 31, 2019, are exercisable commencing
six (6) months following the issuance date at $1.07 per share and
expire five years from issuance. The total grant date fair value of
these warrants was determined to be approximately $1,250,398, as
calculated using the Black-Scholes model, and were recorded as a
debt discount based on their relative fair value.
For
the year ended December 31, 2019, in connection with the December
2019 closings of the Promissory Note Offering, the Company issued
placement agent warrants to purchase an aggregate of 244,372 shares
of Common Stock. These placement agent warrants were issued between
December 20, 2019 and December 31, 2019, vested immediately, are
exercisable at $1.21 per share and expire five years from issuance.
The total grant date fair value of these placement agent warrants
was determined to be approximately $169,025, as calculated using
the Black-Scholes model, and was charged to debt discount that will
be amortized over the life of the debt.
During
the year ended December 31, 2019, in connection with the April 2019
Public Offerings, the Company issued the April 2019 Selling Agent
Warrants to purchase an aggregate of 38,848 shares of Common Stock.
The April 2019 Selling Agent Warrants will become exercisable April
2, 2020, expire on April 2, 2024 and have an exercise price of
$2.55 per share. The total grant date fair value of these
investment banking warrants was determined to be approximately
$60,991, as calculated using the Black-Scholes model, and had no
effect on expenses or stockholders’ equity.
During
the year ended December 31, 2019, in connection with the May 2019
Public Offerings, the Company issued the May 2019 Selling Agent
Warrants to purchase an aggregate of 36,815 shares of Common Stock.
The May 2019 Selling Agent Warrants will become exercisable on May
9, 2020, expire on May 9, 2024 and have an exercise price of $2.82
per share. The total grant date fair value of these investment
banking warrants was determined to be approximately $55,591, as
calculated using the Black-Scholes model, and had no effect on
expenses or stockholders’ equity.
During
the year ended December 31, 2019, in connection with the July 2019
Public Offerings, the Company issued the July 2019 Underwriting
Warrants to purchase an aggregate of 200,000 shares of Common
Stock. The July 2019 Underwriting Warrants are exercisable
immediately, expire on July 17, 2024 and have an exercise price of
$1.25 per share. The total grant date fair value of these
investment banking warrants was determined to be approximately
$116,600, as calculated using the Black-Scholes model, and had no
effect on expenses or stockholders’ equity.
In
February 2019, as additional consideration for issuing the ADEC
Notes and pursuant to the ADEC Warrant Amendment, the Company
agreed to reduce the exercise price of certain outstanding warrants
previously issued by the Company to ADEC and its affiliates (see
Note 9).
During
the year ended December 31, 2018, warrants to purchase an aggregate
of 244,400 shares of Common Stock were issued to investment bankers
in connection with the May 2018 Public Offering. These investment
banking warrants were issued on May 3, 2018, vested immediately,
are exercisable at prices ranging from $2.25 to $2.75 per share and
expire five years from issuance. The grant date fair value of these
investment banking warrants was determined to be approximately
$416,426, as calculated using the Black-Scholes model, and had no
effect on expenses or stockholders’ equity.
In
January 2018, the Company offered certain warrant holders the
opportunity to exercise their warrants at a reduced strike price of
$2.50, and if so elected, would also have the opportunity to
reprice other warrants that they continued to hold unexercised to
$3.25. The offer, which was effective on January 12, 2018, was for
the repricing only and did not modify the life of the warrants.
Warrant holders of approximately 503,000 shares of Common Stock
exercised their warrants and had other warrants modified on
approximately 197,000 shares of Common Stock, which resulted in a
charge of approximately $429,000 in the year ended December 31,
2018.
Warrant
transactions for the years ending December 31, 2019 and 2018 were
as follows:
|
|
|
Exercise
|
Weighted
|
|
|
|
Price Per
|
Average
|
|
|
Warrants
|
Share
|
Exercise Price
|
|
|
|
|
|
|
Warrants outstanding and exercisable at January 1,
2018
|
3,371,385
|
$
3.17 - $7.37
|
$
5.28
|
|
|
|
|
|
|
Granted
during the period
|
244,400
|
$
2.55 - $2.75
|
$
2.58
|
|
Expired
during the period
|
-
|
-
|
-
|
|
Exercised
during the period
|
(503,070
)
|
$
2.50
|
$
2.50
|
|
Warrants outstanding and exercisable at December 31,
2018
|
3,112,715
|
$
2.55 - $7.37
|
$
4.83
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding and exercisable at January 1,
2019
|
3,112,715
|
$
2.55 - $7.37
|
$
4.83
|
|
|
|
|
|
|
Granted
during the period
|
2,265,573
|
$
1.07 - $2.82
|
$
1.15
|
|
Expired
during the period
|
-
|
-
|
-
|
|
Exercised
during the period
|
-
|
-
|
-
|
|
Warrants outstanding and exercisable at December 31,
2019
|
5,378,288
|
$
1.25 - $7.37
|
$
2.53
|
Warrants
exercisable at December 31, 2019 were as follows:
|
|
Number of
|
Weighted Average
|
Weighted
|
|
|
Shares Under
|
Remaining Contract
|
Average
|
|
Exercise Price
|
Warrants
|
Life in Years
|
Exercise Price
|
|
$
1.07 - $1.99
|
3,199,475
|
3.95
|
|
|
$
2.00 - $2.99
|
320,063
|
3.57
|
|
|
$
3.00 - $3.99
|
636,972
|
2.31
|
|
|
$
4.00 - $4.99
|
196,632
|
2.01
|
|
|
$
5.00 - $5.99
|
805,476
|
2.13
|
|
|
$
6.00 - $6.99
|
187,750
|
1.76
|
|
|
$
7.00 - $7.37
|
31,920
|
0.96
|
|
|
Total
|
5,378,288
|
3.30
|
$
2.53
|
The
weighted average fair value of warrants granted during the years
ended December 31, 2019 and 2018, was $0.71 and $1.70 per share,
respectively. The grant date fair values were calculated using the
Black-Scholes model with the following weighted average
assumptions:
|
|
December 31,
|
December 31,
|
|
|
2019
|
2018
|
|
Expected
life (in years)
|
5
|
5
|
|
Volatility
|
71 - 80
%
|
84
%
|
|
Risk-free
interest rate
|
1.64 - 2.37
%
|
2.70
%
|
|
Dividend
yield
|
-
%
|
-
%
|
Note
13 – Stock Options
Under
the 2014 Plan, the fair value of stock options granted is estimated
on the grant date using the Black-Scholes model. This valuation
model for stock-based compensation expense requires the Company to
make assumptions and judgments about the variables used in the
calculation, including the expected term (weighted-average period
of time that the options granted are expected to be outstanding),
the volatility of the Common Stock price and the assumed risk-free
interest rate. The Company recognizes stock-based compensation
expense for only those shares expected to vest over the requisite
service period of the award. No compensation cost is recorded for
options that do not vest and the compensation cost from vested
options, whether forfeited or not, is not reversed.
