FIRST WAVE BIOPHARMA, INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X]
QUARTERLY REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended March 31, 2020
OR
[ ]
TRANSITION REPORT
UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT OF
1934
From the transition period
from to
Commission File Number 001-37853
AZURRX BIOPHARMA,
INC.
(Exact name of small business issuer 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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(IRS
Employer Identification No.)
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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)
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 whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (Sec.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 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.
|
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]
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Trading Symbol(s)
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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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AZRX
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Nasdaq
Capital Market
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As of May 14
, 2020, there were
28,202,850 shares of the registrant’s common stock, $0.0001
par value, (“
common
stock
”) issued and
outstanding.
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Page
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-i-
P
ART
I
FINANCIAL INFORMATION
ITEM 1.
CONSOLIDATED FINANCIAL
S
TATEMENTS
In our opinion, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly our financial
position, results of operations, and cash flows for the interim
periods presented. We have condensed such financial statements in
accordance with the rules and regulations of the Securities and
Exchange Commission (“
SEC
”). Therefore, such financial statements do
not include all disclosures required by accounting principles
generally accepted in the United States of America. In preparing
these consolidated financial statements, the Company has evaluated
events and transactions for potential recognition or disclosure
through the date the consolidated financial statements were issued
by filing with the SEC.
These financial statements should be read in conjunction with our
audited financial statements for the year ended December 31, 2019
included in our Annual Report filed on Form 10-K, filed with the
SEC on March 30, 2020.
The results of operations for the three months ended March 31, 2020
are not necessarily indicative of the results to be expected for
the fiscal year ended December 31, 2020.
-1-
AZURRX BIOPHARMA, INC.
Consolidated
B
alance Sheets
(unaudited)
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March
31,
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December
31,
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2020
|
2019
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ASSETS
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Current
Assets:
|
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Cash
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$
1,630,007
|
$
175,796
|
|
Other
receivables
|
760,232
|
2,637,303
|
|
Prepaid
expenses
|
507,197
|
595,187
|
|
Total
Current Assets
|
2,897,436
|
3,408,286
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|
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Property,
equipment, and leasehold improvements, net
|
73,547
|
77,391
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|
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Other
Assets:
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Patents
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3,275,197
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3,407,084
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Goodwill
|
1,844,006
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1,886,686
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Operating
lease right-of-use assets
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53,399
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82,386
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Deposits
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40,727
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41,047
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Total
Other Assets
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5,213,329
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5,417,203
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Total
Assets
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$
8,184,312
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$
8,902,880
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current
Liabilities:
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Accounts
payable and accrued expenses
|
$
1,039,219
|
$
1,754,682
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Accounts
payable and accrued expenses - related party
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396,853
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533,428
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|
Note
payable
|
279,616
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444,364
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Convertible
debt
|
2,986,328
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1,076,938
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Other
current liabilities
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441,173
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476,224
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Total
Current Liabilities
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5,143,189
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4,285,636
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Stockholders'
Equity:
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Convertible
preferred stock - Par value $0.0001 per share; 10,000,000 shares
authorized and 0 shares issued and outstanding at March 31, 2019
and December 31, 2018; liquidation preference approximates par
value
|
-
|
-
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Common
stock - Par value $0.0001 per share; 100,000,000 shares authorized;
27,157,651 and 26,800,519 shares issued and outstanding,
respectively, at March 31, 2020 and December 31, 2019
|
2,716
|
2,680
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Additional
paid-in capital
|
72,103,490
|
68,575,851
|
|
Accumulated
deficit
|
(67,956,022
)
|
(62,694,732
)
|
|
Accumulated
other comprehensive loss
|
(1,109,061
)
|
(1,266,555
)
|
|
Total
Stockholders' Equity
|
3,041,123
|
4,617,244
|
|
Total
Liabilities and Stockholders' Equity
|
$
8,184,312
|
$
8,902,880
|
See accompanying notes to consolidated financial
statements
-2-
AZURRX BIOPHARMA, INC.
Consolidated Statements of Operations and Comprehensive Loss
(unaudited)
|
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Three Months
|
Three Months
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|
|
Ended
|
Ended
|
|
|
03/31/20
|
03/31/19
|
|
|
|
|
|
Research
and development expenses
|
$
1,553,360
|
$
3,009,676
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General
and administrative expenses
|
1,375,091
|
1,593,968
|
|
|
|
|
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Loss
from operations
|
(2,928,451
)
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(4,603,644
)
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|
|
|
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|
Other:
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Interest
expense
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(2,332,839
)
|
(57,111
)
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Total
other
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(2,332,839
)
|
(57,111
)
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Loss
before income taxes
|
(5,261,290
)
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(4,660,755
)
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Income
taxes
|
-
|
-
|
|
|
|
|
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Net
loss
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(5,261,290
)
|
(4,660,755
)
|
|
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|
|
|
Other
comprehensive loss:
|
|
|
|
Foreign
currency translation adjustment
|
157,494
|
(95,281
)
|
|
Total
comprehensive loss
|
$
(5,103,796
)
|
$
(4,756,036
)
|
|
|
|
|
|
Basic
and diluted weighted average shares outstanding
|
26,941,803
|
17,719,902
|
|
|
|
|
|
Loss
per share - basic and diluted
|
$
(0.20
)
|
$
(0.26
)
|
See accompanying notes to consolidated financial
statements
-3-
AZURRX BIOPHARMA, INC.
Consolidated Statements of Changes in Stockholders' Equity
(unaudited)
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|
|
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|
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|
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Accumulated
|
|
|
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Convertible
|
|
|
Additional
|
|
Other
|
|
|
|
|
Preferred Stock
|
Common Stock
|
Paid In
|
Accumulated
|
Comprehensive
|
|
||
|
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Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Loss
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2019
|
-
|
$
-
|
17,704,925
|
$
1,771
|
$
53,139,259
|
$
(47,517,046
)
|
$
(1,150,112
)
|
$
4,473,872
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued to consultants
|
|
|
27,102
|
2
|
59,998
|
|
|
60,000
|
|
Common
stock issued to Mayoly for patents
|
|
|
775,931
|
77
|
1,740,882
|
|
|
1,740,959
|
|
Stock-based
compensation
|
|
|
|
|
511,335
|
|
|
511,335
|
|
Restricted
stock granted to employees/directors
|
|
|
30,000
|
3
|
296,282
|
|
|
296,285
|
|
Warrant
modification
|
|
|
|
|
325,320
|
|
|
325,320
|
|
Received
from stockholder in relation to warrant modification
|
|
|
|
|
61,590
|
|
|
61,590
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
(95,281
)
|
(95,281
)
|
|
Net
loss
|
|
|
|
|
|
(4,660,755
)
|
|
(4,660,755
)
|
|
Balance, March 31, 2019
|
-
|
$
-
|
18,537,958
|
$
1,853
|
$
56,134,666
|
$
(52,177,801
)
|
$
(1,245,393
)
|
$
2,713,325
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2020
|
-
|
$
-
|
26,800,519
|
$
2,680
|
$
68,575,851
|
$
(62,694,732
)
|
$
(1,266,555
)
|
$
4,617,244
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued to settle related payable accounts
payable
|
|
|
105,937
|
11
|
131,126
|
|
|
131,137
|
|
Common
stock issued to consultants
|
|
|
101,195
|
10
|
87,095
|
|
|
87,105
|
|
Common
stock issued to Lincoln Park for Equity Purchase
agreement
|
|
|
150,000
|
15
|
143,985
|
|
|
144,000
|
|
Warrants
issued in association with convertible debt issuances
|
|
|
|
|
1,252,558
|
|
|
1,252,558
|
|
Beneficial
conversion feature on convertible debt issuances
|
|
|
|
|
1,838,422
|
|
|
1,838,422
|
|
Stock-based
compensation
|
|
|
|
|
74,453
|
|
|
74,453
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
157,494
|
157,494
|
|
Net
loss
|
|
|
|
|
|
(5,261,290
)
|
|
(5,261,290
)
|
|
Balance, March 31, 2020
|
-
|
$
-
|
27,157,651
|
$
2,716
|
$
72,103,490
|
$
(67,956,022
)
|
$
(1,109,061
)
|
$
3,041,123
|
See accompanying notes to consolidated financial
statements
-4-
AZURRX BIOPHARMA, INC.
