First Wave BioPharma, Inc. - Quarter Report: 2018 June (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

 

For the quarterly period ended June 30, 2018

 

OR

 

[  ] TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT OF 1934

 

From the transition period from               to              

 

Commission File Number 001-37853

 

 

AZURRX BIOPHARMA, INC.

(Exact name of small business issuer as specified in its charter)

 

Delaware	46-4993860
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

 

760 Parkside Avenue

Downstate Biotechnology Incubator, Suite 304

Brooklyn, New York 11226

(Address of principal executive offices)

 

(646) 699-7855

(Issuer’s telephone number)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]    No [ ]

 

Indicate by check mark whether the registrant has submitted electronically 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 (Sec.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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	[   ]	Accelerated filer	[   ]
Non-accelerated filer	[   ]	Smaller reporting company	[   ]
(Do not check if a smaller reporting company)		Emerging growth company	[X]

 

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]

 

As of August 10, 2018, there were 16,910,462 shares of the registrant’s common stock, $0.0001 par value, issued and outstanding.

  

 

 

  TABLE O F CONTENTS

 

			Page
PART I.	FINANCIAL INFORMATION
	Item 1.	Consolidated Financial Statements	1
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
	Item 4.	Controls and Procedures	26
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	27
	Item 1A.	Risk Factors	27
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
	Item 3.	Defaults Upon Senior Securities	27
	Item 4.	Mine Safety Disclosures	27
	Item 5.	Other Information	27
	Item 6.	Exhibits	27

 

 

 

 

 

PART I

 

FINANCIAL INFORMATION

 

ITEM  1.   CONSOLIDATED FINANCIAL STATEMENTS

 

In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly our financial position, results of operations, and cash flows for the interim periods presented. We have condensed such financial statements in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Therefore, such financial statements do not include all disclosures required by accounting principles generally accepted in the United States of America. In preparing these consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the consolidated financial statements were issued by filing with the SEC.

 

These financial statements should be read in conjunction with our audited financial statements for the year ended December 31, 2017 included in our Annual Report filed on Form 10-K, filed with the SEC on March 16, 2018.

 

The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the results to be expected for the fiscal year ended December 31, 2018.

 

 

 

 

	June 30,	December 31,
	2018	2017
ASSETS
Current Assets:
Cash	$7,420,425	$573,471
Other receivables	1,081,378	1,104,134
Prepaid expenses	132,324	274,963
Total Current Assets	8,634,127	1,952,568
Property, equipment, and leasehold improvements, net	145,024	133,987
Other Assets:
In process research and development, net	282,293	307,591
License agreements, net	665,578	1,038,364
Goodwill	1,966,670	2,016,240
Deposits	45,546	30,918
Total Other Assets	2,960,087	3,393,113
Total Assets	$11,739,238	$5,479,668
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses	$1,259,889	$1,187,234
Accounts payable and accrued expenses - related party	1,035,970	868,105
Note payable	26,836	159,180
Convertible debt	281,024	257,365
Interest payable	7,192	7,192
Total Current Liabilities	2,610,911	2,479,076
Contingent consideration	1,500,000	1,340,000
Total Liabilities	4,110,911	3,819,076
Stockholders' Equity:
Convertible preferred stock - Par value $0.0001 per share; 10,000,000 shares authorized and 0 shares issued and outstanding at June 30, 2018 and December 31, 2017; liquidation preference approximates par value	-	-
Common stock - Par value $0.0001 per share; 100,000,000 shares authorized; 16,792,395 and 12,042,574 shares issued and outstanding, respectively, at June 30, 2018 and December 31, 2017	1,679	1,205
Additional paid-in capital	49,611,859	37,669,601
Subscriptions receivable	-	(1,071,070)
Accumulated deficit	(40,925,603)	(33,983,429)
Accumulated other comprehensive loss	(1,059,608)	(955,715)
Total Stockholders' Equity	7,628,327	1,660,592
Total Liabilities and Stockholders' Equity	$11,739,238	$5,479,668

 

AZURRX BIOPHARMA, INC. Consolidated Statements of Operations and Comprehensive Loss (unaudited)