During
the year ended December 31, 2019, the Company issued stock options
to purchase an aggregate of 120,000 shares of Common Stock with a
strike price of $1.75 per share and a term of five years to certain
Board members that vest quarterly over one (1) year. These options
had a total fair value of approximately $126,000, as calculated
using the Black-Scholes model and were recorded as stock-based
compensation.
During
the year ended December 31, 2019, the Company issued stock options
to purchase 150,000 shares of Common Stock with a strike price of
$1.75 per share and a term of five years to Johan (Thijs) Spoor,
the former Chief Executive Officer that vest upon the completion of
enrollment of the next trial of MS1819 in the U.S. These stock
options had a grant date fair value of approximately $151,950, as
calculated using the Black-Scholes model. These unvested stock
options were cancelled as a result of Mr. Spoor’s
resignation.
During
the year ended December 31, 2019, the Company issued stock options
to purchase 100,000 shares of Common Stock with a strike price of
$1.75 per share and a term of five years to Maged Shenouda, the
former Chief Financial Officer that vest upon the completion of
enrollment of the next trial of MS1819 in the U.S. These stock
options had a grant date fair value of approximately $101,300, as
calculated using the Black-Scholes model. These unvested stock
options were cancelled as a result of Mr. Shenouda’s
resignation.
During
the year ended December 31, 2019, the Company issued stock options
to purchase an aggregate of 523,500 shares of Common Stock with a
strike price of $1.75 per share and a term of five years to certain
employees with milestone-based vesting based on certain clinical
milestones for MS1819. These options had a total grant date fair
value of approximately $549,675, as calculated using the
Black-Scholes model. 454,250 of these stock options will vest upon
enrollment completion of the next MS1819 clinical trial in the U.S.
for CF (the OPTION 2 Trial), and 69,250 of these stock options will
vest upon enrollment completion of the ongoing Combination Trial in
Europe. The Company will recognize the expense related to these
milestones when the milestones become probable.
The
weighted average fair value of stock options granted to employees
during the year ended December 31, 2019 was $0.89 per
share.
During
the year ended December 31, 2019, stock options to purchase an
aggregate of 304,500 shares of Common Stock vested having a fair
value of $574,335. 242,000 of these stock options with a fair value
of $501,666 vested due to the Company achieving certain clinical
milestones for MS1819.
During
the year ended December 31, 2019, stock options to purchase an
aggregate of 510,000 shares of Common Stock were canceled with
strike prices ranging from of $1.75 to $4.48 per
share.
During
the year ended December 31, 2018, stock options to purchase an
aggregate of 539,000 shares of Common Stock were granted with a
strike price of $3.04 per share and a term of five
years.
During
the year ended December 31, 2018, stock options to purchase an
aggregate of 600,750 shares of Common Stock vested having a fair
value of $1,441,475. Stock options to purchase an aggregate of
570,750 shares of Common Stock with a fair value of $1,325,404
vested due to the Company achieving certain clinical milestones for
MS1819.
During
the year ended December 31, 2018, 90,000 stock options were
canceled with exercise prices ranging from of $3.04 to
$3.60.
The
weighted average fair value of stock options granted to employees
during the year ended December 31, 2018 was $2.07 per
share.
The
fair values were estimated on the grant dates using the
Black-Scholes option-pricing model with the following
weighted-average assumptions:
|
|
December 31,
|
December 31,
|
|
|
2019
|
2018
|
|
Contractual
term (in years)
|
5 - 10
|
5
|
|
Volatility
|
72% - 75
%
|
85
%
|
|
Risk-free
interest rate
|
1.54% - 1.84
%
|
2.82
%
|
|
Dividend
yield
|
-
%
|
-
%
|
The
expected term of the options is based on expected future employee
exercise behavior. Volatility is based on the historical volatility
of the Company’s Common Stock if available or of several
public entities that are similar to the Company. The Company bases
volatility this way because it may not have sufficient historical
transactions in its own shares on which to solely base expected
volatility. The risk-free interest rate is based on the U.S.
Treasury rates at the date of grant with maturity dates
approximately equal to the expected term at the grant date. The
Company has not historically declared any dividends and does not
expect to in the future.
The
Company realized no income tax benefit from stock option exercises
in each of the periods presented due to recurring losses and
valuation allowances.