Consolidated Statements of Cash Flows (unaudited)
|
|
Three Months
|
Three Months
|
|
|
Ended
|
Ended
|
|
|
03/31/20
|
03/31/19
|
|
Cash
flows from operating activities:
|
|
|
|
Net
loss
|
$
(5,261,290
)
|
$
(4,660,755
)
|
|
Adjustments
to reconcile net loss to net cash used in
|
|
|
|
operating
activities:
|
|
|
|
Depreciation
|
9,661
|
17,114
|
|
Amortization
|
131,149
|
561,289
|
|
Non-cash
lease expense
|
(6,065
)
|
(1,030
)
|
|
Stock-based
compensation
|
54,950
|
511,335
|
|
Common
stock issued to settle related party accounts payable
|
131,137
|
-
|
|
Restricted
stock granted to employees/directors
|
19,503
|
296,285
|
|
Restricted
stock granted to consultants
|
87,105
|
60,000
|
|
Accrued
interest on convertible debt
|
164,281
|
24,658
|
|
Accretion
of debt discount
|
2,059,086
|
29,104
|
|
Net
changes in assets and liabilities:
|
|
|
|
Other
receivables
|
2,064,252
|
(149,508
)
|
|
Prepaid
expenses
|
87,906
|
172,886
|
|
Deposits
|
-
|
(4,125
)
|
|
Accounts
payable and accrued expenses
|
(832,955
)
|
514,950
|
|
Net
cash used in operating activities
|
(1,291,280
)
|
(2,627,797
)
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
Purchase
of property and equipment
|
(4,340
)
|
(13,352
)
|
|
Net
cash used in investing activities
|
(4,340
)
|
(13,352
)
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
Proceeds
from issuance of common stock, net
|
144,000
|
-
|
|
Proceeds
from issuance of convertible debt, net
|
3,227,002
|
2,000,000
|
|
Received
from stockholder in relation to warrant modification
|
-
|
61,590
|
|
Repayments
of convertible debt
|
(450,000
)
|
-
|
|
Repayments
of note payable
|
(164,748
)
|
(94,448
)
|
|
Net
cash provided by financing activities
|
2,756,254
|
1,967,142
|
|
|
|
|
|
Increase
(decrease) in cash
|
1,460,634
|
(674,007
)
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
(6,423
)
|
(26,478
)
|
|
|
|
|
|
Cash,
beginning balance
|
175,796
|
1,114,343
|
|
|
|
|
|
Cash,
ending balance
|
$
1,630,007
|
$
413,858
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
$
104,153
|
$
3,933
|
|
|
|
|
|
Cash
paid for income taxes
|
$
-
|
$
-
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
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
-5-
Notes to Unaudited Condensed 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. AzurRx 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 currently focused on developing its lead drug
product candidate, MS1819,
a yeast derived recombinant
lipase for the treatment of exocrine pancreatic insufficiency
(“
EPI
”)
associated with cystic fibrosis (“
CF
”) and chronic pancreatitis
(“
CP
”).
Ongoing and Planned Clinical Studies
MS1819 – Phase 2b OPTION 2 Cystic Fibrosis Monotherapy
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 2b 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
clinical trial protocol has been reviewed by the FDA with no
comments. In April 2020, the Company received approval to conduct
the OPTION 2 Trial in Therapeutics Development Network (TDN)
clinical sites in the U.S. as well as Institutional Review Board
(IRB) approval to commence the OPTION 2 Trial.
The
OPTION 2 Trial is designed to investigate the safety, tolerability
and efficacy of MS1819 (2.2 gram and 4.4 gram doses in enteric
capsules) in a head-to-head manner versus the current standard of
care, porcine pancreatic enzyme replacement therapy (PERT) pills.
The OPTION 2 Trial will be an open-label, crossover study,
conducted in 15 sites in the U.S. and Europe. A total
of 30 CF patients 18 years or older will be enrolled.
MS1819 will be administered in enteric capsules to provide
gastric protection and allow optimal delivery of enzyme to the
duodenum. Patients will first be randomized into two cohorts:
to either the MS1819 arm, where they receive a 2.2 gram daily oral
dose of MS1819 for three weeks; or to the PERT arm, where they
receive their pre-study dose of PERT pills for three weeks. After
three weeks, stools will be collected for analysis of coefficient
of fat absorption (CFA). Patients will then be crossed over
for another three weeks of the alternative treatment. After three
weeks of cross-over therapy, stools will again be collected for
analysis of CFA. A parallel group of patients will be randomized
and studied in the same fashion, using a 4.4 gram daily dose of
MS1819. All patients will be followed for an additional two
weeks after completing both crossover treatments for post study
safety observation. Patients will be assessed using
descriptive methods for efficacy, comparing CFA between MS1819 and
PERT arms, and for safety.
The
Company expects to initiate the OPTION 2 Trial by the end of the
second quarter of 2020, with target enrollment completion in the
fourth quarter of 2020 and study completion anticipated in the
first quarter of 2021, however, these timelines may be delayed due
to the novel coronavirus ("
COVID-19
") pandemic.
MS1819 – Phase 2 Combination Therapy Study
In addition to the monotherapy studies, the Company launched a
Phase 2 multi-center clinical trial (the “
Combination
Trial
”) in Europe 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
(700 mg, 1120 mg and 2240 mg per day, respectively), in conjunction
with a stable dose of PERTs, in order to increase CFA and relieve
abdominal symptoms in uncontrolled CF patients. 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.
On October 15, 2019, the Company announced that it dosed the first
patients in its Combination Trial in Hungary. 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 and possibly Turkey. Study completion was
originally anticipated by the end of 2020; however, this timeline
has been delayed due to the COVID-19 pandemic and topline results
are now expected in the first quarter of 2021.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited interim consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States of America
(“
U.S. GAAP
”). In our opinion, the accompanying
unaudited interim consolidated financial statements include all
adjustments, consisting of normal recurring adjustments, which are
necessary to present fairly our financial position, results of
operations, and cash flows. The consolidated balance sheet at
December 31, 2019, has been derived from audited financial
statements of that date. The unaudited interim consolidated results
of operations are not necessarily indicative of the results that
may occur for the full fiscal year. Certain information and
footnote disclosure normally included in financial statements
prepared in accordance with U.S. GAAP have been omitted pursuant to
instructions, rules, and regulations prescribed by the Securities
and Exchange Commission
(“SEC”
).
The Company believes that the disclosures provided herein are
adequate to make the information presented not misleading when
these unaudited interim consolidated financial statements are read
in conjunction with the audited financial statements and notes
previously distributed in our Annual Report Form 10-K for the year
ended December 31, 2019, filed with the SEC on March 30,
2020.
The
unaudited interim consolidated financial statements include the
accounts of AzurRx and its wholly-owned subsidiary, AzurRx SAS.
Intercompany transactions and balances have been eliminated upon
consolidation.
