First Wave BioPharma, Inc. - Annual Report: 2017 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
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[X]
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ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the fiscal year ended December 31, 2017
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or
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file No. 001-37853
AZURRX BIOPHARMA, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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46-4993860
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. employer identification number)
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760
Parkside Avenue
Downstate
Biotechnology Incubator, Suite 304
Brooklyn, New York 11226
(Address
of principal executive offices)
(646) 699-7855
(Issuer’s
telephone number)
Securities registered pursuant
to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common
stock, par value $0.0001 per share
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NASDAQ
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Securities registered under Section 12(g) of the Exchange Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No
[X]
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ]
No [X]
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes [X] No [
]
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X]
No
[ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
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Large accelerated filer
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Accelerated filer
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Non-accelerated
filer
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Smaller reporting company
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(Do
not check if a smaller reporting company)
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Emerging
growth company
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[X]
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If an emerging growth
company, indicate by check mark if the registrant has elected not
to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section
13(a) of the Exchange Act. [
]
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No
[X]
The
aggregate market value of common stock held by non-affiliates of
the registrant, based on the closing price of a share of the
registrant’s common stock on June 30, 2017, which is the last
business day of the registrant’s most recently completed
second fiscal quarter, as reported by the NASDAQ Capital Market on
such date, was approximately $27,581,562.
There
were 12,572,395 shares of the registrant’s common stock
outstanding as of March 15, 2018.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10,
11, 12, 13 and 14 of Part III incorporate by reference certain
information from AzurRx BioPharma, Inc.’s definitive proxy
statement, to be filed with the Securities and Exchange Commission
on or before April 30, 2018.
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AZURRX BIOPHARMA, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2017
TABLE OF CONTENTS
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K
(“Annual
Report”) contains
forward-looking statements that involve substantial risks and
uncertainties. All statements contained in this Annual Report other
than statements of historical facts, including statements regarding
our strategy, future operations, future financial position, future
revenue, projected costs, prospects, plans, objectives of
management and expected market growth, are forward-looking
statements. These statements involve known and unknown risks,
uncertainties and other important factors that may cause our actual
results, performance or achievements to be materially different
from any future results, performance or achievements expressed or
implied by the forward-looking statements.
The
words “anticipate,” “believe,”
“estimate,” “expect,” “intend,”
“may,” “plan,” “predict,”
“project,” “target,”
“potential,” “will,” “would,”
“could,” “should,” “continue,”
and similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain
these identifying words. These forward-looking statements include,
among other things, statements about:
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the
availability of capital to satisfy our working capital
requirements;
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the
accuracy of our estimates regarding expenses, future revenues and
capital requirements;
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our
plans to develop and commercialize our principal product
candidates, consisting of MS1819 and AZX1101;
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our
ability to initiate and complete our clinical trials and to advance
our principal product candidates into additional clinical trials,
including pivotal clinical trials, and successfully complete such
clinical trials;
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regulatory
developments in the U.S. and foreign countries;
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the
performance of our third-party contract manufacturer(s), contract
research organization(s) and other third-party non-clinical and
clinical development collaborators and regulatory service
providers;
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our
ability to obtain and maintain intellectual property protection for
our core assets;
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the
size of the potential markets for our product candidates and our
ability to serve those markets;
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the
rate and degree of market acceptance of our product candidates for
any indication once approved;
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the
success of competing products and product candidates in development
by others that are or become available for the indications that we
are pursuing;
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the
loss of key scientific, clinical and nonclinical development,
and/or management personnel, internally or from one of our
third-party collaborators; and
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other
risks and uncertainties, including those listed under Part I, Item
1A. Risk Factors of this Annual Report.
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These forward-looking statements are only
predictions and we may not actually achieve the plans, intentions
or expectations disclosed in our forward-looking statements, so you
should not place undue reliance on our forward-looking statements.
Actual results or events could differ materially from the plans,
intentions and expectations disclosed in the forward-looking
statements we make. We have based these forward-looking statements
largely on our current expectations and projections about future
events and trends that we believe may affect our business,
financial condition and operating results. We have included
important factors in the cautionary statements included in this
Annual Report, particularly in Part I, Item 1A, titled
“Risk
Factors” that could cause
actual future results or events to differ materially from the
forward-looking statements that we make. Our forward-looking
statements do not reflect the potential impact of any future
acquisitions, mergers, dispositions, joint ventures or investments
we may make.
You
should read this Annual Report and the documents that we have filed
as exhibits to the Annual Report with the understanding that our
actual future results may be materially different from what we
expect. We do not assume any obligation to update any
forward-looking statements whether as a result of new information,
future events or otherwise, except as required by applicable
law.
PART I
ITEM 1.
DESCRIPTION OF
BUSINESS
As
used in this Annual Report, unless otherwise stated or the context
otherwise requires, references to “AzurRx,”
“Company,” “we,” “us,”
“our,” or similar references 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 SAS, AzurRx BioPharma’s
wholly-owned subsidiary through which we conduct our European
operations.
Overview
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. Our
current product pipeline consists of two therapeutic proteins under
development:
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MS1819 - a yeast derived recombinant lipase for
exocrine pancreatic insufficiency (“EPI”) associated with chronic pancreatitis
(“CP”) and cystic fibrosis
(“CF”). A lipase is an enzyme that breaks up fat
molecules. MS1819 is considered recombinant since it was created
from new combinations of genetic material in a yeast called
Yarrowia
lipolytica. MS1819 is currently
in Phase II clinical development in Australia, New Zealand and
France, with results expected in the second half of
2018.
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AZX1101 - an enzymatic combination of bacterial
origin for the prevention of hospital-acquired infections and
antibiotic-associated diarrhea (“AAD”) by resistant bacterial strains induced by
parenteral administration of several antibiotic classes, including
the b-lactams. AZX1101 is composed of a molecular backbone linked
to several unique enzymes that break up individual classes of
antibiotic molecules. Currently, we are continuing pre-clinical
development of AZX1101, and expect to file an Investigational New
Drug application (an “IND”) with the U.S. Food and Drug
Administration by the end of 2018.
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Our initial product, MS1819, is intended to treat
patients suffering from EPI who are currently treated with porcine
pancreatic enzymes, or PPEs, which have been on the market since
the late 1800’s. The PPE market is well established and
growing with estimated sales of $1.1 billion in the U.S. in 2017
(based on reported sales and analysts’ consensus estimates)
and has been growing for the past five years at a compound annual
growth rate in excess of 20%. In spite of their long-term use, PPEs
suffer from poor stability, formulation problems, possible
transmission of conventional and non-conventional infectious agents
due to their animal origins, possible adverse events at high doses
in patients with CF and limited effectiveness. We believe that
MS1819, if successfully developed and approved for
commercialization, can address these shortcomings associated with
PPEs. Phase 1 testing of MS1819 was completed in March 2011 and we
initiated a Phase II clinical trial during the fourth quarter
of 2016. See “Product
Programs-MS1819-Clinical Program” below.
Our second non-systemic biologic product under
preclinical development, AZX1101, is designed to protect the gut
microbiome (gastrointestinal (“GI”) microflora) from the effects of certain
commonly used intravenous (“IV”) antibiotics for the prevention
of C.
difficile infection
(“CDI”), other hospital acquired infections
(“HAI”) and antibiotic-associated diarrhea
(“AAD”). CDIs are a leading type of HAI and are
frequently associated with IV antibiotic treatment. Designed to be
given orally and co-administered with a broad range of antibiotics
(e.g., penicillins, cephalosporins and aminogycosides), AZX1101 is
intended to protect the gut while the IV antibiotics fight the
primary infection. AZX1101’s potential target market is
significant, based on annual purchases by U.S. hospitals’ of
approximately 118.0 million doses of IV beta-lactam antibiotics
which are administered to approximately 14.0 million patients.
Currently there are no approved treatments designed to protect the
gut microbiome from the damaging effects of IV antibiotics. This
worldwide market could represent a multi-billion-dollar opportunity
for us. Our current objective is to continue preclinical studies
needed to file an IND for AZX1101 with the FDA in the latter half
of 2018.
Recent Developments
TransChem Sublicense
On August 7, 2017, we entered into a Sublicense
Agreement with TransChem, Inc. (“TransChem”), pursuant to which TransChem granted to
us an exclusive license to patents and patent applications relating
to Helicobacter pylori 5’methylthioadenosine nucleosidase
inhibitors (the “Licensed
Patents”) currently held
by TransChem (the “Sublicense
Agreement”). 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 Licensed Patents will allow us
to develop compounds for treating gastrointestinal, lung and other
infections which are specific to individual bacterial
species. H.
pylori bacterial infections are
a major cause of chronic gastritis, peptic ulcer disease, gastric
cancer and other diseases.
June 2017 Private Placement
On June 5, 2017, we entered into Securities
Purchase Agreements (the “Purchase
Agreements”) with certain
accredited investors (“Investors”), pursuant to which we issued an aggregate
of 1,428,572 units for $3.50 per unit, with each unit consisting of
one share of our common stock, par value $0.0001 per share
(“Common
Stock”), one Series A
Warrant to purchase 0.25 shares of Common Stock at $4.00 per share
exercisable immediately through December 31, 2017, and one Series
A-1 Warrant to purchase 0.75 shares of Common Stock at $5.50 per
share exercisable beginning six months from the date of issuance
through June 5, 2022 (together, “Units”) (the “June 2017 Private
Placement”). At closing
of the June 2017 Private Placement, we issued Units resulting in
the issuance of an aggregate of 1,428,572 shares of Common Stock,
Series A Warrants to purchase up to 357,144 shares of Common Stock,
and Series A-1 Warrants to purchase up to 1,071,431 shares of
Common Stock, resulting in gross proceeds of
$5,000,000.
Placement agent fees of $350,475 were paid to
Alexander Capital L.P. (“Alexander
Capital”), based on 8% of
the aggregate principal amount of the Units issued to certain
investors identified by Alexander Capital
(“Alexander
Investors”), which amount
includes both an 8% success fee and a 1% expense fee, and Series
A-1 Warrants to purchase 77,950 shares of Common Stock were issued
to Alexander Capital (the “Placement Agent
Warrants”), reflecting
warrants for that number of shares of Common Stock equal to 7% of
the aggregate number of shares of Common Stock purchased by
Alexander Investors. The Placement Agent Warrants became
exercisable on December 2, 2017 at a fixed price of $6.05 per
share, through June 5, 2022. The Company also incurred $4,000 in
other fees associated with this placement.
On June 20, 2017, we entered into amendments to
the Purchase Agreements with the Investors to allow for the
issuance of up to $400,000 in additional Units, and on July 5,
2017, we issued additional Units resulting in gross proceeds of
$400,000 (“Subsequent
Closing”). Placement
agent fees of $36,000 were paid to Alexander Capital, as well as
additional Placement Agent Warrants to purchase 5,760 shares of
Common Stock. In connection with the Subsequent Closing, the
Company issued 114,283 shares of Common Stock, Series A and A-1
Warrants to purchase 28,572 and 85,715 shares,
respectively.
We
also entered into a Registration Rights Agreement granting the
Investors certain registration rights with respect to the shares of
Common Stock issued in connection with the June 2017 Private
Placement, as well as the shares of Common Stock issuable upon
exercise of the Series A Warrants and Series A-1 Warrants.
All of these shares were registered pursuant to the Registration
Statement on Form S-1 (File No. 333-219385) declared effective by
the SEC on August 11, 2017.
LPC Park Financing
On April 11, 2017, we entered into a Securities
Purchase Agreement (the “Purchase
Agreement”) with Lincoln
Park Capital Fund, LLC (“LPC”), pursuant to which we issued to LPC a 12%
Senior Secured Original Issue Discount Convertible Debenture in the
principal amount of $1.0 million with an original issue discount of
$120,000.00 (the “Debenture”). Pursuant to its terms, the
principal and original issue discount of $1.12 million due under
the terms of the Debenture were due on the earlier to occur of (i)
November 10, 2017 or (ii) on the fifth business day following the
receipt by the Company or our wholly-owned subsidiary, AzurRx
BioPharma SAS (“ABS”), of certain tax credits that we expected
to receive prior to November 10, 2017 (the
“Tax
Credit”) (the
“Maturity
Date”). Pursuant to the
terms of the Purchase Agreement, we had the option to extend the
Maturity Date to July 11, 2018, conditioned on the receipt of the
Tax Credit by the Company or ABS prior to November 10, 2017
(“Extension
Option”).
On
November 10, 2017, we entered into a Modification to the Debenture
with LPC, thereby extending the Maturity Date to November 29, 2017
in exchange for the issuance of 30,000 shares of Common Stock but
retaining our Extension Option. On November 27, 2017, we delivered
notice to LPC of our decision to exercise the Extension
Option.
The principal amount of the Debenture is
convertible into shares of Common Stock, at LPC’s option, at
a conversion price equal to $3.872 per share
(“Conversion
Price”).
Provided
certain conditions are satisfied, we may force conversion of the
Debentures for an amount equal to 100% of the principal amount of
the Debenture.
In connection with the issuance of the Debenture, we issued to LPC
a warrant giving LPC the right to purchase 164,256 shares of Common
Stock at an exercise price of $4.2592 per share. Upon our election
to exercise the Extension Option, we issued an additional warrant
to LPC to purchase 164,256 shares of Common Stock for $3.17 per
share. Both warrants issued to LPC will terminate five years after
the dates of issuance.
We
also entered into a Registration Rights Agreement granting LPC
certain registration rights with respect to the shares of Common
Stock issuable upon conversion of the Debenture and upon exercise
of the warrants, which shares were registered pursuant to the
Registration Statement on Form S-1 (File No. 333-219385) declared
effective by the SEC on August 11, 2017.
Warrant Exchange
Beginning on December 31, 2017, we entered into
warrant repricing letter agreements (the “Exercise
Agreements”) with certain
holders (the “Holders”) of an aggregate total of 1,354,219
various, previously issued Common Stock purchase warrants (the
“Warrants”) pursuant to which we agreed to reduce the
exercise price of an aggregate total of 931,498 Warrants held by
such Holders (the “Repriced
Warrants”) to $2.50 per
share (the “Reduced Exercise
Price”) in consideration
for the exercise in full of the Repriced Warrants, and agreed to
amend an aggregate total of 422,721 remaining, unexercised Warrants
held by certain Holders (the “Remaining
Warrants”) to reduce the
exercise of the Remaining Warrants to $3.25 per share. We received
aggregate gross proceeds of approximately $2.2 million in 2018 from
the exercise of the Repriced Warrants by the
Holders.
Corporate History
On May 21, 2014, we entered into a stock purchase
agreement (the “SPA”) with Protea Biosciences Group, Inc.
(“Protea
Group”) and its
wholly-owned subsidiary, Protea Biosciences, Inc.
(“Protea Sub” and, together with Protea Group,
“Protea”), to acquire 100% of the outstanding
capital stock of AzurRx BioPharma SAS (formerly ProteaBio Europe SAS), a
wholly-owned subsidiary of Protea Sub. On June 13, 2014, we
completed the acquisition in exchange for the payment of $600,000
and the issuance of shares of our Series A Convertible Preferred
Stock (“Series A
Preferred”) convertible
into 33% of our outstanding Common Stock and agreed to make certain
milestone and royalty payments to
Protea.
Product Programs
We
are currently engaged in research and development of two potential
product candidates, MS1819 and AZX1101.
MS1819
MS1819 is the active pharmaceutical ingredient, or
API, derived from Yarrowia
lipolytica, an aerobic yeast
naturally found in various foods such as cheese and olive oil that
is widely used as a biocatalyst in several industrial processes.
MS1819 is an acid-resistant secreted lipase naturally produced
by Yarrowia
lipolytica, known as LIP2,
that we are developing through recombinant DNA technology for the
treatment of EPI associated with CP and CF. We obtained the
exclusive right to commercialize MS1819 in the U.S. and Canada,
South America (excluding Brazil), Asia (excluding China and Japan),
Australia, New Zealand and Israel pursuant to a sublicense from
Laboratoires Mayoly Spindler SAS (“Mayoly”) under a Joint Research and Development
Agreement that also grants us joint commercialization rights for
Brazil, Italy, China and Japan. See “Agreements and
Collaborations” below.
Background
The
pancreas is both an endocrine gland that produces several important
hormones, including insulin, glucagon, and pancreatic polypeptide,
as well as a digestive organ that secretes pancreatic juice
containing digestive enzymes that assist the absorption of
nutrients and digestion in the small intestine.
The
targeted indication of MS1819 is the compensation of EPI, which is
observed when the exocrine functions of the pancreas are below 10%
of normal. The symptomatology of EPI is essentially due to
pancreatic lipase deficiency, an enzyme that hydrolyses
triglycerides into monoglycerides and free fatty acids. The
pancreatic lipase enzymatic activity is hardly compensated by
extrapancreatic mechanisms, because gastric lipase has nearly no
lipolytic activity in the pH range of the intestine. On the other
hand, when they are impaired, the pancreatic amylase and proteases
(enzymes that break up starches and protein,
respectively) activities can be, at least in part, compensated
by the salivary amylase, the intestinal glycosidase, the gastric
pepsin, and the intestinal peptidases, all of which are components
of the gastric juice secreted by the stomach walls. In summary,
lipid maldigestion due to lipase deficiency is responsible for
weight loss, steatorrhea featured by greasy diarrhea, and
fat-soluble vitamin deficiencies (i.e. A, D, E and K vitamins). In
addition, EPI caused by chronic pancreatic disorders is also
frequently associated with endocrine pancreatic insufficiency,
resulting in diabetes mellitus.
CP,
the most common cause of EPI, is a long-standing inflammation of
the pancreas that alters its normal structure and functions. In the
United States, its prevalence rate is of 42 cases per 100,000
inhabitants, resulting in approximately 132,000 cases.
Approximately 60% of patients affected with CP display EPI,
resulting in approximately 80,000 patients requiring substitution
therapy in the U.S. In Western societies, CP is caused by chronic
alcoholic consumption in approximately 55-80% of cases. Other
relatively frequent etiologies include the genetic form of the
disease that is inherited as an autosomal dominant condition with
variable penetrance, pancreatic trauma and idiopathic causes. CP is
frequently associated with episodes of acute inflammation in a
previously injured pancreas, or as chronic damage with persistent
pain, diabetes mellitus due to endocrine pancreatic insufficiency,
or malabsorption caused by EPI. In addition to EPI symptoms, weight
loss due to malabsorption and/or reduction in food intake due to
pain related to food intake, are frequent.
CF, another frequent etiology of EPI, is a severe
genetic disease associated with chronic morbidity and life-span
decrease of most affected individuals. In most Caucasian
populations, CF prevalence is of 7-8 cases per 100,000 inhabitants,
but is less common in other populations, resulting in approximately
30,000 affected individuals in the U.S. CF is inherited as
monogenic autosomal recessive disease due to the defect at a single
gene locus that encodes the Cystic Fibrosis Transmembrane Regulator
protein (“CFTR”), a regulated chloride channel. Mutation
of both alleles of this chloride channel gene results in the
production of thick mucus, which causes a multisystem disease of
the upper and lower respiratory tracts, digestive system, and the
reproductive tract. The progressive destruction of the pancreas
results in EPI that is responsible for malnutrition and contributes
to significant morbidity and mortality. About 80-90% of patients
with CF develop EPI, resulting in approximately 25,000-27,000
patients in the U.S. that require substitution
therapy.
EPI
can also be observed following pancreatic and gastric surgeries due
to insufficient enzyme production or asynchronism between the entry
of food into the small intestine and pancreatic juice with bile
secretion, respectively. Other uncommon etiologies of EPI include
intestinal disorders (e.g. severe celiac disease, small bowel
resection, enteral artificial nutrition), pancreatic diseases (e.g.
pancreatic trauma, severe acute pancreatitis with pancreatic
necrosis, and pancreatic cancer), and other uncommon etiologies
(e.g. Zollinger-Ellison syndrome, Shwachman-Diamond syndrome).
Idiopathic EPI has been also reported in the elderly.
Current
treatments for EPI stemming from CP and CF rely on porcine
pancreatic extracts, or PPEs, which have been on the market since
the late 1800s. The PPE market is well established and growing with
estimated sales in the U.S. of $1.1 billion in 2017 and has been
growing for the past five years at a compound annual growth rate in
excess of 20%. In spite of their long-term use, however, PPEs
suffer from poor stability, formulation problems, possible
transmission of conventional and non-conventional infectious agents
due to their animal origins, and possible adverse events at high
doses in patients with CF and limited effectiveness.
History of the Program
In 1998, Mayoly, a European pharmaceutical company
focusing primarily on gastroenterology disorders, launched a
program for the discovery and characterization of novel lipases of
non-animal origin that could be used in replacement therapy for
EPI. The program was conducted in collaboration with INRA
TRANSFERT, a subsidiary of the French academic laboratory, National
Institute for Agricultural Research, or INRA. In 2000, Mayoly and
INRA discovered that the yeast Yarrowia
lipolytica secreted a
lipase which was named LIP2. During the ensuing years, Mayoly
investigated the in vitro enzymatic activities of LIP2 in
collaboration with the Laboratory of Enzymology at Interfaces and
Physiology of Lipolysis, or EIPL, a French public-funded research
laboratory at the French National Scientific Research Centre
laboratory, or CNR, which focuses on the physiology and molecular
aspects of lipid digestion.
Pre-Clinical Program
The efficacy of MS1819 has been investigated in
normal minipigs, which are generally considered as a relevant model
for digestive drug development when considering their physiological
similarities with humans and their omnivore diet. Experimental
pancreatitis was induced by pancreatic duct ligation, resulting in
severe EPI with baseline coefficient of fat absorption
(“CFA”) around 60% post-ligature. CFA is a
measurement obtained by quantifying the amount of fat ingested
orally over a defined time period and subtracting the amount
eliminated in the stool to ascertain the amount of fat absorbed by
the body. Pigs were treated with either MS1819 or
enteric-coated PPE, both administered as a single-daily
dose.
At doses ranging from 10.5 to 211mg, MS1819
increases the CFA by +25 to +29% in comparison to baseline
(p<0.05 at all doses), whereas the 2.5 mg dose had milder
activity. Similar efficacy was observed in pigs receiving 100,000 U
lipase of enteric-coated porcine pancreatic extract. These findings
demonstrate the in vivo activity of MS1819 in a
relevant in vivo model at a level similar to the PPEs at
dosages of 10.5mg or greater. The results of a trial are
statistically significant if they are unlikely to have occurred by
chance. Statistical significance of the trial results is typically
based on widely used, conventional statistical methods that
establishes the p-value of the results. A p-value of 0.05 or less
is required to demonstrate statistical significance. As such, these
CFA levels are considered to be statistically
significant.
To date, two non-clinical toxicology studies have
been conducted. Both show that MS1819 lipase is clinically well
tolerated at levels up to 1000mg/kg in rats and 250 mg/kg in
minipigs up to 13 weeks. MS1819 is therefore considered non-toxic
in both rodent and non-rodent species up to a maximum feasible dose
(“MFD”) of 1000 mg/kg/day in the rats over six
months of administration.
Clinical Program
We
believe that there are two principal therapeutic indications for
EPI compensation by MS1819: (i) adult patients with CP or
post-pancreatectomy, and (ii) children or young adults affected by
cystic fibrosis. Because of their radically different
pathophysiology, we intend to separately investigate each of these
indications and have determined, based on market size and expected
dose requirements, to pursue the indication for adults
first.
During
2010 and 2011, a phase I/IIa clinical trial of MS1819 was conducted
in conjunction with Mayoly in a single center in France. The study
was an exploratory study mainly designed to investigate the safety
of MS1819-FD (freeze-dried) and was a randomized, double blind,
placebo controlled, parallel clinical trial in 12 patients affected
with CP or pancreatectomy and severe EPI. The primary endpoint of
the study was defined as the relative change in steatorrhea (an
established surrogate biomarker of EPI correction) in comparison to
baseline. The study found that MS1819 was well tolerated with no
serious adverse events. Only two adverse events were observed:
constipation (two patients out of eight with MS1819) and
hypoglycemia (two patients out of eight with MS1819, and one
patient out of four with placebo). A non-statistically significant
difference of the primary endpoint, possibly due to the small group
size, was found between the two groups both in intention-to-treat,
a group that included three patients who received the in-patient
facility study diet but did not fulfill the protocol’s
inclusion criteria, and per-protocol analysis. This study was
not designed, nor did it aim, to demonstrate statistically
significant changes of CFA or steatorrhea under
MS1819-FD.
We
received regulatory approval in Australia and New Zealand in 2016,
with the addition of a 2018 regulatory approval in France, to
conduct a phase II multi-center dose escalation study in CP and
pancreatectomy. This clinical trial is currently enrolling patients
to ascertain the optimal dose of MS1819 and is expected to enroll
approximately 12 to 15 patients. A substantial portion of our
research and development spend is dedicated to sponsor and conduct
MS1819 trials, such as this one. We expect to file an IND for the
study as a result of interactions with the FDA. Following the
results of the dose escalation trial we expect to submit an IND in
the later half of 2018.
AZX1101
AZX1101
is a recombinant-lactamase combination of bacterial origin under
development for the prevention of hospital-acquired infections by
resistant bacterial strains induced by parenteral administration of
several classes of antibiotics (known as nosocomial infections), as
well as the prevention of antibiotic-associated diarrhea, or AAD.
Nosocomial infections are a major health concern contributing to
increased morbidity, mortality and cost. The Centers for Disease
Control, or CDC has estimated that roughly 1.7 million
hospital-associated infections (i.e. ~5% of the number of
hospitalized patients), cause or contribute to 99,000 deaths each
year in the U.S., with the annual cost ranging from $4.5 - $11.0
billion.
Our
AZX1101 product candidate is at an early stage of preclinical
development and will consist of a combination of several enzymes
that having complementary activity spectrum. A portion of our
research and development spend is dedicated to conducting animal
studies and primary toxicology assessments of AZX1101. We continue
to expect to file an IND for AZX1101 in 2018.