During
the years ended December 31, 2019 and 2018, stock option activity
under the 2014 Plan was as follows:
|
|
Number
|
Average
|
Remaining Contract
|
Intrinsic
|
|
|
of Shares
|
Exercise Price
|
Life in Years
|
Value
|
|
|
|
|
|
|
|
Stock options outstanding at January 1, 2018
|
545,000
|
$
4.05
|
7.13
|
$
-
|
|
|
|
|
|
|
|
Granted
during the period
|
539,000
|
$
3.04
|
5.00
|
$
-
|
|
Expired
during the period
|
-
|
-
|
|
|
|
Canceled
during the period
|
(90,000
)
|
$
3.26
|
4.41
|
$
-
|
|
Exercised
during the period
|
-
|
-
|
|
|
|
Stock options outstanding at December 31, 2018
|
994,000
|
$
3.58
|
5.42
|
$
-
|
|
|
|
|
|
|
|
Exercisable at December 31, 2018
|
749,500
|
$
3.74
|
5.71
|
$
-
|
|
|
|
|
|
|
|
Non-vested stock options outstanding at January 1,
2018
|
387,500
|
$
3.89
|
6.39
|
$
-
|
|
|
|
|
|
|
|
Granted
during the period
|
539,000
|
$
3.04
|
5.00
|
$
-
|
|
Vested
during the period
|
(600,750
)
|
$
3.50
|
5.00
|
$
-
|
|
Expired
during the period
|
-
|
-
|
|
|
|
Canceled
during the period
|
(81,250
)
|
$
3.26
|
4.41
|
$
-
|
|
Exercised
during the period
|
-
|
-
|
|
|
|
Non-vested stock options outstanding at December 31,
2018
|
244,500
|
$
3.05
|
4.53
|
$
-
|
|
Stock options outstanding at January 1, 2019
|
994,000
|
$
3.58
|
5.42
|
$
-
|
|
|
|
|
|
|
|
Granted
during the period
|
1,193,500
|
$
1.44
|
5.79
|
$
-
|
|
Expired
during the period
|
-
|
-
|
|
|
|
Canceled
during the period
|
(510,000
)
|
$
2.80
|
4.50
|
$
-
|
|
Exercised
during the period
|
-
|
-
|
|
|
|
Stock options outstanding at December 31, 2019
|
1,677,500
|
$
2.17
|
5.37
|
$
-
|
|
|
|
|
|
|
|
Exercisable at December 31, 2019
|
794,000
|
$
3.36
|
4.04
|
$
-
|
|
|
|
|
|
|
|
Non-vested stock options outstanding at January 1,
2019
|
244,500
|
$
3.05
|
4.53
|
$
-
|
|
|
|
|
|
|
|
Granted
during the period
|
1,193,500
|
$
1.44
|
5.79
|
$
-
|
|
Vested
during the period
|
(304,500
)
|
$
2.79
|
3.72
|
$
-
|
|
Expired
during the period
|
-
|
-
|
|
|
|
Canceled
during the period
|
(250,000
)
|
$
1.75
|
4.45
|
$
-
|
|
Exercised
during the period
|
-
|
-
|
|
|
|
Non-vested stock options outstanding at December 31,
2019
|
883,500
|
$
1.33
|
6.26
|
$
-
|
As of December 31, 2019, the Company had
unrecognized stock-based compensation expense of $733,575. $63,000
of this unrecognized expense will be recognized over the average
remaining vesting term of the options of 0.50 years.
$517,262 of this unrecognized expense
will vest upon enrollment completion
next MS1819 clinical trial in the U.S. for CF (the
OPTION 2 Trial). $72,713 of this unrecognized expense will vest
upon enrollment completion of the ongoing Combination Trial in
Europe. $40,300 of this unrecognized expense vests upon the Company
initiating a Phase III clinical trial in the U.S. for MS1819.
$40,300 of this unrecognized expense vests upon initiating a U.S.
Phase I clinical trial for any product other than MS1819. The
Company will recognize the expense related to these milestones when
the milestones become probable.
Note 14 - Interest Expense
During
the years ended December 31, 2019, the Company incurred $433,939 of
interest expense, including amortization of debt discount of
$425,907 and miscellaneous interest expense of $8,032.
During
the years ended December 31, 2018, the Company incurred $101,846 of
interest expense, including amortization of debt discount of
$97,837 and miscellaneous interest expense of $4,010.
Note
15 - Agreements
Mayoly Agreement
During
the years ended December 31, 2019 and 2018, the Company charged
$403,020 and $621,724, respectively, to Mayoly under the JDLA that
was in effect during both periods.
On
March 27, 2019, the Company entered into the Mayoly APA pursuant to
which the Company assumed the JDLA and purchased substantially all
remaining rights, title and interest in and to MS1819 (see
“Recent Developments” above).
INRA Agreement
In
February 2006, Mayoly and INRA TRANSFERT, on behalf of INRA and
CNRS (French government research centers), entered into a Usage and
Cross-Licensing Agreement granting Mayoly exclusive worldwide
rights to exploit
Yarrowia
lipolytica
and other lipase proteins based on their patents
for use in humans. The INRA Agreement provides for the payment by
Mayoly of royalties on net sales, subject to Mayoly’s right
to terminate such obligation upon the payment of a lump sum
specified in the agreement. Upon execution of the Mayoly APA, all
rights, obligations and interests under the INRA Agreement were
transferred to the Company.
TransChem Sublicense
On
August 7, 2017, the Company entered into a sublicense agreement
with TransChem, pursuant to which TransChem granted the Company an
exclusive license to patents and patent applications relating to
Helicobacter pylori 5’methylthioadenosine nucleosidase
inhibitors (the
“TransChem
Licensed Patents”
) currently held
by TransChem (the
“TransChem
Sublicense Agreement”
). The Company may terminate the
TransChem Sublicense Agreement and the licenses granted therein for
any reason and without further liability on 60 days’ notice.