Going Concern Uncertainty
The accompanying unaudited interim 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 March 31, 2020 of approximately $2.2
million, and had an accumulated deficit of approximately $67.9
million at March 31, 2020. 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. The financial statements do not
include any adjustments
that might result from the outcome
of this uncertainty.
We will need to raise additional capital through additional equity
and/or debt financings, including utilization of our LPC Equity
Line of Credit (see Note 11), in order to fund our ongoing
operations and to satisfy our obligations under our convertible
debt (see Note 9), and the impact of the COVID-19 pandemic which is
evolving rapidly could negatively impact our ability to raise
additional capital and our ability to repay, extend or restructure
our convertible debt.
-6-
Notes to Unaudited Condensed Consolidated Financial
Statements
Note 2 - Significant Accounting Policies and Recent Accounting
Pronouncements
Use of Estimates
The
accompanying unaudited consolidated financial statements are
prepared in conformity with U.S. GAAP and include certain estimates
and assumptions which affect the reported amounts of assets and
liabilities at the date of the financial statements (including
goodwill, intangible assets and contingent consideration), and the
reported amounts of revenues and expenses 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 March 31, 2020 and December
31, 2019, 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 March 31, 2020 and
December 31, 2019, the Company had $236,568 and $0, 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 cash 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.
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.
-7-
Notes to Unaudited Condensed Consolidated Financial
Statements
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 March 31,
2020.
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 March
31, 2020.
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.
-8-
Notes to Unaudited Condensed Consolidated Financial
Statements
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 March 31, 2020 and December 31, 2019, 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 condensed consolidated statements of operations and
condensed consolidated balance sheets. 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 statements 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 14, 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 sublicense agreement are recorded as R&D
expense.
-9-
Notes to Unaudited Condensed Consolidated Financial
Statements
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 ASU 2017-04, Intangibles - Goodwill
and Other, Simplifying the Accounting for Goodwill Impairment. ASU
2017-04 removes Step 2 of the goodwill impairment test, which
requires a hypothetical purchase price allocation. A goodwill
impairment will now be the amount by which a reporting unit’s
carrying value exceeds its fair value, not to exceed the carrying
amount of goodwill. All other goodwill impairment guidance will
remain largely unchanged. Entities will continue to have the option
to perform a qualitative assessment to determine if a quantitative
impairment test is necessary. This new guidance will be applied
prospectively and is effective for annual or any interim goodwill
impairment tests in fiscal years beginning after December 15, 2019.
This ASU, which the Company adopted as of January 1, 2020, did not
have a material effect on the Company’s consolidated
financial statements.
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. U.S. GAAP
establishes a hierarchical disclosure framework that prioritizes
and ranks the level of observability of inputs used in measuring
fair value.
The
fair value of the Company's financial instruments are as
follows:
|
|
|
Fair Value Measured at Reporting Date Using
|
|
||
|
|
Carrying Amount
|
Level 1
|
Level 2
|
Level 3
|
Fair Value
|
|
At
March 31, 2020:
|
|
|
|
|
|
|
Cash
|
$
1,630,007
|
$
-
|
$
1,630,007
|
$
-
|
$
1,630,007
|
|
Other
receivables
|
$
760,232
|
$
-
|
$
-
|
$
760,232
|
$
760,232
|
|
Note
payable
|
$
279,616
|
$
-
|
$
-
|
$
279,616
|
$
279,616
|
|
Convertible
debt
|
$
2,986,328
|
$
-
|
$
-
|
$
2,986,328
|
$
2,986,328
|
|
|
|
|
|
|
|
|
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
March 31, 2020, 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, 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.
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).
-10-
Notes to Unaudited Condensed Consolidated Financial
Statements
Note 4 - Other Receivables
Other
receivables consisted of the following:
|
|
March 31,
|
December 31,
|
|
|
2020
|
2019
|
|
R&D
tax credits
|
$
695,511
|
$
2,566,281
|
|
Other
|
64,721
|
71,022
|
|
Total
other receivables
|
$
760,232
|
$
2,637,303
|
At
March 31, 2020, the R&D tax credits were comprised of the 2019
refundable tax credits for research conducted in
France.
At
December 31, 2019, the R&D tax credits were comprised of the
2017, 2018, and 2019 refundable tax credits for research conducted
in France. In the quarter ended March 31, 2020, the Company
received both the 2017 and 2018 refundable tax credits totaling
approximately $1,770,000.
At
December 31, 2019, Other consisted of amounts due from U.S. R&D
tax credits.
Note 5 - Property, Equipment and Leasehold
Improvements
Property,
equipment and leasehold improvements consisted of the
following:
|
|
March 31,
|
December 31,
|
|
|
2020
|
2019
|
|
Laboratory
equipment
|
$
193,661
|
$
193,661
|
|
Computer
equipment
|
74,836
|
74,836
|
|
Office
equipment
|
36,703
|
36,703
|
|
Leasehold
improvements
|
35,711
|
35,711
|
|
Total
property, plant and equipment
|
340,911
|
340,911
|
|
Less
accumulated depreciation
|
(267,364
)
|
(263,520
)
|
|
Property,
plant and equipment, net
|
$
73,547
|
$
77,391
|
Depreciation
expense for the three months ended March 31, 2020 and 2019 was
$9,661 and $
17,11
4,
respectively.
For the
three months ended March 31, 2020, $4,771 of depreciation is
included in R&D expense and $4,890 of depreciation is included
in G&A expense.
For the
three months ended March 31, 2019, $12,095 of depreciation has been
reclassified to R&D expense and $5,019 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 rights, title and interest in and to MS1819
(see Note 14), the Company recorded Patents in the amount of
$3,802,745 as follows:
|
Common
stock issued at signing to Mayoly
|
$
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
|
-11-
Notes to Unaudited Condensed Consolidated Financial
Statements
Intangible
assets are as follows:
|
|
March 31,
|
December 31,
|
|
|
2020
|
2019
|
|
Patents
|
$
3,802,745
|
$
3,802,745
|
|
Less
accumulated amortization
|
(527,548
)
|
(395,661
)
|
|
Patents,
net
|
$
3,275,197
|
$
3,407,084
|
Amortization expense for the three months ended March 31, 2020 and
2019 was $131,149 and $
561,289
, respectively. Amortization expense for the
three months ended March 31, 2019 included
$384,234
from In process research and development and
License agreements written off as a result of the Mayoly
APA.
As of
March 31, 2020, amortization expense related to patents is expected
to be as follows for the next five years (2020 through
2024):
|
2020
(balance of year)
|
$
395,661
|
|
2021
|
527,548
|
|
2022
|
527,548
|
|
2023
|
527,548
|
|
2024
|
527,548
|
Goodwill is as follows:
|
|
Goodwill
|
|
Balance
at January 1, 2019
|
$
1,924,830
|
|
Foreign
currency translation
|
(38,144
)
|
|
Balance
at December 31, 2019
|
1,886,686
|
|
Foreign
currency translation
|
(42,680
)
|
|
Balance
at March 31, 2020
|
$
1,844,006
|
Note 7 - Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses consisted of the
following:
|
|
March 31,
|
December 31,
|
|
|
2020
|
2019
|
|
Trade
payables
|
$
925,284
|
$
1,683,505
|
|
Accrued
expenses
|
113,935
|
71,177
|
|
Total
accounts payable and accrued expenses
|
$
1,039,219
|
$
1,754,682
|
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 March 31, 2020 was $279,616.