Agreements and Collaborations
Stock Purchase Agreement
On May 21, 2014, we entered into the SPA with
Protea to acquire 100% of the outstanding capital stock of
ProteaBio Europe (the “Acquisition”). On June 13, 2014, we completed the
Acquisition in exchange for the payment to Protea of $600,000 and
the issuance of shares of our Series A Preferred convertible into
33% of our outstanding Common Stock. Pursuant to the SPA, Protea
Sub assigned (i) to Protea Europe all of its rights, assets,
know-how and intellectual property rights in connection with
program PR1101 and those granted under that certain Joint Research
and Development Agreement, by and among Protea Sub, Protea Europe
and Mayoly, dated March 22, 2010; and (ii) to us all amounts,
together with any right of reimbursement, due to Protea Sub in
connection with outstanding shareholder
loans.
Pursuant to the SPA, we were obligated to pay
certain other contingent consideration upon the satisfaction of
certain events, including (a) a one-time milestone payment of $2.0
million due within ten days of receipt of the first approval by the
FDA of an New Drug Application (“NDA”) or Biological License Application
(“BLA”) for a Business Product (as such term is
defined in the SPA); (b) royalty payments equal to 2.5% of net
sales of Business Product up to $100.0 million and 1.5% of net
sales of Business Product in excess of $100.0 million; and (c) 10%
of the Transaction Value (as defined in the SPA) received in
connection with a sale or transfer of the pharmaceutical
development business of Protea Europe.
Mayoly Agreement
Effective March 22, 2010, Protea and AzurRx SAS
entered into a Joint Research and Development Agreement with Mayoly
pursuant to which Mayoly sublicensed certain of its exclusive
rights to a genetically engineered yeast strain cell line on which
our MS1819 is based that derive from a Usage and Cross-Licensing
Agreement dated February 2, 2006 (the “INRA
Agreement”) between
Mayoly and INRA, in charge of patent management acting for and on
behalf of the National Centre of Scientific Research
(“CNRS”) and INRA.
Effective January 1,
2014, Protea entered into an amended and restated Joint
Research and Development Agreement with Mayoly (the
“Mayoly
Agreement”), pursuant to
which Protea acquired the exclusive right to Mayoly patents
and technology, with the right to sublicense, develop, manufacture
and commercialize human pharmaceuticals based on the MS1819 lipase
within the following territories: U.S. and Canada, South America
(excluding Brazil), Asia (excluding China and Japan), Australia,
New Zealand and Israel. The Mayoly Agreement further provides
Mayoly the exclusive right to Protea’s patents and
technology, with the right to sublicense, develop, manufacture and
commercialize human pharmaceuticals based on the MS1819 lipase
within the following territories: Mexico, Europe (excluding Italy,
Portugal and Spain) and any other country not granted to us alone,
or jointly with Mayoly. Rights to the following territories are
held jointly with Mayoly: Brazil, Italy, Portugal, Spain, China and
Japan. In addition, the Mayoly Agreement requires Protea to
pay 70% of all development costs and requires each of the parties
to use reasonable efforts to:
●
devote
sufficient personnel and facilities required for the performance of
its assigned tasks;
●
make
available appropriately qualified personnel to supervise, analyze
and report on the results obtained in the furtherance of the
development program; and
●
deploy
such scientific, technical, financial and other resources as is
necessary to conduct the development program.
Pursuant
to the Mayoly Agreement, if Protea obtains marketing authorization
in the U.S. during the development program, Protea is obligated to
make a one-time milestone payment and pay Mayoly royalties on net
product sales in the low single digits. If Protea does not obtain
marketing authorization in the U.S. during the development program,
but obtains such authorization thereafter, then Mayoly has the
option to either request a license from Protea and pay 30% of our
development costs, less the shared costs incurred by Mayoly and a
royalty on net sales in the mid-teens, or Protea will pay Mayoly
royalties on net product sales in the low single digits. If Mayoly
receives EU marketing authorization after the development program
concludes, then Protea may license the product from Mayoly for 70%
of Mayoly’s development costs, less the shared costs incurred
by Protea and a royalty on net sales in the mid-teens. The
agreement further provides that no royalties are payable by either
party until all expenses incurred in connection with the
development program since 2009 have been recovered. The Mayoly
Agreement further grants Protea the right to cure any breach by
Mayoly of its obligations under the INRA Agreement. See “INRA
Agreement” below. Unless earlier terminated in accordance
with its terms, the Mayoly Agreement will expire, on a country by
country basis, on the latest of (i) the expiration of any patent
covered by the license, (ii) the duration of the legal protection
of any intellectual property licensed under the agreement, or (iii)
the expiration of any applicable data exclusivity period. The
latest expiration date of the current series of issued patents
covered by the Mayoly Agreement is September 2028. See
“Intellectual Property.” Either party may terminate the
agreement upon a material breach by the other party that remains
uncured after 90 days’ notice without prejudicing the rights
of the terminating party. If the development program or license is
terminated due to a material breach that is not cured, then the
non-breaching party is free to develop, manufacture and
commercialize the product, or grant a license to a third party to
carry out such activities in the breaching party’s
territories or the joint territories. Further, the non-breaching
party’s net product sales will be subject to low single digit
royalties. Finally, either party may terminate due to insolvency of
the other party. In connection with the Acquisition, Protea, with
the consent of INRA and CNRS, assigned all of its rights,
title and interest in and to the Mayoly Agreement to AzurRx
SAS.
INRA Agreement
In February 2006, INRA, acting on behalf of CNRS and Institut
National de la Recherche Agronomique, entered into a Usage and
Cross-licensing Agreement with Mayoly to specify their respective
rights to the use of (i) French patent application no. FR9810900
(INRA CNRS patent application), (ii) international patent
application no. WO2000FR0001148 (Mayoly patent application), and
(iii) the technology and know-how associated with both patent
applications.
The
agreement covers extensions of both patent applications.
Specifically, the INRA CNRS patent application encompasses
application no. FR9810900 as well as PCT/FR99/02079 with national
phase entry in the U.S. (no. 09/786,048, now US patent 6,582,951),
Canada (no. 2,341,776) and Europe (no. 99.940.267.0, now EP 1 108
043 B1). The Mayoly patent application encompasses WO2000FR0001148
with the national phase entered in Europe (now EP 1 276 874
B1).
The
agreement provides Mayoly with the world-wide use in human therapy,
nutraceuticals, and cosmetology and provides INRA with world-wide
(i) use of lipase as an enzymatic catalyst throughout this field,
including the production of pharmaceuticals, and (ii) treatment of
the environment, food production processes, cleaning processes and
other fields, excluding human therapies, neutraceuticals and
cosmetology. The agreement provides for shared use in the
production of lipase in the veterinary field (livestock and pets).
As consideration for the agreement, Mayoly will pay INRA an annual
lump sum of €5,000 until marketing. Upon marketing, Mayoly
will pay INRA a lump sum of €100,000 and royalties on net
sales of the product. Unless earlier terminated in accordance with
its terms, the agreement with INRA expires upon the expiration of
the patents in each country in which the license has been granted.
The parties may terminate the agreement in the event the other
party breaches its obligations therein, which termination shall
become effective three months following written notice thereof to
the breaching party. The breaching party shall have the right to
cure such breach or default during such three-month
period.
TransChem Sublicense
On August 7, 2017, we entered into the Sublicense
Agreement with TransChem pursuant to which TransChem granted to us
an exclusive license to the Licensed Patents relating to
Helicobacter 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 Licensed Patents
will allow us to develop compounds for treating gastrointestinal,
lung and other infections which are specific to individual
bacterial species. H. pylori bacterial infections are a major cause of chronic
gastritis, peptic ulcer disease, gastric cancer and other
diseases.
Intellectual Property
Our
goal is to obtain, maintain and enforce patent protection for our
product candidates, formulations, processes, methods and any other
proprietary technologies, preserve our trade secrets, and operate
without infringing on the proprietary rights of other parties, both
in the United States and in other countries. Our policy is to
actively seek to obtain, where appropriate, the broadest
intellectual property protection possible for our current product
candidates and any future product candidates, proprietary
information and proprietary technology through a combination of
contractual arrangements and patents, both in the United States and
abroad. However, patent protection may not afford us with complete
protection against competitors who seek to circumvent our
patents.
We
also depend upon the skills, knowledge, experience and know-how of
our management and research and development personnel, as well as
that of our advisors, consultants and other contractors. To help
protect our proprietary know-how, which is not patentable, and for
inventions for which patents may be difficult to enforce, we
currently rely and will in the future rely on trade secret
protection and confidentiality agreements to protect our interests.
To this end, we require all of our employees, consultants, advisors
and other contractors to enter into confidentiality agreements that
prohibit the disclosure of confidential information and, where
applicable, require disclosure and assignment to us of the ideas,
developments, discoveries and inventions important to our
business.
MS1819
The MS1819 program is protected by the following
series of issued patents that we have licensed under the Mayoly
Agreement covering the method for transformation
of Yarrowia
lipolytica, the sequence of the LIP2 enzyme and its production
process:
|
●
|
PCT/FR99/02079 patent family (including the
patents EP1108043 B1, and US6582951) “Method for
non-homologous transformation of Yarrowia lipolytica,”
concerns the integration of a gene of interest into the genome of
a Yarrowia strain devoid of zeta sequences, by transforming
said strain using a vector bearing zeta sequences. This modified
strain is used for the current production process. This patent has
been issued in the U.S., Canada, and validated in several European
countries, including Austria, Belgium, Switzerland, Cyprus,
Germany, Denmark, Spain, Finland, Great Britain, Greece, Ireland,
France, Italy, Lithuania, Luxembourg, Netherlands, Portugal and
Sweden. This patent expires September 1, 2019;
|
|
●
|
PCT/FR2000/001148 patent family (including the
patent EP1276874 B1) “Cloning and expressing an
acid-resistant extracellular lipase of Yarrowia lipolytica”
describes the coding sequences of acid-resistant extracellular
lipases, in particular Candida ernobii or Yarrowia lipolytica
yeasts and the production of said
lipases in their recombinant form. This patent has been validated
in several European countries, including Italy, France and Great
Britain. This patent expires April 28, 2020;
and
|
|
●
|
PCT/FR2006/001352 patent family (including the
patent EP2035556 and patent US8,334,130 and US8,834,867)
“Method for producing lipase,
transformed Yarrowia
lipolytica cell capable of
producing said lipase and their uses” describes a method for
producing Yarrowia
lipolytica acid-resistant
recombinant lipase utilizing a culture medium without any products
of animal origin or non-characterized mixtures such as tryptone,
peptone or lactoserum, in addition to its uses. The European
patents expire June 15, 2026, U.S. patent 8,334,130 expires
September 11, 2028, and U.S. patent 8,834,867 expires September 15,
2026.
|
AZX1101
To date, we own one patent application covering
different compositions, which has been filed in France. This
application was filed internationally (“PCT”) on October 13, 2015 as PCT/FR2015/052756
claiming priority to French patent application 1459935 dated
October 16, 2014. This application was published as WO/2016/059341
titled “Hybrid Proteinaceous Molecule Capable Of Inhibiting
At Least One Antibiotic And Pharmaceutical Composition Containing
It.” At present all PCT contracting states are
designated. The term of patent protection available is typically 20
years from the filing date of the earliest international (PCT)
application. Patents are territorial rights, meaning that the
rights conferred are only applicable in the country or region in
which a patent has been filed and granted, in accordance with the
law of that country or region. Patent enforcement is only possible
after a patent is granted and before the expiration of the patent
term. Any patent issuing from PCT/FR2015/052756 will expire on
October 13, 2035, unless the patent term is extended pursuant to
specific laws of the granting country. We expect to file additional
patent applications covering the production process and formulation
of AZX1101.
Manufacturing
MS1819
API is obtained by fermentation in bioreactors using our engineered
and proprietary Yarrowia lipolytica strain. MS1819 is currently
manufactured at a contract facility located in Capua Italy owned by
DSM. The proprietary yeast cell line from which the API is derived
is kept at a storage facility maintained by Charles River. Because
the manufacturing process is fairly straightforward, we believe
there are multiple alternative contract manufacturers capable of
producing the product we need for clinical trials. The company is
in the process of establishing alternative manufacturers and
manufacturing sites for the product however there is no guarantee
that the processes are easily reproducible and
transferrable.
AZX1101
API production is still under development in-house with outside
contract manufacturing organizations (CMO’s) producing
material for animal work including proof-of-concept and
toxicological work . To date, the manufacturing process appears
fairly straightforward with multiple options leading us to believe
that there are multiple alternative contract manufacturers capable
of producing the products we will need for clinical trials however
there are no guarantees that the processes will scale up or be
considered acceptable for clinical trial use.
Competition
The
pharmaceutical and biotechnology industries are characterized by
rapidly evolving technology and intense competition. Many companies
of all sizes, including major pharmaceutical companies and
specialized biotechnology companies, are engaged in the development
and commercialization of therapeutic agents designed for the
treatment of the same diseases and disorders that we target. Many
of our competitors have substantially greater financial and other
resources, larger research and development staff and more
experience in the regulatory approval process. Moreover, potential
competitors have or may have patents or other rights that conflict
with patents covering our technologies.
With respect to MS1819, we will
compete with PPEs, a well-established market that is currently
dominated by a few large pharmaceutical companies, including AbbVie
Inc., Johnson & Johnson and Allergan plc. There are currently
six PPE products that have been approved by the FDA for sale in the
U.S. There is another synthetic lipase under development by Anthera
Pharmaceuticals, Inc. (“Anthera”) that may be considered competitive to our
efforts to enter the market with a non-animal based lipase;
however, all clinical development on the Anthera asset was
terminated as of March 12, 2018 due to lack of clinical efficacy.
We believe our ability to compete in this market, if we are
successful in developing and obtaining regulatory approval to
market MS1819, will depend on our ability (or that of a corporate
partner) to convince patients, their physicians, healthcare payors
and the medical community of the benefits of using a non-animal
based product to treat EPI, as well as by addressing other
shortcomings associated with PPEs.
With respect to AZX1101, we are aware of only one
beta-lactamase under active development by a U.S. specialty
pharmaceutical company for the prevention
of c.
difficile infection, although the compounds being
developed appear to have very limited efficacy to a narrower set of
antibiotics rather than the broader group of antibiotics
expected to be covered by our compound.
Government Regulation and Product Approval
Government
authorities in the United States, at the federal, state and local
level, and other countries extensively regulate, among other
things, the research, development, testing, manufacture, quality
control, approval, labeling, packaging, storage, record-keeping,
promotion, advertising, distribution, post-approval monitoring and
reporting, marketing and export and import of products such as
those we are developing. To date, our research and development
efforts have been conducted in France. We expect to continue to
perform substantially all of our basic research activities in
France in order to leverage our human capital expertise as well as
to avail ourselves of tax credits awarded by the French government
to research companies. We expect to continue to conduct early stage
development work in Australia, New Zealand and France, with late
stage development work, including the MS1819 Phase IIb study
and subsequent Phase III trials in the U.S. as North America is our
principal target market for any products that we may successfully
develop.
FDA Approval Process
In the United States, pharmaceutical products are
subject to extensive regulation by the FDA. The Federal Food, Drug,
and Cosmetic Act, or the FDC Act, the Public Health
Services Act or the PHS Act, and other federal and state statutes and
regulations, govern, among other things, the research, development,
testing, manufacture, storage, recordkeeping, approval, labeling,
promotion and marketing, distribution, post-approval monitoring and
reporting, sampling, and import and export of pharmaceutical
products. Failure to comply with applicable U.S. requirements may
subject a company to a variety of administrative or judicial
sanctions, such as FDA refusal to approve pending new drug
applications, or NDAs, refusal to approve
pending biologic license applications, or BLAs, warning letters, product recalls, product
seizures, total or partial suspension of production or
distribution, injunctions, fines, civil penalties, and criminal
prosecution.
Pharmaceutical
product development in the U.S. typically involves preclinical
laboratory and animal tests, the submission to the FDA of either a
notice of claimed investigational exemption or an IND, which must
become effective before clinical testing may commence, and adequate
and well-controlled clinical trials to establish the safety and
effectiveness of the drug for each indication for which FDA
approval is sought. Satisfaction of FDA pre-market approval
requirements typically takes many years and the actual time
required may vary substantially based upon the type, complexity,
and novelty of the product or disease.
Preclinical
tests include laboratory evaluation of product chemistry,
formulation, and toxicity, as well as animal trials to assess the
characteristics and potential safety and efficacy of the product.
The conduct of the preclinical tests must comply with federal
regulations and requirements, including good laboratory practices.
The results of preclinical testing are submitted to the FDA as part
of an IND along with other information, including information about
product chemistry, manufacturing and controls, and a proposed
clinical trial protocol. Long term preclinical tests, such as
animal tests of reproductive toxicity and carcinogenicity, may
continue after the IND is submitted.
Clinical
trials involve the administration of the investigational new drug
to healthy volunteers or patients under the supervision of a
qualified investigator. Clinical trials must be conducted: (i) in
compliance with federal regulations; (ii) in compliance with good
clinical practice, or GCP, an international standard meant to
protect the rights and health of patients and to define the roles
of clinical trial sponsors, administrators, and monitors; as well
as (iii) under protocols detailing the objectives of the trial, the
parameters to be used in monitoring safety, and the effectiveness
criteria to be evaluated. Each protocol involving testing on U.S.
patients and subsequent protocol amendments must be submitted to
the FDA as part of the IND.
The FDA may order the temporary, or permanent,
discontinuation of a clinical trial at any time, or impose other
sanctions if it believes that the clinical trial either is not
being conducted in accordance with FDA requirements or presents an
unacceptable risk to the clinical trial patients. The study
protocol and informed consent information for patients in clinical
trials must also be submitted to an institutional review board
(“IRB”) for approval. An IRB may also require the
clinical trial at the site to be halted, either temporarily or
permanently, for failure to comply with the IRB’s
requirements, or may impose other conditions.
Clinical
trials to support NDAs or BLAs for marketing approval are
typically conducted in three sequential phases, but the phases may
overlap. In Phase 1, the initial introduction of the drug into
healthy human subjects or patients, the drug is generally tested to
assess metabolism, pharmacokinetics, pharmacological actions, side
effects associated with increasing doses, and, if possible, early
evidence on effectiveness. Phase II usually involves trials in a
limited patient population to determine the effectiveness of the
drug for a particular indication, dosage tolerance, and optimum
dosage, and to identify common adverse effects and safety risks. If
a compound demonstrates evidence of effectiveness and an acceptable
safety profile in Phase II evaluations, Phase III trials are
undertaken to obtain the additional information about clinical
efficacy and safety in a larger number of patients, typically at
geographically dispersed clinical trial sites, to permit the FDA to
evaluate the overall benefit-risk relationship of the drug and to
provide adequate information for the labeling of the
drug.
After completion of the required clinical testing,
an NDA is prepared and submitted to the
FDA for
small molecule drugs, or a BLA is prepared and submitted for
biologics. Section 351 of the Public Health Service Act (the
“PHS
Act”) defines a
biological product as a “virus, therapeutic serum, toxin,
antitoxin, vaccine, blood, blood component or derivative,
allergenic product, or analogous product… applicable to the
prevention, treatment, or cure of a disease or condition of human
beings.” Similarly, FDA regulations and policies have
established that biological products include blood-derived
products, vaccines, in vivo diagnostic allergenic products,
immunoglobulin products, products containing cells or
microorganisms, and most protein products (including cytokines and
enzymes). Biological products subject to the PHS Act also meet the
definition of drugs under FDC Act, and therefore are regulated
under provisions of both statutes. FDA approval of the NDA or BLA is required
before marketing of the product may begin in the U.S. The NDA or
BLA must include the results of all preclinical, clinical, and
other testing and a compilation of data relating to the
product’s pharmacology, chemistry, manufacture, and controls.
The cost of preparing and submitting an NDA or a BLA is
substantial.
Once the submission is accepted for filing, the
FDA begins an in-depth review. Priority review can be applied to
drugs that the FDA determines offer major advances in treatment or
provide a treatment where no adequate therapy exists. The FDA may
refer applications for novel drug products, or drug products which
present difficult questions of safety or efficacy, to an advisory
committee — typically a panel that includes
clinicians and other experts — for review,
evaluation, and a recommendation as to whether the application
should be approved. The FDA is not bound by the recommendation of
an advisory committee, but it generally follows such
recommendations. Before approving an NDA or BLA, the FDA will
typically inspect one, or more, clinical sites to assure compliance
with GCP. Additionally, the FDA will inspect the facility or the
facilities at which the drug is manufactured. The FDA will not
approve the product unless compliance with current good
manufacturing practices, or GMP — a quality system
regulating manufacturing — is satisfactory and the
NDA or BLA contains data that provide substantial evidence
that the drug is safe and effective in the indication
studied. The issuance of a
biologics license is a determination that the product, the
manufacturing process, and the manufacturing facilities meet
applicable requirements to ensure the continued safety, purity and
potency of the biologic product.
After the FDA evaluates the NDA or BLA and
the manufacturing facilities, it issues either an approval
letter (with the U.S. license
number, in the case of a biologic license) or a complete response letter. A complete
response letter generally outlines the deficiencies in the
submission and may require substantial additional testing, or
information, in order for the FDA to reconsider the application.
If, or when, those deficiencies have been addressed to the
FDA’s satisfaction in a resubmission of the NDA or BLA, the
FDA will issue an approval letter. An approval letter authorizes
commercial marketing of the drug with specific prescribing
information for specific indications. As a condition of NDA or
BLA approval, the FDA may require a risk evaluation and
mitigation strategy (“REMS”), to help ensure that the benefits of the
drug outweigh the potential risks. REMS can include medication
guides, communication plans for healthcare professionals, and
elements to assure safe use (“ETASU”). ETASU can include, but are not limited
to, special training or certification for prescribing or
dispensing, dispensing only under certain circumstances, special
monitoring, and the use of patient registries. The requirement for
a REMS can materially affect the potential market and profitability
of the drug. Moreover, product approval may require substantial
post-approval testing and surveillance to monitor the drug’s
safety or efficacy. Once granted, product approvals may be
withdrawn if compliance with regulatory standards is not maintained
or problems are identified following initial
marketing.
The BPCIA
The Biologics Price Competition and Innovation Act
(“BPCIA”) was enacted as part of the Affordable
Care Act on March 23, 2010. The BPCIA creates an abbreviated
licensure pathway for biological products shown to be biosimilar
to, or interchangeable with, an FDA-licensed biological reference
product. The objectives of the BPCIA are conceptually similar to
those of the Hatch-Waxman Act, which established abbreviated
pathways for the approval of small molecule drug products under the
FDC Act. The implementation of an abbreviated licensure pathway for
biological products can present challenges given the scientific and
technical complexities that may be associated with the larger and
typically more complex structure of biological products, as well as
the processes by which such products are manufactured. Most
biological products are produced in a living system such as a
microorganism, or plant or animal cells, whereas small molecule
drugs are typically manufactured through chemical
synthesis.
A
“biosimilar” product is a follow-on version of another
biological product for which marketing approval is sought or has
been obtained based on a demonstration that it is
“biosimilar” to the original reference product. Section
351(k) of the PHS Act, added by the BPCIA, sets forth the
requirements for an application for a proposed biosimilar product
and an application or a supplement for a proposed interchangeable
product. Section 351(i) defines biosimilarity to mean “that
the biological product is highly similar to the reference product
notwithstanding minor differences in clinically inactive
components” and that “there are no clinically
meaningful differences between the biological product and the
reference product in terms of the safety, purity, and potency of
the product.” A 351(k) application must contain, among other
things, information demonstrating that the biological product is
biosimilar to a reference product based upon data derived from
analytical studies, animal studies, and a clinical study or
studies, unless the FDA determines, in its discretion, that certain
studies are unnecessary. To meet the additional standard of
“interchangeability,” an applicant must provide
sufficient information to demonstrate biosimilarity, and also to
demonstrate that the biological product can be expected to produce
the same clinical result as the reference product in any given
patient and, if the biological product is administered more than
once to an individual, the risk in terms of safety or diminished
efficacy of alternating or switching between the use of the
biological product and the reference product is not greater than
the risk of using the reference product without such alternation or
switch. Biosimilar drugs are not generic drugs, which are shown to
be the same as the reference product. However, biosimilar products
that are also determined to be interchangeable may be substituted
for the reference product without the intervention of the
prescribing healthcare provider.
In many cases, biosimilars may be brought to market without
conducting the full suite of clinical trials typically required of
originators. The law establishes a period of 12 years of data
exclusivity for reference products in order to preserve incentives
for future innovation and outlines statutory criteria for
science-based biosimilar approval standards that take into account
patient safety considerations. Under this framework, data
exclusivity protects the data in the innovator’s regulatory
application by prohibiting others, for a period of 12 years, from
gaining FDA approval based in part on reliance on or reference to
the innovator’s data in their application to the FDA.
Moreover, a biosimilar applicant cannot file their application
until 4 years after the reference biological product was first
licensed. The law does not change the duration of patents granted
on biologic products but does provide procedures for resolving
patent disputes based on a biosimilar application.
The FDA maintains lists of biological products,
including any biosimilar and interchangeable biological products
licensed by the FDA under the PHS Act in a book titled “Lists
of Licensed Biological Products with Reference Product Exclusivity
and Biosimilarity or Interchangeability Evaluations” (the
“Purple Book”). The Purple Book includes the date a
biological product was licensed under 351(a) of the PHS Act and
whether the FDA evaluated the biological product for reference
product exclusivity. If the FDA has determined that a biological
product is protected by a period of reference product exclusivity,
the list will identify the date of first licensure and the date
that reference product exclusivity (including any attached
pediatric exclusivity) will expire. The list will not identify
periods of orphan exclusivity and their expiration dates for
biological products as those dates are available at the searchable
database for Orphan Designated and/or Approved Products. The Purple
Book also identifies whether a biological product licensed under
section 351(k) of the PHS Act has been determined by the FDA to be
biosimilar to or interchangeable with a reference biological
product. Biosimilar and interchangeable biological products
licensed under section 351(k) of the PHS Act are listed under the
reference product to which biosimilarity or interchangeability was
demonstrated.