Unless terminated earlier, the TransChem Sublicense Agreement will
expire upon the expiration of the last TransChem Licensed Patents.
Upon execution, the Company paid an upfront fee to TransChem and
agreed to reimburse TransChem for certain expenses previously
incurred in connection with the preparation, filing, and
maintenance of the TransChem Licensed Patents. The Company also
agreed to pay TransChem certain future periodic sublicense
maintenance fees, which fees may be credited against future
royalties. The Company may also be required to pay TransChem
additional payments and royalties in the event certain
performance-based milestones and commercial sales involving the
TransChem Licensed Patents are achieved. The TransChem Licensed
Patents will allow the Company to develop compounds for treating
gastrointestinal and other infections which are specific to
individual bacterial species. H. pylori bacterial infections are a
major cause of chronic gastritis, peptic ulcer disease, gastric
cancer and other diseases. Amounts paid under the TransChem
Sublicense Agreement during the years ended December 31, 2019 and
2018 were $50,000 and $136,880, respectively, and are included in
R&D expense.
On
March 11, 2020, the Company provided TransChem with 60 days’
notice of its intent to terminate the TransChem Sublicense
Agreement.
Employment Agreements
James Sapirstein
Effective October
8, 2019, the Company entered into an employment agreement with Mr.
Sapirstein to serve as its President and Chief Executive Officer
for a term of three years, subject to further renewal upon
agreement of the parties. The employment agreement with Mr.
Sapirstein provides for a base salary of $450,000 per year. In
addition to the base salary, Mr. Sapirstein is eligible to receive
(i) a cash bonus of up to 40% of his base salary on an annual
basis, based on certain milestones that are yet to be determined;
(ii) 1% of net fees received by the Company upon entering into
license agreements with any third-party with respect to any product
current in development or upon the sale of all or substantially all
assets of the Company; (iii) a grant of 200,000 restricted shares
(RSUs) of Common Stock which are subject to vest as follows (a)
100,000 shares upon the first commercial sale of MS1819 in the
U.S., and (b) 100,000 shares upon the total market capitalization
of the Company exceeding $1.0 billion for 20 consecutive trading
days; (iv) a grant of 300,000 10-year stock options to purchase
shares of Common Stock with a strike price equal to $0.52 per
share, which are subject to vest as follows (a) 50,000 shares upon
the Company initiating its next Phase II clinical trial in the U.S.
for MS1819, (b) 50,000 shares upon the Company completing its next
or subsequent Phase II clinical trial in the U.S. for MS1819, (c)
100,000 shares upon the Company initiating a Phase III clinical
trial in the U.S. for MS1819, and (d) 100,000 shares upon the
Company initiating a Phase I clinical trial in the U.S. for any
product other than MS1819. Mr. Sapirstein is entitled to receive 20
days of paid vacation, participate in full employee health benefits
and receive reimbursement for all reasonable expenses incurred in
connection with his services to the Company.
In the
event that Mr. Sapirstein’s employment is terminated by the
Company for Cause, as defined in his employment agreement, or by
Mr. Sapirstein voluntarily, then he will not be entitled to receive
any payments beyond amounts already earned, and any unvested equity
awards will terminate. In the event that Mr. Sapirstein’s
employment is terminated as a result of an Involuntary Termination
Other than for Cause, as defined in his employment agreement, Mr.
Sapirstein will be entitled to receive the following compensation:
(i) severance in the form of continuation of his salary (at the
Base Salary rate in effect at the time of termination, but prior to
any reduction triggering Good Reason) for a period of 12 months
following the termination date; (ii) payment of Executive’s
premiums to cover COBRA for a period of 12 months following the
termination date; and (iii) a prorated annual bonus.
Daniel Schneiderman
Effective January
2, 2020, the Company entered into an employment agreement with Mr.
Schneiderman to serve as the Company’s Chief Financial
Officer for a term of three years, subject to further renewal upon
agreement of the parties. The employment agreement with Mr.
Schneiderman provides for a base salary of $285,000 per year. In
addition to the base salary, Mr. Schneiderman is eligible to
receive (a) an annual milestone cash bonus based on certain
milestones that will be established by the Company’s Board or
the Compensation Committee, and (b) a grant of stock options to
purchase 335,006 shares of Common Stock with a strike price of
$1.03 per share, which shall vest in three equal portions on each
anniversary date of the Effective Date commencing on the first
anniversary date of the agreement. Mr. Schneiderman is
entitled to receive 20 days of paid vacation, participate in full
employee health benefits and receive reimbursement for all
reasonable expenses incurred in connection with his service to the
Company. The Company may terminate Mr. Schneiderman’s
employment agreement at any time, with or without Cause, as such
term is defined in his employment agreement.
In the
event that Mr. Schneiderman’s employment is terminated by the
Company for Cause, as defined in his employment agreement, or by
Mr. Schneiderman voluntarily, then he will not be entitled to
receive any payments beyond amounts already earned, and any
unvested equity awards will terminate. If the Company terminates
his employment agreement without Cause, not in connection with a
Change of Control, as such term is defined in his employment
agreement, Mr. Schneiderman will be entitled to (i) all salary owed
through the date of termination; (ii) any unpaid annual milestone
bonus; (iii) severance in the form of continuation of his
salary for the greater of a period of 6 months following the
termination date or the remaining term of the employment agreement;
(iv) payment of premiums to cover COBRA for a period of 6 months
following the termination date; (v) a prorated annual bonus equal
to the target annual milestone bonus, if any, for the year of
termination multiplied by the formula set forth in the agreement.