-12-
Notes to Unaudited Condensed Consolidated Financial
Statements
Note 9 – Convertible Notes
ADEC Notes
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
December 2019, the Company repaid $1,550,000 principal amount of
the ADEC Notes and on January 2, 2020 repaid the remaining
principal balance of $450,000 plus outstanding accrued interest of
$104,153.
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
”).
In
December 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
”).
On
January 2, 2020, January 3, 2020, and January 9, 2020, the Company
issued Promissory Notes to the Note Investors in the aggregate
principal amount of $3,517,700.
-13-
Notes to Unaudited Condensed Consolidated Financial
Statements
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 expire
five years from the date of issuance. The Placement Agent Warrants
in connection with the December 2019 closings have an exercise
price of $1.21 per share.
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 placement agent was issued Placement
Agent Warrants, to purchase an aggregate of 199,732 shares of
Common Stock. 41,495 of these Placement Agent Warrants have an
exercise price of $1.21 per share and 158,237 of these Placement
Agent Warrants have an exercise price of $1.42 per
share.
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.
Pursuant
to the January 2020 closings of the Promissory Note Offering, the
principal amount of $3,517,700 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 $2,439,272. Then
the beneficial conversion feature was calculated, which amounted to
$1,838,422. The Company incurred debt issuance costs of $472,326
related to the offering. The initial carrying value of the
Promissory Notes issued amounted to $128,524.
During
the three months ended March 31, 2020, the Company recognized
$2,209,163 of interest expense related to these Promissory Notes,
including amortization of debt discount related to the value of the
Note Warrants of $658,126, amortization of the beneficial
conversion feature of $1,053,366, amortization of debt discount
related to debt issuance costs of $347,594, and accrued interest
expense of $150,077.
-14-
Notes to Unaudited Condensed Consolidated Financial
Statements
Convertible
Debt consisted of:
|
|
Total
|
Promissory Notes
|
ADEC Notes
|
Total
|
|
|
March 31,
|
March 31,
|
March 31,
|
December 31,
|
|
|
2020
|
2020
|
2020
|
2019
|
|
Convertible
debt
|
$
6,904,000
|
$
6,904,000
|
$
-
|
$
3,836,300
|
|
Unamortized
debt discount - revalued warrants
|
-
|
-
|
-
|
(118,356
)
|
|
Unamortized
debt discount - warrants
|
(1,299,280
)
|
(1,299,280
)
|
-
|
(878,979
)
|
|
Unamortized
debt discount - BCF
|
(2,092,811
)
|
(2,092,811
)
|
-
|
(1,307,755
)
|
|
Unamortized
debt discount - debt issuance costs
|
(684,048
)
|
(684,048
)
|
-
|
(566,815
)
|
|
Accrued
interest
|
158,467
|
158,467
|
-
|
112,543
|
|
Total
convertible debt
|
$
2,986,328
|
$
2,986,328
|
$
-
|
$
1,076,938
|
Note 10 – Other Liabilities
Other
liabilities consisted of the following:
|
|
March 31,
|
December 31,
|
|
Current
|
2020
|
2019
|
|
Due
to Mayoly
|
$
386,925
|
$
392,989
|
|
Lease
liabilities
|
54,248
|
83,235
|
|
|
$
441,173
|
$
476,224
|
|
|
|
|
Note 11 –
Equity
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 March 31,
2020, the Board had not elected to effect a Reverse
Split.
Common Stock
The
Company had 27,157,651 and 26,800,519 shares of its Common Stock
issued and outstanding at March 31, 2020 and December 31, 2019,
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.
Voting
Each
holder of common stock has one vote for each share
held.
-15-
Notes to Unaudited Condensed Consolidated Financial
Statements
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 335,006 and 0 stock options, during
the three months ended March 31, 2020 and 2019, respectively, under
the 2014 Plan (see Note 13). As of March 31, 2020, there were an
aggregate of 4,245,905 total shares available under the 2014 Plan,
of which 1,997,506 are issued and outstanding, 632,667 shares are
reserved subject to issuance of restricted stock and RSUs and
1,615,732 shares are available for potential issuances. The Company
may issue securities outside of the 2014 Plan.
Series A Convertible Preferred Stock
At
March 31, 2020 and December 31, 2019, there were no shares of
Series A Convertible Preferred Stock (“
Series A Preferred
”) outstanding.
However, all terms of the Series A Preferred are still in
effect.
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.
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.
|
-16-
Notes to Unaudited Condensed Consolidated Financial
Statements
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.
|
During the three months ended March 31, 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.
Common Stock Issuances
During
the
three months ended March 31,
2020
, the Company issued an aggregate of 101,195 shares of
its Common Stock to consultants with a grant date fair value of
$87,105 for services provided, that was recorded as part of G&A
expense.
During
the
three months ended March 31,
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 $131,137. 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.
During the three months ended March 31, 2019, the Company issued
27,102 shares of its common stock to a consultant as payment of
$60,000 of accounts payable.
During
the three months ended March 31, 2019, the Company issued an
aggregate of 30,000 shares of its Common Stock to outside members
of its Board as payment of Board fees with an aggregate grant date
fair value of $296,285, that was recorded as part of G&A
expense.
Restricted Stock and Restricted Stock Units
During the three months ended March 31, 2020, an aggregate of 5,417
unvested restricted shares of Common Stock
subject to
time-based vesting,
vested with a
total grant date fair value of $19,500.
During the three months ended March 31, 2019, an aggregate of
72,583 unvested restricted shares of Common Stock
subject to
milestone-based vesting,
vested with a
total grant date fair value of $223,685. 58,833 of these 72,583
shares with a total grant date fair value of $178,852 vested during
the three months ended March 31, 2019 due to the Company achieving
certain clinical milestones. 13,750 of these 72,583 shares with a
total grant date fair value of $44,833 vested during the three
months ended March 31, 2019 due to the terms of such
grants.
As of March 31, 2020, the Company had unrecognized restricted
common stock expense of $424,439. $31,189 of this unrecognized
expense will be recognized over the average remaining vesting term
of 0.4 years. $196,625 of this unrecognized expense vests upon the
first commercial sale in the United States of MS1819 and $196,625
of this unrecognized expense vests upon the total market
capitalization of the Company exceeding $1.0 billion for 20
consecutive trading days. These milestones were not considered
probable at March 31, 2020.
As of March 31, 2019, the Company had unrecognized restricted
common stock expense of $438,528. $337,193 of this unrecognized
expense will be recognized over the average remaining vesting term
of the restricted common stock of 2.04 years. $101,335 of this
unrecognized expense vests upon the enrollment of the first 30
patients in a CF trial. This milestone was not considered probable
at March 31, 2019.
-17-
Notes to Unaudited Condensed Consolidated Financial
Statements
Note 12 - Warrants
For the
three months ended March 31, 2020
, in connection with the January 2020 closings of
the Promissory Note Offering, the Company issued Note Warrants to
investors to purchase an aggregate of 1,813,257 shares of Common
Stock with the issuance of the Promissory Notes as referenced in
Note 9. These Note Warrants were issued between January 2, 2020 and
January 9, 2020, 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 $1,574,886, as
calculated using the Black-Scholes model, and were recorded as a
debt discount based on their relative fair
value.
For the
three months ended March 31, 2020
, in connection with the January 2020 closings of
the Promissory Note Offering, the Company issued placement agent
warrants to purchase an aggregate of 199,732 shares of Common
Stock. These placement agent warrants were issued between January
2, 2020 and January 9, 2020, vested immediately, and expire five
years from issuance. 41,495 of these Placement Agent Warrants are
exercisable at $1.21 per share and 158,237 are exercisable at $1.42
per share. The total grant date fair value of these placement agent
warrants was determined to be approximately $174,130, as calculated
using the Black-Scholes model, and was charged to debt discount
that will be amortized over the life of the
debt.