	Three Months	Three Months	Six Months	Six Months
	Ended	Ended	Ended	Ended
	June 30, 2018	June 30, 2017	June 30, 2018	June 30, 2017
Research and development expenses	$925,776	$743,422	$2,603,805	$1,277,559
General and administrative expenses	2,167,247	1,381,013	4,083,580	3,555,368
Fair value adjustment, contingent consideration	170,000	260,000	160,000	360,000
Loss from operations	(3,263,023)	(2,384,435)	(6,847,385)	(5,192,927)
Other:
Interest expense	(46,154)	(287,347)	(94,789)	(288,221)
Total other	(46,154)	(287,347)	(94,789)	(288,221)
Loss before income taxes	(3,309,177)	(2,671,782)	(6,942,174)	(5,481,148)
Income taxes	-	-	-	-
Net loss	(3,309,177)	(2,671,782)	(6,942,174)	(5,481,148)
Other comprehensive loss:
Foreign currency translation adjustment	(209,913)	230,170	(103,893)	291,856
Total comprehensive loss	$(3,519,090)	$(2,441,612)	$(7,046,067)	$(5,189,292)
Basic and diluted weighted average shares outstanding	15,300,197	10,064,713	13,881,698	9,849,098
Loss per share - basic and diluted	$(0.22)	$(0.27)	$(0.50)	$(0.56)

 

 

 

AZURRX BIOPHARMA, INC.

Consolidated Statements of Changes in Stockholders' Equity (unaudited)

								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, 2017	-	$-	9,631,088	$963	$27,560,960	$-	$(22,887,046)	$(1,461,875)	$3,213,002
Common stock and warrants issued from private placement			1,428,572	143	4,645,082				4,645,225
Stock-based compensation					551,333				551,333
Restricted stock granted to consultants			58,500	6	221,479				221,485
Warrants issued to consultants					560,902				560,902
Warrants issued in association with convertible debt issuances					246,347				246,347
Beneficial conversion feature on convertible debt issuances					395,589				395,589
Foreign currency translation adjustment								291,856	291,856
Net loss							(5,481,148)		(5,481,148)
Balance, June 30, 2017	-	$-	11,118,160	$1,112	$34,181,692	$-	$(28,368,195)	$(1,170,019)	$4,644,590
Balance, January 1, 2018	-	$-	12,042,574	$1,205	$37,669,601	$(1,071,070)	$(33,983,429)	$(955,715)	$1,660,592
Common stock issued from public offering			4,160,000	416	9,577,524				9,577,940
Common stock issued to consultants			751	-	-				-
Common stock issued for warrant exercises			503,070	49	1,253,623	1,071,070			2,324,742
Stock-based compensation					277,948				277,948
Restricted stock granted to employees/directors			60,000	6	335,745				335,751
Convertible debt converted into common stock			26,000	3	68,670				68,673
Warrant modification					428,748				428,748
Foreign currency translation adjustment								(103,893)	(103,893)
Net loss							(6,942,174)		(6,942,174)
Balance, June 30, 2018	-	$-	16,792,395	$1,679	$49,611,859	$-	$(40,925,603)	$(1,059,608)	$7,628,327

 

 

 

AZURRX BIOPHARMA, INC.

Consolidated Statements of Cash Flows (unaudited)

	Six Months Ended June 30, 2018	Six Months Ended June 30, 2017
Cash flows from operating activities:
Net loss	$(6,942,174)	$(5,481,148)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation	30,420	23,124
Amortization	377,499	355,857
Fair value adjustment, contingent consideration	160,000	360,000
Stock-based compensation	277,948	551,333
Restricted stock granted to employees/directors	335,751	-
Restricted stock granted/accrued to consultants	220,230	221,485
Warrants issued to consultants	-	560,902
Accreted interest on convertible debt	-	45,209
Convertible debt beneficial conversion feature	-	149,036
Accreted interest on debt discount - warrants	92,332	92,810
Warrant modification	428,748	-
Changes in assets and liabilities:
Other receivables	(6,624)	70,745
Prepaid expenses	142,560	6,449
Deposits	(15,000)	5,625
Accounts payable and accrued expenses	35,989	(383,867)
Net cash used in operating activities	(4,862,321)	(3,422,440)
Cash flows from investing activities:
Purchase of property and equipment	(41,041)	(21,243)
Net cash used in investing activities	(41,041)	(21,243)
Cash flows from financing activities:
Net proceeds from issuances of common stock and warrants	9,577,940	4,645,225
Net proceeds from common stock issued for warrant exercises	2,324,742	-
Proceeds from issuances of convertible debt	-	1,000,000
Repayments of note payable	(132,344)	(129,177)
Net cash provided by financing activities	11,770,338	5,516,048
Increase in cash	6,866,976	2,072,365
Effect of exchange rate changes on cash	(20,022)	(17,302)
Cash, beginning balance	573,471	1,773,525
Cash, ending balance	$7,420,425	$3,828,588
Supplemental disclosures of cash flow information:
Cash paid for interest	$2,457	$1,166
Cash paid for income taxes	$-	$-
Non-cash investing and financing activities:
Conversion of convertible debt into common stock	$68,673	$-