If the Company terminates his employment agreement without Cause,
in connection with a Change of Control, as such term is defined in
his employment agreement, Mr. Schneiderman will be entitled to the
above and immediate accelerated vesting of any unvested options or
other unvested awards.
Dr. James E. Pennington
Effective May 28,
2018, the Company entered into an employment agreement with Mr.
Pennington to serve as its Chief Medical Officer. The employment
agreement with Dr. Pennington provides for a base annual salary of
$250,000. In addition to his salary, Dr. Pennington is eligible to
receive an annual milestone bonus, awarded at the sole discretion
of the Board based on his attainment of certain financial, clinical
development, and/or business milestones established annually by the
Board or Compensation Committee. The Company may terminate Mr.
Pennington’s employment agreement at any time, with or
without Cause, as such term is defined in his employment agreement.
In the event of termination by the Company other than for Cause,
Dr. Pennington is entitled to three months’ severance payable
over such period. In the event of termination by the Company other
than for Cause in connection with a Change of Control as such term
is defined in his employment agreement, Dr. Pennington will receive
six months’ severance payable over such period.
On June
28, 2018, Mr. Pennington was granted stock options to purchase
75,000 shares of Common Stock with a strike price equal to $3.04
per share, issuable pursuant to the 2014 Plan, subject to vesting
conditions as follows: (i) 50% upon U.S. acceptance of an IND for
MS1819, and (ii) 50% upon the first CF patient dosed with MS1819
anywhere in the world.
On June
13, 2019, Mr. Pennington was granted stock options to purchase
110,000 shares of Common Stock with a strike price equal to $1.75
per share, issuable pursuant to the 2014 Plan, that vest upon the
completion of enrollment of the next MS1819 clinical trial in the
U.S. for CF (the OPTION 2 Trial).
On June
13, 2019, the Board approved and accrued an incentive bonus in the
amount of $75,000, which was paid during the year ended December
31, 2019.
Johan (Thijs) Spoor
On
January 3, 2016, the Company entered into an employment agreement
with its former President and Chief Executive Officer, Johan Spoor.
The employment agreement provided for a term expiring January 2,
2019. Although Mr. Spoor’s employment agreement has expired,
he remained employed as the Company’s President and Chief
Executive Officer under the terms of his prior employment agreement
through his resignation as the Company’s President and Chief
Executive Officer effective October 8, 2019. Mr. Spoor continues to
serve as a director on the Board of the Company.
The
employment agreement with Mr. Spoor provided for a base salary of
$425,000 per year. At the sole discretion of the Board or the
Compensation Committee of the Board, following each calendar year
of employment, Mr. Spoor was eligible to receive an additional cash
bonus based on his attainment of certain financial, clinical
development, and/or business milestones to be established annually
by the Board or the Compensation Committee.
Mr.
Spoor was originally entitled to 10-year stock options to purchase
380,000 shares of Common Stock, pursuant to the 2014 Plan. During
the year ended December 31, 2017, stock options to purchase 100,000
shares of Common Stock with a strike price of $4.48 per share with
a grant date fair value of $386,900 were granted and
vested.
On
September 29, 2017, Mr. Spoor was granted 100,000 shares of
restricted Common Stock subject to milestone-based vesting, in
satisfaction of the Company’s obligation to issue the
additional 280,000 options to Mr. Spoor described above, with an
estimated grant date fair value of $425,000. During the year ended
December 31, 2018, all 100,000 shares of restricted Common Stock
vested. These stock options were cancelled as a result of Mr.
Spoor’s resignation.
On June
28, 2018, Mr. Spoor was granted and accrued 100,000 shares of
restricted Common Stock subject to milestone-based vesting. During
the year ended December 31, 2018, 33,333 of these shares of
restricted Common Stock vested. During the year ended December 31,
2019, 66,667 of these shares of restricted Common Stock
vested.
On June
28, 2018, Mr. Spoor was granted 100,000 shares of restricted Common
Stock subject to time-based vesting over three years. During the
year ended December 31, 2018, 8,333 shares of restricted Common
Stock vested. During the year ended December 31, 2019, 33,334
shares of restricted Common Stock vested. The 58,333 unvested
shares of restricted Common Stock were forfeited upon Mr.
Spoor’s resignation.
On June
28, 2018, the Board approved and accrued an incentive bonus in the
amount of $212,500, which was paid during the year ended December
31, 2018.
On June
13, 2019, Mr. Spoor was granted stock options to purchase 150,000
shares of Common Stock, subject to milestone-based vesting, with a
strike price of $1.75 per share. These unvested stock options were
cancelled as a result of Mr. Spoor’s
resignation.
On June
29, 2019, the Company accrued an incentive bonus in the amount of
$255,000. Subsequent to Mr. Spoor’s resignation, the
Compensation Committee reviewed the accrued bonus and determined
that such amount was not owed by the Company, which determination
is being challenged by Mr. Spoor.
Mr.
Spoor received no additional or severance compensation and all
unvested stock options and shares of restricted Common Stock
granted to Mr. Spoor were cancelled as a result of Mr.
Spoor’s resignation. There are 241,667 earned and unissued
shares of restricted Common Stock due to Mr. Spoor.
Maged Shenouda
On
September 26, 2017, the Company entered into an employment
agreement with Maged Shenouda, pursuant to which Mr. Shenouda
served as the Company’s Chief Financial Officer.
Mr.
Shenouda’s employment agreement provided for the issuance of
stock options to purchase 100,000 shares of Common Stock, pursuant
to the 2014 Plan, with a strike price of $4.39 per share and a term
of ten years. These stock options vested as follows so long as Mr.