Warrant
transactions for the three months ended March 31, 2020 and 2019
were as follows:
|
|
|
Exercise
|
Weighted
|
|
|
|
Price Per
|
Average
|
|
|
Warrants
|
Share
|
Exercise Price
|
|
|
|
|
|
|
Warrants outstanding and exercisable at January 1,
2019
|
3,112,715
|
$
2.55 - 7.37
|
$
4.83
|
|
|
|
|
|
|
Granted
during the period
|
-
|
-
|
-
|
|
Expired
during the period
|
-
|
-
|
-
|
|
Exercised
during the period
|
-
|
-
|
-
|
|
Warrants outstanding and exercisable at March 31, 2019
|
3,112,715
|
$
2.55 - 7.37
|
$
3.53
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding and exercisable at January 1,
2020
|
5,378,288
|
$
1.07 - 7.37
|
$
2.53
|
|
|
|
|
|
|
Granted
during the period
|
2,012,989
|
$
1.07 - 1.42
|
$
1.10
|
|
Expired
during the period
|
-
|
-
|
-
|
|
Exercised
during the period
|
-
|
-
|
-
|
|
Warrants outstanding and exercisable at March 31, 2020
|
7,391,277
|
$
1.07 - 7.37
|
$
2.14
|
|
|
Number of
|
Weighted Average
|
Weighted
|
|
|
Shares Under
|
Remaining Contract
|
Average
|
|
Exercise Price
|
Warrants
|
Life in Years
|
Exercise Price
|
|
$1.07 - $1.99
|
5,212,464
|
4.12
|
|
|
$2.00 - $2.99
|
320,063
|
3.32
|
|
|
$3.00 - $3.99
|
636,972
|
2.06
|
|
|
$4.00 - $4.99
|
196,632
|
1.76
|
|
|
$5.00 - $5.99
|
805,476
|
1.88
|
|
|
$6.00 - $6.99
|
187,750
|
1.51
|
|
|
$7.00 - $7.37
|
31,920
|
0.71
|
|
|
Total
|
7,391,277
|
3.52
|
$2.14
|
-18-
Notes to Unaudited Condensed Consolidated Financial
Statements
|
|
March 31,
|
|
|
2020
|
|
Expected
life (in years)
|
5
|
|
Volatility
|
81.9
%
|
|
Risk-free
interest rate
|
1.64
%
|
|
Dividend
yield
|
-
%
|
Note 13 - Stock Options
Under the 2014 Plan, the fair value of options granted is estimated
on the grant date using the Black-Scholes option valuation 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 three months ended March 31, 2020, the Company issued
stock options to purchase an aggregate of 335,006 shares of Common
Stock with a strike price of $1.03 per share and a term of ten
years to its chief financial officer that vest quarterly over three
years. These options had a total fair value of approximately
$281,405, as calculated using the Black-Scholes model. During the
three months ended March 31, 2020, stock options to purchase an
aggregate of 15,000 shares of Common Stock were cancelled with
strike prices ranging between $1.75 and $3.60 per
share.
During the three months ended March 31, 2020, stock options to
purchase an aggregate of 57,917 shares of Common Stock, subject to
time-based vesting, vested with a total grant date fair value of
$54,950 and were recorded as G&A stock-based
compensation.
During the three months ended March 31, 2019, the Company did not
issue any stock options.
During the three months ended March 31, 2019, stock options to
purchase an aggregate of 244,500 shares of Common Stock with a
total grant date fair value of $511,335 vested. 242,000 of these
options with a total grant date fair value of $501,666 vested due
to the Company achieving certain clinical milestones for
MS1819.
The fair values were estimated on the grant dates using the
Black-Scholes option-pricing model with the following
weighted-average assumptions:
|
|
March 31,
|
|
|
2020
|
|
Expected
life (in years)
|
10
|
|
Volatility
|
80.5
%
|
|
Risk-free
interest rate
|
1.88
%
|
|
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.
-19-
Notes to Unaudited Condensed Consolidated Financial
Statements
During the three months ended March 31, 2020 and 2019, 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, 2019
|
994,000
|
$
3.58
|
5.42
|
$
-
|
|
|
|
|
|
|
|
Granted
during the period
|
-
|
-
|
|
|
|
Expired
during the period
|
-
|
-
|
|
|
|
Canceled
during the period
|
-
|
-
|
|
|
|
Exercised
during the period
|
-
|
-
|
|
|
|
Stock options outstanding at March 31, 2019
|
994,000
|
$
3.58
|
5.17
|
$
-
|
|
|
|
|
|
|
|
Exercisable at March 31, 2019
|
749,500
|
$
3.74
|
5.71
|
$
-
|
|
|
|
|
|
|
|
Non-vested stock options outstanding at January 1,
2019
|
244,500
|
$
3.05
|
4.53
|
$
-
|
|
|
|
|
|
|
|
Granted
during the period
|
-
|
-
|
|
|
|
Vested
during the period
|
(244,500
)
|
$
3.05
|
4.53
|
|
|
Expired
during the period
|
-
|
-
|
|
|
|
Canceled
during the period
|
-
|
-
|
|
|
|
Exercised
during the period
|
-
|
-
|
|
|
|
Non-vested stock options outstanding at March 31, 2019
|
-
|
$
-
|
-
|
$
-
|
|
Stock options outstanding at January 1, 2020
|
1,677,5000
|
$
2.17
|
5.37
|
$
-
|
|
|
|
|
|
|
|
Granted
during the period
|
335,006
|
$
1.03
|
10.00
|
$
-
|
|
Expired
during the period
|
-
|
-
|
|
|
|
Canceled
during the period
|
(15,000
)
|
$
2.80
|
3.28
|
$
-
|
|
Exercised
during the period
|
-
|
-
|
|
|
|
Stock options outstanding at March 31, 2020
|
1,997,506
|
$
2.08
|
5.91
|
$
-
|
|
|
|
|
|
|
|
Exercisable at March 31, 2020
|
841,917
|
$
3.23
|
4.33
|
$
-
|
|
Non-vested stock options outstanding at January 1,
2020
|
883,500
|
$
1.33
|
6.26
|
$
-
|
|
|
|
|
|
|
|
Granted
during the period
|
335,006
|
$
1.03
|
10.00
|
$
-
|
|
Vested
during the period
|
(57,917
)
|
$
1.40
|
6.88
|
$
-
|
|
Expired
during the period
|
-
|
-
|
-
|
|
|
Canceled
during the period
|
(5,000
)
|
$
3.32
|
2.82
|
$
-
|
|
Exercised
during the period
|
-
|
-
|
-
|
|
|
Non-vested stock options outstanding at March 31, 2020
|
1,155,589
|
$
1.24
|
7.06
|
$
-
|
As of March 31, 2020, the Company had unrecognized stock-based
compensation expense of $965,280. $289,455 of this unrecognized
expense will be recognized over the average remaining vesting term
of the options of 9.27 years. $522,513 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.
-20-
Notes to Unaudited Condensed Consolidated Financial
Statements
Note 14 - Agreements
Mayoly Agreement
On March 27, 2019, the Company and
Laboratories Mayoly
Spinder
(“
Mayoly
”) entered into an Asset Purchase Agreement
(the “
Mayoly APA
”), pursuant
to which the Company purchased all rights, title and interest in
and to MS1819. Upon execution of the Mayoly APA, the Joint
Development and License Agreement (the “
JDLA
”) previously executed by AzurRx SAS and
Mayoly was terminated. In addition, the Company granted to Mayoly
an exclusive, royalty-bearing right to revenue received from
commercialization of MS1819 within certain
territories.