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

Note 1 - The Company, Recent Development, 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 BioPharma SAS (“ABS”), are collectively referred to as the “Company.”

 

AzurRx, through its ABS 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.

 

Within our current product pipeline, our two most advanced therapeutic programs are described below:

 

MS1819-SD

 

MS1819-SD is 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-SD is considered recombinant because it was created from new combinations of genetic material in yeast called Yarrowia lipolytica. The Company recently completed an open-label, dose escalation Phase IIa trial of MS1819-SD in France, Australia, and New Zealand to investigate both the safety of escalating doses of MS1819-SD, and the efficacy of MS1819-SD through the analysis of each patient’s coefficient of fat absorption (“CFA”) and its change from baseline. A total of 11 patients with EPI were enrolled in the study and initial data show a strong safety and efficacy profile. Both clinical activity and a clear dose response were observed, with the highest MS1819-SD dose cohort showing greater than 21% improvement in CFA in evaluable patients. Additionally, maximal absolute CFA response to treatment was up to 57%, with an inverse relationship to baseline CFA. Favorable trends were also observed on other evaluated endpoints, including Bristol stool scale, number of daily evacuations and weight of stool, and these were consistent with the CFA results. The Company expects to provide formal data from the Phase IIa study in the fall of 2018 and expects to begin a planned Phase IIb study focused on enrolling patients with CF in the second half of 2018.

 

B-Lactamase Program

 

The Company’s b-lactamase program focuses on products with an enzymatic combination of bacterial origin for the prevention of hospital-acquired infections and antibiotic-associated diarrhea (“AAD”) by resistant bacterial strains induced by parenteral administration of several antibiotic classes. Currently, the Company has two compounds in pre-clinical development in this program, AZX1101 and AZX1103. Both AZX1101 and AZX1103 are composed of several distinct enzymes that break up individual classes of antibiotic molecules. AZX1103 is a b-lactamase enzyme combination that has shown positive pre-clinical activity, with degradation of amoxicillin in the presence of clavulanic acid in the upper gastrointestinal tract in the Gottingen minipig model. Currently, the Company is focused on advancing pre-clinical development of AZX1103 and expects to file an Investigational New Drug application (an “IND”) for AZX1103 with the U.S. Food and Drug Administration (“FDA”) in 2019. At this time, the Company is currently assessing its plans for the continuation of the development of AZX1101.

 

 

 

 

Recent Developments

 

Public Offering of Common Stock

 

On May 3, 2018, the Company completed an underwritten, public offering of 4,160,000 shares of its common stock, par value $0.0001 per share, at a public offering price per share of $2.50, resulting in gross proceeds of $10.4 million (the “May 2018 Public Offering”) with associated expenses of approximately $800,000. The May 2018 Public Offering was completed pursuant to the terms of an underwriting agreement executed by the Company and Oppenheimer & Co. Inc. (“Oppenheimer”) on May 1, 2018. After deducting the underwriting discount paid to Oppenheimer, estimated legal fees, and other offering expenses payable by the Company, the Company received net proceeds of approximately $9.6 million.

 

The May 2018 Public Offering was conducted pursuant to the Company’s effective shelf registration statement on Form S-3 (File No. 333-221275), filed with the SEC on November 1, 2017, and declared effective on November 17, 2017, including the base prospectus dated November 1, 2017 included therein and the related prospectus supplement, and a registration statement on Form S-3 filed pursuant to Rule 462(b) of the Securities Act of 1933, as amended (the “Securities Act”), (File No. 333-224562) filed on May 1, 2018.