Shenouda served as either Executive Vice-President of Corporate
Development or as Chief Financial Officer: (i) 75% upon FDA
acceptance of a U.S. IND application for MS1819, and (ii) 25% upon
the Company completing a Phase IIa clinical trial for MS1819.
During the year ended December 31, 2018, these stock options
vested.
On June
28, 2018, Mr. Shenouda was granted stock options to purchase
100,000 shares of Common Stock, pursuant to the 2014 Plan, with a
strike price of $3.04 per share and a term of five years, subject
to vesting conditions as follows: (i) 50% upon U.S. acceptance of
an IND for MS1819, and (ii) 50% upon the first CF patient doses
with MS1819 anywhere in the world.
During
the year ended December 31, 2018, stock options to purchase 50,000
shares of Common Stock, pursuant to the 2014 Plan, vested and
approximately $103,650 was recognized and expensed as stock-based
compensation. During the year ended December 31, 2019, stock
options to purchase 50,000 shares of Common Stock vested due to the
first dosing of CF patients with MS1819 anywhere in the world and
approximately $103,650 was recognized and expensed as stock-based
compensation.
On June
28, 2018, the Board approved and accrued an incentive bonus in the
amount of $82,500, which was paid during the year ended December
31, 2018.
On June
13, 2019, Mr. Shenouda was granted stock options to purchase
100,000 shares of Common Stock, pursuant to the 2014 Plan, with a
strike price of $1.75 per share and a term of five years, that vest
upon the completion of enrollment of the next trial of MS 1819 in
the U.S. These unvested stock options were cancelled as a result of
Mr. Shenouda’s resignation.
On June
28, 2019, the Compensation Committee approved the accrual of an
incentive bonus in the amount of $100,000. Subsequent to Mr.
Shenouda’s resignation, the Compensation Committee reviewed
the accrued bonus and determined that such amount was not owed, and
the Company reversed the accrual in the quarter ended December 31,
2019.
Mr.
Shenouda resigned from his position as the Company’s Chief
Financial Officer effective November 30, 2019. Mr. Shenouda
received no additional or severance compensation and all unvested
stock options and shares of restricted Common Stock granted to Mr.
Shenouda were cancelled as a result of Mr. Shenouda’s
resignation. Mr. Shenouda has a period of twelve months following
his resignation to exercise all vested stock options.
Note
16 - Leases
The
Company adopted ASU 2016-02, Leases, as of January 1, 2019, using
the modified retrospective approach. Prior year financial
statements were not recast under the new standard.
The
Company leases its office and research facilities under operating
leases which are subject to various rent provisions and escalation
clauses expiring at various dates through 2020. The escalation
clauses are indeterminable and considered not material and have
been excluded from minimum future annual rental
payments.
For the
years ended December 31, 2019 and 2018, lease expense amounted to
$198,061 and $147,051, respectively.
The
weighted-average remaining lease term and weighted-average discount
rate under operating leases at December 31, 2019 were:
|
|
December 31,
|
|
|
2019
|
|
Lease term and discount rate
|
|
|
Weighted-average
remaining lease term
|
0.85
years
|
|
Weighted-average
discount rate
|
6.0
%
|
Maturities of
operating lease liabilities at December 31, 2019 were as
follows:
|
2020
|
87,008
|
|
Total
lease payments
|
87,008
|
|
Less
imputed interest
|
(3,773
)
|
|
Present
value of lease liabilities
|
$
83,235
|
Note
17 - Income Taxes
The
Company is subject to taxation at the federal level in both the
United States and France and at the state level in the United
States. At December 31, 2019 and 2018, the Company had no tax
provision for either jurisdictions.
At
December 31, 2019 and 2018, the Company had gross deferred tax
assets of approximately $16,372,000 and $12,490,000, respectively.
As the Company cannot determine that it is more likely than not
that the Company will realize the benefit of the deferred tax
asset, a valuation allowance of approximately $16,372,000 and
$12,490,000, respectively, has been established at December 31,
2019 and 2018. The change in the valuation allowance in 2019 and
2018 was $3,882,000 and $2,572,000, respectively.
As of
December 31, 2019, and 2018, the significant components of the
Company’s net deferred tax assets consisted of:
|
|
December 31,
|
December 31,
|
|
|
2019
|
2018
|
|
Gross
deferred tax assets:
|
|
|
|
Net
operating loss carry-forwards
|
$
16,197,000
|
$
12,019,000
|
|
Temporary
differences:
|
|
|
|
Stock
compensation
|
199,000
|
303,000
|
|
Accruals
|
136,000
|
124,000
|
|
Other
|
131,000
|
44,000
|
|
Amortization
|
(291,000
)
|
-
|
|
Deferred
tax asset valuation allowance
|
(16,372,000
)
|
(12,490,000
)
|
|
Net
deferred tax asset
|
$
-
|
$
-
|
Income
taxes computed using the federal statutory income tax rate differs
from the Company’s effective tax rate primarily due to the
following:
|
|
December 31,
|
December 31,
|
|
|
2019
|
2018
|
|
Income
taxes benefit (expense) at statutory rate
|
21
%
|
21
%
|
|
State
income tax
|
14
%
|
14
%
|
|
Non-deductible
expense
|
(5
%)
|
(6
%)
|
|
Change
in valuation allowance
|
(30
%)
|
(29
%)
|
|
|
0
%
|
0
%
|
At
December 31, 2019, the Company has gross net operating loss
(“
NOL
”)
carryforwards for U.S. federal and state income tax purposes of
approximately $29,320,000 and $27,764,000, respectively. The
NOL’s expire between the years 2034 and 2039. The
Company’s ability to use its NOL carryforwards may be limited
if it experiences an “ownership change” as defined in
Section 382 (“
Section
382
”) of the Internal Revenue Code of 1986, as
amended. An ownership change generally occurs if certain
stockholders increase their aggregate percentage ownership of a
corporation’s stock by more than 50 percentage points over
their lowest percentage ownership at any time during the testing
period, which is generally the three-year period preceding any
potential ownership change.
At
December 31, 2019 and 2018, the Company had approximately
$19,475,000 and $15,406,000, respectively, in net operating losses
which it can carryforward indefinitely to offset against future
French income.
At
December 31, 2019 and 2018, the Company had taken no uncertain tax
positions that would require disclosure under ASC 740, Accounting
for Income Taxes.
Note
18 - Net Loss per Common Share
Basic
net loss per share is computed by dividing net loss available to
Common Stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflect,
in periods in which they have a dilutive effect, the impact of
common shares issuable upon exercise of stock options and warrants
and conversion of convertible debt that are not deemed to be
anti-dilutive. The dilutive effect of the outstanding stock options
and warrants is computed using the treasury stock
method.
At
December 31, 2019, diluted net loss per share did not include the
effect of 3,671,055 shares of Common Stock issuable upon the
conversion of convertible debt, 5,378,288 shares of Common Stock
issuable upon the exercise of outstanding warrants, 632,667 shares
of restricted stock not yet issued, and 1,677,500 shares of Common
Stock issuable upon the exercise of outstanding options as their
effect would be antidilutive during the periods prior to
conversion.
At
December 31, 2018, diluted net loss per share did not include the
effect of 3,112,715 shares of Common Stock issuable upon the
exercise of outstanding warrants, 416,000 shares of restricted
stock not yet issued, and 994,000 shares of Common Stock issuable
upon the exercise of outstanding options as their effect would be
antidilutive during the periods prior to conversion.
Note
19 - Related Party Transactions
Johan (Thijs) Spoor
During
the year ended December 31, 2015, the Company employed the services
of JIST Consulting (“
JIST
”), a company controlled by
Johan (Thijs) Spoor, the Company’s former Chief Executive
Officer and President, as a consultant for business strategy,
financial modeling, and fundraising. Included in accounts payable
at December 31, 2019 and 2018, is $348,400 and $478,400,
respectively, for JIST relating to Mr. Spoor’s services. Mr.
Spoor received no other compensation from the Company other than as
specified in his employment agreement. On October 8, 2019, Mr.
Spoor resigned as Chief Executive Officer and President of the
Company.
On June
29, 2019, the Company accrued an incentive bonus in the amount of
$255,000 payable to Mr. Spoor. Subsequent to Mr. Spoor’s
resignation, the Compensation Committee reviewed the accrued bonus
and determined that such amount was not owed, which determination
is being challenged by Mr. Spoor. As a result of management’s
determination, the Company reversed the accrual in the quarter
ended December 31, 2019.
In
addition, Mr. Spoor is entitled to
241,667 shares of restricted Common Stock with a grant date fair
value of $855,668 that have not been issued. Management is
currently negotiating with Mr. Spoor regarding the amounts, if any,
that should be paid to Mr. Spoor relating to payments due to JIST,
any bonus payable, as well as the equity awards due to Mr.
Spoor
.
Maged Shenouda
From
October 1, 2016 until his appointment as the Company’s Chief
Financial Officer on September 25, 2017, the Company employed the
services of Maged Shenouda as a financial consultant. Included in
accounts payable at December 31, 2019 and 2018 is $10,000 and
$50,000, respectively, for Mr. Shenouda’s services. On
November 1, 2019, Mr. Shenouda submitted his resignation as Chief
Financial Officer of the Company, effective November 30,
2019.
On June
29, 2019, the Company accrued an incentive bonus in the amount of
$100,000 payable to Mr. Shenouda. Subsequent to Mr.
Shenouda’s resignation, the Compensation Committee reviewed
the accrued bonus and determined that such amount should not be
paid, and the Company reversed the accrual in the quarter ended
December 31, 2019.
Christine Rigby-Hutton
During
the year ended December 31, 2015, the Company's President,
Christine Rigby-Hutton, was employed through Rigby-Hutton
Management Services (“
RHMS
”). Ms. Rigby-Hutton resigned
from the Company effective April 20, 2015. Included in accounts
payable at both December 31, 2019 and 2018 is $38,453 for RHMS for
Ms. Rigby-Hutton’s services.
Note 20 - Employee Benefit Plans
401(k) Plan
The
Company sponsors a multiple employer defined contribution benefit
plan, which complies with Section 401(k) of the Internal Revenue
Code covering substantially all employees of the
Company.
All
employees are eligible to participate in the plan. Employees may
contribute from 1% to 100% of their compensation and the Company
matches an amount equal to 100% on the first 6% of the employee
contribution and may also make discretionary profit-sharing
contributions.
Employer
contributions under this 401(k) plan amounted to $63,109 and
$40,901 for the years ended December 31, 2019 and 2018,
respectively.
Note 21 – Subsequent Events
Coronavirus Disease (COVID-19)
Beginning around
January 2020, the COVID-19 outbreak originating in Wuhan, China
has spread globally
and may
impact the Company’s operations and delay current and
planned clinical trial operations in Europe and the U.S.,
including, but not limited to clinical trial recruitment and
participation. Given the uncertainty of the situation, the duration
of the business disruption and related financial impact cannot be
reasonably estimated at this time. The impact of COVID-19 is
evolving rapidly and its future effects are uncertain, management
is responding to this crisis and anticipates the need to secure
additional financing in response to any potential disruptions or
delays due to the COVID-19 outbreak.
Termination of TransChem License Agreement
On
March 11, 2020, the Company provided TransChem with sixty (60) days
prior written notice of its intent to terminate the TransChem
Sublicense Agreement and the licenses granted
thereunder.
Issuance of shares of Common Stock to Settle Accounts
Payable
Effective March 11,
2020, The Company issued its outside Board members an aggregate of
105,937 shares of Common Stock for the settlement of accounts
payable in the aggregate amount of $131,149. The aggregate
effective settlement price was $1.24 per share, and each individual
stock issuance was based on the closing stock price of the Common
Stock on the initial date the payable was accrued.
Benefit of French Tax Credit Received
On
March 2, 2020, the Company announced that it has benefited from
certain tax credits applicable to French technology companies
through its wholly-owned subsidiary, AzurRx SAS resulting in a
credit of over 1 million Euros in the French Crédit
d’impôt Recherche ("
CIR
"), a French tax credit aimed at
stimulating research activities.
LPC Equity Line of Credit
In
February 2020, the Company issued 150,000 shares of Common Stock in
connection with the LPC Purchase Agreement, resulting in gross
proceeds to the Company of $144,000.
Continued Nasdaq Listing
On March 23, 2020, the Company received a letter
from the Listing Qualifications Staff of The Nasdaq Stock Market,
LLC ("
Nasdaq
") indicating that, based upon the closing bid
price of the Company's Common Stock for the last 30 consecutive
business days, the Company is not currently in compliance with the
requirement to maintain a minimum bid price of $1.00 per share for
continued listing on the Nasdaq Capital Market, as set forth in
Nasdaq Listing Rule 5550(a)(2) (the "
Notice
").
The
Notice has no immediate effect on the continued listing status of
the Company's Common Stock on the Nasdaq Capital Market, and,
therefore, the Company's listing remains fully
effective.
The
Company will continue to monitor the closing bid price of its
Common Stock and seek to regain compliance with all applicable
Nasdaq requirements within the allotted compliance periods. To
regain compliance, the closing bid price of the Company's Common
Stock must be at least $1.00 per share for 10 consecutive business
days at some point during the period of 180 calendar days from the
date of the Notice, or until September 21, 2020. If the Company
does not regain compliance with the minimum bid price requirement
by September 21, 2020, Nasdaq may grant the Company a second period
of 180 calendar days to regain compliance. To qualify for this
additional compliance period, the Company would be required to meet
the continued listing requirement for market value of publicly held
shares and all other initial listing standards for the Nasdaq
Capital Market, other than the minimum bid price requirement. In
addition, the Company would also be required to notify Nasdaq of
its intent to cure the minimum bid price deficiency. If the Company
does not regain compliance within the allotted compliance periods,
including any extensions that may be granted by Nasdaq, Nasdaq will
provide notice that the Company's Common Stock will be subject to
delisting. The Company would then be entitled to appeal that
determination to a Nasdaq hearings panel. There can be no assurance
that the Company will regain compliance with the minimum bid price
requirement during the 180-day compliance period, secure a second
period of 180 days to regain compliance, or maintain compliance
with the other Nasdaq listing requirements.
January 2020 Closings of the Promissory Note Offering
On
January 2, 2020, January 3, 2020, and January 9, 2020, the Company
issued the Note Investors Promissory Notes in the aggregate
principal amount of $3,517,700 and Note Warrants to purchase an
aggregate of 1,813,257 shares of Common Stock for total net
proceeds of $3,240,930.
In
connection with the three closings in January 2020 of the
Promissory
Note
Offering, the Company paid aggregate placement agent fees of
$276,770, which fees were based on (i) 9% of the aggregate
principal amount of the Promissory Notes issued to the Note
Investors introduced by the placement agent, and (ii) a
non-accountable expense allowance of 1% of the gross proceeds from
the Promissory
Note
Offering. In addition, the Company issued Placement Agent Warrants
to purchase an aggregate of 199,732 shares of Common
Stock.
On
January 9, 2020, the Company concluded the Promissory Note
Offering. In aggregate, the Company issued the Note Investors
Promissory Notes in the aggregate principal amount of $6,904,000
and Note Warrants to purchase an aggregate of 3,558,795 shares of
Common Stock for total net proceeds of $6,234,600. Additionally,
the Company issued Placement Agent Warrants to purchase an
aggregate of 444,108 shares of Common Stock.
On
January 2, 2020, the Company repaid the remaining principal balance
of $450,000 plus outstanding accrued interest of $104,153 on the
ADEC Notes.
F-34
TABLE OF CONTENTS
Part IItem 1. Description Of BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5. Market For Common Equity and Related Stockholder MattersItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial StatementsItem 8. FinaItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. ExhibitsNote 1 - The Company and Basis Of PresentationNote 2 - Significant Accounting Policies and Recent Accounting PronouncementsNote 3 - Fair Value DisclosuresNote 4 - Other ReceivablesNote 5 - Property, Equipment and Leasehold ImprovementsNote 6 - Intangible Assets and GoodwillNote 7 - Accounts Payable and Accrued ExpenseNote 8 - Note PayableNote 9 Convertible DebtNote 10 Other LiabilitiesNote 11 Equity, Common Stock and Incentive PlanNote 12 - WarrantsNote 13 Stock OptionsNote 14 - Interest ExpenseNote 15 - AgreementsNote 16 - LeasesNote 17 - Income TaxesNote 18 - Net Loss Per Common ShareNote 19 - Related Party TransactionsNote 20 - Employee Benefit PlansNote 21 Subsequent Events