During the three months ended March 31, 2019, the Company charged
$403,020 to Mayoly under the JDLA that was in effect during both
periods.
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.
Amounts
paid under this Sublicense Agreement during the three months ended
March 30, 2020 and 2019 were $0 and $50,000, respectively, and are
included in R&D expense.
Employment Agreements
Current Named Executive Officers
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 stock
units (“
RSUs
”)
which are scheduled 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 an
exercise price equal to $0.56 per share, which are scheduled 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.
-21-
Notes to Unaudited Condensed Consolidated Financial
Statements
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 (as such term is defined in
Mr. Sapirstein’s employment agreement) for a period of twelve
months following the termination date; (ii) payment of Mr.
Sapirstein’s premiums to cover COBRA for a period of twelve
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 an exercise price of
$1.03 per share, which shall vest in three equal portions on each
anniversary date of the execution of Mr. Schneiderman’s
employment agreement, commencing on January 2, 2021, 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 Mr. Schneiderman’s
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 Mr.
Schneiderman’s employment agreement, he 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 six
months following the termination date or the remaining term of the
employment agreement; (iv) payment of premiums to cover COBRA for a
period of six 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 Mr. Schneiderman’s
employment agreement without Cause, in connection with a Change of
Control, he 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
Dr. 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 Dr. Pennington’s employment agreement
at any time, with or without Cause, as such term is defined in Dr.
Pennington’s 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 Dr.
Pennington’s employment agreement, Dr. Pennington will
receive six months’ severance payable over such
period.
Former Named Executive Officers
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 expired, he
remained employed as the Company’s President and Chief
Executive Officer under the terms of his prior employment agreement
through his resignation from all positions with the Company on
October 8, 2019. In addition, Mr. Spoor resigned as a member of the
Board on April 29, 2020.
-22-
Notes to Unaudited Condensed Consolidated Financial
Statements
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’s
employment agreement was terminable by either party at any
time.
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 unvested shares of restricted common
stock granted to Mr. Spoor were cancelled as a result of Mr.
Spoor’s resignation. As of March 31, 2020, there were 241,667
shares earned, but unissued shares of restricted common stock due
to Mr. Spoor. However, Mr. Spoor declined the right to receive
these shares on April 29, 2020.
Maged Shenouda
On
September 26, 2017, the Company
entered into an employment agreement with Mr. Shenouda to serve as
its Executive Vice-President of Corporate Development and Chief
Financial Officer for a term of three years, during which time he
received a base salary of $275,000. In addition to the base salary,
Mr. Shenouda was eligible to receive an annual milestone cash bonus
based on the achievement of certain financial, clinical
development, and/or business milestones, which milestones were
established annually at the sole discretion of the Company’s
Board or the Compensation Committee.
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 an exercise price of $4.39 per share and a term of ten years.
These stock options vested according to the following
performance-based criteria, so long as Mr. Shenouda served as
either Executive Vice-President of Corporate Development or as
Chief Financial Officer of the Company: (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. These stock
options vested during the year ended December 31,
2018.
Mr. Shenouda’s employment agreement provided that the Company
may terminate Mr. Shenouda’s employment agreement at any
time, with or without Cause, as such term is defined in the
agreement. If the Company terminated the agreement without Cause,
or if the agreement was terminated due to a Change of Control, as
such term is defined in the agreement, Mr. Shenouda was 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 12 months
following the termination date or the remaining term of his
employment agreement; (iv) payment of premiums to cover COBRA for a
period of 12 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; and (vi) immediate accelerated vesting of any
unvested options or other unvested awards.
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.
-23-
Notes to Unaudited Condensed Consolidated Financial
Statements
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 15 - 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.
Lease
expense amounted to $35,098 and $50,655, respectively, in the
three months ended March 31, 2020 and 2019.
The
weighted-average remaining lease term and weighted-average discount
rate under operating leases at March 31, 2020 are:
|
|
March 31,
|
|
|
2020
|
|
Lease term and discount rate
|
|
|
Weighted-average
remaining lease term
|
0.66
years
|
|
Weighted-average
discount rate
|
6.0
%
|
Maturities of
operating lease liabilities at March 31, 2020 are as
follows:
|
2020
|
$
56,442
|
|
Total
lease payments
|
56,442
|
|
Less
imputed interest
|
(2,194
)
|
|
Present
value of lease liabilities
|
$
54,248
|
Note 16 - 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 March 31, 2020 and December 31, 2019, the Company had no
tax provision for either jurisdiction.
At
March 31, 2020 and December 31, 2019, the Company had gross
deferred tax assets of approximately $16,020,000 and $16,372,000,
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
$16,020,000 and $16,372,000, respectively, has been established at
March 31, 2020 and December 31, 2019. The change in the valuation
allowance in the three months ended March 31, 2020 and 2019 was
$(352,000) and $1,160,000, respectively.
At
March 31, 2020, the Company has gross net operating loss
(“
NOL
”)
carryforwards for U.S. federal and state income tax purposes of
approximately $30,682,000 and $22,178,000, 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
March 31, 2020 and December 31, 2019, the Company had approximately
$19,782,000 and $19,475,000, respectively, in net operating losses
which it can carryforward indefinitely to offset against future
French income.
At
March 31, 2020 and December 31, 2019, the Company had taken no
uncertain tax positions that would require disclosure under ASC
740, Accounting for Income Taxes.
-24-
Notes to Unaudited Condensed Consolidated Financial
Statements
Note 17 - 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
March 31, 2020, diluted net loss per share did not include the
effect of 7,117,559 shares of Common Stock issuable upon the
conversion of convertible debt, 7,391,277 shares of Common Stock
issuable upon the exercise of outstanding warrants, 632,667 shares
of Common Stock pursuant to unissued restricted stock and RSUs, and
1,997,506 shares of Common Stock issuable upon the exercise of
outstanding options as their effect would be antidilutive during
the periods prior to conversion.
At
March 31, 2019, 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 18 - 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.
In addition, Mr. Spoor
resigned as a member of the Board on April 29,
2020.
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 by the Company, 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.
All unvested shares of restricted stock and stock options subject
to time and other performance-based vesting conditions have been
forfeited in connection with Mr. Spoor's resignation as the
Company’s President and Chief Executive Officer. Mr.
Spoor also declined the right to receive 241,667 shares earned, but
unissued shares of restricted stock on April 29, 2020.
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.
-25-
Notes to Unaudited Condensed Consolidated Financial
Statements
Note 19 – Subsequent Events
LPC Equity Line of Credit
In
April and May 2020, the Company issued an aggregate of 788,464
shares of Common Stock in connection with the LPC Purchase
Agreement, resulting in gross proceeds to the Company of
$456,698.
Change in Directors
Effective April 3, 2020, the Company appointed Gregory Oakes to the
Board. Mr. Oakes, age 52, brings over 25 years of pharmaceutical
industry and leadership experience and currently serves as
Corporate Vice President, Global Integration Lead for Otezla at
Amgen where he is responsible for the integration and continued
success for sustained growth of the brand with $2 billion in
assets. Prior to Amgen from 2017 to 2019, Mr. Oakes served as
Corporate Vice President and U.S. General Manager at Celgene, a
global biopharmaceutical company which develops and commercializes
medicines for cancer and inflammatory disorders. Mr. Oakes also
served as the Global Commercial Integration Lead at Celgene where
he helped steer the $74 billion acquisition by Bristol-Myers Squibb
and the $13.4 billion divestiture of Otezla. From 2010 to 2017, Mr.