 

In addition to the underwriting discount received by Oppenheimer, the Company also issued unregistered warrants to Oppenheimer to purchase up to 208,000 shares of its common stock (the “Underwriter Warrants”). The Underwriter Warrants, valued at $349,232, will become exercisable six months from the date of issuance, expire on May 1, 2023 and have an exercise price of $2.55 per share. As a result of certain investors participating in the Offering, the Company also paid a financial advisory fee to Alexander Capital, LP, consisting of a cash payment of approximately $104,000 and the issuance of warrants valued at $67,194, substantially similar to the Underwriter Warrants, to purchase up to 36,400 shares of its common stock at an exercise price of $2.75 per share.

 

Basis of Presentation and Principles of Consolidation

 

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In our opinion, the accompanying unaudited interim consolidated financial statements include all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly our financial position, results of operations, and cash flows. The consolidated balance sheet at December 31, 2017, has been derived from audited financial statements of that date. The unaudited interim consolidated results of operations are not necessarily indicative of the results that may occur for the full fiscal year. Certain information and footnote disclosure normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to instructions, rules, and regulations prescribed by the SEC. We believe that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited interim consolidated financial statements are read in conjunction with the audited financial statements and notes previously distributed in our Annual Report Form 10-K for the year ended December 31, 2017, filed with the SEC on March 16, 2018.

 

The unaudited interim consolidated financial statements include the accounts of AzurRx and its wholly-owned subsidiary, AzurRx Europe SAS. Intercompany transactions and balances have been eliminated upon consolidation.

 

The accompanying unaudited interim consolidated financial statements have been prepared as if the Company will continue as a going concern. The Company has incurred significant operating losses and negative cash flows from operations since inception, had working capital at June 30, 2018 of approximately $6,023,000, and had an accumulated deficit of approximately $40,926,000 at June 30, 2018. The Company currently believes that its cash on hand will sustain its operations until July 2019. 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 financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

 

 

Note 2 - Significant Accounting Policies and Recent Accounting Pronouncements

 

Use of Estimates

The accompanying consolidated financial statements are prepared in conformity with 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 June 30, 2018 and December 31, 2017, the Company had approximately $6,418,602 and $78,859, 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.

 

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 for 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.

 

Research and Development

Research and development (“R&D”) costs are charged to operations when incurred and are included in operating expenses. R&D costs consist principally of compensation of employees and consultants that perform the Company’s research activities, the fees paid to maintain the Company’s licenses, and the payments to third parties for clinical trial and additional product development and testing.

 

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.

 

Revenue Recognition

The Company is still in its startup phase and is not generating revenues at this time. When revenues are generated, the Company will follow the provisions of FASB Accounting Standards Codification (“ASC” or the “Codification”) Topic 606, Revenue From Contracts With Customers.

 

Recent Accounting Pronouncements

In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which amends the Codification to expand the scope of FASB ASC Topic 718, Compensation—Stock Compensation, to include share-based payment transactions for acquiring goods and services from non-employees. Guidance on accounting for non-employee share-based payment arrangements, which differs significantly in many respects from that for employee share-based payment transactions, was included in FASB ASC Subtopic 505-50, Equity—Equity Based Payments to Non-Employees. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods. The Company is currently assessing this pronouncement and believes this will have an impact on the Company’s financial statements.

 

 

 

 

In July 2017, the FASB issued 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 adoption of this pronouncement did 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.

 

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 believes that the adoption of this pronouncement will not have a material impact on the Company's financial statements. We believe that the most significant changes relate to the recognition of new right-of-use assets and lease liabilities on the balance sheet for office space and research facilities.

 

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 June 30, 2018 and December 31, 2017, the Company had Level 3 instruments consisting of contingent consideration in connection with the Protea Europe SAS acquisition, see Note 7.

 

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 June 30, 2018:
Contingent consideration	$1,500,000	$-	$-	$1,500,000
At December 31, 2017:
Contingent consideration	$1,340,000	$-	$-	$1,340,000

 

 

 

 

The following table provides a reconciliation of the fair value of liabilities using Level 3 significant unobservable inputs:

	Contingent
	Consideration
Balance at December 31, 2017	$1,340,000
Change in fair value	160,000
Balance at June 30, 2018	$1,500,000

 

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 June 30, 2018 and December 31, 2017 included projected net sales over a period of patent exclusivity (seven years), discounted by (i) the Company’s weighted average cost of capital (32.8% and 32.4%, respectively), (ii) the contractual hurdle amount of $100 million that replaces the strike price input in the traditional BSM, (iii) asset volatility (85.2% and 83.1%, respectively), that replaces the equity volatility in the traditional BSM, (iv) risk-free rates (ranging from 2.3% to 2.8% and 1.8% to 2.4%, respectively), and (v) an option-adjusted spread (1.2% and 0.6%, 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 Company's financial instruments are as follows:

 

	Carrying	Fair Value Measured at Reporting Date Using			Fair
	Amount	Level 1	Level 2	Level 3	Value
At June 30, 2018:
Cash	$7,420,425	$-	$7,420,425	$-	$7,420,425
Other receivables	$1,081,378	$-	$-	$1,081,378	$1,081,378
Notes payable	$26,836	$-	$-	$26,836	$26,836
Convertible debt	$281,024	$-	$-	$286,529	$286,529
At December 31, 2017:
Cash	$573,471	$-	$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

 

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 Laboratoires Mayoly Spindler SAS (“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:

 

	June 30,	December 31,
	2018	2017
R&D tax credits	$931,421	$954,897
Other	149,957	149,237
Total other receivables	$1,081,378	$1,104,134

 

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.

 

Note 5 - Property, Equipment and Leasehold Improvements

 

Property, equipment and leasehold improvements consisted of the following:

 

	June 30,	December 31,
	2018	2017
Laboratory equipment	$188,558	$165,611
Computer equipment	62,878	44,364
Office equipment	36,334	36,334
Leasehold improvements	29,163	29,163
Total property, plant and equipment	316,933	275,472
Less accumulated depreciation	(171,909)	(141,485)
Property, plant and equipment, net	$145,024	$133,987

 

Depreciation expense for the three months ended June 30, 2018 and 2017 was $15,657 and $12,527, respectively. Depreciation expense for the six months ended June 30, 2018 and 2017 was $30,420 and $23,124, respectively. Depreciation expense is included in general and administrative (“G&A”) expense.

 

Note 6 - Intangible Assets and Goodwill

 

Intangible assets are as follows:

	June 30,	December 31,
	2018	2017
In process research and development	$425,656	$436,385
Less accumulated amortization	(143,363)	(128,794)
In process research and development, net	$282,293	$307,591
License agreements	$3,472,581	$3,560,107
Less accumulated amortization	(2,807,003)	(2,521,743)
License agreements, net	$665,578	$1,038,364

 

Amortization expense for the three months ended June 30, 2018 and 2017 was $185,818 and $189,669, respectively. Amortization expense for the six months ended June 30, 2018 and 2017 was $377,499 and $355,857, respectively.

 

 

 

 

As of June 30, 2018, amortization expense is expected to be as follows for the next five years:

 

2018 (balance of year)	$364,994
2019	353,791
2020	35,471
2021	35,471
2022	35,471
2023	35,471

 

Goodwill is as follows:

 

	Goodwill
Balance at December 31, 2017	$2,016,240
Foreign currency translation	(49,570)
Balance at June 30, 2018	$1,966,670

 

Note 7 - Contingent Consideration

 

On June 13, 2014, the Company executed 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 one-time milestone payment of $2,000,000 due within (10) days of receipt of the first approval by the 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:

 

	June 30,	December 31,
	2018	2017
Trade payables	$453,244	$705,041
Accrued expenses	302,430	182,200
Accrued bonus	350,000	80,000
Accrued payroll	154,215	219,993
Total accounts payable and accrued expenses	$1,259,889	$1,187,234

 

Note 9 - Note Payable

 

On October 30, 2017, the Company entered into a nine-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 June 30, 2018 and December 31, 2017 was $26,836 and $159,180, respectively.

 

 

 

 

 

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, ABS, of certain tax credits that the Company received prior to November 10, 2017 (the “Tax Credit”). 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.

 

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”) in exchange for 30,000 shares of the Company’s common stock which were valued at $90,300 and charged to interest expense. The Company exercised its Extension Option on November 29, 2017 and issued 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.

 

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.

 

On July 11, 2018, the Company paid off this Debenture for the amount of approximately $286,529.

 

The obligations under the Debenture are guaranteed by ABS, as well as a security agreement providing LPC with a secured interest in the Tax Credit.

 

For the three months ended June 30, 2018 and 2017, the Company recorded $45,537 and $287,055, respectively, of interest expense related to the amortization of the debt discount and beneficial conversion feature related to the warrant features of the Debenture. For the six months ended June 30, 2018 and 2017, the Company recorded $92,332 and $287,055, respectively, of interest expense related to the amortization of the debt discount and beneficial conversion feature related to the warrant features of the Debenture.

 

Convertible Debt consisted of:

 

	June 30,	December 31,
	2018	2017
Convertible debt	$261,008	$352,713
Accreted OID interest	25,521	34,488
Unamortized debt discount - warrants	(5,505)	(129,836)
Total convertible debt	$281,024	$257,365

 

 

 

 

Note 11 - Equity

 

Common Stock

At June 30, 2018 and December 31, 2017, the Company had 16,792,395 and 12,042,574, respectively, of shares of its common stock issued and outstanding.

 

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. During the three months ended June 30, 2018 and 2017, the Company granted 539,000 and 0, respectively, of stock options under the 2014 Plan. During the six months ended June 30, 2018 and 2017, the Company granted 539,000 and 190,000, respectively, of stock options under the 2014 Plan, see Note 13.

 

Series A Convertible Preferred Stock

At June 30, 2018 and December 31, 2017, there were no Series A outstanding and all terms of the Series A are still in effect.

 

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 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 “Financing ”). At closing of the Financing, 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 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 are exercisable beginning 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. 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 authorizing the Company to issue up to $400,000 in 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 114,287 shares of Common Stock, 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.

 

Restricted Stock

During the three months ended June 30, 2018, 317,500 shares of restricted common stock were granted or accrued to employees and consultants with a total value of $986,160. During the three months ended June 30 31, 2018, 91,917 shares of restricted common stock vested with a value of $333,671 of which an aggregate of 30,000 shares with a value of $96,300 have been issued to our directors as a part of Board compensation. During the six months ended June 30, 2018, 379,000 shares of restricted common stock were granted or accrued to employees and consultants with a total value of $1,188,970. During the six months ended June 30, 2018, 158,834 shares of restricted common stock vested with a value of $555,981 of which an aggregate of 60,000 shares with a value of $190,500 have been issued to our directors as a part of Board compensation. The restricted common stock granted 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 June 30, 2018, the Company had unrecognized restricted common stock expense of $1,264,686. $471,696 of this unrecognized expense will be recognized over the average remaining vesting term of the restricted common stock of 2.73 years. $505,204 of this unrecognized expense vests upon an FDA acceptance of an IND application in the United States. $186,453 of this unrecognized expense vests upon the first dosing of a cystic fibrosis patient with MS1819 anywhere in the world. $101,333 vests upon the enrollment of the first 30 patients in a cystic fibrosis trial. As of June 30, 2018, the probability of these milestones being reached could not be determined.

 

During the three months ended June 30, 2017, 37,500 shares of restricted common stock were granted to employees and consultants with a total value of $140,425. During the three months ended June 30, 2017, 30,387 of these shares vested with a value of $114,678. During the six months ended June 30, 2017, 58,500 shares of restricted common stock were granted to employees and consultants with a total value of $221,485. During the six months ended June 30, 2017, 51,387 of these shares vested with a value of $195,738.

 

On July 24, 2017, the Company entered into a consulting agreement that includes a grant of 40,000 shares of restricted common stock to the consultant contingent upon the approval of the Board, which as of Aug 10, 2018 has not yet been granted.

 

On January 2, 2018, the Company entered into a consulting agreement that includes a grant of 43,000 shares of restricted common stock to the consultant contingent upon the approval of the Board. The Board approved this restricted stock on June 28, 2018 and the shares were issued on July 19, 2018.

 

Note 12 - Warrants

 

In January 2018, the Company offered 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 resulted in a charge of approximately $429,000 in the six months ended June 30, 2018. Cash proceeds on the exercise of these warrants as well as the stock subscriptions as of December 31, 2017 of $1,071,070 amounted to approximately $2,300,000 in January 2018.

 

Stock warrant transactions for the periods January 1 through June 30, 2018 and 2017 are as follows:

		Exercise Price Per	Weighted Average Exercise
	Warrants	Share	Price
Warrants outstanding and exercisable at January 1, 2017	1,858,340	$4.76 - $7.37	$5.66
Granted during the period	1,920,781	$3.53 - $6.50	$5.16
Expired during the period	-	-	-
Exercised during the period	-	-	-
Warrants outstanding and exercisable at June 30, 2017	3,779,121	$4.76 - $7.37	$5.41
Warrants outstanding and exercisable at January 1, 2018	3,371,385	$3.17 - $7.37	$5.28
Granted during the period	244,400	$2.55 - $2.75	$2.58
Expired during the period	-	-	-
Exercised during the period	(503,070)	$2.50	$2.50
Warrants outstanding and exercisable at June 30, 2018	3,112,715	$2.55 - $7.37	$4.83

 

 

	Number of	Weighted Average	Weighted
	Shares Under	Remaining Contract	Average
Exercise Price	Warrants	Life in Years	Exercise Price
$2.55 - $3.99	881,372	4.10
$4.00 - $4.99	196,632	3.51
$5.00 - $5.99	1,815,041	3.47
$6.00 - $6.99	187,750	3.26
$7.00 - $7.37	31,920	2.46
Total	3,112,715	3.63	$4.83

 

 

 

 

During the three and six months ended June 30, 2018, 244,400 warrants were issued to investment bankers in association with the May 2018 Public Offering with a value of $416,426 that had no effect on expenses or stockholders’ equity.

 

During the three months ended June 30, 2017, 50,000 warrants were issued to consultants. 47,771 warrants issued to consultants were earned and expensed in the three months ended June 30, 2017 with a value of $82,732. During the six months ended June 30, 2017, 250,000 warrants were issued to consultants. 214,438 warrants issued to consultants were earned and expensed in the six months ended June 30, 2017 with a value of $485,050. The earned and expensed amounts were included in G&A expenses.

 

The weighted average fair value of warrants granted to non-employees during the three months ended June 30, 2018 and 2017 was $1.70 and $2.13. The weighted average fair value of warrants granted to non-employees during the six months ended June 30, 2018 and 2017 was $1.70 and $2.40. The fair value was estimated on the grant dates using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

	June 30,	June 30,
	2018	2017
Expected life (in years)	5	5
Volatility	84%	87%
Risk-free interest rate	2.70%	1.82% - 1.92%
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 three and six months ended June 30, 2018, 539,000 stock options were granted with an exercise price of $3.04 and a life of five years. 96,250 of these options vested in the three months ended June 30, 2018 having a fair value of $248,930. 103,750 of these options vested in the six months ended June 30, 2018 having a fair value of $277,948. The weighted average fair value of stock options granted to employees during the three and six months ended June 30, 2018 was $2.07.

 

During the three and six months ended June 30, 2017, 190,000 stock options were granted with an exercise price of $4.48 and a life of 10 years. 7,500 of these options vested in the three months ended June 30, 2017. 142,500 of these options vested in the six months ended June 30, 2017. The weighted average fair value of stock options granted to employees during the three and six months ended June 30, 2017 was $3.87.

 

The fair values were estimated on the grant dates using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

	June 30,	June 30,
	2018	2017
Expected life (in years)	5	10
Volatility	85%	90%
Risk-free interest rate	2.82%	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.

 

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 for the periods January 1 through June 30, 2017 and 2018 is as follows:

	Number	Weighted Average	Weighted Average Remaining Contract	Aggregate
	of Shares	Exercise Price	Life in Years	Intrinsic Value
Stock options outstanding at January 1, 2017	-	-
Granted during the period	190,000	$4.48	9.60	$-
Expired during the period	-	-
Exercised during the period	-	-
Stock options outstanding at June 30, 2017	190,000	$4.48	9.60	$-
Exercisable at June 30, 2017	142,500	$4.48	9.60	$-
Non-vested stock options outstanding at January 1, 2017	-	-
Granted during the period	47,500	$4.48	9.60	$-
Expired during the period	-	-
Exercised during the period	-	-
Non-vested stock options outstanding at June 30, 2017	47,500	$4.48	9.60	$-
Stock options outstanding at January 1, 2018	545,000	$4.05	7.13	$-
Granted during the period	539,000	$3.04	5.00	$-
Expired during the period	-	-
Exercised during the period	-	-
Stock options outstanding at June 30, 2018	1,084,000	$3.72	5.82	$-
Exercisable at June 30, 2018	261,250	$4.26	8.60	$-
Non-vested stock options outstanding at January 1, 2018	387,500	$3.89	6.39	$-
Granted during the period	539,000	$3.04	5.00	$-
Vested during the period	(103,750)	$3.92	6.02	$-
Expired during the period	-	-
Exercised during the period	-	-
Non-vested stock options outstanding at June 30, 2018	822,750	$3.32	5.77	$-