Advertising and Promotion
Once
an NDA or BLA is approved, a product will be subject to certain
post-approval requirements. For instance, the FDA closely regulates
the post-approval marketing and promotion of drugs, including
standards and regulations for direct-to-consumer advertising,
off-label promotion, industry-sponsored scientific and educational
activities and promotional activities involving the
internet.
Drugs
may be marketed only for the approved indications and in accordance
with the provisions of the approved labeling. Changes to some of
the conditions established in an approved application, including
changes in indications, labeling, or manufacturing processes or
facilities, require submission and FDA approval of a new NDA
or BLA or supplement to same, before the change can
be implemented. An NDA or BLA supplement for a new indication
typically requires clinical data similar to that in the original
application, and the FDA uses the same procedures and actions in
reviewing NDA and BLA supplements as it does in reviewing NDAs
and BLAs.
Adverse Event Reporting and GMP Compliance
Adverse event reporting and submission of periodic
reports is required following FDA approval of an NDA or BLA. The
FDA also may require post-marketing testing, known as Phase IV
testing, risk minimization action plans, and surveillance to
monitor the effects of an approved product, or the FDA may place
conditions on an approval that could restrict the distribution or
use of the product. In addition, quality-control, drug manufacture,
packaging, and labeling procedures must continue to conform to
current good manufacturing practices (“cGMPs”) after approval. Drug manufacturers and
certain of their subcontractors are required to register their
establishments with FDA and certain state agencies. Registration
with the FDA subjects entities to periodic unannounced inspections
by the FDA, during which the agency inspects manufacturing
facilities to assess compliance with cGMPs. Accordingly,
manufacturers must continue to expend time, money, and effort in
the areas of production and quality-control to maintain compliance
with cGMPs. Regulatory authorities may withdraw product approvals
or request product recalls if a company fails to comply with
regulatory standards, if it encounters problems following initial
marketing, or if previously unrecognized problems are subsequently
discovered.
Pediatric Information
Under the Pediatric Research Equity Act
(“PREA”), NDAs, BLAs or supplements
to the same must contain data to assess the safety and
effectiveness of the drug for the claimed indications in all
relevant pediatric subpopulations and to support dosing and
administration for each pediatric subpopulation for which the drug
is safe and effective. The FDA may grant full or partial waivers,
or deferrals, for submission of data. Unless otherwise required by
regulation, PREA does not apply to any drug for an indication for
which orphan designation has been granted.
The Best Pharmaceuticals for Children Act
(“BPCA”) provides NDA and BLA holders a
six-month extension of any exclusivity — patent or
non-patent — for a drug if certain conditions are
met. Conditions for exclusivity include the FDA’s
determination that information relating to the use of a new drug in
the pediatric population may produce health benefits in that
population, the FDA making a written request for pediatric studies,
and the applicant agreeing to perform, and reporting on, the
requested studies within the statutory timeframe. Applications
under the BPCA are treated as priority applications, with all of
the benefits that designation confers.
Foreign Regulatory Issues
Sales
of pharmaceutical products outside the United States are subject to
foreign regulatory requirements that vary widely from country to
country. Whether or not FDA approval has been obtained, approval of
a product by a comparable regulatory authority of a foreign country
must generally be obtained prior to the commencement of marketing
in that country. Although the time required to obtain such approval
may be longer or shorter than that required for FDA approval, the
requirements for FDA approval are among the most detailed in the
world.
Employees
As
of December 31, 2017, we had thirteen full-time employees, of
whom nine were employed by AzurRx SAS and located in France and
four were employed by us and located in our office in Brooklyn, New
York.
Available Information
As a public company, we are required to file our
annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, proxy statements on Schedule 14A and
other information (including any amendments) with the Securities
and Exchange Commission (the “SEC”). You may read and copy such material at
the SEC’s Public Reference Room located at 100 F Street,
N.E., Washington, D.C. 20549, on official business days during the
hours of 10:00 a.m. to 3:00 p.m. You may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. You can also find our SEC filings at the
SEC’s website at http://www.sec.gov.
Our Internet address is www.azurrx.com.
Information contained on our website is not part of this Annual
Report. Our SEC filings (including any amendments) will be made
available free of charge on www.azurrx.com,
as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC.
ITEM 1A. RISK FACTORS
We
are subject to various risks that could have a negative effect on
us and our financial condition. These risks could cause actual
operating results to differ from those expressed in certain
“forward looking statements” contained in this Annual
Report as well as in other communications.
Risks Related to Our Business and Industry
We are a development stage company and have a limited operating
history upon which to base an investment decision.
We
are a clinical development stage biopharmaceutical company. Since
inception, we have engaged primarily in research and development
activities, have not generated any revenues from product sales and
have incurred significant net losses. We have not demonstrated our
ability to perform the functions necessary for the successful
commercialization of any products. The successful commercialization
of any of our products will require us to perform a variety of
functions, including:
●
continuing
to undertake pre-clinical development and clinical
trials;
●
participating
in regulatory approval processes;
●
formulating
and manufacturing products; and
●
conducting
sales and marketing activities.
Our
operations to date have been limited to organizing and staffing,
acquiring, developing and securing the proprietary rights for, and
undertaking pre-clinical development and clinical trials of our
product candidates. These operations provide a limited basis for
our stockholders and prospective investors to assess our ability to
complete development of or commercialize any products and the
advisability of investing in our securities.
We
have incurred significant operating losses and negative cash flows
from operations since inception, had negative working capital at
December 31, 2017 of approximately $527,000 and had an accumulated
deficit at December 31, 2017 of approximately $33,983,000. We
believe that our cash on hand, including the approximately
$2,200,000 in net proceeds received in 2018 from the exercise of
warrants, will sustain operations until September 2018. 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.
Our product candidates are at an early stage of development and may
not be successfully developed or commercialized.
Our
two product candidates, MS1819 and AZX1101, are in the early stages
of development and will require substantial further capital
expenditures, development, testing, and regulatory clearances prior
to commercialization. The development and regulatory approval
process takes several years and it is not likely that either of
such products, even if successfully developed and approved by the
FDA or any comparable foreign regulatory authority, would be
commercially available for at least four to five years or more. Of
the large number of drugs in development, only a small percentage
successfully completes the regulatory approval process and is
commercialized. Accordingly, even if we are able to obtain the
requisite financing to fund our development programs, we cannot
assure you that our product candidates will be successfully
developed or commercialized. Our failure to develop, manufacture or
receive regulatory approval for or successfully commercialize any
of our product candidates, could result in the failure of our
business and a loss of all of your investment in our
company.
Any product candidates we advance into clinical development are
subject to extensive regulation, which can be costly and time
consuming, cause unanticipated delays or prevent the receipt of the
required approvals to commercialize our product
candidates.
The
clinical development, manufacturing, labeling, storage,
record-keeping, advertising, promotion, import, export, marketing
and distribution of our product candidates are subject to extensive
regulation by the FDA in the United States and by comparable health
authorities in foreign markets, including Health Canada’s
Therapeutic Products Directorate, or the TPD, and the European
Medicines Agency, or the EMA. In the United States, we are not
permitted to market our product candidates until we receive
approval of an NDA or BLA from the FDA. The process of obtaining
such approval is expensive, often takes many years and can vary
substantially based upon the type, complexity and novelty of the
products involved. In addition to the significant clinical testing
requirements, our ability to obtain marketing approval for these
products depends on obtaining the final results of required
non-clinical testing, including characterization of the
manufactured components of our product candidates and validation of
our manufacturing processes. The FDA may determine that our product
manufacturing processes, testing procedures or facilities are
insufficient to justify approval. Approval policies or regulations
may change and the FDA has substantial discretion in the
pharmaceutical approval process, including the ability to delay,
limit or deny approval of a product candidate for many reasons.
Despite the time and expense invested in clinical development of
product candidates, regulatory approval is never
guaranteed.
The
FDA, the TPD and/or the EMA can delay, limit or deny approval of a
product candidate for many reasons, including, but not limited
to:
●
disagreement
with the design or implementation of our clinical
trials;
●
failure
to demonstrate to their satisfaction that a product candidate is
safe and effective for any indication;
●
failure
to accept clinical data from trials which are conducted outside
their jurisdiction;
●
the
results of clinical trials may not meet the level of statistical
significance required for approval;
●
we
may be unable to demonstrate that a product candidate’s
clinical and other benefits outweigh its safety risks;
●
such
agencies may disagree with our interpretation of data from
preclinical studies or clinical trials;
●
failure
to approve the manufacturing processes or facilities of third-party
manufacturers with which we or our collaborators contract for
clinical and commercial supplies; or
●
changes
in the approval policies or regulations of such agencies may
significantly change in a manner rendering our clinical data
insufficient for approval.
Any
delay in obtaining, or inability to obtain, applicable regulatory
approvals would prevent us from commercializing our product
candidates.
If we encounter difficulties enrolling patients in our clinical
trials, our clinical development activities could be delayed or
otherwise adversely affected.
We
may experience difficulties in patient enrollment in our clinical
trials for a variety of reasons. The timely completion of
clinical trials in accordance with their protocols depends, among
other things, on our ability to enroll a sufficient number of
patients who remain in the trial until its conclusion. The
enrollment of patients depends on many factors,
including:
●
the
patient eligibility criteria defined in the protocol;
●
the
size of the patient population;
●
the
proximity and availability of clinical trial sites for prospective
patients;
●
the
design of the trial;
●
our
ability to recruit clinical trial investigators with the
appropriate competencies and experience;
●
our
ability to obtain and maintain patient consents; and
●
the
risk that patients enrolled in clinical trials will drop out of the
trials before completion.
Our
clinical trials will compete with other clinical trials for product
candidates that are in the same therapeutic areas as our product
candidates. This competition will reduce the number and types
of patients and qualified clinical investigators available to us,
because some patients who might have opted to enroll in our trials
may instead opt to enroll in a trial being conducted by one of our
competitors or clinical trial sites may not allow us to conduct our
clinical trial at such site if competing trials are already being
conducted there. Since the number of qualified clinical
investigators is limited, we expect to conduct some of our clinical
trials at the same clinical trial sites that some of our
competitors use, which will reduce the number of patients who are
available for our clinical trials in such clinical trial
site. We may also encounter difficulties finding a clinical
trial site at which to conduct our trials.
Delays
in patient enrollment may result in increased costs or may affect
the timing or outcome of our planned clinical trials, which could
prevent completion of these clinical trials and adversely affect
our ability to advance the development of our product
candidates.
Because the results of preclinical studies and early clinical
trials are not necessarily predictive of future results, any
product candidate we advance into clinical trials may not have
favorable results in later clinical trials, if any, or receive
regulatory approval.
Pharmaceutical
development has inherent risk. We will be required to demonstrate
through well-controlled clinical trials that our product candidates
are effective with a favorable benefit-risk profile for use in
their target indications before we can seek regulatory approvals
for their commercial sale. Our principal product candidate, MS1819
has only completed a phase Ib clinical trial, while our second
product, AZX1101 has only been tested in a pre-clinical
setting. Success in pre-clinical studies or early clinical
trials does not mean that later clinical trials will be successful,
as product candidates in later-stage clinical trials may fail to
demonstrate sufficient safety or efficacy despite having progressed
through initial clinical testing. We also may need to conduct
additional clinical trials that are not currently anticipated.
Companies frequently suffer significant setbacks in advanced
clinical trials, even after earlier clinical trials have shown
promising results.
Any product candidate we advance into clinical trials may cause
unacceptable adverse events or have other properties that may delay
or prevent their regulatory approval or commercialization or limit
their commercial potential.
Unacceptable
adverse events caused by any of our product candidates in clinical
trials could cause us or regulatory authorities to interrupt, delay
or halt clinical trials and could result in the denial of
regulatory approval by the FDA or other regulatory authorities for
any or all targeted indications and markets. This, in turn, could
prevent us from commercializing the affected product candidate and
generating revenues from its sale. We have not yet completed
testing of any of our product candidates for the treatment of the
indications for which we intend to seek product approval in humans,
and we currently do not know the extent of adverse events, if any,
that will be observed in patients who receive any of our product
candidates. If any of our product candidates cause
unacceptable adverse events in clinical trials, we may not be able
to obtain regulatory approval or commercialize such product or, if
such product candidate is approved for marketing, future adverse
events could cause us to withdraw such product from the
market.
Delays in the commencement or completion of our clinical trials
could result in increased costs and delay our ability to pursue
regulatory approval.
Although
we commenced a Phase II clinical trial for MS1819 in late-2016, and
currently anticipate completing the preclinical work necessary to
file an IND for AZX1101 by the end of 2018 the commencement of
clinical trials can be delayed for a variety of reasons, including
delays in:
●
obtaining
regulatory clearance to commence a clinical trial;
●
identifying,
recruiting and training suitable clinical
investigators;
●
reaching agreement on acceptable terms with
prospective clinical research organizations
(“CROs”) and trial sites, the terms of which can
be subject to extensive negotiation, may be subject to modification
from time to time and may vary significantly among different CROs
and trial sites;
●
obtaining
sufficient quantities of a product candidate for use in clinical
trials;
●
obtaining Investigator Review Board
(“IRB”) or ethics committee approval to conduct a
clinical trial at a prospective site;
●
identifying,
recruiting and enrolling patients to participate in a clinical
trial;
●
retaining
patients who have initiated a clinical trial but may withdraw due
to adverse events from the therapy, insufficient efficacy, fatigue
with the clinical trial process or personal issues;
and
●
availability
of funds.
Any delays in the commencement of our clinical
trials will delay our ability to pursue regulatory approval for our
product candidates. In addition, many of the factors that cause, or
lead to, a delay in the commencement of clinical trials may also
ultimately lead to the denial of regulatory approval of a product
candidate.
We may be required to suspend, repeat or terminate our clinical
trials if they are not conducted in accordance with regulatory
requirements, the results are negative or inconclusive or the
trials are not well designed.
Regulatory
agencies, IRBs or data safety monitoring boards may at any time
recommend the temporary or permanent discontinuation of our
clinical trials or request that we cease using investigators in the
clinical trials if they believe that the clinical trials are not
being conducted in accordance with applicable regulatory
requirements, or that they present an unacceptable safety risk to
participants. Clinical trials must be conducted in accordance
with current cGCPs or other applicable foreign government
guidelines governing the design, safety monitoring, quality
assurance and ethical considerations associated with clinical
studies. Clinical trials are subject to oversight by the FDA,
other foreign governmental agencies and IRBs at the study sites
where the clinical trials are conducted. In addition, clinical
trials must be conducted with product candidates produced in
accordance with applicable cGMPs, which are the FDA’s
regulations governing the design, monitoring and control of
manufacturing processes and facilities. Clinical trials may be
suspended by the FDA, other foreign governmental agencies, or us
for various reasons, including:
●
deficiencies
in the conduct of the clinical trials, including failure to conduct
the clinical trial in accordance with regulatory requirements or
clinical protocols;
●
deficiencies
in the clinical trial operations or trial sites;
●
the
product candidate may have unforeseen adverse side
effects;
●
deficiencies
in the trial design necessary to demonstrate efficacy;
●
fatalities
or other adverse events arising during a clinical trial due to
medical problems that may not be related to clinical trial
treatments;
●
the
product candidate may not appear to be more effective than current
therapies; or
●
the
quality or stability of the product candidate may fall below
acceptable standards.
If
we elect or are forced to suspend or terminate a clinical trial of
any other of our product candidates, the commercial prospects for
that product will be harmed and our ability to generate product
revenue from that product may be delayed or
eliminated. Furthermore, any of these events could prevent us
or our partners from achieving or maintaining market acceptance of
the affected product and could substantially increase the costs of
commercializing our product candidates and impair our ability to
generate revenue from the commercialization of these products
either by us or by our collaboration partners.
Because we licensed our product candidates from third parties, any
dispute with our licensors or non-performance by us or by our
licensors may adversely affect our ability to develop and
commercialize the applicable product candidates.
Some
of our product candidates, including related intellectual property
rights, were licensed from third parties. Under the terms of our
license agreements, the licensors generally have the right to
terminate such agreements in the event of a material breach by us.
Our licenses require us to make annual, milestone or other payments
prior to commercialization of any product and our ability to make
these payments depends on our ability to generate cash in the
future. These agreements generally require us to use diligent and
reasonable efforts to develop and commercialize the product
candidate. In the case of MS1819, Mayoly licenses MS1819 from a
third party and, accordingly, our rights to MS1819 are also subject
to Mayoly’s performance of its obligations to its licensor,
any breach of which we may be required to remedy in order to
preserve our rights.
If
there is any conflict, dispute, disagreement or issue of
non-performance between us and our licensing partner regarding our
rights or obligations under the license agreement, including any
conflict, dispute or disagreement arising from our failure to
satisfy payment obligations under such agreement, our ability to
develop and commercialize the affected product candidate may be
adversely affected. Similarly, any such dispute or issue of
non-performance between Mayoly and its licensor that we are unable
to cure could adversely affect our ability to develop and
commercialize MS1819. Any loss of our rights under our license
agreements could delay or completely terminate our product
development efforts for the affected product
candidate.
We may form or seek strategic alliances or enter into additional
licensing arrangements in the future, and we may not realize the
benefits of such alliances or licensing arrangements.
From
time to time, we may form or seek strategic alliances, create joint
ventures or collaborations or enter into additional licensing
arrangements with third parties that we believe will complement or
augment our development and commercialization efforts with respect
to our product candidates and any future product candidates that we
may develop. Any of these relationships may require us to
incur non-recurring and other charges, increase our near and
long-term expenditures, issue securities that dilute our existing
stockholders or disrupt our management and business. These
relationships also may result in a delay in the development of our
product candidates if we become dependent upon the other party and
such other party does not prioritize the development of our product
candidates relative to its other development activities. In
addition, we face significant competition in seeking appropriate
strategic partners and the negotiation process is time-consuming
and complex. Moreover, we may not be successful in our efforts
to establish a strategic partnership or other alternative
arrangements for our product candidates because they may be deemed
to be at too early of a stage of development for collaborative
effort and third parties may not view our product candidates as
having the requisite potential to demonstrate safety and
efficacy. If we license products or businesses, we may not be
able to realize the benefit of such transactions if we are unable
to successfully integrate them with our existing operations and
company culture. We cannot be certain that, following a
strategic transaction or license, we will achieve the revenue or
specific net income that justifies such transaction. We rely
completely on third parties to manufacture our preclinical and
clinical pharmaceutical supplies and expect to continue to rely on
third parties to produce commercial supplies of any approved
product candidate, and our dependence on third party suppliers
could adversely impact our business.
We rely completely on third parties to manufacture our preclinical
and clinical pharmaceutical supplies and expect to continue to rely
on third parties to produce commercial supplies of any approved
product candidate, and our dependence on third party suppliers
could adversely impact our business.
The
proprietary yeast strain used to manufacture MS1819 API is located
in a storage facility maintained by Charles River Laboratories in
Malvern, Pennsylvania, and such manufacturing is conducted by DSM
Capua SPA in Italy. We are completely dependent on these third
parties for product supply and our MS1819 development programs
would be adversely affected by a significant interruption in our
ability to receive such materials. Furthermore, our
third-party suppliers will be required to maintain compliance with
cGMPs and will be subject to inspections by the FDA or comparable
regulatory authorities in other jurisdictions to confirm such
compliance. In the event that the FDA or such other authorities
determine that our third-party suppliers have not complied with
cGMP, our clinical trials could be terminated or subjected to a
clinical hold until such time as we are able to obtain appropriate
replacement material. Any delay, interruption or other issues
that arise in the manufacture, packaging, or storage of our
products as a result of a failure of the facilities or operations
of our third-party suppliers to pass any regulatory agency
inspection could significantly impair our ability to develop and
commercialize our products.
We
do not expect to have the resources or capacity to commercially
manufacture any of our proposed products, if approved, and will
likely continue to be dependent upon third party manufacturers. Our
dependence on third parties to manufacture and supply us with
clinical trial materials and any approved products may adversely
affect our ability to develop and commercialize our products on a
timely basis or at all.
We rely on third parties to conduct our clinical trials. If these
third parties do not meet our deadlines or otherwise conduct the
trials as required, our clinical development programs could be
delayed or unsuccessful and we may not be able to obtain regulatory
approval for or commercialize our product candidates when expected
or at all.
We
do not have the ability to conduct all aspects of our preclinical
testing or clinical trials ourselves. We intend to use CROs to
conduct our planned clinical trials and will rely upon such CROs,
as well as medical institutions, clinical investigators and
consultants, to conduct our trials in accordance with our clinical
protocols. Our future CROs, investigators and other third parties
will play a significant role in the conduct of these trials and the
subsequent collection and analysis of data from the clinical
trials.
There
is no guarantee that any CROs, investigators and other third
parties upon which we rely for administration and conduct of our
clinical trials will devote adequate time and resources to such
trials or perform as contractually required. If any of these third
parties fail to meet expected deadlines, fail to adhere to our
clinical protocols or otherwise perform in a substandard manner,
our clinical trials may be extended, delayed or terminated. If any
of our clinical trial sites terminate for any reason, we may
experience the loss of follow-up information on patients enrolled
in our ongoing clinical trials unless we are able to transfer the
care of those patients to another qualified clinical trial site. In
addition, principal investigators for our clinical trials may serve
as scientific advisors or consultants to us from time to time and
receive cash or equity compensation in connection with such
services. If these relationships and any related compensation
result in perceived or actual conflicts of interest, the integrity
of the data generated at the applicable clinical trial site may be
jeopardized.
We will face intense competition and may not be able to compete
successfully.
We
operate in highly competitive segments of the biotechnology and
biopharmaceutical markets. We face competition from many different
sources, including commercial pharmaceutical and biotechnology
enterprises, academic institutions, government agencies, and
private and public research institutions. Our product candidates,
if successfully developed and approved, will compete with
established therapies, as well as new treatments that may be
introduced by our competitors. Many of our competitors have
significantly greater financial, product development, manufacturing
and marketing resources than us. Large pharmaceutical companies
have extensive experience in clinical testing and obtaining
regulatory approval for drugs. In addition, many universities and
private and public research institutes are active in cancer
research, some in direct competition with us. We also may compete
with these organizations to recruit management, scientists and
clinical development personnel. Smaller or early-stage companies
may also prove to be significant competitors, particularly through
collaborative arrangements with large and established companies.
New developments, including the development of other biological and
pharmaceutical technologies and methods of treating disease, occur
in the pharmaceutical and life sciences industries at a rapid pace.
Developments by competitors may render our product candidates
obsolete or noncompetitive. We will also face competition from
these third parties in recruiting and retaining qualified
personnel, establishing clinical trial sites and patient
registration for clinical trials and in identifying and
in-licensing new product candidates.
Our success will depend upon intellectual property, proprietary
technologies and regulatory market exclusivity periods, and we may
be unable to protect our intellectual property.
Our
success will depend, in large part, on obtaining and maintaining
patent protection and trade secret protection for our product
candidates and their formulations and uses, as well as successfully
defending these patents against third-party challenges. Under our
license agreement with Mayoly, enforcement of patents relating to
MS1819 is the responsibility of Mayoly. If we or our licensors fail
to appropriately prosecute and maintain patent protection for our
product candidates, our ability to develop and commercialize these
product candidates may be adversely affected and we may not be able
to prevent competitors from making, using and selling competing
products. This failure to properly protect the intellectual
property rights relating to these product candidates could have a
material adverse effect on our financial condition and results of
operations.
The patent application process is subject to numerous risks and
uncertainties, and there can be no assurance that we or our
partners will be successful in protecting our product candidates by
obtaining and defending patents. These risks and uncertainties
include the following:
●
patent
applications may not result in any patents being
issued;
●
patents
that may be issued or in-licensed may be challenged, invalidated,
modified, revoked, circumvented, found to be unenforceable, or
otherwise may not provide any competitive advantage;
●
our
competitors, many of which have substantially greater resources
than we or our partners and many of which have made significant
investments in competing technologies, may seek, or may already
have obtained, patents that will limit, interfere with, or
eliminate our ability to make, use, and sell our potential
products;
●
there
may be significant pressure on the United States government and
other international governmental bodies to limit the scope of
patent protection both inside and outside the United States for
disease treatments that prove successful as a matter of public
policy regarding worldwide health concerns;
●
countries
other than the United States may have patent laws less favorable to
patentees than those upheld by United States courts, allowing
foreign competitors a better opportunity to create, develop, and
market competing products; and
●
we
may be involved in lawsuits to protect or enforce our patents or
the patents of our licensors, which could be expensive, time
consuming and unsuccessful.
In
addition to patents, we and our partners also rely on trade secrets
and proprietary know-how. Although we have taken steps to protect
our trade secrets and unpatented know-how, including entering into
confidentiality agreements with third parties, and confidential
information and inventions agreements with employees, consultants
and advisors, third parties may still obtain this information or
come upon this same or similar information independently. We may
become subject to claims that we or consultants, advisors or
independent contractors that we may engage to assist us in
developing our product candidates have wrongfully or inadvertently
disclosed to us or used trade secrets or other proprietary
information of their former employers or their other
clients.
We intend to rely on market exclusivity periods that may not be or
remain available to us.
We
intend to rely on our ability to obtain and maintain a regulatory
period of market exclusivity for any of our biologic product
candidates that are successfully developed and approved for
commercialization. Although this period in the United States is
currently 12 years from the date of marketing approval, reductions
to this period have been proposed. This exclusivity period in
Europe is currently 10 years from the date of marketing
approval by the EMA. Once any regulatory period of exclusivity
expires, depending on the status of our patent coverage and the
nature of the product, we may not be able to prevent others from
marketing products that are biosimilar to or interchangeable with
our products, which would materially adversely affect
us.
If we are unable to establish sales and marketing capabilities or
fail to enter into agreements with third parties to market,
distribute and sell any products we may successfully develop, we
may not be able to effectively market and sell any such products
and generate product revenue.
We
do not currently have the infrastructure for the sales, marketing
and distribution of any of our product candidates, and must build
this infrastructure or make arrangements with third parties to
perform these functions in order to commercialize any products that
we may successfully develop. The establishment and development of a
sales force, either by us or jointly with a partner, or the
establishment of a contract sales force to market any products we
may develop will be expensive and time-consuming and could delay
any product launch. If we, or our partners, are unable to establish
sales and marketing capability or any other non-technical
capabilities necessary to commercialize any products we may
successfully develop, we will need to contract with third parties
to market and sell such products. We may not be able to establish
arrangements with third-parties on acceptable terms, if at
all.
If any product candidate that we successfully develop does not
achieve broad market acceptance among physicians, patients,
healthcare payors and the medical community, the revenues that it
generates from their sales will be limited.
Even
if our product candidates receive regulatory approval, they may not
gain market acceptance among physicians, patients, healthcare
payors and the medical community. Coverage and reimbursement of our
product candidates by third-party payors, including government
payors, generally is also necessary for commercial success. The
degree of market acceptance of any approved products will depend on
a number of factors, including:
●
the
efficacy and safety as demonstrated in clinical
trials;
●
the
clinical indications for which the product is
approved;
●
acceptance
by physicians, major operators of hospitals and clinics and
patients of the product as a safe and effective
treatment;
●
acceptance
of the product by the target population;
●
the
potential and perceived advantages of product candidates over
alternative treatments;
●
the
safety of product candidates seen in a broader patient group,
including its use outside the approved indications;
●
the
cost of treatment in relation to alternative
treatments;
●
the
availability of adequate reimbursement and pricing by third parties
and government authorities;
●
relative
convenience and ease of administration;
●
the
prevalence and severity of adverse events;
●
the
effectiveness of our sales and marketing efforts; and
●
unfavorable
publicity relating to the product.
If
any product candidate is approved but does not achieve an adequate
level of acceptance by physicians, hospitals, healthcare payors and
patients, we may not generate sufficient revenue from these
products and may not become or remain profitable.
We may incur substantial product liability or indemnification
claims relating to the clinical testing of our product
candidates.
We
face an inherent risk of product liability exposure related to the
testing of our product candidates in human clinical trials, and
claims could be brought against us if use or misuse of one of our
product candidates causes, or merely appears to have caused,
personal injury or death. While we have and intend to maintain
product liability insurance relating to our clinical trials, our
coverage may not be sufficient to cover claims that may be made
against us and we may be unable to maintain such insurance. Any
claims against us, regardless of their merit, could severely harm
our financial condition, strain our management and other resources
or destroy the prospects for commercialization of the product which
is the subject of any such claim. We are unable to predict if we
will be able to obtain or maintain product liability insurance for
any products that may be approved for marketing. Additionally, we
have entered into various agreements where we indemnify third
parties for certain claims relating to the testing and use of our
product candidates. These indemnification obligations may require
us to pay significant sums of money for claims that are covered by
these indemnifications.
If we fail to attract and retain key management and clinical
development personnel, we may be unable to successfully develop or
commercialize our product candidates.
We
are dependent on our management team and clinical development
personnel and our success will depend on their continued service,
as well as our ability to attract and retain highly qualified
personnel. In particular, the continued service of our senior
management team, including Johan M. (Thijs) Spoor, our President
and Chief Executive Officer, Maged Shenouda, our Chief Financial
Officer, and Daniel Dupret, our Chief Scientific Officer, is
critical to our success. The market for the services of qualified
personnel in the pharmaceutical industry is highly competitive. The
loss of service of any member of our senior management team or key
personnel could prevent, impair or delay the implementation of our
business plan, the successful conduct and completion of our planned
clinical trials and the commercialization of any product candidates
that we may successfully develop. We do not carry key man insurance
for any member of our senior management team.
We use
biological materials and may use hazardous materials, and any
claims relating to improper handling, storage or disposal of these
materials could be time consuming or costly.
We
may use hazardous materials, including chemicals and biological
agents and compounds, that could be dangerous to human health and
safety or the environment. Our operations also produce hazardous
waste products. Federal, state and local laws and regulations
govern the use, generation, manufacture, storage, handling and
disposal of these materials and wastes. Compliance with applicable
environmental laws and regulations may be expensive, and current or
future environmental laws and regulations may impair our product
development efforts. In addition, we cannot entirely eliminate the
risk of accidental injury or contamination from these materials or
wastes. We do not carry specific biological or hazardous waste
insurance coverage and our property and casualty and general
liability insurance policies specifically exclude coverage for
damages and fines arising from biological or hazardous waste
exposure or contamination. Accordingly, in the event of
contamination or injury, we could be held liable for damages or
penalized with fines in an amount exceeding our resources, and our
clinical trials or regulatory approvals could be
suspended.
Although
we maintain workers’ compensation insurance to cover us for
costs and expenses we may incur due to injuries to our employees
resulting from the use of hazardous materials, this insurance may
not provide adequate coverage against potential liabilities. We do
not maintain insurance for environmental liability or toxic tort
claims that may be asserted against us in connection with our
storage or disposal of biological or hazardous
materials.
In
addition, we may incur substantial costs in order to comply with
current or future environmental, health and safety laws and
regulations. These current or future laws and regulations may
impair our research, development or production efforts. Failure to
comply with these laws and regulations also may result in
substantial fines, penalties or other sanctions.
If we or our partners are sued for infringing intellectual property
rights of third parties, it will be costly and time consuming, and
an unfavorable outcome in that litigation would have a material
adverse effect on our business.
Our
success also depends upon our ability and the ability of any of our
future collaborators to develop, manufacture, market and sell our
product candidates without infringing the proprietary rights of
third parties. Numerous United States and foreign issued patents
and pending patent applications, which are owned by third parties,
exist in the fields in which we are developing products, some of
which may be directed at claims that overlap with the subject
matter of our intellectual property. Because patent applications
can take many years to issue, there may be currently pending
applications, unknown to us, which may later result in issued
patents that our product candidates or proprietary technologies may
infringe. Similarly, there may be issued patents relevant to our
product candidates of which we are not aware.
There is a substantial amount of litigation involving patent and
other intellectual property rights in the biotechnology and
biopharmaceutical industries generally. If a third party claims
that we or any of our licensors, suppliers or collaborators
infringe the third party’s intellectual property rights, we
may have to:
|
●
|
obtain
licenses, which may not be available on commercially reasonable
terms, if at all;
|
|
●
|
abandon
an infringing product candidate or redesign our products or
processes to avoid infringement;
|
|
●
|
pay
substantial damages, including the possibility of treble damages
and attorneys’ fees, if a court decides that the product or
proprietary technology at issue infringes on or violates the third
party’s rights;
|
|
●
|
pay
substantial royalties, fees and/or grant cross licenses to our
technology; and/or
|
|
●
|
defend
litigation or administrative proceedings which may be costly
whether we win or lose, and which could result in a substantial
diversion of our financial and management resources.
|
Healthcare reform and restrictions on reimbursements may limit our
financial returns.
Our
ability or the ability of our collaborators to commercialize any of
our product candidates that we successfully develop may depend, in
part, on the extent to which government health administration
authorities, private health insurers and other organizations will
reimburse consumers for the cost of these products. These third
parties are increasingly challenging both the need for and the
price of new drug products. Significant uncertainty exists as to
the reimbursement status of newly approved therapeutics. Adequate
third-party reimbursement may not be available for our product
candidates to enable us or our collaborators to maintain price
levels sufficient to realize an appropriate return on their and our
investments in research and product development.
Changes in healthcare law and implementing regulations, including
government restrictions on pricing and reimbursement, as well as
healthcare policy and other healthcare payor cost-containment
initiatives, may negatively impact our ability to generate
revenues.
The potential pricing and reimbursement environment for our drug
product candidates and any future products may change in the future
and become more challenging due to, among other reasons, policies
advanced by the current or any new presidential administration,
federal agencies, new healthcare legislation passed by Congress or
fiscal challenges faced by all levels of government health
administration authorities.
If we or any of our independent contractors, consultants,
collaborators, manufacturers, vendors or service providers fail to
comply with healthcare laws and regulations, we or they could be
subject to enforcement actions, which could result in penalties and
affect our ability to develop, market and sell our product
candidates and may harm our reputation.
We
are subject to federal, state, and foreign healthcare laws and
regulations pertaining to fraud and abuse and patients’
rights. These laws and regulations include:
●
the
U.S. federal healthcare program anti-kickback law, which prohibits,
among other things, persons and entities from soliciting, receiving
or providing remuneration, directly or indirectly, to induce either
the referral of an individual for a healthcare item or service, or
the purchasing or ordering of an item or service, for which payment
may be made under a federal healthcare program such as Medicare or
Medicaid;
●
the
U.S. federal false claims and civil monetary penalties laws, which
prohibit, among other things, individuals or entities from
knowingly presenting or causing to be presented, claims for payment
by government funded programs such as Medicare or Medicaid that are
false or fraudulent, and which may apply to us by virtue of
statements and representations made to customers or third
parties;
●
the U.S. federal Health Insurance Portability and
Accountability Act (“HIPAA”), which prohibits, among other things,
executing a scheme to defraud healthcare
programs;
●
HIPAA,
as amended by the Health Information Technology for Economic and
Clinical Health Act, or HITECH, imposes requirements relating to
the privacy, security, and transmission of individually
identifiable health information, and requires notification to
affected individuals and regulatory authorities of certain breaches
of security of individually identifiable health
information;
●
the
federal Physician Payment Sunshine Act, which requires certain
manufacturers of drugs, devices, biologics and medical supplies to
report annually to the Centers for Medicare & Medicaid
Services, or CMS, information related to payments and other
transfers of value to physicians, other healthcare providers and
teaching hospitals, and ownership and investment interests held by
physicians and other healthcare providers and their immediate
family members, which is published in a searchable form on an
annual basis; and
●
state
laws comparable to each of the above federal laws, such as, for
example, anti-kickback and false claims laws that may be broader in
scope and also apply to commercial insurers and other non-federal
payors, requirements for mandatory corporate regulatory compliance
programs, and laws relating to patient data privacy and
security.
If
our operations are found to be in violation of any such health care
laws and regulations, we may be subject to penalties, including
administrative, civil and criminal penalties, monetary damages,
disgorgement, imprisonment, the curtailment or restructuring of our
operations, loss of eligibility to obtain approvals from the FDA,
or exclusion from participation in government contracting,
healthcare reimbursement or other government programs, including
Medicare and Medicaid, any of which could adversely affect our
financial results. Although effective compliance programs can
mitigate the risk of investigation and prosecution for violations
of these laws, these risks cannot be entirely eliminated. Any
action against us for an alleged or suspected violation could cause
us to incur significant legal expenses and could divert our
management’s attention from the operation of our business,
even if our defense is successful. In addition, achieving and
sustaining compliance with applicable laws and regulations may be
costly to us in terms of money, time and resources.
We will need to grow the size of our organization, and we may
experience difficulties in managing this growth.
As
of December 31, 2017, we had thirteen employees. As our
development and commercialization plans and strategies develop, and
as we continue to transition into operating as a public company, we
expect to need additional managerial, operational, sales,
marketing, financial and other personnel. Future growth would
impose significant added responsibilities on members of management,
including:
●
identifying,
recruiting, integrating, maintaining and motivating additional
employees;
●
managing
our internal development efforts effectively, including the
clinical, FDA and international regulatory review process for our
product candidates, while complying with our contractual
obligations to contractors and other third parties;
and
●
improving
our operational, financial and management controls, reporting
systems and procedures.
Our
future financial performance and our ability to commercialize our
product candidates will depend, in part, on our ability to
effectively manage any future growth, and our management may also
have to divert a disproportionate amount of its attention away from
day-to-day activities in order to devote a substantial amount of
time to managing these growth activities.
We
currently rely, and for the foreseeable future will continue to
rely, in substantial part on certain independent organizations,
advisors and consultants to provide certain services, including
substantially all aspects of regulatory approval, clinical
management and manufacturing. There can be no assurance that
the services of independent organizations, advisors and consultants
will continue to be available to us on a timely basis when needed,
or that we can find qualified replacements. In addition, if we
are unable to effectively manage our outsourced activities or if
the quality or accuracy of the services provided by consultants is
compromised for any reason, our clinical trials may be extended,
delayed or terminated, and we may not be able to obtain regulatory
approval of our product candidates or otherwise advance our
business. There can be no assurance that we will be able to
manage our existing consultants or find other competent outside
contractors and consultants on economically reasonable terms, or at
all.
If
we are not able to effectively expand our organization by hiring
new employees and expanding our groups of consultants and
contractors, we may not be able to successfully implement the tasks
necessary to further develop and commercialize our product
candidates and, accordingly, may not achieve our research,
development and commercialization goals.
Risks Relating to our Finances, Capital Requirements and Other
Financial Matters
We are a development stage company with a history of operating
losses that are expected to continue and we are unable to predict
the extent of future losses, whether we will generate significant
revenues or whether we will achieve or sustain
profitability.
We
are a company in the development stage and our prospects must be
considered in light of the uncertainties, risks, expenses and
difficulties frequently encountered by companies in their early
stages of operations. We have generated operating losses since our
inception, including losses of approximately $11,096,000 and
$14,592,000 for the years ended December 31, 2017 and 2016,
respectively. We expect to make substantial expenditures and incur
increasing operating costs in the future and our accumulated
deficit will increase significantly as we expand development and
clinical trial activities for our product candidates. Our losses
have had, and are expected to continue to have, an adverse impact
on our working capital, total assets and stockholders’
equity. Because of the risks and uncertainties associated with
product development, we are unable to predict the extent of any
future losses, whether we will ever generate significant revenues
or if we will ever achieve or sustain profitability.
We
have incurred significant operating losses and negative cash flows
from operations since inception, had negative working capital at
December 31, 2017 of approximately $527,000 and had an accumulated
deficit at December 31, 2017 of approximately $33,983,000. We
believe that our cash on hand, including the approximately
$2,200,000 in net proceeds received in 2018 from the exercise of
warrants, will sustain operations until September 2018. 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 substantial additional funding and may be unable to
raise capital when needed, which would force us to delay, curtail
or eliminate one or more of our research and development programs
or commercialization efforts.
Our
operations have consumed substantial amounts of cash since
inception. During the years ended December 31, 2017 and 2016, we
incurred research and development expenses of approximately
$2,395,000 and $2,496,000, respectively. We expect to continue to
spend substantial amounts on product development, including
conducting clinical trials for our product candidates and
purchasing clinical trial materials from our suppliers. We believe
that our cash on hand, including the approximately $2,200,000 in
net proceeds received in 2018 from the exercise of warrants, will
sustain our operations until September 2018 and that we will
require substantial additional funds to support our continued
research and development activities, as well as the anticipated
costs of preclinical studies and clinical trials, regulatory
approvals and potential commercialization. We have based this
estimate, however, on assumptions that may prove to be wrong, and
we could spend our available financial resources much faster than
we currently expect.
Until
such time, if ever, as we can generate a sufficient amount of
product revenue and achieve profitability, we expect to seek to
finance future cash needs through equity or debt financings or
corporate collaboration and licensing arrangements. We currently
have no other commitments or agreements relating to any of these
types of transactions and we cannot be certain that additional
funding will be available on acceptable terms, or at all. If we are
unable to raise additional capital, we will have to delay, curtail
or eliminate one or more of our research and development
programs.
Raising additional funds by issuing securities or through licensing
or lending arrangements may cause dilution to our existing
stockholders, restrict our operations or require us to relinquish
proprietary rights.
To
the extent that we raise additional capital by issuing equity
securities, the share ownership of existing stockholders will be
diluted. Any future debt financing may involve covenants that
restrict our operations, including limitations on our ability to
incur liens or additional debt, pay dividends, redeem our stock,
make certain investments and engage in certain merger,
consolidation or asset sale transactions, among other restrictions.
In addition, if we raise additional funds through licensing
arrangements, it may be necessary to relinquish potentially
valuable rights to our product candidates or grant licenses on
terms that are not favorable to us.
We have certain debentures outstanding, in the total amount,
including accrued interest, of $387,200, which debentures mature on
July 11, 2018. If we are unable to pay the debentures when due, or
otherwise restructure the debentures, we will be in
default.
During the quarter ended June 30, 2017, we issued
certain debentures, the principal and original issue discount of
which is $1,120,000. The holder has converted $732,799 of these
debentures into 189,256 shares of the Company’s Common Stock.
The debentures are due on July 11, 2018 (the
“Maturity
Date”). In
the event we do not have the cash resources to pay the debentures
when due, such debentures will be in default. As a result, our
business, financial condition and future prospects could be
negatively impacted.
Risks Associated with our Capital Stock
The limited public market for our securities may adversely affect
an investor’s ability to liquidate an investment in
us.
Although
our Common Stock is currently listed on the NASDAQ Capital Market,
there is limited trading activity. We can give no assurance
that an active market will develop, or if developed, that it will
be sustained. If an investor acquires shares of our Common
Stock, the investor may not be able to liquidate our shares should
there be a need or desire to do so.
The market price of our Common Stock may be volatile and may
fluctuate in a way that is disproportionate to our operating
performance.
Our stock price may experience substantial
volatility as a result of a number of factors,
including:
●
sales
or potential sales of substantial amounts of our Common
Stock;
●
delay
or failure in initiating or completing pre-clinical or clinical
trials or unsatisfactory results of these trials;
●
announcements
about us or about our competitors, including clinical trial
results, regulatory approvals or new product
introductions;
●
developments
concerning our licensors or product manufacturers;
●
litigation
and other developments relating to our patents or other proprietary
rights or those of our competitors;
●
conditions
in the pharmaceutical or biotechnology industries;
●
governmental
regulation and legislation;
●
variations
in our anticipated or actual operating results;
●
change
in securities analysts’ estimates of our performance, or our
failure to meet analysts’ expectations; foreign currency
values and fluctuations; and
●
overall
economic conditions.
Many
of these factors are beyond our control. The stock markets in
general, and the market for pharmaceutical and biotechnological
companies in particular, have historically experienced extreme
price and volume fluctuations. These fluctuations often have been
unrelated or disproportionate to the operating performance of these
companies. These broad market and industry factors could reduce the
market price of our Common Stock, regardless of our actual
operating performance.
We have never paid and do not intend to pay cash dividends. As
a result, capital appreciation, if any, will be your sole source of
gain.
We
have never paid cash dividends on any of our capital stock and we
currently intend to retain future earnings, if any, to fund the
development and growth of our business. In addition, the terms
of existing and future debt agreements may preclude us from paying
dividends. As a result, capital appreciation, if any, of our
Common Stock will be your sole source of gain for the foreseeable
future.
Provisions in our restated certificate of incorporation, our
restated by-laws and Delaware law might discourage, delay or
prevent a change in control of our company or changes in our
management and, therefore, depress the trading price of our Common
Stock.
Provisions
of our restated certificate of incorporation, our restated by-laws
and Delaware law may have the effect of deterring unsolicited
takeovers or delaying or preventing a change in control of our
company or changes in our management, including transactions in
which our stockholders might otherwise receive a premium for their
shares over then current market prices. In addition, these
provisions may limit the ability of stockholders to approve
transactions that they may deem to be in their best interests.
These provisions include:
●
the
inability of stockholders to call special meetings;
and
●
the
ability of our board of directors to designate the terms of and
issue new series of preferred stock without stockholder approval,
which could include the right to approve an acquisition or other
change in our control or could be used to institute a rights plan,
also known as a poison pill, that would work to dilute the stock
ownership of a potential hostile acquirer, likely preventing
acquisitions that have not been approved by our board of
directors.
In
addition, Section 203 of the Delaware General Corporation Law
prohibits a publicly-held Delaware corporation from engaging in a
business combination with an interested stockholder, generally a
person which together with its affiliates owns, or within the last
three years, has owned 15% of our voting stock, for a period of
three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination
is approved in a prescribed manner.
The
existence of the foregoing provisions and anti-takeover measures
could limit the price that investors might be willing to pay in the
future for shares of our Common Stock. They could also deter
potential acquirers of our company, thereby reducing the likelihood
that you could receive a premium for your Common Stock in an
acquisition.
We are eligible to be treated as an “emerging growth
company,” as defined in the JOBS Act, and we cannot be
certain if the reduced disclosure requirements applicable to
emerging growth companies will make our Common Stock less
attractive to investors.
We are an “emerging growth company,”
as defined in the Jumpstart Our Business Startups Act of 2012 (the
“JOBS
Act”). For as long as we
continue to be an emerging growth company, we may take advantage of
exemptions from various reporting requirements that are applicable
to other public companies that are not emerging growth companies,
including (i) not being required to comply with the auditor
attestation requirements of Section 404 of the Sarbanes-Oxley Act,
(ii) reduced disclosure obligations regarding executive
compensation in our periodic reports and proxy statements, and
(iii) exemptions from the requirements of holding a nonbinding
advisory vote on executive compensation and stockholder approval of
any golden parachute payments not previously approved. We could be
an emerging growth company for up to five years, although
circumstances could cause us to lose that status earlier, including
if the market value of our Common Stock held by non-affiliates
exceeds $700.0 million as of any June 30 before that time
or if we have total annual gross revenue of $1.0 billion or more
during any fiscal year before that time, after which, in each case,
we would no longer be an emerging growth company as of the
following December 31 or, if we issue more than $1.0 billion in
non-convertible debt during any three-year period before that time,
we would cease to be an emerging growth company
immediately.
Under
the JOBS Act, emerging growth companies can also delay adopting new
or revised accounting standards until such time as those standards
apply to private companies. We have irrevocably elected not to
avail ourselves of this exemption from new or revised accounting
standards and, therefore, will be subject to the same new or
revised accounting standards as other public companies that are not
emerging growth companies.
If securities or industry analysts do not publish research or
reports about our business, if they adversely change their
recommendations regarding our shares or if our results of
operations do not meet their expectations, our share price and
trading volume could decline.
The
trading market for our shares is influenced by the research and
reports that industry or securities analysts publish about us or
our business. We do not have any control over these analysts. If
one or more of these analysts cease coverage of our company or fail
to publish reports on us regularly, we could lose visibility in the
financial markets, which in turn could cause our share price or
trading volume to decline. Moreover, if one or more of the analysts
who cover us downgrade our stock, or if our results of operations
do not meet their expectations, our share price could
decline.
ITEM 1B. UNRESOLVED STAFF
COMMENTS
None.
ITEM 2. PROPERTIES
Facilities
Our
executive offices are located in approximately 687 square feet of
office space at 760 Parkside Avenue, Downstate Biotechnology
Incubator, Suite 304, Brooklyn, NY 11226 that we occupy under a
lease expiring on December 31, 2018 with the option for
multiple year renewals. The operations of AzurRx SAS are
conducted at approximately 4,520 square feet of office space
located at 290 chemin de Saint Dionisy, Jardin des Entreprises,
30980 Langlade, France, that we occupy under a nine-year lease
expiring in December 24, 2020.
ITEM 3. LEGAL
PROCEEDINGS
As
of the date hereof, we know of no material, existing or pending
legal proceedings against us, nor are we the plaintiff in any
material proceedings or pending litigation. There are no
proceedings in which any of our directors, executive officers or
affiliates, or any registered or beneficial shareholder, is an
adverse party or has a material interest adverse to our
interest. From time to time, we may be subject to various
claims, legal actions and regulatory proceedings arising in the
ordinary course of business.
ITEM 4. MINE SAFETY
DISCLOSURES
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Our
Common Stock is listed on the NASDAQ Capital Market, or NASDAQ,
under the symbol “AZRX.”
The
following table sets forth high and low sales prices for our Common
Stock for the calendar quarter and year indicated as reported by
NASDAQ. These prices represent quotations between dealers without
adjustment for retail markup, markdown, or commission and may not
represent actual transactions. Our Common Stock began trading on
NASDAQ on October 11, 2016, and the following table reflects the
high and low sales prices for our Common Stock subsequent to that
date:
|
|
High
|
Low
|
|
Fiscal Year Ending December 31, 2017
|
|
|
|
First
quarter ending March 31, 2017
|
$5.00
|
$3.44
|
|
Second
quarter ending June 30, 2017
|
4.20
|
3.25
|
|
Third
quarter ending September 30, 2017
|
5.25
|
3.07
|
|
Fourth
quarter ending December 31, 2017
|
3.98
|
2.40
|
|
|
|
|
|
Fiscal Year Ending December 31, 2016
|
|
|
|
Fourth
quarter ending December 31, 2016
|
5.48
|
3.96
|
Holders
At
March 15, 2018, there were 12,572,395 shares of our Common
Stock outstanding and approximately 123 shareholders of
record.
Dividends
We did not declare any dividends on our Common Stock for the years
ended December 31, 2017 and 2016. Our board of directors does not
intend to distribute dividends in the future. Instead, we
plan to retain any earnings to finance the development and
expansion of our business. The declaration, payment and amount
of any future dividends will be made at the discretion of the board
of directors, and will depend upon, among other things, the results
of our operations, cash flows and financial condition, operating
and capital requirements, and other factors as the board of
directors considers relevant. There is no assurance that future
dividends will be paid, and if dividends are paid, there is no
assurance with respect to the amount of any such
dividend.
Our board of directors is empowered, without stockholder approval,
to issue shares of preferred stock with dividend, liquidation,
redemption, voting or other rights which could adversely affect the
voting power or other rights of the holders of our Common Stock. In
addition, the preferred stock could be utilized as a method of
discouraging, delaying or preventing a change in control of us.
Although we do not currently intend to issue any shares of
preferred stock, we cannot assure you that we will not do so in the
future.
Securities Authorized for Issuance Under Equity Compensation
Plans
The
following table provides information as of December 31, 2017
regarding equity compensation plans approved by our security
holders and equity compensation plans that have not been approved
by our security holders:
|
Plan category
|
Number of securities to be issued upon exercise of outstanding
options, warrants and rights
|
Weighted-average exercise price of outstanding options,
warrants and rights
|
Number of securities remaining available for future issuance under
equity compensation plans (excluding securities reflected in column
(a))
|
|
|
(a)
|
(b)
|
(c)
|
|
Equity
compensation plans approved by security holders
|
545,000
|
$4.05
|
963,553
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
|
-
|
-
|
-
|
|
|
|
|
|
|
Total
|
545,000
|
$4.05
|
963,553
|
Transfer Agent
The
transfer agent for our Common Stock is Colonial Stock Transfer, 66
Exchange Place, 1st Floor, Salt Lake City, Utah 84111, Tel: (801)
355-5740.
ITEM 6. SELECTED FINANCIAL DATA
As
an “emerging growth company” as defined by the rules
and regulations of the SEC, we are not required to provide this
information.
ITEM 7. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion and analysis in
conjunction with our financial statements, including the notes
thereto contained in this Annual Report. This discussion contains
forward-looking statements that involve risks, uncertainties and
assumptions. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of a
variety of certain factors, including those set forth under
“Risk Factors Associated with Our Business” and
elsewhere in this Annual Report.
Critical Accounting Policies and Estimates
This Management's Discussion and Analysis of
Financial Condition and Results of Operations is based on our
financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America (“U.S. GAAP”). The preparation of financial
statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements
and the reported amount of revenues and expenses during the
reporting period. In our consolidated financial statements,
estimates are used for, but not limited to, valuation of financial
instruments and intangible assets, fair value of long-lived assets
and contingent consideration, deferred taxes and valuation
allowance, and the depreciable lives of long-lived
assets.
On
an ongoing basis, we evaluate these estimates and assumptions,
including those described below. We base our estimates on
historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. These estimates
and assumptions form the basis for making judgments about the
carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results could differ from
those estimates. Due to the estimation processes involved, the
following summarized accounting policies and their application are
considered to be critical to understanding our business operations,
financial condition and operating results.
Intangible Assets
Our
definite-lived intangible assets have a carrying value of
approximately $1,346,000 and $1,836,000, at December 31, 2017 and
2016, respectively. These assets include in-process research and
development and license agreements. These intangible assets were
recorded at historical cost and are stated net of
accumulated amortization.
The in-process research and development and licenses are amortized
over their remaining estimated useful lives, ranging from 5 to
12 years, based on the straight-line method. The estimated
useful lives directly impact the amount of amortization expense
recorded for these assets on a quarterly and annual
basis.
In
addition, we test for impairment of definite-lived intangible
assets when events or circumstances indicate that the carrying
value of the assets may not be recoverable. Judgment is used in
determining when these events and circumstances arise. If we
determine that the carrying value of the assets may not be
recoverable, judgment and estimates are used to assess the fair
value of the assets and to determine the amount of any impairment
loss. No events or circumstances arose in the years ended
December 31, 2017 and 2016 that would indicate that the carrying
value of any of our definite-lived intangible assets may not be
recoverable.
Goodwill
Goodwill
relates to the acquisition of ProteaBio Europe during 2014 and
represents the excess of the total purchase consideration over the
fair value of acquired assets and assumed liabilities, using the
purchase method of accounting. Goodwill is not amortized but is
subject to periodic review for impairment. As a result, the amount
of goodwill is directly impacted by the estimates of the fair
values of the assets acquired and liabilities assumed.
In
addition, goodwill will be reviewed annually, and whenever events
or changes in circumstances indicate that the carrying amount of
the goodwill might not be recoverable. Judgment is used in
determining when these events and circumstances arise. We perform
our review of goodwill on our one reporting unit. If we determine
that the carrying value of the assets may not be recoverable,
judgment and estimates are used to assess the fair value of the
assets and to determine the amount of any impairment
loss.
The
carrying value of goodwill at December 31, 2017 and 2016 was
approximately $2,016,000 and $1,768,000, respectively. If actual
results are not consistent with our estimates or assumptions, we
may be exposed to an impairment charge that could be
material.
Income Taxes
We
use the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax
rates and laws that are expected to be in effect when the
differences are expected to reverse. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
the period that such tax rate changes are enacted. The measurement
of a deferred tax asset is reduced, if necessary, by a valuation
allowance if it is more likely than not that some portion or all of
the deferred tax asset will not be realized.
We
use a recognition threshold and a measurement attribute for
the financial statement recognition and measurement of tax
positions taken or expected to be taken in a tax return. For those
benefits to be recognized, a tax position must be
more-likely-than-not to be sustained upon examination by taxing
authorities. We have not identified any uncertain income tax
positions that could have a material impact to the consolidated
financial statements. We are subject to taxation in various U.S.
and foreign jurisdictions and remain subject to examination by
taxing jurisdictions for the calendar year 2014 and all subsequent
periods due to the availability of net operating loss
carryforwards. To the extent we prevail in matters for which a
liability has been established or are required to pay amounts in
excess of our established liability, our effective income tax rate
in a given financial statement period could be materially affected.
An unfavorable tax settlement generally would require use of our
cash and may result in an increase in our effective income tax rate
in the period of resolution. A favorable tax settlement may reduce
our effective income tax rate and would be recognized in the period
of resolution.
Our
effective income tax rate may be affected by changes in tax
law, our level of earnings, and the results of tax
audits.
Although
we believe that the judgments and estimates discussed herein are
reasonable, actual results could differ, and we may be exposed to
losses or gains that could be material.
Jumpstart Our Business Startups Act of 2012
On
April 5, 2012, the JOBS Act was enacted. The JOBS Act provides
that an “emerging growth company” can take advantage of
the extended transition period provided in Section 7(a)(2)(B)
of the Securities Act for complying with new or revised accounting
standards.
General
To date, we have not generated any revenues from
operations and at December 31, 2017, we had an accumulated deficit
of approximately $33,994,000, primarily as a result of research and
development (“R&D”) expenses and general and administrative
(“G&A”) expenses. While in the future we may
generate revenue from a variety of sources, including license fees,
research and development payments in connection with strategic
partnerships and/or government grants, our product candidates are
at an early stage of development and may never be successfully
developed or commercialized. Accordingly, we expect to continue to
incur substantial losses from operations for the foreseeable future
and there can be no assurance that we will ever generate
significant revenues or net income.
R&D Expense
Conducting
R&D is central to our business. R&D expense consists
primarily of:
●
employee-related
expense, which include salaries and benefits, and rent
expense;
●
license
fees and annual payments related to in-licensed products and
intellectual property;
●
expenses
incurred under agreements with clinical research organizations,
investigative sites and consultants that conduct or provide other
services relating to our clinical trials and a substantial portion
of our preclinical activities;
●
the
cost of acquiring clinical trial materials from third party
manufacturers; and
●
costs
associated with non-clinical activities, patent filings and
regulatory filings.
We
expect to continue to incur substantial expense related to our
R&D activities for the foreseeable future as we continue
product development. Since product candidates in later stages of
clinical development generally have higher development costs than
those in earlier stages of clinical development, primarily due to
the increased size and duration of later stage clinical trials, we
expect that our R&D expense will increase in the future. In
addition, if our product development efforts are successful, we
expect to incur substantial costs to prepare for potential
commercialization of any late-stage product candidates and, in the
event one or more of these product candidates receive regulatory
approval, to fund the launch of the product.
G&A Expense
G&A
expense consists principally of personnel-related costs,
professional fees for legal, consulting and audit services, rent
and other general operating expenses not otherwise included in
R&D. We anticipate G&A expense will increase in future
periods, reflecting continued and increasing costs associated
with:
●
support
of our expanded R&D activities;
●
an
expanding infrastructure and increased professional fees and other
costs associated with the compliance with the Exchange Act, the
Sarbanes-Oxley Act and stock exchange regulatory requirements and
compliance; and
●
business
development and financing activities.
Liquidity and Capital Resources
We
have experienced net losses and negative cash flows from operations
since our inception. As of December 31, 2017, we had cash of
approximately $573,000, negative working capital of approximately
$527,000, and had sustained cumulative losses attributable to
common stockholders of approximately $33,983,000. We believe that
our cash on hand, including the approximately $2,200,000 in net
proceeds received in 2018 from the exercise of warrants, will
sustain operations until September 2018. We are dependent on
obtaining, and are continuing to pursue, the necessary funding from
outside sources, including obtaining additional funding from the
sale of securities in order to continue our operations. Without
adequate funding, we may not be able to meet our obligations. We
believe these conditions raise substantial doubt about our ability
to continue as a going concern.
We have funded our operations to date primarily
through the completion of our initial public offering
(“IPO”), the issuance of debt and convertible
debt securities, as well as the issuance of Common Stock. The debt
was issued through short-term 8% convertible promissory notes,
original issue discounted convertible notes (the
“OID
Notes”), and the issuance
of the Debentures to LPC.
On
October 14, 2016, we completed an IPO of 960,000 shares of our
Common Stock at an initial public offering price of $5.50 per share
and received gross proceeds of $5,280,000. We incurred total
expense of approximately $1,774,000 in connection with the IPO,
resulting in net offering proceeds of $3,506,000.
During the quarter ended June 30, 2017, we issued
a 12% Senior Secured Original Issue Discount Convertible Debenture
(the “Debenture”) to Lincoln Park Capital Fund, LLC
(“LPC”), resulting in gross proceeds of
$1,000,000 (the “Debenture
Offering”). We incurred
total expenses in connection with the consummation of the Debenture
Offering of approximately $85,000, resulting in net offering
proceeds of $915,000. In addition, in June and July of 2017 we
issued Units 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 the Reprice Warrants.
We
expect to incur substantial expenditures in the foreseeable future
for the development of our 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. 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 or debt financings,
collaborative or other arrangements with corporate sources, or
through other sources of financing.
We
are focused on expanding our product pipeline through
collaborations, and also through acquisitions of products and
companies. We are continually evaluating potential asset
acquisitions and business combinations. To finance such
acquisitions, we might raise additional equity capital, incur
additional debt, or both.
Cash Flows for the Years Ended December 31, 2017 and
2016
Net
cash used in operating activities for the year ended December 31,
2017 was $7,184,638, which primarily reflected our net loss of
$11,096,383 plus adjustments to reconcile net loss to net cash used
in operating activities of depreciation and amortization expense of
$753,998, non-cash fair value adjustment of the contingent
consideration of $140,000, non-cash stock-based compensation of
$609,369, non-cash restricted stock granted to consultants,
employees, and directors of $869,017, non-cash warrant expense of
$538,945, accreted interest on OID convertible debt of $104,328, a
beneficial conversion feature of OID convertible debt of $395,589,
and accreted interest on debt discount - warrants of $280,834,
non-cash stock granted for OID Debt maturity extension of $90,300,
and a non-cash warrant modification expense of $397,570. Changes in
assets and liabilities are due to a decrease in prepaid expenses of
$43,491 due primarily to the expensing of prepaid insurance and an
increase in accounts payable and accrued expenses of
$233,777.
Net cash used in operating activities for the year
ended December 31, 2016 was $4,534,859, which primarily reflected
our net loss of $14,591,662 plus adjustments to reconcile net loss
to net cash used in operating activities of depreciation and
amortization expense of $734,500, fair value adjustment of the
warrants liability of $2,329,019, fair value adjustment of the
contingent consideration of ($300,000), restricted stock granted to
employees and directors of $603,750, warrant expense to placement
agents of $55,097, warrant expense for lockup provisions of
$2,741,003, accreted interest
on OID convertible debt of $1,160,267, a beneficial conversion
feature of OID convertible debt of $1,144,865, and accreted
interest on debt discount - warrants of $883,429. Changes in assets
and liabilities are due to a decrease in other receivables of
$132,038 due primarily to the settling of amounts owed from an
investor in the OID Notes and an increase in accounts payable and
accrued expenses of $805,766 due to our cash position, offset by an
increase in prepaid expenses of $229,411 due to the addition of
prepaid D&O liability insurance.
Net
cash used in investing activities for the years ended December 31,
2017 and 2016 was $32,168 and $12,355, respectively, which
consisted of the purchase of property and equipment.
Net
cash provided by financing activities for the year ended December
31, 2017 was $6,013,218, which consisted of the gross proceeds
resulting from the issuance of the Debentures to LPC of $1,000,000
and the net proceeds resulting from the June 2017 Private Placement
of $5,009,225, proceeds from the issuance of notes payable from a
financing agreement for our D&O insurance premiums of $296,338
offset by repayments of notes payable of $292,345.
Net
cash provided by financing activities for the year ended December
31, 2016 was $5,746,294, which consisted of $5,280,000 in gross
proceeds from the sale of stock from our IPO, less $1,420,107 of
offering costs paid in association with our IPO, $232,000 in
proceeds from the issuance of notes payable from a financing
agreement for our D&O insurance premiums less $76,813 in
repayment of these notes, and $2,094,000 in gross proceeds from the
issuance of OID Notes offset by $362,786 in repayment of OID
Notes.
Consolidated Results of Operations for the Years Ended December 31,
2017 and 2016
We
have not yet achieved revenue-generating status from any of our
product candidates or technologies. Since inception, we have
devoted substantially all of our time and efforts to developing our
principal product candidates, consisting of AZX1101 and
MS1819. As a result, we did not have any revenue during the
years ended December 31, 2017 or 2016.
R&D
expenses were $2,395,478 for the year ended December 31, 2017, as
compared to $2,496,105 for the year ended December 31, 2016, a
decrease of $100,627. We expect R&D expense to increase in
future periods as our product candidates continue through clinical
trials and we seek strategic collaborations.
G&A
expenses were $7,685,706 for the year ended December 31, 2017, as
compared to $4,129,053 for the year ended December 31, 2016, an
increase of $3,556,653. The increase was due primarily to non-cash
restricted stock, stock-based compensation, and warrants
granted/modified of $2,017,331, salaries and bonus increased by
$330,542, as well as various increased expenses associated with
being a publicly reporting company such as legal fees increased by
$181,547, accounting and auditing fees increased by $178,281,
investor relations increased by $277,926, directors’ fees
increased by $25,000, and directors and officer’s insurance
increased by $211,707. We expect G&A expense to increase going
forward as we proceed to advance our product candidates through the
development and regulatory process.
Fair
value adjustment of our contingent consideration increased $140,000
for the year ended December 31, 2017 as compared to a decrease of
$300,000 for the year ended December 31, 2016, due primarily to the
change in time on the present value of the expected cash
flows.
Interest
expense for the year ended December 31, 2017 was $875,199 as
compared to $5,937,486 for the year ended December 31, 2016. The
lower interest expense is due to having less OID Notes outstanding
during 2017 as compared to 2016.
Fair
value adjustment of our warrants was $0 and $2,329,018,
respectively, for the years ended December 31, 2017 and 2016. The
difference is due to no longer having any warrant liability in
2017.
Net
loss was $11,096,383 and $14,591,662, respectively, for the years
ended December 31,2017 and 2016. The lower net loss for the year
ended December 31, 2017 compared to the same period in 2016 is due
to the changes in expenses as noted above.
Off-Balance Sheet Items
The
following table summarizes our contractual obligations over the
periods indicated, as well as our total contractual
obligations:
|
Contractual Obligation
|
Total
|
2018
|
2019
|
2020
|
2021
|
2022
|
|
Operating
Leases
|
$233,386
|
$97,514
|
$67,936
|
$67,936
|
$-
|
$-
|
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
An
emerging growth company is not required to provide the information
required by this item.
ITEM 8. FINANCIAL STATEMENTS
The
audited consolidated financial statements of AzurRx BioPharma,
Inc., including the notes thereto, together with the report thereon
of Mazars USA LLP, the Company’s independent registered
public accounting firm, are included in this Annual Report as a
separate section beginning on page F-1.
ITEM 9. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND
PROCEDURES
|
Evaluation of disclosure controls and procedures.
|
As required by Rule 13a-15(b) under the Securities
Exchange Act of 1934, as amended,
(the “Exchange
Act”) our Chief Executive
Officer (“CEO”) and our Chief Financial Officer
(“CFO”) conducted an evaluation as of the end of
the period covered by this Annual Report on Form 10-K, of the
effectiveness of our disclosure controls and procedures as defined
in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on
that evaluation, our CEO and our CFO each concluded that our
disclosure controls and procedures are effective to provide
reasonable assurance that information required to be disclosed in
the reports that we file or submit under the Exchange Act, (i) is
recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules
and forms and (ii) is accumulated and communicated to our
management, including our CEO and our CFO, as appropriate to allow
timely decisions regarding required disclosure.
|
Management’s Annual Report on Internal Control over Financial
Reporting.
|
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting as such term is
defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our
internal control over financial reporting is a process designed
under the supervision of our principal executive officer and
principal financial officer to provide reasonable assurance
regarding the reliability of financial reporting and preparation of
our financial statements for external purposes in accordance with
generally accepted accounting principles.
Due
to its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements and, even when
determined to be effective, can only provide reasonable, not
absolute, assurance with respect to financial statement preparation
and presentation. Projections of any evaluation of
effectiveness to future periods are subject to risk that controls
may become inadequate as a result of changes in conditions or
deterioration in the degree of compliance.
Under the supervision and with the participation
of our management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
based on the framework in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (“COSO”) issued in May 2013 and related COSO
guidance. Based on our evaluation under this framework, our
internal control over financial reporting was effective based upon
those criteria.
This
report does not include an attestation report of the
Company’s independent registered public accounting firm
regarding internal control over financial
reporting. Management’s report was not subject to
attestation by the independent registered public accounting firm
pursuant to rules of the SEC that permit the Company to provide
only management’s report in this Annual Report on Form
10-K.
|
Changes in internal controls over financial reporting.
|
Changes in our internal control over financial reporting identified
in management’s evaluation pursuant to Rules 13a-15(d) or
15d-15(d) of the Exchange Act during the period covered by this
Annual Report on Form 10-K that materially affected, or are
reasonably likely to materially affect, our internal control over
financial reporting are improved resources and ability to identify,
evaluate, and appropriately conclude on accounting and reporting
treatment.
ITEM 9B. OTHER
INFORMATION
None.
PART III
|
ITEM 10.
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The
information required by this item will be incorporated by reference
from our definitive proxy statement, to be filed with the
Securities and Exchange Commission on or before April 30,
2018.
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The
information required by this item will be incorporated by reference
from our definitive proxy statement, to be filed with the
Securities and Exchange Commission on or before April 30,
2018.
|
ITEM 12.
|
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
|
The
information required by this item will be incorporated by reference
from our definitive proxy statement, to be filed with the
Securities and Exchange Commission on or before April 30,
2018.
|
ITEM 13.
|
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|
The
information required by this item will be incorporated by reference
from our definitive proxy statement, to be filed with the
Securities and Exchange Commission on or before April 30,
2018.
|
ITEM 14.
|
PRINCIPAL ACCOUNTING FEES
AND SERVICES
|
The
information required by this item will be incorporated by reference
from our definitive proxy statement, to be filed with the
Securities and Exchange Commission on or before April 30,
2018.
PART IV
ITEM 15. EXHIBITS
|
Exhibit No.
|
|
Description
|
|
|
|
|
|
|
Form
of Underwriting Agreement (Incorporated by reference from Exhibit
1.1 filed with Amendment No 1. to Registration Statement on Form
S-1, filed July 29, 2016).
|
|
|
|
Amended
and Restated Certificate of Incorporation of the Registrant
(Incorporated by reference from Exhibit 3.1 filed with Registration
Statement on Form S-1, filed July 13, 2016).
|
|
|
|
Amended
and Restated Bylaws of the Registrant (Incorporated by reference
from Exhibit 3.2 filed with Registration Statement on Form S-1,
filed July 13, 2016).
|
|
|
|
Form
of Common Stock Certificate (Incorporated by reference from Exhibit
4.1 filed with Amendment No 1. to Registration Statement on Form
S-1, filed July 29, 2016).
|
|
|
|
Form
of Investor Warrant (Incorporated by reference from Exhibit 4.2
filed with Registration Statement on Form S-1, filed July 13,
2016).
|
|
|
|
Form
of Underwriter Warrant (Incorporated by reference from Exhibit 4.3
filed with Amendment No 1. to Registration Statement on Form S-1,
filed July 29, 2016).
|
|
|
|
Stock
Purchase Agreement dated May 21, 2014 between the Registrant,
Protea Biosciences Group, Inc. and its wholly-owned subsidiary,
Protea Biosciences, Inc (Incorporated by reference from Exhibit
10.1 filed with Registration Statement on Form S-1, filed July 13,
2016).
|
|
|
|
Amended
and Restated Joint Research and Development Agreement dated January
1, 2014 between the Registrant and Mayoly (Incorporated by
reference from Exhibit 10.2 filed with Registration Statement on
Form S-1, filed July 13, 2016).
|
|
|
|
Amended
and Restated AzurRx BioPharma, Inc. 2014 Omnibus Equity Incentive
Plan (Incorporated by reference from Exhibit 10.3 filed with
Registration Statement on Form S-1, filed July 13,
2016).
|
|
|
|
Employment Agreement
between the Registrant and Mr. Spoor (Incorporated by reference
from Exhibit 10.4 filed with Registration Statement on Form S-1,
filed July 13, 2016).
|
|
|
|
Securities
Purchase Agreement dated April 11, 2017 between the Registrant and
Lincoln Park Capital Fund, LLC (Incorporated by reference from
Exhibit 10.1 filed with Current Report on Form 8-K, filed April 12,
2017)
|
|
|
|
12%
Senior Secured Original Issue Discount Convertible Debenture
between the Registrant and Lincoln Park Capital Fund, LLC
(Incorporated by reference from Exhibit 10.2 filed with Current
Report on Form 8-K, filed April 12, 2017)
|
|
|
|
Form
of Series A Warrant dated April 11, 2017 between the Registrant and
Lincoln Park Capital Fund, LLC (Incorporated by reference from
Exhibit 10.3 filed with Current Report on Form 8-K, filed April 12,
2017)
|
|
|
|
Registration
Rights Agreement dated April 11, 2017 between the Registrant and
Lincoln Park Capital Fund, LLC (Incorporated by reference from
Exhibit 10.4 filed with Current Report on Form 8-K, filed April 12,
2017)
|
|
|
|
Form
of Securities Purchase Agreement dated June 5, 2017 (Incorporated
by reference from Exhibit 10.1 filed with Current Report on Form
8-K, filed June 9, 2017)
|
|
|
|
Form
of Registration Rights Agreement dated June 5, 2017 (Incorporated
by reference from Exhibit 10.2 filed with Current Report on Form
8-K, filed April 12, 2017)
|
|
|
|
Form
of Series A Warrant, dated June 5, 2017 (Incorporated by reference
from Exhibit 10.3 filed with Current Report on Form 8-K, filed June
9, 2017)
|
|
|
|
Form
of Series A-1 Warrant, dated June 5, 2017 (Incorporated by
reference from Exhibit 10.4 filed with Current Report on Form 8-K,
filed June 9, 2017)
|
|
|
|
Sublicense
Agreement dated August 7, 2017 by and between the Registrant and
TransChem, Inc. (Incorporated by reference from Exhibit 10.1 filed
with Current Report on Form 8-K, filed August 11,
2017).
|
|
|
|
Employment
Agreement between the Registrant and Mr. Shenouda (Incorporated by
reference from Exhibit 10.1 filed with Current Report on Form 8-K,
filed October 2, 2017).
|
|
|
|
Modification
to 12% Senior Secured Original Issue Discount Convertible
Debenture, dated November 10, 2017 (Incorporated by reference from
Exhibit 10.1 filed with Quarterly Report on Form 10-Q, filed
November 13, 2017).
|
|
|
|
Form
of Exercise Letter (Incorporated by reference from Exhibit 10.1
filed with Current Report on Form 8-K, filed January 5,
2018).
|
|
|
|
Form
of Partial Exercise Letter (Incorporated by reference from Exhibit
10.2 filed with Current Report on Form 8-K, filed January 5,
2018).
|
|
|
|
Code
of Ethics of AzurRx BioPharma, Inc. Applicable To Directors,
Officers And Employees (Incorporated by reference from Exhibit 14.1
filed with Registration Statement on Form S-1, filed July 13,
2016).
|
|
|
|
Subsidiaries
of the Registrant (Incorporated by reference from Exhibit 21.1
filed with Registration Statement on Form S-1, filed July 13,
2016).
|
|
|
|
Consent
of Mazars USA LLP, dated March 16, 2018, filed
herewith.
|
|
|
|
Certification
of CEO as Required by Rule 13a-14(a)/15d-14, filed
herewith.
|
|
|
|
Certification
of CFO as Required by Rule 13a-14(a)/15d-14, filed
herewith.
|
|
|
|
Certification
of CEO as Required by Rule 13a-14(a) and Rule 15d-14(b) (17 CFR
240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the
United States Code, filed herewith.
|
|
|
|
Certification
of CFO as Required by Rule 13a-14(a) and Rule 15d-14(b) (17 CFR
240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the
United States Code, filed herewith.
|
|
|
|
|
|
|
101.INS
|
|
XBRL
Instance Document
|
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema
|
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase
|
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase
|
|
101.LAB
|
|
XBRL
Taxonomy Extension Label Linkbase
|
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase
|
+
Confidential treatment has been granted with respect to portions of
this exhibit.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, there unto duly
authorized.
|
|
AZURRX BIOPHARMA, INC.
|
|
March
16, 2018
|
By: /s/ Johan M. (Thijs)
Spoor
Name: Johan M. (Thijs) Spoor
Title: President and Chief Executive Officer
By: /s/ Maged
Shenouda
Name: Maged Shenouda
Title: Chief Financial Officer and Director
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the
registrant and in the capacities held on the dates
indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/
Johan M. (Thijs) Spoor
|
|
President,
Chief Executive Officer and Director
|
|
March
16, 2018
|
|
Johan
M. (Thijs) Spoor
|
|
(principal
executive officer)
|
|
|
|
|
|
|
|
|
|
/s/
Maged Shenouda
|
|
Chief
Financial Officer and Director
|
|
March
16, 2018
|
|
Maged
Shenouda
|
|
(principal
financial officer and accounting officer)
|
|
|
|
|
|
|
|
|
|
/s/
Edward J. Borkowski
|
|
Chairman
of the Board of Directors
|
|
March
16, 2018
|
|
Edward
J. Borkowski
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Alastair Riddell
|
|
Director
|
|
March
16, 2018
|
|
Alastair
Riddell
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Charles Casamento
|
|
Director
|
|
March
16, 2018
|
|
Charles
Casamento
|
|
|
|
|
|
/s/
Vern Lee Schramm
|
|
Director
|
|
March
16, 2018
|
|
Vern
Lee Schramm
|
|
|
|
|
AzurRx BioPharma, Inc.
Index to Consolidated Financial
Statements
|
|
Page
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To
the Shareholders and the Board of Directors of AzurRx BioPharma,
Inc.
Opinion on the Consolidated Financial Statements
We
have audited the accompanying consolidated balance sheets of AzurRx
BioPharma, Inc. (the “Company”) as of December 31, 2017
and 2016, and the related consolidated statements of operations and
comprehensive loss, changes in stockholders’ equity, and cash
flows for the years then ended, and the related notes (collectively
referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2017 and 2016, and the
results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted
in the United States of America.
The
accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 1 to the consolidated financial statements, the
Company has incurred significant operating losses and negative cash
flows from operations since inception. The Company also had an
accumulated deficit of $33,983,429 at December 31, 2017. The
Company is dependent on obtaining necessary funding from outside
sources, including obtaining additional funding from the sale of
securities in order to continue their operations. These conditions
raise substantial doubt about its ability to continue as a going
concern. Management’s plans regarding those matters also are
described in Note 1. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
Basis for Opinion
These
consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements
based on our audits. We are a public accounting firm registered
with the Public Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due
to error or fraud. The Company is not required to have, nor were we
engaged to perform an audit of the Company's internal control over
financial reporting. As part of our audits we are required to
obtain an understanding of internal control over financial
reporting, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits
provide a reasonable basis for our opinion.
/s/ Mazars USA LLP
We
have served as the Company’s auditor since 2015.
New
York, New York
March
16, 2018
|
AZURRX BIOPHARMA, INC.
|
|
Consolidated Balance Sheets
|
|
|
12/31/17
|
12/31/16
|
|
ASSETS
|
|
|
|
Current
Assets:
|
|
|
|
Cash
|
$573,471
|
$1,773,525
|
|
Other
receivables
|
1,104,134
|
961,038
|
|
Prepaid
expenses
|
274,963
|
229,411
|
|
Total
Current Assets
|
1,952,568
|
2,963,974
|
|
|
|
|
|
Property,
equipment, and leasehold improvements, net
|
133,987
|
151,622
|
|
|
|
|
|
Other
Assets:
|
|
|
|
In
process research & development, net
|
307,591
|
301,531
|
|
License
agreements, net
|
1,038,364
|
1,534,487
|
|
Goodwill
|
2,016,240
|
1,767,550
|
|
Deposits
|
30,918
|
34,678
|
|
Total
Other Assets
|
3,393,113
|
3,638,246
|
|
Total
Assets
|
$5,479,668
|
$6,753,842
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
Accounts
payable and accrued expenses
|
$1,187,234
|
$1,471,280
|
|
Accounts
payable and accrued expenses - related party
|
868,105
|
707,181
|
|
Note
payable
|
159,180
|
155,187
|
|
Convertible
debt
|
257,365
|
-
|
|
Interest
payable
|
7,192
|
7,192
|
|
Total
Current Liabilities
|
2,479,076
|
2,340,840
|
|
|
|
|
|
Contingent
consideration
|
1,340,000
|
1,200,000
|
|
Total
Liabilities
|
3,819,076
|
3,540,840
|
|
|
|
|
|
Stockholders'
Equity:
|
|
|
|
Convertible
preferred stock - Par value $0.0001 per share; 10,000,000 shares
authorized and 0 shares issued and outstanding at December 31, 2017
and 2016; liquidation preference approximates par
value
|
-
|
-
|
|
Common
stock - Par value $0.0001 per share; 100,000,000 shares authorized;
12,042,574 and 9,631,088 shares issued and outstanding,
respectively, at December 31, 2017 and 2016
|
1,205
|
963
|
|
Additional
paid in capital
|
37,669,601
|
27,560,960
|
|
Subscriptions
receivable
|
(1,071,070)
|
-
|
|
Accumulated
deficit
|
(33,983,429)
|
(22,887,046)
|
|
Accumulated
other comprehensive loss
|
(955,715)
|
(1,461,875)
|
|
Total
Stockholders' Equity
|
1,660,592
|
3,213,002
|
|
Total
Liabilities and Stockholders' Equity
|
$5,479,668
|
$6,753,842
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements
|
||
AZURRX BIOPHARMA, INC.
Consolidated Statements of Operations and Comprehensive Loss
|
|
|
|
|
|
Year Ended
12/31/17
|
Year Ended
12/31/16
|
|
|
|
|
|
Research
and development expenses
|
$2,395,478
|
$2,496,105
|
|
General
& administrative expenses
|
7,685,706
|
4,129,053
|
|
Fair
value adjustment, contingent consideration
|
140,000
|
(300,000)
|
|
|
|
|
|
Loss
from operations
|
(10,221,184)
|
(6,325,158)
|
|
|
|
|
|
Other:
|
|
|
|
Interest
expense
|
(875,199)
|
(5,937,486)
|
|
Fair
value adjustment, warrants
|
-
|
(2,329,018)
|
|
Total
other
|
(875,199)
|
(8,266,504)
|
|
|
|
|
|
Loss
before income taxes
|
(11,096,383)
|
(14,591,662)
|
|
|
|
|
|
Income
taxes
|
-
|
-
|
|
|
|
|
|
Net
loss
|
$(11,096,383)
|
$(14,591,662)
|
|
|
|
|
|
Other
comprehensive loss:
|
|
|
|
Foreign
currency translation adjustment
|
506,160
|
(115,811)
|
|
Total
comprehensive loss
|
$(10,590,223)
|
$(14,707,473)
|
|
|
|
|
|
Basic
and diluted weighted average shares outstanding
|
10,628,835
|
6,504,789
|
|
|
|
|
|
Loss
per share - basic and diluted
|
$(1.04)
|
$(2.24)
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements
|
||
AZURRX BIOPHARMA, INC.
Consolidated Statements of Changes in Stockholders' Equity
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Convertible
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
Preferred Stock
|
Common Stock
|
Paid In
|
Subscriptions
|
Accumulated
|
Comprehensive
|
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Receivable
|
Deficit
|
Loss
|
Total
|
|
Balance, January 1, 2016
|
71
|
$3,479,000
|
4,296,979
|
$430
|
$2,532,188
|
$-
|
$(8,295,384)
|
$(1,346,064)
|
$(3,629,830)
|
|
Common
stock issued
|
|
|
960,000
|
96
|
3,505,978
|
|
|
|
3,506,074
|
|
Preferred
stock converted into common stock
|
(71)
|
(3,479,000)
|
1,731,949
|
173
|
3,478,827
|
|
|
|
0
|
|
Convertible
debt converted into common stock
|
|
|
2,642,160
|
264
|
9,828,572
|
|
|
|
9,828,836
|
|
Restricted
stock granted to employees/directors
|
|
|
|
|
603,750
|
|
|
|
603,750
|
|
Warrants
issued to investment bankers
|
|
|
|
|
55,097
|
|
|
|
55,097
|
|
Warrants
issued to convertible debt holders for lockup
provisions
|
|
|
|
|
2,741,003
|
|
|
|
2,741,003
|
|
Warrant
liability reclassified into additional paid in capital at
IPO
|
|
|
|
|
3,670,680
|
|
|
|
3,670,680
|
|
Beneficial
conversion feature on convertible debt issuances
|
|
|
|
|
1,144,865
|
|
|
|
1,144,865
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
(115,811)
|
(115,811)
|
|
Net
loss
|
|
|
|
|
|
|
(14,591,662)
|
|
(14,591,662)
|
|
Balance, December 31, 2016
|
-
|
$-
|
9,631,088
|
$963
|
$27,560,960
|
$-
|
$(22,887,046)
|
$(1,461,875)
|
$3,213,002
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued in private placement
|
|
|
1,542,858
|
154
|
5,009,071
|
|
|
|
5,009,225
|
|
Stock-based
compensation
|
|
|
|
|
609,369
|
|
|
|
609,369
|
|
Restricted
stock granted to employees/directors
|
|
|
115,000
|
12
|
487,290
|
|
|
|
487,302
|
|
Restricted
stock granted to consultants
|
|
|
105,944
|
11
|
381,704
|
|
|
|
381,715
|
|
Warrants
issued to consultants
|
|
|
|
|
538,945
|
|
|
|
538,945
|
|
Warrants
issued in association with convertible debt issuances
|
|
|
|
|
410,672
|
|
|
|
410,672
|
|
Beneficial
conversion feature on convertible debt issuances
|
|
|
|
|
395,589
|
|
|
|
395,589
|
|
Convertible
debt converted into common stock
|
|
|
189,256
|
19
|
717,107
|
|
|
|
717,126
|
|
Common
stock issued for convertible debt extension
|
|
|
30,000
|
3
|
90,297
|
|
|
|
90,300
|
|
Warrant
modification
|
|
|
|
|
397,570
|
|
|
|
397,570
|
|
Common
stock subscribed
|
|
|
428,428
|
43
|
1,071,027
|
|
|
|
1,071,070
|
|
Subscriptions
receivable
|
|
|
|
|
|
(1,071,070)
|
|
|
(1,071,070)
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
506,160
|
506,160
|
|
Net
loss
|
|
|
|
|
|
|
(11,096,383)
|
|
(11,096,383)
|
|
Balance, December 31, 2017
|
-
|
$-
|
12,042,574
|
$1,205
|
$37,669,601
|
$(1,071,070)
|
$(33,983,429)
|
$(955,715)
|
$1,660,592
|
|
AZURRX BIOPHARMA, INC.
|
||
|
Consolidated Statements of Cash Flows
|
||
|
|
|
|
|
|
Year Ended
12/31/17
|
Year Ended
12/31/16
|
|
Cash
flows from operating activities:
|
|
|
|
Net
loss
|
$(11,096,383)
|
$(14,591,662)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
Depreciation
|
49,520
|
44,305
|
|
Amortization
|
704,478
|
690,195
|
|
Fair
value adjustment, warrants
|
-
|
2,329,018
|
|
Fair
value adjustment, contingent consideration
|
140,000
|
(300,000)
|
|
Stock-based
compensation
|
609,369
|
-
|
|
Restricted
stock granted to employees/directors
|
487,302
|
603,750
|
|
Restricted
stock granted to consultants
|
381,715
|
-
|
|
Warrants
issued to consultants
|
538,945
|
55,097
|
|
Warrants
issued for lockup provisions
|
-
|
2,741,003
|
|
Accreted
interest on convertible debt
|
104,328
|
1,160,267
|
|
Convertible
debt beneficial conversion feature
|
395,589
|
1,144,865
|
|
Accreted
interest on debt discount - warrants
|
280,834
|
883,429
|
|
Common
stock issued for convertible debt extension
|
90,300
|
-
|
|
Warrant
modification
|
397,570
|
-
|
|
Changes
in assets and liabilities:
|
|
|
|
Other
receivables
|
3,438
|
132,038
|
|
Prepaid
expenses
|
(43,491)
|
(229,411)
|
|
Deposits
|
5,625
|
(9,524)
|
|
Accounts
payable and accrued expenses
|
(233,777)
|
805,765
|
|
Interest
payable
|
-
|
6,006
|
|
Net
cash used in operating activities
|
(7,184,638)
|
(4,534,859)
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
Purchase
of property and equipment
|
(32,168)
|
(12,355)
|
|
Net
cash used in investing activities
|
(32,168)
|
(12,355)
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
Proceeds
from sale of stock - IPO
|
-
|
5,280,000
|
|
Payments
of offering costs - IPO
|
-
|
(1,420,107)
|
|
Issuances
of common stock
|
5,009,225
|
-
|
|
Proceeds
of note payable
|
296,338
|
232,000
|
|
Repayments
of note payable
|
(292,345)
|
(76,813)
|
|
Issuances
of convertible debt
|
1,000,000
|
2,094,000
|
|
Repayments
of convertible debt
|
-
|
(362,786)
|
|
Net
cash provided by financing activities
|
6,013,218
|
5,746,294
|
|
|
|
|
|
(Decrease)
Increase in cash
|
(1,203,588)
|
1,199,080
|
|
Effect
of exchange rate changes on cash
|
3,534
|
(7,223)
|
|
Cash,
beginning balance
|
1,773,525
|
581,668
|
|
Cash,
ending balance
|
$573,471
|
$1,773,525
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
Cash
paid for interest
|
$4,148
|
$1,393
|
|
Cash
paid for income taxes
|
$-
|
$-
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
Conversion
of preferred shares into common shares by Protea
|
$-
|
$3,479,000
|
|
Conversion
of convertible promissory notes into convertible debt
|
$-
|
$135,000
|
|
Conversion
of convertible debt into common stock
|
$717,126
|
$9,828,836
|
|
Warrant
liability reclassified into additional paid in capital at
IPO
|
$-
|
$3,670,680
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements
|
||
Notes
to Consolidated Financial Statements, AzurRx BioPharma Inc.,
December 31, 2017 and 2016
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 BioPharma SAS
(formerly “ProteaBio Europe
SAS”), a company
incorporated in October 2008 under the laws of France that had been
a wholly-owned subsidiary of Protea Biosciences, Inc., or Protea
Sub, in turn a wholly-owned subsidiary of Protea Biosciences Group,
Inc., a publicly-traded company. AzurRx and its wholly-owned
subsidiary, AzurRx Europe SAS (“AES”), are collectively referred to as the
“Company.”
AzurRx,
through its AES subsidiary, 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’s current product pipeline consists
of two therapeutic proteins under development:
●
MS1819 - a yeast derived recombinant lipase for
exocrine pancreatic insufficiency (“EPI”) associated with chronic pancreatitis
(“CP”) and cystic fibrosis
(“CF”). 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.
●
AZ1101- an enzymatic combination of bacterial
origin for the prevention of hospital-acquired infections and
antibiotic-associated diarrhea (“AAD”) by resistant bacterial strains induced by
parenteral administration of several antibiotic classes, including
the b-lactams. AZX1101 is composed of a molecular backbone linked
to several distinct enzymes that break up individual classes of
antibiotic molecules.
Initial Public Offering
On October 11, 2016 (the
“IPO
Date”), the Company
completed an Initial Public Offering (“IPO”) of 960,000 shares of common stock at a
price of $5.50 per share and received gross proceeds of $5,280,000.
The Company incurred total expenses of approximately $1,774,000 in
connection with the IPO, resulting in net offering proceeds of
approximately $3,506,000. Concurrent with the IPO, (i) the Company
issued 2,642,160 shares of common stock upon the mandatory
conversion of the convertible debt that results in a beneficial
conversion feature resulting in interest expense of approximately
$1,108,000 and the elimination of the convertible debt and warrant
liability, (ii) the Company issued 717,540 warrants with a
five-year term to certain Original Issued Discounted
(“OID”) noteholders in exchange for their
agreement not to sell their shares for 6 months following the IPO
with a strike price at the IPO price with an estimated value of
approximately $2,741,000 which was charged to interest expense, and
(iii) the grant of 48,000 warrants with a five-year term to the
underwriters at 120% of the IPO price with an estimated value of
approximately $197,000 that had no effect on expenses or
stockholders’ equity. On November 18, 2016, the Company
retired $362,786 of OID convertible debt and accreted interest not
mandatorily converted at the time of the IPO that decreases cash
and current liabilities by
$362,786.
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements
have been prepared in accordance with accounting principles
generally accepted in the United States of America
(“U.S. GAAP”).
The
financial statements for the years ended December 31, 2017 and 2016
include the accounts of AzurRx and its wholly-owned subsidiary,
AzurRx Europe SAS. Intercompany transactions and balances have been
eliminated upon consolidation.
The
accompanying consolidated financial statements have been prepared
as if the Company will continue as a going concern. The Company has
incurred significant operating losses and negative cash flows from
operations since inception, had negative working capital at
December 31, 2017 of approximately $527,000, and had an accumulated
deficit of approximately $33,983,000 at December 31, 2017. The
Company currently believes that its cash on hand, including the
approximately $2,200,000 in net proceeds received in 2018 from the
exercise of warrants, will sustain its operations until September
2018. The Company is dependent on obtaining, and continues to
pursue, the necessary funding from outside sources, including
obtaining additional funding from the sale of securities in order
to continue operations. Without adequate funding, the Company may
not be able to meet its obligations. Management believes these
conditions raise substantial doubt about its ability to continue as
a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
Notes
to Consolidated Financial Statements, AzurRx BioPharma Inc.,
December 31, 2017 and 2016
Note 2 - Significant Accounting Policies and Recent Accounting
Pronouncements
Use of Estimates
The
accompanying 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.
Concentrations
Financial
instruments that potentially expose the Company to concentrations
of credit risk consist of cash. The Company primarily maintains its
cash balances with financial institutions in federally-insured
accounts in the U.S. The Company may from time to time have cash in
banks in excess of FDIC insurance limits. At December 31, 2017 and
2016, the Company had approximately $78,859 and $1,279,000,
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 also has exposure to foreign currency risk as its
subsidiary in France has a functional currency in
Euros.
Property, Equipment, and Leasehold Improvements
Property,
equipment and leasehold improvements are carried on the cost basis
and depreciated over the estimated useful lives of the related
assets using the straight-line method. For financial statement
purposes, depreciation expense is provided using the straight-line
method over the estimated useful lives of the assets as
follows:
Laboratory
Equipment 5 years
Computer
Equipment 5 years
Office
Equipment 7-8 years
Leasehold
Improvements Term of lease or estimated useful life of the assets;
whichever is shorter
Expenditures
for maintenance and repairs are charged to operations as incurred
while renewals and betterments are capitalized. At December 31,
2017 and 2016, there are no restrictions on the Company’s
title of property, equipment, and leasehold improvements and no
amounts have been pledged as security for liabilities.
Goodwill and Intangible Assets
Goodwill
represents the excess of the purchase price of the acquired
business over the fair value of amounts assigned to assets acquired
and liabilities assumed. Goodwill and other intangible assets with
indefinite useful lives are reviewed for impairment annually or
more frequently if events or circumstances indicate impairment may
be present. Any excess in carrying value over the estimated fair
value is charged to results of operations. The Company has not
recognized any impairment charges through December 31,
2017.
Intangible
assets subject to amortization consist of in process research and
development and license agreements 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:
In
Process Research & Development 12 years
License
Agreements 5 years
Research and Development
Research
& development costs are charged to operations when incurred and
are included in operating expenses. Research & development
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 clinical trial and additional product
development and testing.
Notes
to Consolidated Financial Statements, AzurRx BioPharma Inc.,
December 31, 2017 and 2016
Fair Value Measurements
The Company follows Accounting
Standards Codification (“ASC”) Topic 820-10, Fair Value Measurements and
Disclosures (“ASC 820”), which among other things, defines fair
value, establishes a consistent framework for measuring fair value
and expands disclosure for each major asset and liability category
measured at fair value on either a recurring or nonrecurring basis.
Fair value is an exit price, representing the amount that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants. As such, fair
value is a market-based measurement that should be determined based
on assumptions that market participants would use in pricing an
asset or liability.
As
a basis for considering such assumptions, a three-tier fair value
hierarchy has been established, which prioritizes the inputs used
in measuring fair value as follows:
Level
1: Observable inputs such as quoted prices (unadjusted) in active
markets for identical assets or liabilities;
Level
2: Inputs, other than the quoted prices in active markets, that are
observable either directly or indirectly; and
Level
3: Unobservable inputs in which there is little or no market data,
which require the reporting entity to develop its own assumptions,
which reflect those that a market participant would
use.
Stock-Based Compensation
The Company’s board of directors
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 directors in accordance with ASC Topic 718,
Compensation—Stock Compensation ("ASC 718"). ASC 718 requires all stock-based payments to
employees, including grants of employee stock options, to be
recognized in the statements of operations based on their grant
date fair values. For stock options granted to employees and to
members of the board of directors for their services on the board
of directors, the Company estimates the grant date fair value of
each option award 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. For awards subject to
service-based vesting conditions, the Company recognizes
stock-based compensation expense, net of estimated forfeitures,
equal to the grant date fair value of stock options on a
straight-line basis over the requisite service
period.
Equity-Based Payments to Non-Employees
The
Company accounts for equity instruments, including restricted
stock, stock options and warrants, issued to non-employees in
accordance with authoritative guidance (ASC Topic 505-50
Equity-based Payments to Non-Employees). All transactions in which
goods or services are received in exchange for equity instruments
are accounted for based on the fair value of the consideration
received or the fair value of the equity instrument issued,
whichever is more reliably measurable. The measurement date of the
fair value of the equity instrument issued is the earlier of (i)
the date of grant if nonforfeitable and fully vested, or (ii) the
date the non-employee's performance is completed and there is no
further associated performance commitment. The fair value of
unvested equity instruments granted to non-employees is re-measured
at each reporting date, and the resulting change in value, if any,
is recognized as expense during the period the related services are
rendered. The expense is recognized in the same manner as if we had
paid cash for the services provided by the
non-employees.
Income Taxes
Income
taxes are recorded in accordance with ASC 740, Accounting for
Income Taxes ("ASC 740"),
which provides for deferred taxes using an asset and liability
approach. The Company recognizes deferred tax assets and
liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns. The
Company determines its deferred tax assets and liabilities based on
differences between financial reporting and tax bases of assets and
liabilities, which are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to
reverse. Valuation allowances are provided if, based upon the
weight of available evidence, it is more likely than not that some
or all of the deferred tax assets will not be
realized.
The
Company accounts for uncertain tax positions in accordance with the
provisions of ASC 740. When uncertain tax positions exist, the
Company recognizes the tax benefit of tax positions to the extent
that the benefit will more likely than not be realized. The
determination as to whether the tax benefit will more likely than
not be realized is based upon the technical merits of the tax
position as well as consideration of the available facts and
circumstances. At December 31, 2017 and 2016, the Company does not
have any significant uncertain tax positions. All tax years are
still open for audit.
Notes
to Consolidated Financial Statements, AzurRx BioPharma Inc.,
December 31, 2017 and 2016
Impairment of Long-Lived Assets
The
Company periodically evaluates its long-lived assets for potential
impairment in accordance with ASC Topic 360, Property, Plant and
Equipment (“ASC
360”). Potential impairment is assessed when there is
evidence that events or changes in circumstances indicate that the
carrying amount of an asset may not be recovered. Recoverability of
these assets is assessed based on undiscounted expected future cash
flows from the assets, considering a number of factors, including
past operating results, budgets and economic projections, market
trends and product development cycles. If impairments are
identified, assets are written down to their estimated fair value.
The Company has not recognized any impairment charges through
December 31, 2017.
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 shareholders’ equity.
Collaboration Agreements
As
more fully discussed in Note 15, the Company has joint research
collaboration agreements with Laboratoires Mayoly Spindler SAS and
INRA TRANSFERT. Any payments due from our collaboration partners is
recorded as a reduction in research and development
expenses.
Sublicense Agreement
As
more fully discussed in Note 15, the Company entered into a
Sublicense Agreement with TransChem, Inc. pursuant to which
TransChem granted the Company an exclusive license to certain
patents and patent applications. Any payments made to Transchem for
this agreement will be recorded as research and development
expenses.
Operating Leases
The
Company recognizes rent expense from operating leases with various
escalation clauses on a straight-line basis over the applicable
lease term. The Company considers lease renewals in the useful life
of its leasehold improvements when such renewals are reasonably
assured.
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 July 2017, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2017-11, Earnings per Share (Topic 260),
Distinguishing Liabilities from Equity (Topic 480) and Derivatives
and Hedging (Topic 815). ASU 2017-11 provides guidance on
accounting for financial instruments with down round features and
clarifies the deferral of certain provisions in Topic 480. ASU
2017-11 will become effective for annual periods beginning after
December 15, 2018 and interim periods within those periods. Early
adoption is permitted. The
Company currently believes that the adoption of this pronouncement
will not have an impact on the Company’s financial
statements.
In
January 2017, the FASB issued guidance to simplify the subsequent
measurement of goodwill impairment. The new guidance eliminates the
two-step process that required identification of potential
impairment and a separate measure of the actual impairment.
Goodwill impairment charges, if any, would be determined by
reducing the goodwill balance by the difference between the
carrying value and the reporting unit’s fair value
(impairment loss is limited to the carrying value). This standard
is effective for annual or any interim goodwill impairment tests
beginning after December 15, 2019. The Company believes that the
adoption of this pronouncement will not have an impact on the
Company’s measurement of goodwill impairment.
Notes
to Consolidated Financial Statements, AzurRx BioPharma Inc.,
December 31, 2017 and 2016
In
February 2016, the FASB issued an ASU which requires lessees to
recognize lease assets and lease liabilities arising from operating
leases on the balance sheet. This ASU is effective for annual and
interim reporting periods beginning after December 15, 2018 using a
modified retrospective approach, with early adoption permitted. The
Company is currently evaluating the standard to determine the
impact of its adoption on its consolidated financial statements.
The Company would have to capitalize its operating leases (rent for
office and research facilities) on its balance sheet.
In January 2016,
the FASB issued ASU No. 2016-01, Recognition and Measurement of
Financial Assets and Financial Liabilities, to mainly change the
accounting for investments in equity securities and financial
liabilities carried at fair value as well as tomodify the
presentation and disclosure requirements for financial instruments.
The ASU is effective for interim and annual periods beginning after
December 15, 2017, with early adoption permitted. Adoption of the
ASU is retrospective with a cumulative adjustment to retained
earnings or accumulated deficit as of the adoption date. The
Company believes that the adoption of this pronouncement will not
have an impact on the Company’s financial
statements.
In
May 2014, the FASB issued an ASU which supersedes the most current
revenue recognition requirements. The new revenue recognition
standard requires entities to recognize revenue in a way that
depicts the transfer of goods or services to customers in an amount
that reflects the consideration which the entity expects to be
entitled to in exchange for those goods or services. This guidance
is effective for annual and interim reporting periods beginning
after December 15, 2017. The Company is still in its startup phase
and is not generating revenues at this time; therefore, this
standard will have no impact on its consolidated financial
statements until such time as revenues are generated. When revenues
are generated, the Company will follow the provisions of the new
standard.
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.
At
December 31, 2017 and 2016, the Company had Level 3 instruments
consisting of contingent consideration in connection with the
Protea Europe SAS acquisition, see Note 7.
During
2016, the Company had Level 3 instruments consisting of the
Company’s common stock warrant liability related to the
Company’s convertible debt, see Note 10.
The
following tables summarize the Company’s financial
instruments measured at fair value on a recurring
basis:
|
|
Fair Value Measurements at Reporting Date Using
|
|||
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|
At
December 31, 2017:
|
|
|
|
|
|
Contingent
consideration
|
$1,340,000
|
$-
|
$-
|
$1,340,000
|
|
|
|
|
|
|
|
At
December 31, 2016:
|
|
|
|
|
|
Contingent
consideration
|
$1,200,000
|
$-
|
$-
|
$1,200,000
|
The
following table provides a reconciliation of the fair value of
liabilities using Level 3 significant unobservable
inputs:
|
|
Contingent
|
Warrant
|
|
|
Consideration
|
Liability
|
|
Balance
at January 1, 2016
|
$1,500,000
|
$818,216
|
|
Issuance
of warrants
|
-
|
523,446
|
|
Change
in fair value
|
(300,000)
|
2,329,018
|
|
Reclassified
to equity at IPO Date
|
-
|
(3,670,680)
|
|
Balance
at December 31, 2016
|
1,200,000
|
-
|
|
Change
in fair value
|
140,000
|
-
|
|
Balance
at December 31, 2017
|
$1,340,000
|
$-
|
Notes
to Consolidated Financial Statements, AzurRx BioPharma Inc.,
December 31, 2017 and 2016
The contingent consideration was valued by
incorporating a series of Black-Scholes Option Pricing Models
(“BSM”) into a discounted cash flow framework.
Significant unobservable inputs used in this calculation at
December 31, 2017 and 2016 included projected net sales over a
period of patent exclusivity (7 years and 8 years, respectively),
discounted by (i) the Company’s weighted average cost of
capital (32.4% and 30.2%, respectively), (ii) the contractual
hurdle amount of $100 million that replaces the strike price input
in the traditional BSM, (iii) asset volatility (83.1% and 71%,
respectively), that replaces the equity volatility in the
traditional BSM, (iv) risk-free rates (ranging from 1.8% to 2.4%
and 1.6% to 2.4%, respectively), and (v) an option-adjusted spread
(0.6% and 1.3%, respectively) that is applied to these payments to
account for the payer’s risk and arrive at a fair value of
the expected payment.
The
fair value of the outstanding warrants was measured using a
Binomial Option Pricing model. Inputs used to determine estimated
fair value of the warrant liabilities reclassified to equity at the
IPO Date include the estimated fair value of the underlying stock
at the valuation date of $5.50, the estimated term in years of the
warrants ranging from 3.87 to 4.58 years, risk-free interest rate
of 1.24%, expected dividends of zero, and the expected volatility
of 90% of the underlying stock. The significant unobservable inputs
used in the fair value measurement of the warrant liabilities are
the fair value of the underlying stock at the valuation date and
the estimated term of the warrants.
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
December 31, 2017:
|
|
|
|
|
|
|
Cash
|
$573,471
|
$-
|
$573,471
|
$-
|
$-
|
|
Other
receivables
|
$1,104,134
|
$-
|
$-
|
$1,104,134
|
$1,104,134
|
|
Notes
payable
|
$159,180
|
$-
|
$-
|
$159,180
|
$159,180
|
|
Convertible
debt
|
$257,365
|
$-
|
$-
|
$387,201
|
$387,201
|
|
|
|
|
|
|
|
|
At
December 31, 2016:
|
|
|
|
|
|
|
Cash
|
$1,773,525
|
$-
|
$1,773,525
|
$-
|
$-
|
|
Other
receivables
|
$961,038
|
$-
|
$-
|
$961,038
|
$961,038
|
|
Notes
payable
|
$155,187
|
$-
|
$-
|
$155,187
|
$155,187
|
The
fair value of other receivables approximates carrying value as
these consist primarily of French R&D tax credits that are
normally received within nine months from year end and amounts due
from our collaboration partner Mayoly, see Note 15.
The
fair value of note payable approximates carrying value due to the
terms of such instruments and applicable interest
rates.
The
fair value of convertible debt is based on the par value plus
accrued interest through the date of reporting due to the terms of
such instruments and interest rates, or the current interest rates
of similar instruments.
Note 4 - Other Receivables
Other
receivables consisted of the following:
|
|
December 31,
|
December 31,
|
|
|
2017
|
2016
|
|
R&D
tax credits
|
$954,897
|
$758,305
|
|
Other
|
149,237
|
202,733
|
|
Total
other receivables
|
$1,104,134
|
$961,038
|
The
R&D tax credits are refundable tax credits for research
conducted in France. Other consists primarily of amounts due from
collaboration partner Mayoly, see Note 15, and non-income tax
related items from French government entities.
Notes
to Consolidated Financial Statements, AzurRx BioPharma Inc.,
December 31, 2017 and 2016
Note 5 - Property, Equipment and Leasehold
Improvements
Property,
equipment and leasehold improvements consisted of the
following:
|
|
December 31,
|
December 31,
|
|
|
2017
|
2016
|
|
Laboratory
equipment
|
$165,611
|
$165,611
|
|
Computer
equipment
|
44,364
|
19,718
|
|
Office
equipment
|
36,334
|
29,006
|
|
Leasehold
improvements
|
29,163
|
29,163
|
|
Total
property, plant and equipment
|
275,472
|
243,498
|
|
Less
accumulated depreciation
|
(141,485)
|
(91,876)
|
|
Property,
plant and equipment, net
|
$133,987
|
$151,622
|
Depreciation expense for the years ended December
31, 2017 and 2016 was $49,520 and $44,305, respectively.
Depreciation expense is included in general and administrative
(“G&A”) expenses.
Note 6 - Intangible Assets and Goodwill
Intangible
assets are as follows:
|
|
December 31,
|
December 31,
|
|
|
2017
|
2016
|
|
In
process research and development
|
$436,385
|
$382,560
|
|
Less
accumulated amortization
|
(128,794)
|
(81,029)
|
|
In
process research and development, net
|
$307,591
|
$301,531
|
|
|
|
|
|
License
agreements
|
$3,560,107
|
$3,120,991
|
|
Less
accumulated amortization
|
(2,521,743)
|
(1,586,504)
|
|
License
agreements, net
|
$1,038,364
|
$1,534,487
|
Amortization
expense for the years ended December 31, 2017 and 2016 was $704,478
and $690,195, respectively.
As
of December 31, 2017, amortization expense is expected to be as
follows for the next five years:
|
2018
|
$748,387
|
|
2019
|
362,709
|
|
2020
|
36,365
|
|
2021
|
36,365
|
|
2022
|
36,365
|
Goodwill
is as follows:
|
Balance
at January 1, 2016
|
$1,832,579
|
|
Foreign
currency translation
|
(65,029)
|
|
Balance
at December 31, 2016
|
1,767,550
|
|
Foreign
currency translation
|
248,690
|
|
Balance
at December 31, 2017
|
$2,016,240
|
Notes
to Consolidated Financial Statements, AzurRx BioPharma Inc.,
December 31, 2017 and 2016
Note 7 - Contingent Consideration
On June 13, 2014, the Company completed a stock
purchase agreement (the “SPA”) with Protea Biosciences Group, Inc.
(“Protea
Group”). Pursuant to the
SPA, the Company is obligated to pay Protea certain contingent
consideration in U.S. dollars upon the satisfaction of certain
events, including (i) a onetime milestone payment of $2,000,000 due
within (10) days of receipt of the first approval by the Food and
Drug Administration (“FDA”) of a New Drug Application
(“NDA”) or Biologic License Application
(“BLA”) for a Business Product (as such term is
defined in the SPA). (ii) royalty payments equal to 2.5% of net
sales of Business Product up to $100,000,000 and 1.5% of net sales
of Business Product in excess of $100,000,000, and (iii) 10% of the
Transaction Value (as defined in the SPA) received in connection
with a sale or transfer of the pharmaceutical development business
of Protea Europe, see Note 3.
Note 8 - Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses consisted of the
following:
|
|
December 31,
|
December 31,
|
|
|
2017
|
2016
|
|
Trade
payables
|
$705,041
|
$1,072,358
|
|
Accrued
expenses
|
262,200
|
73,750
|
|
Accrued
payroll
|
219,993
|
325,172
|
|
Total
accounts payable and accrued expenses
|
$1,187,234
|
$1,471,280
|
Note 9 - Note Payable
On
October 30, 2017, the Company entered into a 9-month financing
agreement for its directors and officer’s liability insurance
in the amount of $237,137 that bears interest at an annual rate of
5.537%. Monthly payments, including principal and interest, are
$26,960 per month. The balance due under this financing agreement
at December 31, 2017 was $159,180.
On
October 11, 2016, the Company entered into a 9-month financing
agreement for its directors and officer’s liability insurance
in the amount of $232,000 that bears interest at an annual rate of
2.7%. Monthly payments, including principal and interest, were
$26,069 per month. Amounts due under this financing agreement have
been fully repaid in 2017. The balance due under this financing
agreement at December 31, 2016 was $155,187.
Note 10 - Original Issue Discounted Convertible Notes and
Warrants
LPC OID Debenture
On April 11, 2017, the Company entered into a Note
Purchase Agreement with Lincoln Park Capital Fund, LLC
(“LPC”), pursuant to which the Company issued a
12% Senior Secured Original Issue Discount Convertible Debenture
(the “Debenture”) to LPC. The principal and original issue
discount of $1,120,000 due under the terms of the Debenture were
due on the Maturity Date, which is defined as the earlier to occur
of (i) November 10, 2017 or (ii) on the fifth business day
following the receipt by the Company or its wholly-owned
subsidiary, AES, of certain tax credits that the Company is
expected to receive prior to November 10, 2017 (the
“Tax
Credit”). On November 10,
2017, the Company and LPC modified the Debenture to extend the
Maturity Date to November 29, 2017, subject to the Company’s
right to extend the Maturity Date to July 11, 2018 (the
“Extension
Option”). As
consideration for the extension of the Maturity Date, the Company
was obligated to issue 30,000 shares of the Company’s common
stock to LPC on November 15, 2017. These shares were valued at
$90,300 and charged to interest
expense.
The principal and original issue discount amount
of the Debenture is convertible into shares of the Company’s
common stock at LPC’s option, at a conversion price equal to
$3.872 (“Conversion
Price”). Provided certain
conditions related to compliance with the terms of the Debenture
are satisfied, the closing price of the Company’s common
stock exceeds 150% of the Conversion Price, the median daily volume
for the preceding 30 days exceeds 50,000 shares per day, among
other conditions, the Company may, at its option, force conversion
of the Debenture for an amount equal to the outstanding balance of
the principal and original issue discount of the Debenture. During
the year ended December 31, 2017, LPC elected to convert $717,126
of the Debenture pursuant to which LPC received 189,256 shares of
common stock. On January 10, 2018, LPC elected to convert $100,672
of the Debenture pursuant to which LPC received 26,000 shares of
common stock.
Notes
to Consolidated Financial Statements, AzurRx BioPharma Inc.,
December 31, 2017 and 2016
In connection with the issuance of the Debenture,
the Company issued to LPC a warrant giving LPC the right to
purchase 164,256 shares of the Company’s common stock at an
exercise price of $4.2592 per share (“LPC Series A
Warrant”) that will
terminate five years after the date of
issuance.
The
obligations under the Debenture are guaranteed by AES, as well as a
security agreement providing LPC with a secured interest in the Tax
Credit.
The
Company also entered into a Registration Rights Agreement granting
LPC certain registration rights with respect to the shares of
common stock issuable upon conversion of the Debenture, and upon
exercise of the LPC Series A Warrants. All of these shares were
registered pursuant to registration statement on Form S-1 declared
effective by the SEC on August 11, 2017.
The
Company accounted for the LPC Series A Warrant feature of the
Debenture based upon the relative fair value of the LPC Series A
Warrants on the date of issuance of the Debenture of $246,347,
which was recorded as additional paid in capital and a discount to
the Debenture.
The
proceeds received from the issuance of the Debenture were allocated
based on the relative fair values of the Debenture and the LPC
Series A Warrant.
The Company determined that there was a beneficial
conversion feature (“BCF”) on the Debenture in the amount of
$395,589 at the date of issuance. This amount was recorded as
additional paid in capital and a discount to the Debenture. Under
the Company’s option to force conversion, all of the
unamortized discount remaining at the date of conversion shall be
recognized immediately upon conversion at that date as interest
expense.
The
effective interest rate after the allocation of proceeds to the LPC
Series A Warrant and the BCF is 363%.
The Company exercised its Extension Option on
November 29, 2017 and issued to LPC an additional warrant to
purchase 164,256 shares of the Company’s common stock at an
exercise price of $3.17 per share (“LPC Series B
Warrant”) that will
terminate five years after the date of
issuance.
The
Company accounted for the LPC Series B Warrant feature of the
Debenture based upon the relative fair value of the warrants on the
date of issuance of the Debenture of $164,325, which was recorded
as additional paid in capital and a discount to the
Debenture.
For the year ended December 31, 2017, the Company
recorded $871,051 of interest expense related to the original issue
discount, warrant features and beneficial conversion features of
the Debenture. For the year ended December 31, 2017, $194,627 of
this amount was accreted interest expense related to the original
issue discount feature of the Debenture that also increased the outstanding balance of
convertible debt by the same amount. For the year ended December
31, 2017, $280,834 of this amount was amortization of the debt
discount related to the warrant features of the Debenture. For the
year ended December 31, 2017, $395,590 of this amount was
amortization of the debt discount related to the beneficial
conversion feature of the Debenture that also increased the
outstanding balance of convertible debt by the same
amount.
March 2016 OID Notes
On
March 31, 2016, the Company issued original issue discounted
convertible notes at 92% of the principal amount of the notes due
on November 4, 2016 with a conversion price of $4.65 per share,
issued 39,446 new warrants with a strike price of $5.58 per share,
and adjusted the strike price to $5.58 share on 528,046
warrants.
For
the year ended December 31, 2016, the Company recorded $2,080,365
of interest expense related to the original issue discount, warrant
features, and beneficial conversion features of these notes. For
the year ended December 31, 2016, $1,160,267 of this amount was
accreted interest expense related to the original issue discount
feature of the notes that also increased the outstanding balance of
the convertible debt by the same amount. For the year ended
December 31, 2016, $883,429 of this amount was amortization of the
debt discount related to the warrant features of the notes. For the
year ended December 31, 2016, $36,669 of this amount was
amortization of the debt discount related to the beneficial
conversion feature of the note that also increased the outstanding
balance of the convertible debt by the same amount.
Upon consummation of the Company’s initial
public offering (“IPO”) on October 11, 2016, these notes
converted into 2,642,160 shares of common
stock.
Notes
to Consolidated Financial Statements, AzurRx BioPharma Inc.,
December 31, 2017 and 2016
The
Company accounted for the warrant feature of the notes by recording
a warrant liability based upon the fair value of the warrants on
the dates of issuance. The warrant liability was adjusted to the
fair value at the IPO Date of $3,670,680 by recording a fair value
adjustment of $2,329,018. Upon the satisfaction of conditions
related to the number of Warrant Shares to be issued, the fair
value of the warrant liability at the IPO Date of $3,670,680 was
reclassified into equity at that date.
There
was no original issue discounted convertible notes outstanding at
December 31, 2016.
Convertible
Debt consisted of:
|
|
December 31,
|
December 31,
|
|
|
2017
|
2016
|
|
Convertible
debt
|
$352,713
|
$-
|
|
Accreted
OID interest
|
34,488
|
-
|
|
Unamortized
debt discount - warrants
|
(129,836)
|
-
|
|
Total
convertible debt
|
$257,365
|
$-
|
Note 11 - Equity
On
July 13, 2016, the Company amended its Certificate of Incorporation
to increase the authorized shares of its common stock, $0.0001 par
value, to 100,000,000 shares from 9,000,000 shares and increase the
authorized shares of its preferred stock, $0.0001 par value, to
10,000,000 shares from 1,000,000 shares.
Common Stock
At
December 31, 2017 and 2016, the Company had 12,042,574 and
9,631,088, respectively, of shares of its common stock issued and
outstanding.
Voting
Each
holder of common stock has one vote for each share
held.
Stock Option Plan
The
Company’s board of directors and stockholders have 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 permits the Company to award stock options (both incentive
stock options and non-qualified stock options), stock appreciation
rights, restricted stock, restricted stock units, performance stock
awards, performance unit awards, unrestricted stock awards,
distribution equivalent rights to the Company’s officers,
employees, directors, consultants and advisers. The maximum number
of shares of common stock that may be issued pursuant to awards
under the 2014 Plan is ten percent (10%) of the issued and
outstanding shares of the Company’s common stock on an
“as converted” basis on a rolling basis. The “as
converted” shares include all shares of the Company’s
common stock and all shares of the Company’s common stock
issuable upon the conversion of outstanding preferred stock and
other convertible securities, but do not include any shares of
common stock issuable upon the exercise of options and other
convertible securities issued pursuant to the Plan. During the year
ended December 31, 2017, the Company granted 545,000 stock options
under the 2014 Plan, see Note 13. There were no such options
granted in the year ended December 31, 2016.
Series A Convertible Preferred Stock
Pursuant to the SPA with the Protea
Group, on June 13, 2014, the Company issued 100 shares of Series A
Convertible Preferred Stock (“Series A
Preferred”). At December
31, 2017 and 2016, there were no Series A Preferred outstanding and
all terms of the Series A Preferred are still in
effect.
The
terms of the Series A Preferred are described below:
Notes
to Consolidated Financial Statements, AzurRx BioPharma Inc.,
December 31, 2017 and 2016
Voting
The Series A Preferred holders are entitled to vote, together with
the holders of common stock as one class, on all matters to which
holders of common stock shall be entitled to vote, in the same
manner and with the same effect as the common stock holders with
the same number of votes per share that equals the number of shares
of common stock into which the Series A Preferred is convertible at
the time of such vote.
Dividends
The
holders of the Series A Preferred shall be entitled to receive
dividends, when, as, and if declared by the board of directors,
ratably with any declaration or payment of any dividend on common
stock. To date there have been no dividends declared or paid by the
board of directors.
Liquidation
The
holders of the Series A Preferred shall be entitled to receive,
before and in preference to, any distribution of any assets of the
Company to the holders of common stock, an amount equal to $0.0001
per share, plus any declared but unpaid dividends. The liquidation
preference as of December 31, 2017 and 2016 approximates par
value.
Conversion
The
Series A Preferred was convertible into 33% of the issued and
outstanding shares of common stock on a fully diluted basis,
assuming the conversion, exercise, or exchange for shares of common
stock of all convertible securities issued and outstanding
immediately prior to such conversion, including the Series A
Preferred, all outstanding warrants and options, and all
outstanding convertible debt, notes, debentures, or any other
securities which are convertible, exercisable, or exchangeable for
shares of common stock. The Series A Preferred was convertible at
the holder’s option any time commencing on the one-year
anniversary of the initial issuance date. The Series A Preferred
was subject to mandatory conversion at any time commencing on the
one-year anniversary of the initial issuance date upon the vote or
written consent by the holders of a majority of the Series A
Preferred then outstanding or upon the occurrence of certain
triggering events, including a public offering coupled with an
equity-linked financing with an offering price that values the
Company prior to consummation of such financing at not less than
$12,000,000 and the aggregate gross proceeds to the Company (before
deduction of underwriting discounts and registration expenses) are
not less than $6,000,000. On November 11, 2015, the Company and the
Protea Group agreed that the Series A Preferred would be
convertible into 2,439,365 shares of common stock.
During
the year ended December 31, 2016, Protea Group converted 71 shares
of Series A Preferred into 1,731,949 shares of common stock. As of
December 31, 2016, all Series A Preferred has been converted into
common stock.
Beneficial Conversion
The
Series A Preferred was recorded at fair value when issued under
purchase accounting for the purchase of the Company’s French
subsidiary. As such, there was no intrinsic value that would result
in a beneficial conversion feature at date of issuance. The Series
A Preferred was voluntarily converted and there was no associated
beneficial conversion.
Restricted Stock
During
the year ended December 31, 2017, 405,944 shares of restricted
common stock were granted to employees and consultants with a total
value of $1,582,915. During the year ended December 31, 2017,
248,528 restricted shares of common stock vested with a value of
$951,217 of which 20,000 shares having a value of $82,200 have not
been issued yet. The restricted common stock granted in the year
ended December 31, 2017 have vesting terms ranging from immediately
to three years or based on the Company achieving certain milestones
as set forth in the following paragraph.
As of December 31, 2017, the Company had
unrecognized restricted common stock expense of $631,698. $206,698
of this unrecognized expense will be recognized over the average
remaining vesting term of the restricted common stock of 2.65
years. $425,000 of this unrecognized expense vests (i) 75% upon an
FDA acceptance of an Investigational New Drug (“IND”)
application in the United States; and (ii) 25% upon the Company
completing a Phase IIa clinical trial for MS1819. Neither of these
milestones are considered probable at December 31,
2017.
Notes
to Consolidated Financial Statements, AzurRx BioPharma Inc.,
December 31, 2017 and 2016
During
the year ended 2016, the Company granted 100,000 shares of
restricted common stock to its CEO, Johan Spoor, which are to be
issued as follows: (i) 50,000 restricted shares upon the first
commercial sale in the United States of MS1819, and (ii) 50,000
restricted shares upon the total market capitalization of the
Company exceeding $1 billion dollars for 20 consecutive trading
days, in each case subject to the earlier determination of a
majority of the board of directors. In the event of a Change of
Control (as defined in the agreement), all of the restricted shares
shall vest in full. The estimated fair value at the date of grant
was $210,000 and this amount was expensed in 2016.
On
July 24, 2017, the Company entered into a consulting agreement that
includes a grant of 40,000 restricted shares of common stock to a
consultant contingent upon the approval of the Board, which as of
March 15, 2018 has not yet been granted.
June 2017 Private Placement
On June 5, 2017, the Company entered into
Securities Purchase Agreements (the “Purchase
Agreements”) with certain
accredited investors (“Investors”), pursuant to which the Company issued an
aggregate of 1,428,572 units for $3.50 per unit, with each unit
consisting of one share of common stock, one warrant to purchase
0.25 shares of common stock at $4.00 per share exercisable
immediately through December 31, 2017 (“Series A
Warrant”), and one
warrant to purchase 0.75 shares of common stock at $5.50 per share
(“Series A-1
Warrant”) exercisable
beginning six months from the date of issuance through June 5, 2022
(together, “Units”) (the "Financing"). At closing of the June 2017 Private Placement,
the Company issued Units resulting in the issuance of an aggregate
of 1,428,572 shares of common stock, Series A Warrants to purchase
up to 357,144 shares of common stock, and Series A-1 Warrants to
purchase up to 1,071,431 shares of common stock, resulting in gross
proceeds of $5,000,000.
Placement agent fees of $350,475 were paid to
Alexander Capital L.P. (“Alexander
Capital”), based on the
aggregate principal amount of the Units issued to certain investors
identified by Alexander Capital (“Alexander
Investors”), which amount
includes both an 8% success fee and a 1% expense fee, and Series
A-1 Warrants to purchase 77,950 shares of common stock were issued
to Alexander Capital (the “Placement Agent
Warrants”), reflecting
warrants for that number of shares of common stock equal to 7% of
the aggregate number of shares of common stock purchased by
Alexander Investors. The Placement Agent Warrants are exercisable
at a fixed price of $6.05 per share beginning December 2, 2017
through June 5, 2022. The Company also incurred $4,000 in other
fees associated with this placement. The placement agent and other
fees are netted against the proceeds in the Consolidated Statements
of Changes in Stockholders' Equity.
On June 20, 2017, the Company and Investors
executed an amendment to the Purchase Agreements to authorize the
Company to issue up to $400,000 of additional Units, and on July 5,
2017, the Company issued additional Units resulting in gross
proceeds of $400,000 (“Subsequent
Closing”). Placement
agent fees of $36,000 were paid to Alexander Capital, as well as
additional Placement Agent Warrants to purchase 5,760 shares of
common stock. In connection with the Subsequent Closing, the
Company issued 114,283 shares of common stock and Series A and A-1
Warrants to purchase 28,572 and 85,715 shares, respectively. The
placement agent fees are netted against the proceeds in the
Consolidated Statements of Changes in Stockholders'
Equity.
The
Company also entered into a Registration Rights Agreement granting
the Investors certain registration rights with respect to the
shares of common stock issued in connection with the June 2017
Private Placement, as well as the shares of common stock issuable
upon exercise of the Series A Warrants and Series A-1 Warrants. All
of these shares have been registered pursuant to the registration
statement on Form S-1 declared effective by SEC on August 11,
2017.
Notes
to Consolidated Financial Statements, AzurRx BioPharma Inc.,
December 31, 2017 and 2016
Note 12 - Warrants
Stock
warrant transactions for the period January 1, 2016 through
December 31, 2017 were as follows:
|
|
Warrants
|
Exercise Price Per Share
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
Warrants outstanding and exercisable at January 1,
2016
|
662,474
|
$7.37
|
$7.37
|
|
|
|
|
|
|
Granted
during the period
|
1,195,866
|
$4.76 - $6.60
|
$5.57
|
|
Expired
during the period
|
-
|
-
|
-
|
|
Exercised
during the period
|
-
|
-
|
-
|
|
Warrants outstanding and exercisable at December 31,
2016
|
1,858,340
|
$4.76 - $7.37
|
$5.66
|
|
|
|
|
|
|
Granted
during the period
|
2,205,080
|
$3.17 - $6.50
|
$5.02
|
|
Expired
during the period
|
(263,607)
|
$4.00
|
$4.00
|
|
Exercised
during the period
|
(428,428)
|
$2.50
|
$2.50
|
|
Warrants outstanding and exercisable at December 31,
2017
|
3,371,385
|
$3.17 - $7.37
|
$5.28
|
|
|
Number of
|
Weighted Average
|
Weighted
|
|
|
Shares Under
|
Remaining Contract
|
Average
|
|
Exercise Price
|
Warrants
|
Life in Years
|
Exercise Price
|
|
$3.00 - $3.99
|
440,349
|
4.54
|
|
|
$4.00 - $4.99
|
196,632
|
4.01
|
|
|
$5.00 - $5.99
|
2,409,953
|
3.83
|
|
|
$6.00 - $6.99
|
225,134
|
3.82
|
|
|
$7.00 - $7.37
|
99,317
|
3.03
|
|
|
Total
|
3,371,385
|
3.91
|
$5.28
|
Certain
Company warrants were expiring December 31, 2017. The Company
offered the holders of these warrants the opportunity to exercise
their warrants at a reduced strike price of $2.50, and if so
elected, would also have the opportunity to exercise other warrants
that they held at $2.50 and/or reprice other warrants that they
continue to hold unexercised to $3.25. The offer, which was
effective December 28, 2017, was for the repricing only and did not
modify the life of the warrants. Warrant holders of approximately
428,000 shares exercised their warrants and also had other warrants
modified on approximately 226,000 shares, resulting in a charge of
approximately $398,000 in December 2017. At December 31, 2017, the
Company recorded stock subscriptions receivable and common stock
subscribed in the amount of $1,071,070 which are netted against
each other within equity.
In
addition, in January 2018, the Company offered other warrant
holders the opportunity to exercise their warrants at a reduced
strike price of $2.50, and if so elected, would also have the
opportunity to reprice other warrants that they continue to hold
unexercised to $3.25. The offer, which was effective January 12,
2018, was for the repricing only and did not modify the life of the
warrants. Warrant holders of approximately 503,000 shares exercised
their warrants and also had other warrants modified on
approximately 197,000 shares, which will result in a charge of
approximately $429,000 in January 2018.
All
cash proceeds on the exercise of the warrants and related stock
issuances occurred after December 31, 2017 and amounted to
approximately $2,200,000.
During the year ended December 31, 2017, 250,000
fully vested warrants were issued to consultants with a value of $538,945. These
amounts were earned and expensed as G&A expenses in the year
ended December 31, 2017.
Notes
to Consolidated Financial Statements, AzurRx BioPharma Inc.,
December 31, 2017 and 2016
During the year ended December 31, 2017,
1,542,858 warrants
were issued in association with the June 2017 Private Placement of
the Company’s common stock with a value of $2,503,673, which
had no effect on expenses or stockholders’
equity.
During the year ended December 31, 2017,
83,710 warrants were issued to investment bankers
in association with the June 2017
Private Placement of the Company’s common stock that vested
immediately with a value of $154,529, which had no effect on expenses or stockholders’
equity.
During
the year ended December 31, 2016, 41,118 warrants were issued to
investment bankers in association with the placement of original
issue discounted convertible notes that vested immediately with a
value of $55,097. These amounts were included in G&A
expenses.
During
the year ended December 31, 2016, 717,540 warrants were issued to
certain original issue discounted convertible noteholders in
exchange for 180-day lockup provisions with a value of $2,741,003.
This amount was included in interest expense.
During
the year ended December 31, 2016, 48,000 immediately vesting
warrants were issued to investment bankers in connection with the
consummation of the IPO with a value of $196,752 that had no effect
on expenses or stockholders’ equity.
The
weighted average fair value of warrants granted to non-employees
during the years ended December 31, 2017 and 2016 was $2.16 and
$1.34, respectively. The fair values were estimated on the grant
dates using the Black-Scholes option-pricing model with the
following weighted-average assumptions:
|
|
December 31,
|
December 31,
|
|
|
2017
|
2016
|
|
Expected
life (in years)
|
5
|
5
|
|
Volatility
|
73 - 90%
|
118%
|
|
Risk-free
interest rate
|
1.82% - 2.05%
|
1.28%
|
|
Dividend
yield
|
—%
|
—%
|
The expected term of the warrants is based on the
actual term of the warrants. Volatility is based on the historical volatility
of several public entities that are similar to the Company. The
Company bases volatility this way because it does 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.
Note 13 - Stock-Based Compensation Plan
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 year ended December 31, 2017, 545,000 stock options were
granted with exercise prices ranging from $3.60 to $4.48 and lives
ranging from five to ten years. 157,500 options vested in the year
ended December 31, 2017 having a fair value of $609,369. The
weighted average fair value of stock options granted to employees
during the year ended December 31, 2017 was $2.96.
Notes
to Consolidated Financial Statements, AzurRx BioPharma Inc.,
December 31, 2017 and 2016
The
fair values were estimated on the grant dates using the
Black-Scholes option-pricing model with the following
weighted-average assumptions:
|
|
December 31,
|
|
|
2017
|
|
Expected
life (in
years)
|
5 - 10
|
|
Volatility
|
71% - 90%
|
|
Risk-free
interest
rate
|
1.78% - 2.48%
|
|
Dividend
yield
|
—%
|
The
expected term of the options is based on expected future employee
exercise behavior. Volatility is based on the historical volatility
of several public entities that are similar to the Company. The
Company bases volatility this way because it does 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.
During
the year ended December 31, 2016, no stock options were
granted.
The
Company realized no income tax benefit from stock option exercises
in each of the periods presented due to recurring losses and
valuation allowances.
Stock
option activity under the 2014 Plan is as follows:
|
|
Number of Shares
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contract Life in Years
|
Aggregate Intrinsic Value
|
|
|
|
|
|
|
|
Stock options outstanding at January 1, 2017
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Granted
during the period
|
545,000
|
$4.05
|
7.13
|
$-
|
|
Expired
during the period
|
-
|
-
|
|
|
|
Exercised
during the period
|
-
|
-
|
|
|
|
Stock options outstanding at December 31, 2017
|
545,000
|
$4.05
|
7.13
|
$-
|
|
Exercisable at December 31, 2017
|
157,500
|
$4.48
|
9.10
|
$-
|
|
|
|
|
|
|
|
Non-vested stock options outstanding at January 1,
2017
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Granted
during the period
|
387,500
|
$3.88
|
6.33
|
$-
|
|
Expired
during the period
|
-
|
-
|
|
|
|
Exercised
during the period
|
-
|
-
|
|
|
|
Non-vested stock options outstanding at December 31,
2017
|
387,500
|
$3.88
|
6.33
|
$-
|
593,553
shares were available for future issuance under the 2014 Plan as of
December 31, 2017.
As
of December 31, 2017, the Company had unrecognized stock-based
compensation expense of $1,005,389. $125,739 of this unrecognized
expense will be recognized over the average remaining vesting term
of the options of 1.09 years. $879,650 of this unrecognized expense
vests (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. Neither of these milestones are
considered probable at December 31, 2017.
Note 14 - Interest Expense
During
the years ended December 31, 2017 and 2016, the Company incurred
$875,199 and $5,937,486, respectively, of interest expense. During
the years ended December 31, 2017 and 2016, $871,051 and
$5,930,087, respectively, of these amounts was in connection with
the convertible notes issued by the Company in the form of
accretion of original issue debt discount, amortization of debt
discount related to the warrants, and beneficial conversion
feature. During the years ended December 31, 2017 and 2016, the
Company incurred $0 and $6,007, respectively, of interest expense
in connection with promissory notes issued by the Company. During
the years ended December 31, 2017 and 2016, the Company also
incurred $4,148 and $1,392, respectively, of miscellaneous interest
expense.
Notes
to Consolidated Financial Statements, AzurRx BioPharma Inc.,
December 31, 2017 and 2016
Note 15 - Agreements
Mayoly Agreement
On March 22, 2010, the Predecessor entered into a
joint research and development agreement (the
“2010
Agreement”) with
Laboratoires Mayoly Spindler SAS (“Mayoly”) with no consideration exchanged, pursuant
to which Mayoly sublicensed certain of its exclusive rights to a
genetically engineered yeast strain cell line on which MS1819 is
based that derive from a Usage and Cross-Licensing Agreement dated
February 2, 2006 (the “INRA Agreement”) between Mayoly
and INRA TRANSFERT, a subsidiary of the National Institute for
Agricultural Research (“INRA”) in charge of patent management acting for
and on behalf of the National Centre of Scientific Research
(“CNRS”) and INRA.
Effective January 1, 2014, the Predecessor entered
into an amended and restated joint research and development
agreement with Mayoly (the “Mayoly
Agreement”) with no
consideration exchanged, pursuant to which the Predecessor acquired
the exclusive right, with the right to sublicense, to commercialize
human pharmaceuticals based on the MS1819 lipase within the
following territories: U.S. and Canada, South America (excluding
Brazil), Asia (excluding China and Japan), Australia, New Zealand
and Israel. Rights to the following territories are held jointly
with Mayoly: Brazil, Italy, Portugal, Spain, China and Japan. The
Mayoly Agreement requires the Predecessor to pay 70% of all
development costs and requires each of the parties to use
reasonable efforts to:
●
devote
sufficient personnel and facilities required for the performance of
its assigned tasks;
●
make
available appropriately qualified personnel to supervise, analyze
and report on the results obtained in the furtherance of the
development program; and
●
deploy
such scientific, technical, financial and other resources as is
necessary to conduct the development program.
During
the years ended December 31, 2017 and 2016, the Company was
reimbursed $785,509 and $601,575, respectively, from Mayoly under
the Mayoly Agreement.
The
Mayoly Agreement grants the Predecessor the right to cure any
breach by Mayoly of its obligations under the INRA agreement. In
connection with the acquisition of ProteaBio Europe, the
Predecessor, with the consent of INRA and CNRS, assigned all of it
rights, title and interest in and to the Mayoly Agreement to the
AzurRx Europe SAS.
The
Mayoly Agreement includes a €1,000,000 payment due to Mayoly
upon the U.S. FDA approval of MS1819. At this time, based on
management’s assessment of ASC Topic 450, Contingencies, the
Company has not recorded any contingent liability related to this
payment.
INRA Agreement
In
February 2006, Mayoly and INRA TRANSFERT, on behalf of INRA and
CNRS, entered into a Usage and Cross-Licensing Agreement granting
Mayoly exclusive worldwide rights to exploit Yarrowia lipolytica
and other lipase proteins based on their patents for use in humans.
The INRA Agreement provides for the payment by Mayoly of royalties
on net sales, subject to Mayoly’s right to terminate such
obligation upon the payment of a lump sum specified in the
agreement.
TransChem Sublicense
On August 7, 2017, the Company entered
into a Sublicense Agreement with TransChem, Inc.
(“TransChem”), pursuant to which TransChem granted the
Company an exclusive license to patents and patent applications
relating to Helicobacter pylori 5’methylthioadenosine
nucleosidase inhibitors (the “Licensed
Patents”) currently held
by TransChem (the “Sublicense
Agreement”). The Company
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, the Company paid an upfront fee to
TransChem and agreed to reimburse TransChem for certain expenses
previously incurred in connection with the preparation, filing, and
maintenance of the Licensed Patents. The Company also agreed to pay
TransChem certain future periodic sublicense maintenance fees,
which fees may be credited against future royalties. The Company
may also be required to pay TransChem additional payments and
royalties in the event certain performance-based milestones and
commercial sales involving the Licensed Patents are achieved. The
Licensed Patents will allow the Company to develop compounds for
treating gastrointestinal, lung and other infections which are
specific to individual bacterial species. H.pylori bacterial
infections are a major cause of chronic gastritis, peptic ulcer
disease, gastric cancer and other
diseases.
Notes
to Consolidated Financial Statements, AzurRx BioPharma Inc.,
December 31, 2017 and 2016
Employment Agreement
On
January 3, 2016, the Company entered into an employment agreement
with its President and Chief Executive Officer, Johan Spoor. The
employment agreement provides for a term expiring January 2, 2019.
Either party may terminate Mr. Spoor’s employment at any time
and for any reason, or for no reason. During the term and for a
period of twelve (12) months thereafter, Mr. Spoor shall not engage
in competition with the Company either directly or indirectly, in
any manner or capacity.
The
Company will pay Mr. Spoor a base salary of $350,000 per year,
which automatically increased to $425,000 per year upon the
consummation of the IPO which occurred on October 11, 2016. At the
sole discretion of the board of directors or the compensation
committee of the board, following each calendar year of employment,
Mr. Spoor shall be 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
of directors or the compensation committee. On September 29, 2017,
the Board approved a 2016 annual incentive bonus equal to 40% of
Mr. Spoor’s current base salary pursuant to his employment
agreement in the amount of $170,000.
In
addition, subject to any required consents from third parties, Mr.
Spoor shall be granted 100,000 shares of restricted common stock,
which are to be issued as follows: (i) 50,000 restricted shares
upon the first commercial sale in the United States of MS1819, and
(ii) 50,000 restricted shares upon the total market capitalization
of the Company exceeding $1 billion dollars for 20 consecutive
trading days, in each case subject to the earlier determination of
a majority of the board of directors. In the event of a Change of
Control (as defined in the agreement), all of the restricted shares
shall vest in full. The estimated fair value at the date of grant
was $210,000 and this amount was expensed in 2016.
Subject
to any required consents from third parties, Mr. Spoor shall also
be entitled to 380,000 10-year stock options pursuant to the 2014
Plan, which options shall vest as follows so long as Mr. Spoor is
serving as Chief Executive Officer or President at such time: (i)
100,000 of such stock options shall vest upon consummation of the
IPO, (ii) 50,000 of such stock options shall vest upon the Company
initiating a Phase II clinical trial in the United States for
MS1819 (i.e., upon the first individual enrolled in the trial),
(iii) 50,000 of such stock options shall vest upon the Company
completing a Phase II clinical trial in the United States for
MS1819, (iv) 100,000 of such stock options shall vest upon the
Company initiating a Phase III clinical trial in the United States
for MS1819, (v) 50,000 of such stock options shall vest upon the
Company initiating a Phase I clinical trial in the United States
for any product other than MS1819, and (vi) 30,000 of such stock
options shall vest upon the determination of a majority of the
board of directors.
On
June 8, 2016, the board of directors clarified Mr. Spoor’s
agreement as follows: the 380,000 options described have neither
been granted nor priced since certain key provisions, particularly
the underlying exercise price, have not been determined. The
options will be granted at a future date to be determined by the
board of directors, and the options will be priced at that future
date when they are granted. In the first quarter of 2017, 100,000
options having a value of $386,900 were granted and
expensed.
On September 29, 2017, Mr. Spoor was
granted 100,000 shares of
restricted common stock subject to vesting conditions as follows:
(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, in satisfaction of the Company’s obligation to
issue the additional 280,000 options to Mr. Spoor described above,
with an estimated fair value at the grant date of $425,000 to be
expensed when the above milestones are
probable.
If
the Company terminates Mr. Spoor’s employment other than for
cause, or he terminates for good reason, as both terms are defined
in the agreement, the Company will pay him twelve (12) months of
his base salary as severance. If the Company terminates Mr.
Spoor’s employment other than for cause, or he terminates for
good reason, in connection with a Change of Control, the Company
will pay him eighteen (18) months of his base salary in lump sum as
severance.
On
September 26, 2017, the Company entered into an employment
agreement with Maged Shenouda, a member of the Company’s
Board of Directors, pursuant to which Mr. Shenouda serves as the
Company’s Chief Financial Officer. Mr. Shenouda’s
employment agreement provides for the issuance of stock options to
purchase 100,000 shares of the Company’s common stock,
issuable pursuant to the 2014 Plan. These options will vest as
follows so long as Mr. Shenouda is serving as either Executive
Vice-President of Corporate Development or as Chief Financial
Officer (i) 75% upon FDA acceptance of a U.S. IND application for
MS1819, and (ii) 25% upon the Company completing a Phase IIa
clinical trial for MS1819. The option is exercisable for $4.39 per
share, and will expire on September 25, 2027.
Notes
to Consolidated Financial Statements, AzurRx BioPharma Inc.,
December 31, 2017 and 2016
Note 16 - Leases
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. Rental
expense, which is calculated on a straight-line basis, amounted to
$123,735 and $147,254, respectively, in the years ended December
31, 2017 and 2016.
Minimum
future annual rental payments are as follows:
|
2018
|
$97,514
|
|
2019
|
$67,936
|
|
2020
|
$67,936
|
Note 17 - Income Taxes
The
Company is subject to taxation at the federal level in both the
United States and France and at the state level in the United
States. At December 31, 2017 and 2016, the Company had no tax
provision for either jurisdictions.
The
Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”), which was signed
into law on December 22, 2017, has resulted in significant changes
to the U.S. corporate income tax system. These changes include a
federal statutory rate reduction from 35% to 21% and the
elimination or reduction in the deductibility of certain credits
and limitations, such as net operating losses, interest expense,
and executive compensation. The federal statutory rate reduction
takes effect on January 1, 2018. As a result of the reduction of
federal corporate income tax rates, the Company has estimated a
material reduction of $2,240,000 to its deferred tax assets.
However, consistent with 2016, its deferred tax assets continue to
be fully offset by a valuation allowance in 2017 as the Company
cannot currently conclude that it is more likely than not that the
remaining deferred tax assets will be utilized. Consequently,
although the future potential benefit from its deferred tax assets
has been materially reduced by the reduction of federal corporate
income tax rates, there was no effect on its 2017 Consolidated
Statement of Operations. On December 22, 2017, Staff Accounting
Bulletin No. 118 (SAB 118) was issued to address the application of
U.S. GAAP in situations when a registrant does not have the
necessary information available, prepared, or analyzed (including
computations) in reasonable detail to complete the accounting for
certain income tax effects of the 2017 Tax Act. In accordance with
SAB 118, the Company continues to evaluate the impact of the 2017
Tax Act, which may impact its current conclusions.
At December 31, 2017 and 2016, the Company had gross deferred tax
assets of approximately $9,918,000 and $7,875,000, 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 $9,918,000 and $7,875,000,
respectively, has been established at December 31, 2017 and 2016.
The change in the valuation allowance in 2017 and 2016 was
$2,043,000 and $3,968,000, respectively.
The
significant components of the Company’s net deferred tax
assets consisted of:
|
|
December 31,
|
December 31,
|
|
|
2017
|
2016
|
|
Gross
deferred tax assets:
|
|
|
|
Net
operating loss carry-forwards
|
$8,848,000
|
$6,962,000
|
|
Temporary
differences
|
1,070,000
|
913,000
|
|
Deferred
tax asset valuation allowance
|
(9,918,000)
|
(7,875,000)
|
|
Net
deferred tax asset
|
$-
|
$-
|
Notes
to Consolidated Financial Statements, AzurRx BioPharma Inc.,
December 31, 2017 and 2016
Income
taxes computed using the federal statutory income tax rate differs
from the Company’s effective tax rate primarily due to the
following:
|
|
December 31,
|
December 31,
|
|
|
2017
|
2016
|
|
Income
taxes benefit (expense) at statutory rate
|
34%
|
34%
|
|
State
income tax, net of federal benefit
|
11%
|
11%
|
|
Non-deductible
expenses
|
(19%)
|
(24%)
|
|
Change
in valuation allowance
|
(26%)
|
(21%)
|
|
|
0%
|
0%
|
At December 31, 2017, the Company has gross net
operating loss (“NOL”) carry-forwards for U.S. federal and state
income tax purposes of approximately $15,253,000 and $13,822,000,
respectively. The Company’s ability to use its NOL
carryforwards may be limited if it experiences an “ownership
change” as defined in Section 382 (“Section 382”) of the Internal Revenue Code of 1986, as
amended. An ownership change generally occurs if certain
stockholders increase their aggregate percentage ownership of a
corporation’s stock by more than 50 percentage points over
their lowest percentage ownership at any time during the testing
period, which is generally the three-year period preceding any
potential ownership change.
At
December 31, 2017 and 2016, the Company had approximately
$12,374,000 and $8,374,000, respectively, in net operating losses
which it can carryforward indefinitely to offset against future
French income.
At
December 31, 2017 and 2016, the Company had taken no uncertain tax
positions that would require disclosure under ASC 740, Accounting
for Income Taxes.
Note 18 - Net Loss per Common Share
Basic
net loss per share is computed by dividing net loss available to
common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflect,
in periods in which they have a dilutive effect, the impact of
common shares issuable upon exercise of stock options and warrants
and conversion of convertible debt that are not deemed to be
anti-dilutive. The dilutive effect of the outstanding stock options
and warrants is computed using the treasury stock
method.
At December 31, 2017, diluted net loss per share
did not include the effect of
3,371,385 shares of common stock issuable upon the exercise of
outstanding warrants, 545,000 shares of common stock issuable upon
the exercise of outstanding options, and 100,000 shares of common
stock issuable upon the conversion of convertible debt as their
effect would be antidilutive during the periods prior to
conversion.
At
December 31, 2016, diluted net loss per share did not include the
effect of 1,858,340 shares of common stock issuable upon the
exercise of outstanding warrants, as their effect would be
antidilutive during the periods prior to conversion.
Note 19 - Related Party Transactions
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 current Chief Executive Officer and
president, as a consultant for business strategy, financial
modeling, and fundraising. Included in accounts payable at December
31, 2017 and 2016 is $478,400 and $508,300, 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.
During the year ended December 31, 2015, the
Company's President, Christine Rigby-Hutton, was employed through
Rigby-Hutton Management Services (“RHMS”). Ms. Rigby-Hutton resigned from the
Company effective April 20, 2015. Included in accounts payable at
both December 31, 2017 and 2016 is $38,453 for RHMS for Ms.
Rigby-Hutton’s services.
Notes
to Consolidated Financial Statements, AzurRx BioPharma Inc.,
December 31, 2017 and 2016
From
October 1, 2015 through December 31, 2015, the Company used the
services of Edward Borkowski, a member of our Board of Directors
and the Company’s Audit Committee Chair, as a financial
consultant. Included in accounts payable at both December 31, 2017
and 2016 is $90,000 for Mr. Borkowski’s
services.
In
July 2016, the Company granted 45,000 shares of restricted common
stock to Mr. Borkowski, a member of our Board of Directors, and
30,000 shares of restricted common stock to each of Messrs.
Shenouda and Dr. Alistair Riddell, both members of our Board of
Directors. The shares of restricted stock will be issued as
follows: (i) 50% upon the first commercial sale in the United
States of MS1819, and (ii) 50% upon our total market capitalization
exceeding $1 billion dollars for 20 consecutive trading days, or in
each case subject to the earlier determination of a majority of the
Board.
Starting
on October 1, 2016 until his appointment as the Company’s
Chief Financial Officer on September 25, 2017, the Company used the
services of Maged Shenouda as a financial consultant. Expense
recorded in G&A expense in the accompanying statements of
operations related to Mr. Shenouda for the years ended December 31,
2017 and 2016 was $80,000 and $70,000, respectively. Included in
accounts payable at both December 31, 2017 and 2016 is $70,000 for
Mr. Shenouda’s services.
On
February 3, 2017, the Board granted 30,000 options each to Messrs.
Borkowksi and Shenouda, and Dr. Riddell, with a total value of
$348,210 of which $222,469 was vested and charged to expense in the
year ended December 31, 2017.
During the year ended December 31, 2017, the
Company recorded Board fees of $35,000 for Mr. Borkowski and Dr. Riddell; $25,000 for Mr.
Shenouda; $30,000 for Mr. Charles Casamento; and $8,750 for Mr.
Vern Schramm.
During
the year ended December 31, 2017, as part of Board compensation,
the Company issued 30,000 shares of restricted common stock each to
Messr. Borkowksi and Dr. Riddell; 22,500 shares of restricted
common stock to Messr. Shenouda; 25,000 shares of restricted common
stock to Mr. Casamento; and 7,500 shares to Mr. Schramm with a
total value of $460,000 which was vested and charged to expense in
the year ended December 31, 2017.
On
September 29, 2017, the Board granted 100,000 shares of restricted
common stock to Mr. Spoor, the Company’s Chief Executive
Officer, subject to vesting conditions as follows: (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 with
an estimated fair value at the grant date of $425,000 to be
expensed when the above milestones are probable.
Note 20 - Employee Benefit Plans
401(k) Plan
The
Company sponsors a multiple employer defined contribution benefit
plan, which complies with Section 401(k) of the Internal Revenue
Code covering substantially all employees of the
Company.
All
employees are eligible to participate in the plan. Employees may
contribute from 1% to 100% of their compensation and the Company
matches an amount equal to 100% on the first 6% of the employee
contribution and may also make discretionary profit sharing
contributions.
Employer
contributions under this plan amounted to $23,207 and $16,867 for
the years ended December 31, 2017 and 2016,
respectively.
F-25