Oakes held several positions at Novartis, the most recent as Head
of Sandoz Biopharmaceuticals, North America. He began his career at
Schering-Plough (Merck) where he held executive roles in both the
U.S. and Europe. Mr. Oakes holds a bachelor's degree in Marketing
and Business Administration from Edinboro University and a M.B.A.
from Clemson University. He currently sits on the Board of BioNJ
and previously served on various Executive Committees at Celgene,
Novartis, and Schering-Plough (Merck).
In connection with his service on the Board for 2020, Mr. Oakes
received an initial grant of stock options to purchase 60,000
shares of Common Stock
with an exercise price of $0.97 per
share.
20,000
of these
stock options
vest
in equal
installments on each of June 30, 2020, September 30, 2020 and
December 31, 2020
, in accordance with
the Company's director compensation plan.
On April 29, 2020, Mr. Spoor resigned as a member of the Board.
Additionally, Mr. Spoor provided notice to the Company that he
declined the right to receive 241,667 earned shares, but unissued
shares of restricted stock.
French R&D (CIR) Tax Credit
In May
2020, the Company received payment for the 2019 refundable tax
credits for research conducted in France of approximately
$721,000.
CARES ACT PPP Loan
In
April 2020, the Company applied for and r
eceived a CARES Act Paycheck Protection Program
(PPP) loan of approximately $180,000 through the Small Business
Administration (SBA). Subsequently, in May 2020, the Company
returned the loan of approximately $180,000 after analysis of the
updated
guidance from the U.S. Department of Treasury and
the SBA regarding the eligibility of such loans.
2020 Board Compensation
On
April 6, 2020, the Company issued each of its five outside Board
members stock options to purchase a total of 80,000 shares of
Common Stock each with an exercise price of $0.97 per share. 20,000
of these stock options were vested immediately with the remainder
vesting in equal installments on each of June 30, 2020, September
30, 2020 and December 31, 2020.
-26-
I
TEM
2.
M
ANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
References in this report to “AzurRx,”
“Company,” “we,” “us,”
“our,” or similar references mean 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 BioPharma’s wholly owned subsidiary through
which we conduct our European operations. References to the
“SEC” refer to the U.S. Securities and Exchange
Commission.
Forward-Looking Statements
You should read the following discussion and analysis of our
financial condition and results of operations in conjunction with
our consolidated financial statements and the related notes
included elsewhere in this interim report. Our consolidated
financial statements have been prepared in accordance with U.S.
GAAP. The following discussion and analysis contains
forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”), including, without limitation, statements regarding
our expectations, beliefs, intentions or future strategies that are
signified by the words “expect,”
“anticipate,” “intend,”
“believe,” or similar language. All forward-looking
statements included in this document are based on information
available to us on the date hereof, and we assume no obligation to
update any such forward-looking statements. Our business and
financial performance are subject to substantial risks and
uncertainties. Actual results could differ materially from those
projected in the forward-looking statements. In evaluating our
business, you should carefully consider the information set forth
under the heading “Risk Factors” included in our Annual
Report filed on Form 10-K for the year ended December 31, 2019,
filed with the SEC on March 30, 2020. Readers are cautioned not to
place undue reliance on these forward-looking
statements.
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 the treatment of 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
.
Completed Clinical Studies
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%.
-27-
MS1819 – Phase 2 OPTION Cystic Fibrosis Monotherapy
Study
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-derived
pancreatic 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.
Ongoing and Planned Clinical Studies
MS1819 – Phase 2b OPTION 2 Cystic Fibrosis Monotherapy
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 2b 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
clinical trial protocol has been reviewed by the FDA with no
comments. In April 2020, the Company received approval to conduct
the OPTION 2 Trial in Therapeutics Development Network (TDN)
clinical sites in the U.S. as well as Institutional Review Board
(IRB) approval to commence the OPTION 2 Trial.
The
OPTION 2 Trial is designed to investigate the safety, tolerability
and efficacy of MS1819 (2.2 gram and 4.4 gram doses in enteric
capsules) in a head-to-head manner versus the current standard of
care, porcine pancreatic enzyme replacement therapy (PERT) pills.
The OPTION 2 Trial will be an open-label, crossover study,
conducted in 15 sites in the U.S. and Europe. A total
of 30 CF patients 18 years or older will be enrolled.
MS1819 will be administered in enteric capsules to provide
gastric protection and allow optimal delivery of enzyme to the
duodenum. Patients will first be randomized into two cohorts:
to either the MS1819 arm, where they receive a 2.2 gram daily oral
dose of MS1819 for three weeks; or to the PERT arm, where they
receive their pre-study dose of PERT pills for three weeks. After
three weeks, stools will be collected for analysis of coefficient
of fat absorption (CFA). Patients will then be crossed over
for another three weeks of the alternative treatment. After three
weeks of cross-over therapy, stools will again be collected for
analysis of CFA. A parallel group of patients will be randomized
and studied in the same fashion, using a 4.4 gram daily dose of
MS1819. All patients will be followed for an additional two
weeks after completing both crossover treatments for post study
safety observation. Patients will be assessed using
descriptive methods for efficacy, comparing CFA between MS1819 and
PERT arms, and for safety.
The
Company expects to initiate the OPTION 2 Trial by the end of the
second quarter of 2020, with target enrollment completion in the
fourth quarter of 2020 and study completion anticipated in the
first quarter of 2021, however, these timelines may be delayed due
to the COVID-19 pandemic.
MS1819 – Phase 2 Combination Therapy Study
In addition to the monotherapy studies, the Company launched a
Phase 2 multi-center clinical trial (the “
Combination
Trial
”) in Europe 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
(700 mg, 1120 mg and 2240 mg per day, respectively), in conjunction
with a stable dose of PERTs, in order to increase CFA and relieve
abdominal symptoms in uncontrolled CF patients. 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.
-28-
On October 15, 2019, the Company announced that it dosed the first
patients in its Combination Trial in Hungary. 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 and possibly Turkey. Study completion was
originally anticipated by the end of 2020; however, this timeline
has been delayed due to the COVID-19 pandemic and topline results
are now expected in the first quarter of 2021.
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.
Liquidity and Capital Resources
We have experienced net losses and negative cash flows from
operations since our inception. As of March 31, 2020, we had cash
of approximately $1,630,007 and had sustained cumulative losses
attributable to common stockholders of approximately $67.9 million.
Subsequent to March 31, 2020, we have raised aggregate net proceeds
of approximately $456,698. 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.
We will
need to raise additional capital through additional equity and/or
debt financings, including utilization of our LPC Equity Line of
Credit (see Note 11), in order to fund our ongoing operations and
to satisfy our obligations under our convertible debt (see Note 9),
and the impact of the COVID-19 pandemic which is evolving rapidly
could negatively impact our ability to raise additional capital and
our ability to repay, extend or restructure our convertible
debt.
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.
-29-
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.
In the quarter ended March 31, 2020,
we issued an aggregate
of 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.
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.
-30-
Cash Flows for the Three Months Ended March 31, 2020 and
2019
Net cash used in operating activities for the three months ended
March 31, 2020 was $1,291,280, which primarily reflected our net
loss of $5,261,290
plus
adjustments to reconcile net loss to net cash used in operating
activities of depreciation and amortization expense of $140,810,
non-cash stock-based compensation of $54,950, non-cash restricted
stock granted to employees and directors of $19,503, non-cash
Common Stock granted to settle accounts payable of $131,137,
non-cash Common Stock granted to consultants of $87,105, non-cash
accretion of debt discount of $2,059,086, non-cash interest on
convertible debt of $164,281, non-cash lease expense of 6,065.
Changes in assets and liabilities are due to a decrease in other
receivables of $2,064,252
due
primarily to the payments of French R&D tax credits, offset by
a decrease in prepaid expense of $87,906
due primarily to the expensing of prepaid
insurance, a decrease in accounts payable and accrued expense of
$832,955.
Net cash used in investing activities for the three months ended
March 31, 2020 was $5,080, which consisted of the purchase of
property and equipment. Net cash used in investing activities for
the three months ended March 31, 2019 was $13,352, which
consisted
of the purchase of
property and equipment.
Net cash provided by financing activities for the three months
ended March 31, 2020 was $2,751,132,
compared to $1,967,142
for the
three months ended March 31,
2029, representing an increase of $783,990.
Net cash provided by financing activities for the three months
ended March 31, 2020 consisted of $
3,221,880
from the from the issuance of the
convertible debt in the Promissory Note Offering, and
$144,000
from the proceeds of
the LPC Equity Line of Credit, offset by repayments of convertible
debt of $450,000 plus accrued interest of $
104,153
related to the ADEC Notes and
repayment of a note payable of $164,748.
Consolidated Results of Operations for the Three Months Ended March
31, 2020 and 2019
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 three months ended March 31,
2020 and 2019, respectively.
Research and Development Expense.
R&D expense was $1,553,360 for the three
months ended March 31, 2020, as compared to $3,009,676 for the
three months ended March 31, 2019. This represents a decrease of
$1,456,316, or approximately 48% for the three months ended March
31, 2020 as compared to the three months ended March 31,
2019.
Stock-based compensation for stock options, stock
expense for employees and consultants and depreciation and
amortization was $9,000, $0, and $136,658, respectively, for the
three months ended March 31,
2020
, as compared to $361,739, $12,095, and $549,171,
respectively for the
three months
ended March 31, 2019
. Excluding non-cash stock-based
compensation, stock expense and depreciation and amortization, cash
R&D expenses decreased by $681,863, or approximately 33% to
$1,407,701
for the three months ended
March 31, 2020, from $2,086,671 for the three months ended March
31, 2019.
The decrease in R&D cash spending was primarily due to
decreased direct clinical trial costs of $548,436 related to the
recruitment delay in the Combination Study for the three months
ended March 31, 2020 as compared to OPTION Cross-Over Study for the
three months ended March 31, 2019, decreased consulting expenses of
$63,445, decreased personnel costs of $41,973. We expect cash
R&D expense to increase during the remainder of this fiscal
year as we progress the Combination Study and CMC activities, and
launch the Phase 2 OPTION2 Trial in connection with the continued
development of MS1819.
General and Administrative Expense.
G&A expense was $1,375,091 for the three
months ended March 31, 2020, as, as compared to $1,593,968 for the
for the three months ended March 31, 2019. This represents a
decrease of $218,877, or approximately 14% for the three months
ended March 31, 2020 as compared to the three months ended March
31, 2019.
Stock-based compensation for stock options, stock
expense for employees and consultants, depreciation was $152,558,
$4,890, and $0, respectively, for the
three months ended March 31, 2020
, as
compared to $445,881, $17,110, and $0, respectively for the
three months ended March 31,
2019
. Excluding non-cash stock-based compensation, stock
expense, depreciation and amortization, cash G&A expenses
increased by $87,164, or approximately 8% to $1,218,142
for the three months ended March 31,
2020, from $1,130,978 for the three months ended March 31,
2019.
-31-
The increase in G&A cash spending was primarily due to
increased consulting expenses of $72,695, increased insurance of
$66,276, increased personnel costs of $41,173, increased travel and
entertainment expenses of $35,425, and increased information
technology administration expenses of $24,128, offset by decreased
legal expenses of $76,145, decreased directors fees of $35,000,
decreased public company and corporate communications, including
investor relations of $16,000, decreased rent of
$14,750.
We expect cash G&A expense to remain relatively flat during the
remainder of this 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.
Other Expense.
Interest expense
for the three months ended March 31, 2020 was $2,332,839 as
compared to $57,111 for the three months ended March 31, 2019. The
increased interest expense is due to amortization of debt discount
and accrued interest related to the convertible debt issued in 2019
which was not present in the prior period.
Net Loss
. As a result of the
factors above, our net loss increased by $600,535 to $5,261,290 for
the three months ended March 31, 2020 as compared to $4,660,755 for
the three months ended March 31, 2019.
I
TEM 3.
QUAN
T
ITATIVE
AND QUALITATIVE DISCLOSURES
ABOUT MARKET
RISKS
Not
applicable.
I
TEM 4.
CONT
ROLS AND
PROCEDURES
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 Quarterly Report on Form 10-Q, 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.
Changes in Internal Control Over Financial Reporting
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 Quarterly Report on Form 10-Q that materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
-32-
P
A
RT
II
OTHER INFORMATION
|
I
TEM
1. LEGAL PROCEEDINGS
|
None.
|
I
TEM 1A.
RISK
FACTORS
|
Our
results of operations and financial condition are subject to
numerous risks and uncertainties described in our Annual Report on
Form 10-K for our fiscal year ended December 31, 2019, filed on
March 30, 2020. You should carefully consider these risk factors in
conjunction with the other information contained in this Quarterly
Report. Should any of these risks materialize, our business,
financial condition and future prospects could be negatively
impacted. As of May 15, 2020, there have been no material changes
to the disclosures made in the above referenced Form
10-K.
|
I
TEM 2.
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
During
the
three months ended March 31,
2020
, the Company issued an aggregate of 101,195 shares of
its Common Stock to consultants with a grant date fair value of
$87,105 for services provided, that was recorded as part of G&A
expense.
During
the
three months ended March 31,
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 $131,137. 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.
During
the three months ended March 31, 2019, the Company issued 27,102
shares of its common stock to a consultant as payment of $60,000 of
accounts payable.
During
the three months ended March 31, 2019, the Company issued an
aggregate of 30,000 shares of its Common Stock to outside members
of its Board as payment of Board fees with an aggregate grant date
fair value of $296,285, that was recorded as part of G&A
expense.
|
ITEM 3.
D
EFAULTS
UPON SENIOR
SECURITIES
|
None.
|
ITEM 4.
M
INE
SAFETY
DISCLOSURES
|
|
|
Not
applicable.
|
ITEM 5.
O
THER
INFORMATION
|
None.
|
ITEM 6.
E
XHIBITS
|
|
|
|
(b)
|
Exhibits
|
|
Exhibit No.
|
|
Description
|
|
|
Certification
of the Principal Executive Officer, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
Certification
of the Principal Financial Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
Certification
of the Principal Executive Officer and Principal
Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
|
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
|
-33-
S
IGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly
authorized.
|
|
|
AZURRX
BIOPHARMA, INC.
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By
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/s/
James Sapirstein
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James
Sapirstein
President, Chief Executive Officer and Director
(Principal Executive Officer)
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By
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/s/
Daniel Schneiderman
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Date:
May
15
, 2020
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Daniel
Schneiderman
Chief Financial Officer
(Principal Financial and Accounting Officer)
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TABLE OF CONTENTS
Part IItem 1. Consolidated Financial StatementsNote 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 ExpensesNote 8 - Note PayableNote 9 Convertible NotesNote 10 Other LiabilitiesNote 11 EquityNote 12 - WarrantsNote 13 - Stock OptionsNote 14 - AgreementsNote 15 - LeasesNote 16 - Income TaxesNote 17 - Net Loss Per Common ShareNote 18 - Related Party TransactionsNote 19 Subsequent EventsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RisksItem 4. Controls and ProceduresPart IIItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits