First Wave BioPharma, Inc. - Quarter Report: 2019 June (Form 10-Q)
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DRAFT
|
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, 2019
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.)
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760 Parkside Avenue
Downstate Biotechnology Incubator, Suite 304
Brooklyn, New York 11226
(Address of principal executive offices)
(646) 699-7855
(Issuer’s telephone number)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this
chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit such files). Yes
[X] No [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
|
Large accelerated filer
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[
]
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Accelerated filer
|
[
]
|
|
Non-accelerated
filer
|
[X]
|
Smaller reporting company
|
[X]
|
|
|
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]
Securities registered pursuant to Section 12(b) of the
Act:
|
Title
of each class
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Trading
Symbol(s)
|
Name
of each exchange on which registered
|
|
Common
Stock, par value $0.0001 per share
|
AZRX
|
Nasdaq
Capital Market
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As of August 12, 2019, there were 26,103,434 shares of the
registrant’s common stock, $0.0001 par value, issued and
outstanding.
TABLE OF CONTENTS
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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, 2018 included
in our Annual Report filed on Form 10-K, filed with the SEC on
April 1, 2019.
The
results of operations for the three and six months ended June 30,
2019 are not necessarily indicative of the results to be expected
for the fiscal year ended December 31, 2019.
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AZURRX BIOPHARMA,
INC.
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Consolidated Balance Sheets (unaudited)
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|
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June 30,
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December 31,
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2019
|
2018
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ASSETS
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|
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|
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|
|
|
Current
Assets:
|
|
|
|
Cash
|
$1,310,687
|
$1,114,343
|
|
Other
receivables
|
2,119,700
|
3,172,676
|
|
Prepaid
expenses
|
198,245
|
512,982
|
|
Total
Current Assets
|
3,628,632
|
4,800,001
|
|
|
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Property,
equipment, and leasehold improvements, net
|
108,187
|
128,854
|
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Other
Assets:
|
|
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In
process research and development, net
|
-
|
258,929
|
|
License
agreements, net
|
-
|
311,548
|
|
Patents,
net
|
3,670,858
|
-
|
|
Goodwill
|
1,913,740
|
1,924,830
|
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Operating
lease right-of-use assets
|
241,714
|
-
|
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Deposits
|
49,275
|
45,233
|
|
Total
Other Assets
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5,875,587
|
2,540,540
|
|
Total
Assets
|
$9,612,406
|
$7,469,395
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LIABILITIES AND STOCKHOLDERS' EQUITY
|
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Current
Liabilities:
|
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Accounts
payable and accrued expenses
|
$3,041,167
|
$2,070,396
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Accounts
payable and accrued expenses - related party
|
627,563
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670,095
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Note
payable
|
64,714
|
255,032
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|
Convertible
debt
|
1,837,160
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-
|
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Other
current liabilities
|
650,668
|
-
|
|
Total
Current Liabilities
|
6,221,272
|
2,995,523
|
|
|
|
|
|
Other
liabilities
|
443,032
|
-
|
|
Total
Liabilities
|
6,664,304
|
2,995,523
|
|
|
|
|
|
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, 2019 and
December 31, 2018; liquidation preference approximates par
value
|
-
|
-
|
|
Common
stock - Par value $0.0001 per share; 100,000,000 shares authorized;
21,103,434 and 17,704,925 shares issued and outstanding,
respectively, at June 30, 2019 and December 31, 2018
|
2,110
|
1,771
|
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Additional
paid-in capital
|
61,385,534
|
53,139,259
|
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Accumulated
deficit
|
(57,220,637)
|
(47,517,046)
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Accumulated
other comprehensive loss
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(1,218,905)
|
(1,150,112)
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Total
Stockholders' Equity
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2,948,102
|
4,473,872
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Total
Liabilities and Stockholders' Equity
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$9,612,406
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$7,469,395
|
See accompanying notes to consolidated financial
statements
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AZURRX BIOPHARMA, INC.
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Consolidated Statements of Operations and Comprehensive Loss
(unaudited)
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Three Months
|
Three Months
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Six Months
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Six Months
|
|
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Ended
|
Ended
|
Ended
|
Ended
|
|
|
06/30/19
|
06/30/18
|
06/30/19
|
06/30/18
|
|
|
|
|
|
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Research
and development expenses
|
$2,738,768
|
$925,776
|
$4,857,301
|
$2,603,805
|
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General
and administrative expenses
|
2,193,423
|
2,167,247
|
4,678,533
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4,083,580
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Fair
value adjustment, contingent consideration
|
-
|
170,000
|
-
|
160,000
|
|
|
|
|
|
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Loss
from operations
|
(4,932,191)
|
(3,263,023)
|
(9,535,834)
|
(6,847,385)
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Other:
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Interest
expense
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(110,646)
|
(46,154)
|
(167,757)
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(94,789)
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Total
other
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(110,646)
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(46,154)
|
(167,757)
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(94,789)
|
|
|
|
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Loss
before income taxes
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(5,042,837)
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(3,309,177)
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(9,703,591)
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(6,942,174)
|
|
|
|
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Income
taxes
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
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Net
loss
|
(5,042,837)
|
(3,309,177)
|
(9,703,591)
|
(6,942,174)
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|
|
|
|
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Other
comprehensive loss:
|
|
|
|
|
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Foreign
currency translation adjustment
|
26,488
|
(209,913)
|
(68,793)
|
(103,893)
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Total
comprehensive loss
|
$(5,016,349)
|
$(3,519,090)
|
$(9,772,384)
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$(7,046,067)
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|
|
|
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Basic
and diluted weighted average shares outstanding
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20,479,917
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15,300,197
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19,107,534
|
13,881,698
|
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|
|
|
|
|
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Loss
per share - basic and diluted
|
$(0.25)
|
$(0.22)
|
$(0.51)
|
$(0.50)
|
See accompanying notes to consolidated financial
statements
|
AZURRX BIOPHARMA, INC.
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Changes in Stockholders' Equity
(unaudited)
|
|
|
|
|
|
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||
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|
|
|
|
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|
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|
Accumulated
|
|
|
|
Convertible
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
Preferred Stock
|
Common Stock
|
Paid In
|
Subscriptions
|
Accumulated
|
Comprehensive
|
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Receivable
|
Deficit
|
Loss
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2019
|
-
|
$-
|
17,704,925
|
$1,771
|
$53,139,259
|
$-
|
$(47,517,046)
|
$(1,150,112)
|
$4,473,872
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued from public offerings
|
|
|
2,522,097
|
252
|
5,023,704
|
|
|
|
5,023,956
|
|
Common
stock issued to consultants
|
|
|
40,481
|
4
|
89,996
|
|
|
|
90,000
|
|
Common
stock issued to Mayoly for patents
|
|
|
775,931
|
77
|
1,740,882
|
|
|
|
1,740,959
|
|
Stock-based
compensation
|
|
|
|
|
511,335
|
|
|
|
511,335
|
|
Restricted
stock granted to employees/directors
|
|
|
60,000
|
6
|
493,448
|
|
|
|
493,454
|
|
Warrant
modification
|
|
|
|
|
325,320
|
|
|
|
325,320
|
|
Received from stockholder in relation to warrant
modification
|
|
|
|
61,590
|
|
|
|
61,590
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
(68,793)
|
(68,793)
|
|
Net
loss
|
|
|
|
|
|
|
(9,703,591)
|
|
(9,703,591)
|
|
Balance, June 30, 2019
|
-
|
$-
|
21,103,434
|
$2,110
|
$61,385,534
|
$-
|
$(57,220,637)
|
$(1,218,905)
|
$2,948,102
|
See accompanying notes to consolidated financial
statements
|
AZURRX BIOPHARMA, INC.
|
|
|
|
Consolidated Statements of Cash Flows (unaudited)
|
|
|
|
|
|
|
|
|
Six Months
|
Six Months
|
|
|
Ended
|
Ended
|
|
|
06/30/19
|
06/30/18
|
|
Cash
flows from operating activities:
|
|
|
|
Net
loss
|
$(9,703,591)
|
$(6,942,174)
|
|
Adjustments
to reconcile net loss to net cash used in
|
|
|
|
operating
activities:
|
|
|
|
Depreciation
|
34,041
|
30,420
|
|
Amortization
|
693,176
|
377,499
|
|
Fair
value adjustment, contingent consideration
|
-
|
160,000
|
|
Stock-based
compensation
|
511,335
|
277,948
|
|
Restricted
stock granted to employees/directors
|
493,454
|
335,751
|
|
Restricted
stock granted to consultants
|
90,000
|
220,230
|
|
Accreted
interest on convertible debt
|
74,521
|
-
|
|
Accreted
interest on debt discount - warrants
|
87,959
|
92,332
|
|
Warrant
modification
|
-
|
428,748
|
|
Changes
in assets and liabilities:
|
|
|
|
Other
receivables
|
(193,152)
|
(6,624)
|
|
Prepaid
expenses
|
312,672
|
142,560
|
|
Right
of use assets
|
(240,993)
|
-
|
|
Deposits
|
(4,125)
|
(15,000)
|
|
Accounts
payable and accrued expenses
|
940,347
|
35,989
|
|
Other
liabilities
|
250,579
|
-
|
|
Net
cash used in operating activities
|
(6,653,777)
|
(4,862,321)
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
Purchase
of property and equipment
|
(13,337)
|
(41,041)
|
|
Net
cash used in investing activities
|
(13,337)
|
(41,041)
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
Issuances
of common stock
|
5,023,956
|
11,902,682
|
|
Issuances
of convertible debt
|
2,000,000
|
-
|
|
Received
from stockholder in relation to warrant modification
|
61,590
|
-
|
|
Repayments
of note payable
|
(190,318)
|
(132,344)
|
|
Net
cash provided by financing activities
|
6,895,228
|
11,770,338
|
|
|
|
|
|
Increase
in cash
|
228,114
|
6,866,976
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
(31,770)
|
(20,022)
|
|
|
|
|
|
Cash,
beginning balance
|
1,114,343
|
573,471
|
|
|
|
|
|
Cash,
ending balance
|
$1,310,687
|
$7,420,425
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
Cash
paid for interest
|
$5,277
|
$2,457
|
|
|
|
|
|
Cash
paid for income taxes
|
$-
|
$-
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
Conversion
of convertible debt into common stock
|
$-
|
$68,673
|
|
|
|
|
|
Common
stock issued for patents purchased from Mayoly
|
$1,740,959
|
$-
|
|
|
|
|
|
Warrant
modification related to convertible debt issuance
|
$325,320
|
$-
|
See accompanying notes to consolidated financial
statements
Note 1 - The Company and Basis of Presentation
The Company
AzurRx BioPharma, Inc. (“AzurRx” or “Parent”) was incorporated on January 30, 2014 in
the State of Delaware. In June 2014, the Company acquired 100% of
the issued and outstanding capital stock of AzurRx SAS (formerly
“ProteaBio Europe
SAS”), a company
incorporated in October 2008 under the laws of France. AzurRx and
its wholly-owned subsidiary, AzurRx SAS (“ABS”), are collectively referred to as the
“Company.”
The
Company is engaged in the research and development of non-systemic
biologics for the treatment of patients with gastrointestinal
disorders. Non-systemic biologics are non-absorbable drugs that act
locally, i.e. the intestinal lumen, skin or mucosa, without
reaching an individual’s systemic circulation. The
Company’s current product pipeline consists of two
therapeutic proteins under development:
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. In June 2018, the
Company completed an open-label, dose escalation Phase 2a 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 CP patients with EPI were enrolled in the
study and final data showed a strong safety and efficacy profile.
Although the study was not powered for efficacy, in a pre-planned
analysis, the highest dose cohort of MS1819-SD showed statistically
significant and clinically meaningful increases in CFA compared to
baseline with a mean increase of 21.8% and a p value of p=0.002 on
a per protocol basis. Additionally, maximal absolute CFA response
to treatment was up to 57%, with an inverse relationship to
baseline CFA.
In
October 2018, the U.S. Food and Drug Administration
(“FDA”) cleared
the Company’s Investigational New Drug (“IND”) application for MS1819-SD
in patients with EPI due to CF. In connection with the FDA’s
clearance of the IND, the Company initiated a multi-center Phase 2
OPTION study in the fourth quarter of 2018 in the United States and
Europe (the “OPTION Study”). The Company targeted
enrollment of 30 to 35 patients for the OPTION Study and dosed the
first patients in February 2019. In June 2019, the Company reached
its enrollment target for the study. The Company expects to
announce topline results from the OPTION Study in the third quarter
of 2019.
In
addition to the OPTION Study, in July 2019 the Company launched a
Phase 2 multi-center clinical trial in Hungary to investigate
MS1819-SD in combination with standard porcine enzyme replacement
therapy (“PERT”), the digestive standard of
care for both CF and CP patients with EPI, for CF patients who
suffer from severe EPI, but continue to experience clinical
symptoms of fat malabsorption despite taking the maximum daily dose
of PERTs. The Phase 2 study is designed to investigate the safety,
tolerability and efficacy of escalating doses of MS1819-SD, in
conjunction with a stable dose of PERTs, in order to increase CFA
and relieve abdominal symptoms. Planned enrollment is expected to
include approximately 24 CF patients with severe EPI, with study
completion anticipated in 2020.
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. The Company is also
currently assessing its plans for the continuation of the
development of AZX1101.
Recent Developments
Asset Purchase Agreement with Mayoly
On March 27, 2019, the Company entered into
an Asset Purchase Agreement with Mayoly (the “Mayoly APA”), pursuant to which the Company purchased all
rights, title and interest in and to MS1819-SD. Upon execution of
the Mayoly APA, the Joint Development and License Agreement (the
“JDLA”) previously executed by AzurRx SAS and
Mayoly was terminated. In addition, the Company granted to Mayoly
an exclusive, royalty-bearing right to revenue received from
commercialization of MS1819-SD within certain
territories.
In
accordance with the Mayoly APA, the Company provided to Mayoly the
following consideration for the purchase of MS1819-SD:
(i)
the
Company assumed certain of Mayoly’s liabilities with respect
to MS1819-SD;
(ii)
the
Company forgave all amounts currently owed to AzurRx SAS by Mayoly
under the JDLA;
(iii)
the
Company agreed to pay, within 30 days after the execution of the
Mayoly APA, all amounts incurred by Mayoly for the maintenance of
patents related to MS1819-SD from January 1, 2019 through the date
of the Mayoly APA;
(iv)
the Company made an initial payment to Mayoly of
€800,000, which amount was paid by the issuance of 400,481
shares of the Company’s common stock at a price of $2.29 per
share (the “Closing Payment
Shares”) and the Company
recognized $917,101 as part of stockholders’ equity;
and
(v)
the Company agreed to pay to Mayoly an additional
€1,500,000, payable in a mix of cash and shares of the
Company’s common stock as follows (the
“Milestone
Payments”): (y) on
December 31, 2019, a cash payment of €400,000 and 200,240
shares of common stock (the “2019 Escrow
Shares”) and (z) on
December 31, 2020, a cash payment of €350,000 and 175,210
shares of common stock (the “2020 Escrow
Shares” and, together
with the 2019 Escrow Shares, the “Escrow
Shares”) and the Company
recognized $823,858 as part of stockholders’
equity.
The Closing Payment Shares and the Escrow Shares
were all issued upon execution of the Mayoly APA;
provided, however, per the terms of the Mayoly APA, the Escrow
Shares will be held in escrow until the applicable Milestone
Payment date, at which time the respective Escrow Shares will be
released to Mayoly. See Note 6.
April 2019 Registered Direct Public Offering
In
April 2019, the Company completed a public offering of 1,294,930
shares of its common stock at a public offering price of $2.13 per
share, resulting in net proceeds of approximately $2,500,000, after
deducting the selling agent fee paid to Alexander Capital, L.P. and
other offering expenses payable by the Company (the
“April 2019 Public
Offering”). The April 2019 Public Offering was
completed pursuant to the Company’s effective shelf
registration statement on Form S-3 (File No. 333-226065) and the
prospectus supplement filed on April 2, 2019.
In
connection with the April 2019 Public Offering, the Company entered
into a Selling Agent Agreement with Alexander Capital, L.P.,
pursuant to which we paid to Alexander Capital, L.P. (i) a cash fee
equal to 7% of the aggregate gross proceeds of the April 2019
Public Offering, and (ii) issued to Alexander Capital, L.P.
warrants to purchase 38,848 shares of the Company’s common
stock (the “April 2019
Selling Agent Warrants”), an amount equal to 3% of the
aggregate number of shares of common stock sold in the April 2019
Public Offering. The April 2019 Selling Agent Warrants will become
exercisable one year from the date of issuance, expire on April 2,
2024 and have an exercise price of $2.55 per share. Also see Note
12. The Company also reimbursed Alexander Capital, L.P. for its
expenses on a non-accountable basis in an amount equal to 1% of the
gross proceeds of the April 2019 Public Offering and $50,000 for
other accountable expenses.
May 2019 Registered Direct Public Offering
On
May 9, 2019, the Company completed a second public offering with
Alexander Capital of 1,227,167 shares of the Company’s common
stock at a public offering price of $2.35 per share, resulting in
net proceeds of approximately $2,550,000, after deducting the
selling agent fee paid to Alexander Capital and other offering
expenses payable by the Company (the “May 2019 Public Offering”). The
May 2019 Public Offering was completed pursuant to the
Company’s effective shelf registration statement on Form S-3
(File No. 333-226065) and the prospectus supplement filed on May 9,
2019.
In
connection with the May 2019 Public Offering, the Company entered
into a Selling Agent Agreement with Alexander Capital, pursuant to
which the Company (i) paid Alexander Capital a cash fee equal to
7.0% of the aggregate gross proceeds of the May 2019 Public
Offering, and (ii) issued Alexander Capital warrants to purchase up
to 36,815 shares of Common Stock, an amount equal to 3.0% of the
aggregate number of shares of Common Stock sold in the Offering.
The May 2019 Selling Agent Warrants will become exercisable one
year from the date of issuance, expire on May 9, 2024 and have an
exercise price of $2.82 per share. Also see Note 12. The Company
also agreed to reimburse Alexander Capital for its expenses in
connection with the Offering on a non-accountable basis in an
amount equal to 1.0% of the gross proceeds of the Offering and up
to $50,000 for other accountable expenses.
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, 2018, has been derived from audited financial
statements of that date. The unaudited interim consolidated results
of operations are not necessarily indicative of the results that
may occur for the full fiscal year. Certain information and
footnote disclosure normally included in financial statements
prepared in accordance with U.S. GAAP have been omitted pursuant to
instructions, rules, and regulations prescribed by the Securities
and Exchange Commission (“SEC”).
The Company believes that the disclosures provided herein are
adequate to make the information presented not misleading when
these unaudited interim consolidated financial statements are read
in conjunction with the audited financial statements and notes
previously distributed in our Annual Report Form 10-K for the year
ended December 31, 2018, filed with the SEC on April 1,
2019.
The
unaudited interim consolidated financial statements include the
accounts of AzurRx and its wholly-owned subsidiary, AzurRx SAS.
Intercompany transactions and balances have been eliminated upon
consolidation.
Going Concern Uncertainty
The
accompanying unaudited interim consolidated financial statements
have been prepared as if the Company will continue as a going
concern. The Company has incurred significant operating losses and
negative cash flows from operations since inception, had negative
working capital at June 30, 2019 of approximately $2,593,000, and
had an accumulated deficit of approximately $57,221,000 at June 30,
2019. The Company is dependent on obtaining, and continues to
pursue, additional working capital funding from the sale of
securities and debt in order to continue to execute its development
plan and continue operations. Without adequate working capital, the
Company may not be able to meet its obligations and continue as a
going concern. 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, 2019 and
December 31, 2018, the Company had $967,813 and $754,261,
respectively, in one account in the U.S. in excess of these limits.
The Company has not experienced any losses to date resulting from
this practice.
The
Company also has exposure to foreign currency risk as its
subsidiary in France has a functional currency in
Euros.
Leases
Effective January
1, 2019, the Company adopted Accounting Standards Update
(“ASU”) No.
2016-02, "Leases." This ASU requires substantially all leases be
recorded on the balance sheet as right of use assets and lease
obligations. The Company adopted the ASU using a modified
retrospective adoption method at January 1, 2019, as outlined in
ASU No. 2018-11, "Leases - Targeted Improvements." Under this
method of adoption, there is no impact to the comparative condensed
consolidated statement of operations and condensed consolidated
balance sheet. The Company determined that there was no
cumulative-effect adjustment to beginning retained earnings on the
consolidated balance sheet. In addition, the Company elected the
package of practical expedients permitted under the transition
guidance within the new standard, which among other things, allowed
carryforward of historical lease classifications. Adoption of this
standard did not materially impact the Company’s results of
operations and had no impact on the consolidated statement of cash
flows.
Equity-Based Payments to Non-Employees
Equity-based
payments to non-employees are measured at fair value on the grant
date per ASU No. 2018-07, Improvements to Nonemployee Share-Based
Payment Accounting.
Research and Development
Research and
development costs are charged to operations when incurred and are
included in operating expenses. Research and 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.
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.
Recent Accounting Pronouncements
In
January 2017, the FASB issued guidance to simplify the subsequent
measurement of goodwill impairment. The new guidance eliminates the
two-step process that required identification of potential
impairment and a separate measure of the actual impairment.
Goodwill impairment charges, if any, would be determined by
reducing the goodwill balance by the difference between the
carrying value and the reporting unit’s fair value
(impairment loss is limited to the carrying value). This standard
is effective for annual or any interim goodwill impairment tests
beginning after December 15, 2019. The Company believes that the
adoption of this pronouncement will not have an impact on the
Company’s measurement of goodwill impairment.
Note
3 - Fair Value
Disclosures
Fair
value is the price that would be received from the sale of an asset
or paid to transfer a liability assuming an orderly transaction in
the most advantageous market at the measurement date. U.S. GAAP
establishes a hierarchical disclosure framework that prioritizes
and ranks the level of observability of inputs used in measuring
fair value.
The
fair value of the Company's financial instruments are as
follows:
|
|
|
Fair Value Measured at Reporting Date Using
|
|
||
|
|
Carrying Amount
|
Level 1
|
Level 2
|
Level 3
|
Fair Value
|
|
At
June 30, 2019:
|
|
|
|
|
|
|
Cash
|
$1,310,687
|
$-
|
$1,310,687
|
$-
|
$1,310,687
|
|
Other
receivables
|
$2,119,700
|
$-
|
$-
|
$2,119,700
|
$2,119,700
|
|
Note
payable
|
$64,714
|
$-
|
$-
|
$64,714
|
$64,714
|
|
Convertible
debt
|
$1,837,160
|
$-
|
$-
|
$1,837,160
|
$1,837,160
|
|
|
|
|
|
|
|
|
At
December 31, 2018:
|
|
|
|
|
|
|
Cash
|
$1,114,343
|
$-
|
$1,114,343
|
$-
|
$1,114,343
|
|
Other
receivables
|
$3,172,676
|
$-
|
$-
|
$3,172,676
|
$3,172,676
|
|
Note
payable
|
$255,032
|
$-
|
$-
|
$255,032
|
$255,032
|
The
fair value of other receivables approximates carrying value as
these consist primarily of French R&D tax credits that are
normally received the following year and amounts due from our
collaboration partner Mayoly, see Note 14.
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,
|
|
|
2019
|
2018
|
|
R&D
tax credits
|
$2,119,700
|
$2,162,373
|
|
Other
|
-
|
1,010,303
|
|
Total
other receivables
|
$2,119,700
|
$3,172,676
|
The
research and development (“R
& D”) tax credits are the 2017 and 2018 refundable
tax credits for research conducted in France. The tax credits for
the years 2016 through 2018 are currently being examined by the
French tax authorities which is in the normal course of business.
At December 31, 2018, Other consists primarily of amounts due from
collaboration partner Mayoly.
Note
5 - Property, Equipment and Leasehold Improvements
Property, equipment
and leasehold improvements consisted of the following:
|
|
June 30,
|
December 31,
|
|
|
2019
|
2018
|
|
Laboratory
equipment
|
$193,661
|
$190,406
|
|
Computer
equipment
|
78,986
|
75,417
|
|
Office
equipment
|
37,264
|
37,262
|
|
Leasehold
improvements
|
35,711
|
29,163
|
|
Total
property, plant and equipment
|
345,622
|
332,248
|
|
Less
accumulated depreciation
|
(237,435)
|
(203,394)
|
|
Property,
plant and equipment, net
|
$108,187
|
$128,854
|
Depreciation
expense for the three months ended June 30, 2019 and 2018 was
$16,927 and $15,657, respectively. Depreciation expense for the six
months ended June 30, 2019 and 2018 was $34,041 and $30,420,
respectively. Depreciation expense is included in general and
administrative (“G&A”) expenses.
Note
6 - Intangible Assets and Goodwill
Patents
Pursuant to the
Mayoly APA entered into on March 27, 2019, in which the Company
purchased all rights, title and interest in and to MS1819-SD (see
Note 14), the Company recorded Patents in the amount of $3,802,745
as follows:
|
Common
stock issued at signing to Mayoly
|
$1,740,959
|
|
Due
to Mayoly at 12/31/19 - €400,000
|
449,280
|
|
Due
to Mayoly at 12/31/20 - €350,000
|
393,120
|
|
Assumed
Mayoly liabilities and forgiveness of Mayoly debt
|
1,219,386
|
|
|
|
|
|
$3,802,745
|
Intangible assets
are as follows:
|
|
June 30,
|
December 31,
|
|
|
2019
|
2018
|
|
In
process research and development
|
$-
|
$416,600
|
|
Less
accumulated amortization
|
-
|
(157,671)
|
|
In
process research and development, net
|
$-
|
$258,929
|
|
|
|
|
|
License
agreements
|
$-
|
$3,398,702
|
|
Less
accumulated amortization
|
-
|
(3,087,154)
|
|
License
agreements, net
|
$-
|
$311,548
|
|
|
|
|
|
Patents
|
$3,802,745
|
$-
|
|
Less
accumulated amortization
|
(131,887)
|
-
|
|
Patents,
net
|
$3,670,858
|
$-
|
Amortization
expense for the three months ended June 30, 2019 and 2018 was
$131,887 and $185,818, respectively. Amortization expense for the
six months ended June 30, 2019 and 2018 was $693,176 and $377,499,
respectively. Amortization expense for the six months ended June
30, 2019 included $384,234 from In process research and development
and License agreements written off as a result of the Mayoly
APA.
As of
June 30, 2019, amortization expense is expected to be as follows
for the next five years:
|
2019
(balance of year)
|
$263,774
|
|
2020
|
527,548
|
|
2021
|
527,548
|
|
2022
|
527,548
|
|
2023
|
527,548
|
Goodwill
is as follows:
|
|
Goodwill
|
|
Balance
at January 1, 2018
|
$2,016,240
|
|
Foreign
currency translation
|
(91,410)
|
|
Balance
at December 31, 2018
|
1,924,830
|
|
Foreign
currency translation
|
(11,090)
|
|
Balance
at June 30, 2019
|
$1,913,740
|
Note 7 - Accounts Payable and Accrued Expenses
Accounts payable
and accrued expenses consisted of the following:
|
|
June 30,
|
December 31,
|
|
|
2019
|
2018
|
|
Trade
payables
|
$2,170,434
|
$1,532,110
|
|
Accrued
expenses
|
758,230
|
285,061
|
|
Accrued
payroll
|
112,503
|
253,225
|
|
Total
accounts payable and accrued expenses
|
$3,041,167
|
$2,070,396
|
Note
8 - Note Payable
On
December 14, 2018, the Company entered into a 9-month financing
agreement for its directors and officer’s liability insurance
in the amount of $286,203 that bears interest at an annual rate of
5.99%. Monthly payments, including principal and interest, are
$32,599 per month. The balance due under this financing agreement
at June 30, 2019 was $64,714.
ADEC Notes
On
February 14, 2019, the Company entered into a Note Purchase
Agreement (the “NPA”) with ADEC Private
Equity Investments, LLC (“ADEC”), pursuant to which
the Company issued to ADEC two Senior Convertible Notes
(“Note A” and
“Note B,”
respectively, each a “Note,” and together, the
“Notes”), in
the principal amount of $1,000,000 per Note, resulting in gross
proceeds to the Company of $2,000,000. ADEC is controlled by a
significant stockholder of the Company.
The
Notes accrue interest at a rate of 10% per annum (the “Interest Rate”); provided,
however, that in the event the Company elects to repay the full
balance due under the terms of both Notes prior to December 31,
2019, then the interest rate will be reduced to 6% per annum.
Interest is payable at the time all outstanding Principal Amounts
owed under each Note is repaid. The Notes will mature on the
earlier to occur of (i) the tenth business day following the
receipt by ABS of certain tax credits that the Company expects to
receive prior to July 2019 in the case of Note A (the “2019 Tax Credit”) and July
2020 in the case of Note B (the “2020 Tax Credit”),
respectively, or (ii) December 31, 2019 in the case of Note A and
December 31, 2020 in the Case of Note B (the “Maturity Dates”). As a
condition to entering into the NPA, ABS and ADEC also entered into
a Pledge Agreement, pursuant to which ABS agreed to pledge an
interest in the 2019 and 2020 Tax Credits to ADEC in order to
guarantee payment of all amounts due under the terms of the
Notes.
Prior
to their respective Maturity Dates, each of the Notes is
convertible, at ADEC’s option, into shares of the
Company’s common stock, at a conversion price equal to the
principal and accrued interest due under the terms of the Notes
divided by $2.50 (“Conversion Shares”);
provided, however, that pursuant to the term of the Notes, ADEC may
not convert all or a portion of the Notes if such conversion would
result in the significant stockholder and/or entities affiliated
with him beneficially owning in excess of 19.99% of the
Company’s shares of common stock issued and outstanding
immediately after giving effect to the issuance of the Conversion
Shares.
As
additional consideration for entering into the NPA, pursuant to a
Warrant Amendment Agreement, the Company agreed to reduce the
exercise price of 1,009,565 outstanding warrants previously issued
by the Company to ADEC and its affiliates (the “Warrants”) to $1.50 per
share. The Warrant Amendment does not alter any other terms of the
Warrants. This resulted in a debt discount of $325,320 that will be
accreted to additional interest expense over the lives of the
Notes.
In
connection with the above transaction, the Company also entered
into a registration rights agreement with ADEC, pursuant to which
the Company agreed to file a registration statement with the
Securities and Exchange Commission no later than 45 days after the
closing date of February 14, 2019 in order to register, on behalf
of ADEC, the Conversion Shares. ADEC subsequently agreed to extend
the date to file a registration statement to April 30, 2019. The
registration statement was filed on April 25, 2019.
During
the three months ended June 30, 2019, the Company accrued $49,863
of interest expense in connection with these convertible notes.
During the three months ended June 30, 2019, the Company recorded
$58,855 of interest expense in the form of amortization of debt
discount related to the repriced warrants. During the six months
ended June 30, 2019, the Company accrued $74,521 of interest
expense in connection with these convertible notes. During the six
months ended June 30, 2019, the Company recorded $87,959 of
interest expense in the form of amortization of debt discount
related to the repriced warrants.
Convertible Debt
consisted of:
|
|
June 30,
|
December 31,
|
|
|
2019
|
2018
|
|
Convertible
debt
|
$2,000,000
|
$-
|
|
Unamortized
debt discount - revalued warrants
|
(237,361)
|
-
|
|
Accrued
interest
|
74,521
|
|
|
Total
convertible debt
|
$1,837,160
|
$-
|
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.
On July 11, 2018, the Company paid
off the remaining amount due under the terms of this Debenture in
the amount of $286,529.
For the three months ended June 30,
2018, the Company recorded $45,537 of interest expense related to
the amortization of the debt discount related to the warrant
features of the Debenture. For the six months ended June 30, 2018,
the Company recorded $92,332 of interest expense related to the
amortization of the debt discount related to the warrant features
of the Debenture.
Note
10 – Other Liabilities
Other
liabilities consisted of the following:
|
|
June 30,
|
December 31,
|
|
Current
|
2019
|
2018
|
|
Due
to Mayoly
|
$455,560
|
$-
|
|
Lease
liabilities
|
195,108
|
-
|
|
|
$650,668
|
$-
|
|
|
June 30,
|
December 31,
|
|
Long-term
|
2019
|
2018
|
|
Due
to Mayoly
|
$398,615
|
$-
|
|
Lease
liabilities
|
44,417
|
-
|
|
|
$443,032
|
$-
|
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 June
30, 2019 and December 31, 2018, the Company had 21,103,434 and
17,704,925, 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. During the
three and six months ended June 30, 2019 and 2018, the Company
granted 893,500 and 539,000, respectively of stock options under
the 2014 Plan.
Series A Convertible Preferred Stock
At June
30, 2019 and December 31, 2018, there were no Series A Convertible
Preferred Stock (“Series A
Preferred”) outstanding. However, all terms of the
Series A Preferred are still in effect.
Restricted Stock
During
the three months ended June 30, 2019, 77,084 restricted shares of
common stock vested with a fair value of $197,169. 33,334 of these
77,084 shares having a fair value of $101,335 vested during the
three months ended June 30, 2019 due to the Company reaching
enrollment of 30 patients in the Company's Phase II study to
investigate MS1819-SD in CF patients. 30,000 of these 77,084 shares
having a fair value of $51,000 were issued during the three months
ended June 30, 2019 to our directors as a part of Board
compensation. 13,750 of these 77,084 shares having a fair value of
$44,834 vested during the three months ended June 30,
2019.
During
the six months ended June 30, 2019, 179,667 restricted shares of
common stock vested with a fair value of $493,454. 58,833 of these
179,667 shares having a fair value of $178,852 vested during the
six months ended June 30, 2019 due to the Company dosing the first
patients in the Company's Phase II study to investigate MS1819-SD
in CF patients. 33,334 of these 179,667 shares having a fair value
of $101,335 vested during the six months ended June 30, 2019 due to
the Company reaching enrollment of 30 patients in the Company's
Phase II study to investigate MS1819-SD in CF patients. 60,000 of
these 179,667 shares having a fair value of $123,600 were issued
during the six months ended June 30, 2019 to our directors as a
part of Board compensation. 27,500 of these 179,667 shares having a
fair value of $89,667 vested during the six months ended June 30,
2019.
During
the three months ended June 30, 2019, the Company issued 13,379
shares of its common stock to a consultant as payment of $30,000 of
accounts payable. During the six months ended June 30, 2019, the
Company issued 40,481 shares of its common stock to a consultant as
payment of $90,000 of accounts payable.
As
of June 30, 2019, the Company had unrecognized restricted common
stock expense of $292,359 that will be recognized over the average
remaining vesting term of 1.80 years.
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, 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.
Note
12 - Warrants
In
February 2019, as additional consideration for issuing convertible
notes with ADEC and pursuant to a Warrant Amendment Agreement, the
Company agreed to reduce the exercise price of certain outstanding
warrants previously issued by the Company to ADEC and its
affiliates, see Note 9.
Stock
warrant transactions for the periods January 1 through June 30,
2019 and 2018 are as follows:
|
|
|
Exercise
|
Weighted
|
|
|
|
Price Per
|
Average
|
|
|
Warrants
|
Share
|
Exercise Price
|
|
|
|
|
|
|
Warrants outstanding and exercisable at January 1,
2018
|
3,371,385
|
$3.17 - $7.37
|
$5.28
|
|
|
|
|
|
|
Granted
during the period
|
244,400
|
$2.55 - $2.75
|
$2.58
|
|
Expired
during the period
|
-
|
-
|
-
|
|
Exercised
during the period
|
(503,070)
|
$2.50
|
$2.50
|
|
Warrants outstanding and exercisable at June 30, 2018
|
3,112,715
|
$2.55 - $7.37
|
$4.83
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding and exercisable at January 1,
2019
|
3,112,715
|
$2.55 - $7.37
|
$4.83
|
|
|
|
|
|
|
Granted
during the period
|
75,663
|
$2.55 - $2.82
|
$2.68
|
|
Expired
during the period
|
-
|
-
|
-
|
|
Exercised
during the period
|
-
|
-
|
-
|
|
Warrants outstanding and exercisable at June 30, 2019
|
3,188,378
|
$1.50 - $7.37
|
$3.51
|
|
|
Number of
|
Weighted Average
|
Weighted
|
|
|
Shares Under
|
Remaining Contract
|
Average
|
|
Exercise Price
|
Warrants
|
Life in Years
|
Exercise Price
|
|
$1.50 - $2.99
|
1,329,628
|
2.75
|
|
|
$3.00 - $3.99
|
636,972
|
2.82
|
|
|
$4.00 - $4.99
|
196,632
|
2.51
|
|
|
$5.00 - $5.99
|
805,476
|
2.63
|
|
|
$6.00 - $6.99
|
187,750
|
2.26
|
|
|
$7.00 - $7.37
|
31,920
|
1.46
|
|
|
Total
|
3,188,378
|
2.68
|
$3.51
|
In
January 2018, the Company offered certain warrant holders the
opportunity to exercise their warrants at a reduced strike price of
$2.50, and if so elected, would also have the opportunity to
reprice other warrants that they continued to hold unexercised to
$3.25. The offer, which was effective 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 had other warrants modified on approximately 197,000 shares,
which resulted in a charge of approximately $429,000 in January
2018.
During
the three and six months ended June 30, 2019, 75,663 warrants were
issued to investment bankers in association with the April and May
2019 Public Offerings with a value of $116,582 that had no effect
on expenses or stockholders’ equity.
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.
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, 2019 893,500 stock options
were granted with an exercise price of $1.70 and a term of five
years. During the three months ended June 30, 2019, no options
vested. During the six months ended June 30, 2019, 244,500 options
vested having a fair value of $511,335 and an intrinsic value of
$0. 242,000 of these options valued at $501,666 vested due to the
Company having its first CF patient dosed with MS1819-SD anywhere
in the world, which was achieved by the dosing of the first patient
in the OPTION Study.
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 term of five
years. During the three months ended June 30, 2018, 96,250 options
vested having a fair value of $248,930 and an intrinsic value of
$0. During the six months ended June 30, 2018, 103,750 options
vested having a fair value of $277,948 and an intrinsic value of
$0.
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,
|
|
|
2019
|
2018
|
|
Contractual
term (in years)
|
5
|
5
|
|
Volatility
|
71%
|
85%
|
|
Risk-free
interest rate
|
2.19%
|
2.82%
|
|
Dividend
yield
|
-%
|
-%
|
The
expected term of the options is based on expected future employee
exercise behavior. Volatility is based on the historical volatility
of the Company’s common stock if available or of several
public entities that are similar to the Company. The Company bases
volatility this way because it may not have sufficient historical
transactions in its own shares on which to solely base expected
volatility. The risk-free interest rate is based on the U.S.
Treasury rates at the date of grant with maturity dates
approximately equal to the expected term at the grant date. The
Company has not historically declared any dividends and does not
expect to in the future.
-16-
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
|
Average
|
Remaining Contract
|
Intrinsic
|
|
|
of Shares
|
Exercise Price
|
Life in Years
|
Value
|
|
|
|
|
|
|
|
Stock options outstanding at January 1, 2018
|
545,000
|
$4.05
|
7.13
|
$-
|
|
|
|
|
|
|
|
Granted
during the period
|
539,000
|
$3.04
|
5.00
|
$-
|
|
Expired
during the period
|
-
|
-
|
|
|
|
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
|
$-
|
|
Stock options outstanding at January 1, 2019
|
994,000
|
$3.58
|
5.42
|
$-
|
|
|
|
|
|
|
|
Granted
during the period
|
893,500
|
$1.70
|
4.96
|
|
|
Expired
during the period
|
-
|
-
|
|
|
|
Canceled
during the period
|
-
|
-
|
|
|
|
Exercised
during the period
|
-
|
-
|
|
|
|
Stock options outstanding at June 30, 2019
|
1,887,500
|
$2.58
|
4.94
|
$-
|
|
|
|
|
|
|
|
Exercisable at June 30, 2019
|
994,000
|
$3.58
|
4.92
|
$-
|
|
|
|
|
|
|
|
Non-vested stock options outstanding at January 1,
2019
|
244,500
|
$3.05
|
4.53
|
$-
|
|
|
|
|
|
|
|
Granted
during the period
|
893,500
|
$1.70
|
4.96
|
|
|
Vested
during the period
|
(244,500)
|
$3.05
|
4.53
|
|
|
Expired
during the period
|
-
|
-
|
|
|
|
Canceled
during the period
|
-
|
-
|
|
|
|
Exercised
during the period
|
-
|
-
|
|
|
|
Non-vested stock options outstanding at June 30, 2019
|
893,500
|
$1.70
|
4.96
|
$-
|
5,681
shares of common stock were available for future issuance under the
2014 Plan as of June 30, 2019.
As of June 30, 2019, the Company had unrecognized
stock-based compensation expense of $905,116. $121,560 of this
unrecognized expense will be recognized over the average remaining
vesting term of the options of one year. $713,405 of this unrecognized expense vests upon
the completion of enrollment of the next trial of MS 1819-SD in the
U.S. $70,151 of this unrecognized expense vests upon the completion
of enrollment of the ongoing clinical trial assessing MS1819-SD in
cystic fibrosis patients as a combination therapy with the standard
of care. The expense related to these milestones will be recognized
when the milestones become probable.
Note
14 - Agreements
Mayoly Agreement
During
the three months ended June 30, 2019 and 2018, the Company charged
$0 and $399,622, respectively, to Mayoly under the JDLA that was in
effect during both periods. During the six months ended June 30,
2019 and 2018, the Company charged $403,020 and $525,605,
respectively, to Mayoly under the JDLA that was in effect during
both periods.
On March 27, 2019, the Company entered into
the Mayoly APA pursuant to which the
Company purchased substantially all rights, title and interest in
and to MS1819-SD, see Recent Developments
above.
INRA Agreement
In
February 2006, Mayoly and INRA TRANSFERT, on behalf of INRA and
CNRS (French government research centers), entered into a Usage and
Cross-Licensing Agreement granting Mayoly exclusive worldwide
rights to exploit Yarrowia lipolytica and other lipase proteins
based on their patents for use in humans. The INRA Agreement
provides for the payment by Mayoly of royalties on net sales,
subject to Mayoly’s right to terminate such obligation upon
the payment of a lump sum specified in the agreement. Upon
execution of the Mayoly APA, all rights, obligations and interests
under the INRA Agreement were transferred to the
Company.
TransChem Sublicense
On
August 7, 2017, the Company entered into a Sublicense Agreement
with TransChem, 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 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.
No payments were made under this agreement in the three and six
months ended June 30, 2019 and 2018.
Employment Agreements
Johan (Thijs) Spoor
On
January 3, 2016, the Company entered into an employment agreement
with its President and Chief Executive Officer, Johan Spoor. The
employment agreement provided for a term expiring January 2, 2019.
Although Mr. Spoor’s employment agreement has expired, he
remains employed as the Company’s President and Chief
Executive Officer under the terms of his prior employment
agreement.
Either
party may terminate Mr. Spoor’s employment at any time and
for any reason, or for no reason. For a period of twelve (12)
months after Mr. Spoor’s termination, Mr. Spoor shall not
engage in competition with the Company either directly or
indirectly, in any manner or capacity.
Mr.
Spoor is paid a base salary of $425,000 per year. 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.
Mr. Spoor was
originally entitled to 380,000 10-year stock options pursuant to
the 2014 Plan. 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-SD, and (ii) 25%
upon the Company completing a Phase IIa clinical trial for
MS1819-SD, 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. All of
these shares vested during 2018. $106,250 was expensed in the
second quarter of 2018 and $318,750 was expensed in the fourth
quarter of 2018 due to the Company completing both
milestones.
On June
28, 2018, Mr. Spoor was granted 200,000 shares of restricted common
stock subject to vesting conditions as follows: (i) 50% shall vest
in three equal installments beginning one year from the date of
issuance, and (ii) the remaining 50% shall vest as follows:
one-third shall vest upon U.S. acceptance of IND for MS1819-SD,
one-third upon the first dosing of a CF patient with MS1819-SD
anywhere in the world, and the remaining one-third upon enrollment
of the first 30 patients in a CF trial. These restricted shares had
an estimated fair value at the grant date of $608,000 to be
expensed when the above milestones are probable. 8,333 shares with
a fair value of $25,332 vested and was expensed in the three months
ended June 30, 2019 due to being earned over that time. 16,666
shares with a fair value of $50,664 vested and was expensed in the
six months ended June 30, 2019 due to being earned over that time.
33,333 shares with a fair value of $101,332 vested and was expensed
in the six months ended June 30, 2019 due to the first dosing of CF
patients with MS1819-SD anywhere in the world.
On June
28, 2018, the Board approved a 2017 annual incentive bonus pursuant
to his employment agreement in the amount of $212,500.
On June
13, 2019, Mr. Spoor was granted stock options to purchase 150,000
shares of the Company’s common stock, issuable pursuant to
the 2014 Plan, that vest upon the completion of enrollment of the
next trial of MS 1819-SD in the U.S. These options had an estimated
fair value at the grant date of $151,950 to be expensed when the
above milestone is probable.
On June
29, 2019, the Board approved a 2018 annual incentive bonus pursuant
to his employment agreement in the amount of $255,000 that is
included in accrued expenses at June 30, 2019.
Maged Shenouda
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-SD, and (ii) 25% upon the Company completing a Phase IIa
clinical trial for MS1819-SD. The option is exercisable for $4.39
per share and will expire on September 25, 2027. All of these
shares vested in 2018. $84,125 was expensed in the second quarter
of 2018 and $252,375 was expensed in the fourth quarter of 2018 due
to the Company completing both milestones.
On June
28, 2018, Mr. Shenouda was granted stock options to purchase
100,000 shares of the Company’s common stock, issuable
pursuant to the 2014 Plan, subject to vesting conditions as
follows: (i) 50% upon U.S. acceptance of an IND for MS1819-SD, and
(ii) 50% upon the first CF patient doses with MS1819-SD anywhere in
the world. These options had an estimated fair value at the grant
date of $207,300 to be expensed when the above milestones are
probable. 50,000 of these options
having a fair value of $103,650 vested and was expensed in 2018 due
to the FDA acceptance of the Company’s IND application for
MS1819-SD. The remaining 50,000 options having a fair value of
$103,650 vested and was expensed in the six months ended June 30,
2019 due to the first dosing of CF patients with MS1819-SD anywhere
in the world.
On June
28, 2018, the Board approved a 2017 annual incentive bonus pursuant
to his employment agreement in the amount of $82,500.
On June
13, 2019, Mr. Shenouda was granted stock options to purchase
100,000 shares of the Company’s common stock, issuable
pursuant to the 2014 Plan, that vest upon the completion of
enrollment of the next trial of MS 1819-SD in the U.S. These
options had an estimated fair value at the grant date of $101,300
to be expensed when the above milestone is probable.
On June
28, 2019, the Board approved a 2018 annual incentive bonus pursuant
to his employment agreement in the amount of $100,000 that is
included in accrued expenses at June 30, 2019.
Dr. James E. Pennington
On May
28, 2018, the Company entered into an employment agreement with Dr.
Pennington to serve as the Company’s Chief Medical Officer.
The employment agreement with Dr. Pennington provides for a base
annual salary of $250,000. In addition to his salary, Dr.
Pennington is eligible to receive an annual milestone bonus,
awarded at the sole discretion of the Board based on his attainment
of certain financial, clinical development, and/or business
milestones established annually by the Board or Compensation
Committee. The employment agreement is terminable by either party
at any time. In the event of termination by the Company other than
for cause, Dr. Pennington is entitled to three months’
severance payable over such period. In the event of termination by
the Company other than for cause in connection with a Change of
Control, Dr. Pennington will receive six months’ severance
payable over such period.
On June
28, 2018, Mr. Pennington was granted stock options to purchase
75,000 shares of the Company’s common stock, issuable
pursuant to the 2014 Plan, subject to vesting conditions as
follows: (i) 50% upon U.S. acceptance of an IND for MS1819-SD, and
(ii) 50% upon the first CF patient doses with MS1819-SD anywhere in
the world. These options had an estimated fair value at the grant
date of $155,475 to be expensed when the above milestones are
probable. 37,500 of these options vested and $77,738 was expensed
in 2018 due to the FDA acceptance of the Company’s IND
application for MS1819-SD in 2018. 37,500 of these options having a
fair value of $77,738 vested and was expensed in the six months
ended June 30, 2019 due to the first dosing of CF patients with
MS1819-SD anywhere in the world.
On June
13, 2019, Mr. Pennington was granted stock options to purchase
110,000 shares of the Company’s common stock, issuable
pursuant to the 2014 Plan, that vest upon the completion of
enrollment of the next trial of MS 1819-SD in the U.S. These
options had an estimated fair value at the grant date of $111,430
to be expensed when the above milestone is probable.
On June
13, 2019, the Board approved a 2018 annual incentive bonus pursuant
to his employment agreement in the amount of $75,000 that is
included in accrued expenses at June 30, 2019.
Note
15 - Leases
The
Company adopted ASU 2016-02, Leases, as of January 1, 2019, using
the modified retrospective approach. Prior year financial
statements were not recast under the new standard.
The
Company leases its office and research facilities under operating
leases which are subject to various rent provisions and escalation
clauses expiring at various dates through 2020. The escalation
clauses are indeterminable and considered not material and have
been excluded from minimum future annual rental
payments.
Lease
expense amounted
to $51,011 and $36,766, respectively, in the three months ended
June 30, 2019 and 2018. Lease expense amounted
to $101,666 and $67,993, respectively, in the six months ended June
30, 2019 and 2018.
The
weighted-average remaining lease term and weighted-average discount
rate under operating leases at
June
30, 2019 are:
|
|
June 30,
|
|
|
2019
|
|
Lease term and discount rate
|
|
|
Weighted-average
remaining lease term
|
1.25
years
|
|
Weighted-average
discount rate
|
6.0%
|
Maturities of
operating lease liabilities at June 30, 2019 are as
follows:
|
2019
|
$101,359
|
|
2020
|
154,066
|
|
Total
lease payments
|
255,425
|
|
Less
imputed interest
|
(15,900)
|
|
Present
value of lease liabilities
|
$239,525
|
Note
16 - Income Taxes
The
Company is subject to taxation at the federal level in both the
United States and France and at the state level in the United
States. At June 30, 2019 and December 31, 2018, the Company had no
tax provision for either jurisdiction.
At June
30, 2019 and December 31, 2018, the Company had gross deferred tax
assets of approximately $14,500,000 and $12,490,000, respectively.
As the Company cannot determine that it is more likely than not
that the Company will realize the benefit of the deferred tax
asset, a valuation allowance of approximately $14,500,000 and
$12,490,000, respectively, has been established at June 30, 2019
and December 31, 2018. The change in the valuation allowance in the
six months ended June 30, 2019 and 2018 was $2,010,000 and
$1,399,000, respectively.
At June
30, 2019, the Company has gross net operating loss
(“NOL”)
carryforwards for U.S. federal and state income tax purposes of
approximately $27,279,000 and $25,722,000, respectively. The
NOL’s expire between the years 2034 and 2039. The
Company’s ability to use its NOL carryforwards may be limited
if it experiences an “ownership change” as defined in
Section 382 (“Section
382”) of the Internal Revenue Code of 1986, as
amended. An ownership change generally occurs if certain
stockholders increase their aggregate percentage ownership of a
corporation’s stock by more than 50 percentage points over
their lowest percentage ownership at any time during the testing
period, which is generally the three-year period preceding any
potential ownership change.
At June
30, 2019 and December 31, 2018, the Company had approximately
$17,072,000 and $15,406,000, respectively, in net operating losses
which it can carryforward indefinitely to offset against future
French income.
At June
30, 2019 and December 31, 2018, the Company had taken no uncertain
tax positions that would require disclosure under ASC 740,
Accounting for Income Taxes.
Note
17 - 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 June
30, 2019, diluted net loss per share did not include the effect of
3,188,378 shares of common stock issuable upon the exercise of
outstanding warrants, 416,000 shares of restricted stock not yet
issued, and 1,887,500 shares of common stock issuable upon the
exercise of outstanding options as their effect would be
antidilutive during the periods prior to conversion.
At June
30, 2018, diluted net loss per share did not include the effect of
3,112,715 shares of common stock issuable upon the exercise of
outstanding warrants, 1,084,000 shares of common stock issuable
upon the exercise of outstanding options, and 74,000 shares of
common stock issuable upon the conversion of convertible debt as
their effect would be antidilutive during the periods prior to
conversion.
Note
18 - 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 both June 30, 2019 and December 31, 2018 is $478,400 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 June 30, 2019 and December 31, 2018 is $38,453 for
RHMS for Ms. Rigby-Hutton’s services.
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. Included in
accounts payable at June 30, 2019 and December 31, 2018 is $10,000
and $50,000, respectively, for Mr. Shenouda’s
services.
Note
19 – Subsequent Events
July 2019 Underwritten Public Offering
On July
17, 2019, we entered into an underwriting agreement (the
“Underwriting
Agreement”) with H.C. Wainwright & Co., LLC.
(“Wainwright”)
as representatives of the several underwriters named therein (the
“Underwriters”), relating to the
issuance and sale of 5 million shares of our common stock. Each
share of common stock was sold at a public offering price of $1.00
per share, resulting in gross proceeds to us of $5,000,000, or net
proceeds of approximately $4,500,000, after deducting the
underwriting discount, estimated legal fees and other offering
expenses payable by the Company (the “July 2019 Public Offering”). In
addition, pursuant to the terms of the Underwriting Agreement, the
Company granted to the Underwriters a 30-day option to purchase up
to an additional 750,000 shares of Common Stock at the same public
offering price per share.
The
July 2019 Public Offering was conducted pursuant to our effective
shelf registration statement on Form S-3 (File No. 333-231954),
filed with the Securities and Exchange Commission (the
“SEC”) on June
5, 2019, and declared effective on June 25, 2019, including the
base prospectus dated June 4, 2019 included therein and the related
prospectus supplement filed on July 19, 2019.
In
addition to the underwriting discount received by the Underwriters,
we also issued unregistered common stock purchase warrants to
Wainwright to purchase up to 200,000 shares of common stock (the
“Wainwright
Warrants”). The Wainwright Warrants are exercisable
immediately upon issuance, expire on July 17, 2024 and have an
exercise price of $1.25 per share.
Cyber-Related Fraud
On August 8, 2019,
management was advised that it was a victim of a cyber-related
fraud whereby a hacker impersonated one of the Company’s key
vendors to redirect payments, totaling approximately $400,000. The
Company, including the Audit Committee, is currently conducting an
investigation and reviewing all available avenues of recovery,
including from the Company’s financial institution and
potential insurance claims to recover the payments. As of August
12, 2019, management is unable to determine the magnitude of the
loss, if any, resulting from the cyber-related
fraud.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
References in this report to “AzurRx,”
“Company,” “we,” “us,”
“our,” or similar references mean AzurRx BioPharma,
Inc. and its subsidiaries on a consolidated basis. References to
“AzurRx BioPharma” refer to AzurRx BioPharma, Inc. on
an unconsolidated basis. References to “AzurRx SAS”
refer to AzurRx BioPharma’s wholly owned subsidiary through
which we conduct our European operations. References to the
“SEC” refer to the U.S. Securities and Exchange
Commission.
Forward-Looking Statements
You should read the following discussion and analysis of our
financial condition and results of operations in conjunction with
our consolidated financial statements and the related notes
included elsewhere in this interim report. Our consolidated
financial statements have been prepared in accordance with U.S.
GAAP. The following discussion and analysis contains
forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”), including, without limitation, statements regarding
our expectations, beliefs, intentions or future strategies that are
signified by the words “expect,”
“anticipate,” “intend,”
“believe,” or similar language. All forward-looking
statements included in this document are based on information
available to us on the date hereof, and we assume no obligation to
update any such forward-looking statements. Our business and
financial performance are subject to substantial risks and
uncertainties. Actual results could differ materially from those
projected in the forward-looking statements. In evaluating our
business, you should carefully consider the information set forth
under the heading “Risk Factors” included in our Annual
Report filed on Form 10-K for the year ended December 31, 2018,
filed with the SEC on April 1, 2019. Readers are cautioned not to
place undue reliance on these forward-looking
statements.
Overview
AzurRx BioPharma, Inc. was incorporated on January
30, 2014 in the State of Delaware. In June 2014, the Company
acquired 100% of the issued and outstanding capital stock of AzurRx
SAS (formerly “ProteaBio Europe
SAS”), a company
incorporated in October 2008 under the laws of France. AzurRx and
its wholly-owned subsidiary, AzurRx SAS (“ABS”),
are collectively referred to as the “Company.”
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 programs under
development, each of which 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. In June 2018, we
completed an open-label, dose escalation Phase 2a 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 CP patients with EPI were enrolled in the
study and final data showed a strong safety and efficacy profile.
Although the study was not powered for efficacy, in a pre-planned
analysis, the highest dose cohort of MS1819-SD showed statistically
significant and clinically meaningful increases in CFA compared to
baseline with a mean increase of 21.8% and a p value of p=0.002 on
a per protocol basis. Additionally, maximal absolute CFA response
to treatment was up to 57%, with an inverse relationship to
baseline CFA.
In
October 2018, the U.S. Food and Drug Administration
(“FDA”) cleared
our Investigational New Drug (“IND”) application for MS1819-SD
in patients with EPI due to CF. In connection with the FDA’s
clearance of the IND, we initiated the multi-center Phase 2 OPTION
study in the fourth quarter of 2018 in the United States and Europe
(the “OPTION
Study”). We targeted enrollment of 30 to 35 patients
for the OPTION Study and dosed the first patients in February 2019.
In June 2019, we reached our enrollment target for the study. We
expect to announce topline results from the OPTION Study in the
third quarter of 2019.
In
addition to the OPTION Study, in July 2019 we launched a Phase 2
multi-center clinical trial in Hungary to investigate MS1819-SD in
combination with standard porcine enzyme replacement therapy
(“PERT”), the
digestive standard of care for both CF and CP patients with EPI,
for CF patients who suffer from severe EPI, but continue to
experience clinical symptoms of fat malabsorption despite taking
the maximum daily dose of PERTs. The Phase 2 study is designed to
investigate the safety, tolerability and efficacy of escalating
doses of MS1819-SD, in conjunction with a stable dose of PERTs, in
order to increase CFA and relieve abdominal symptoms. Planned
enrollment is expected to include approximately 24 CF patients with
severe EPI, with study completion anticipated in 2020.
b-Lactamase Program
Our
b-lactamase program focuses on products with an enzymatic
combination of bacterial origin for the prevention of
hospital-acquired infections and antibiotic-associated diarrhea
(“AAD”) by
resistant bacterial strains induced by parenteral administration of
several antibiotic classes. Currently, we have 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, we are focused on advancing
pre-clinical development of AZX1103. We are also currently
assessing its plans for the continuation of the development of
AZX1101.
We
do not expect to generate revenue from drug candidates that we
develop until we obtain approval for one or more of such drug
candidates and commercialize our product or enter into a
collaborative agreement with a third party. We do not have any
products approved for sale at the present and have never generated
revenue from product sale.
Recent Developments
April 2019 Registered Direct Public Offering
In April 2019, we completed a public offering of
1,294,930 shares of our common stock at a public offering price of
$2.13 per share, resulting net proceeds of approximately $2.5
million, after deducting the selling agent fee paid to Alexander
Capital, L.P. and other offering expenses payable by the Company
(the “April 2019 Public
Offering”). The April
2019 Public Offering was completed pursuant to our effective shelf
registration statement on Form S-3 (File No. 333-226065) and the
prospectus supplement filed on April 2, 2019.
In connection with the April 2019 Public Offering,
we entered into a Selling Agent Agreement with Alexander Capital,
L.P., pursuant to which we paid to Alexander Capital, L.P. (i) a
cash fee equal to 7% of the aggregate gross proceeds of the April
2019 Public Offering, and (ii) issued to Alexander Capital, L.P.
warrants to purchase 38,848 shares of our common stock (the
“April 2019 Selling Agent
Warrants”), an amount
equal to 3% of the aggregate number of shares of common stock sold
in the April 2019 Public Offering. We also reimbursed Alexander
Capital, L.P. for its expenses on a non-accountable basis in an
amount equal to 1% of the gross proceeds of the April 2019 Public
Offering and $50,000 for other accountable expenses. The April 2019
Selling Agent Warrants will become exercisable one year from the
date of issuance, expire on April 2, 2024 and have an exercise
price of $2.55 per share.
May 2019 Registered Direct Public Offering
On May 9, 2019, we completed a second public
offering with Alexander Capital of 1,227,167 shares of our common
stock at a public offering price of $2.35 per share, resulting net
proceeds of approximately $2.55 million, after deducting the
selling agent fee paid to Alexander Capital and other offering
expenses payable by the Company (the “May 2019 Public
Offering”). The May 2019
Public Offering was completed pursuant to our effective shelf
registration statement on Form S-3 (File No. 333-226065) and the
prospectus supplement filed on May 9, 2019.
In
connection with the May 2019 Public Offering, we entered into a
Selling Agent Agreement with Alexander Capital, pursuant to which
we (i) paid Alexander Capital a cash fee equal to 7.0% of the
aggregate gross proceeds of the May 2019 Public Offering, and (ii)
issued Alexander Capital warrants to purchase up to 36,815 shares
of common stock a number of shares of Common Stock equal to 3.0% of
the aggregate number of shares of Common Stock sold in the
Offering. The Company also agreed to reimburse Alexander Capital
for its expenses in connection with the Offering on a
non-accountable basis in an amount equal to 1.0% of the gross
proceeds of the Offering and up to $50,000 for other accountable
expenses. The May 2019 Selling Agent Warrants will become
exercisable one year from the date of issuance, expire on May 9,
2024 and have an exercise price of $2.82 per share.
July 2019 Underwritten Public Offering
On July 17, 2019, we entered into an
underwriting agreement (the “Underwriting
Agreement”) with H.C.
Wainwright & Co., LLC. (“Wainwright”) as representatives of the several
underwriters named therein (the “Underwriters”),
relating to the issuance and sale of 5.0 million
shares of our common stock. Each share of common stock was
sold at a public offering price of $1.00 per share, resulting in
gross proceeds to us of $5.0 million, or net proceeds of $4.5
million, after deducting the underwriting discount, estimated legal
fees and other offering expenses payable by the Company (the
“July
2019 Public Offering”). In addition, pursuant to the terms of
the Underwriting Agreement, the Company granted to the Underwriters
a 30-day option to purchase up to an additional 750,000 shares of
Common Stock at the same public offering price per
share.
The July 2019 Public Offering was conducted
pursuant to our effective shelf registration statement on Form S-3
(File No. 333-231954), filed with the Securities and Exchange
Commission (the “SEC”) on June 5, 2019, and declared effective
on June 25, 2019, including the base prospectus dated June 4, 2019
included therein and the related prospectus supplement filed on
July 19, 2019.
In addition to the underwriting discount received
by the Underwriters, we also issued unregistered common stock
purchase warrants to Wainwright to purchase up to 200,000 shares of
common stock (the “Wainwright
Warrants”). The
Wainwright Warrants are exercisable immediately upon issuance,
expire on July 17, 2024 and have an exercise price of $1.25 per
share.
Liquidity and Capital Resources
We
have experienced net losses and negative cash flows from operations
since our inception. As of June 30, 2019, we had cash of
approximately $1,311,000 and had an accumulated deficit of
approximately $57,221,000. We are dependent on obtaining, and are
continuing to pursue, funding necessary to continue our operations
from outside sources, including obtaining additional funding from
the sale of securities. 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 in October
2016 (“IPO”), the issuance of debt and convertible
debt securities, the issuance of common stock in various private
placement transactions, and our public offerings in May 2018, April
2019, May 2019 and July 2019. We do not believe our current cash,
including net proceeds from recent equity issuance, will be
sufficient to fund our working capital requirements beyond the next
12 months. 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.
We
are focused on expanding our product pipeline through
collaborations, and also through potential acquisitions. We are
continually evaluating potential asset acquisitions and business
combinations. To finance such potential acquisitions, we may raise
additional equity capital, incur additional debt, or both, which
capital may not be available on a timely basis or on acceptable
terms.
Cash Flows for the Six Months Ended June 30, 2019 and
2018
Net
cash used in operating activities for the six months ended June 30,
2019 was $6,653,777, which primarily reflected our net loss of
$9,703,991 plus adjustments to reconcile net loss to net cash used
in operating activities of depreciation and amortization expense of
$727,217, non-cash stock-based compensation of $511,335 due
primarily to achievement of certain performance-based milestones
associated with previously issued equity awards, non-cash
restricted stock granted to employees/directors of $493,454 due
primarily to reaching certain performance-based milestones,
non-cash restricted stock granted to a consultant in payment of
accounts payable for $90,000, accrued interest on convertible debt
of $74,521, and non-cash debt discount - warrants on convertible
debt of $87,959. Changes in assets and liabilities are due to an
increase in other receivables of $193,152, a decrease in prepaid
expenses of $312,672 due primarily to the expensing of prepaid
insurance, an increase in right of use assets of $240,993 due to
the adoption of new lease accounting standards, an increase in
deposits of $4,125, an increase in accounts payable and accrued
expenses of $940,347 due primarily to increases in expenses as
detailed below and an increase in other liabilities of $250,579 due
to the adoption of new lease accounting standards.
Net
cash used in operating activities for the six months ended June 30,
2018 was $4,862,321, which primarily reflected our net loss of
$6,942,174 plus adjustments to reconcile net loss to net cash used
in operating activities of depreciation and amortization expense of
$407,919, non-cash fair value adjustment of the contingent
consideration of $160,000, non-cash stock-based compensation of
$277,948, non-cash restricted stock granted to employees/directors
of $335,751, non-cash restricted stock granted/accrued to
consultants of $220,230, non-cash debt discount - warrants on a 12%
Senior Secured Original Issue Discount Convertible Debenture issued
to Lincoln Park Capital in April 2017 of $92,332, and a non-cash
warrant modification expense of $428,748. Changes in assets and
liabilities are due to an increase in other receivables of $6,624
due primarily to the billings to our research partner Laboratoires
Mayoly Spindler SAS, a decrease in prepaid expense of $142,560 due
primarily to the expensing of prepaid insurance, and an increase in
accounts payable and accrued expense of $35,989 due primarily to
increased research and development expenses as detailed
below.
Net
cash used in investing activities for the six months ended June 30,
2019 and 2018 was $13,337 and $41,041, respectively, which
consisted of the purchase of property and equipment.
Net
cash provided by financing activities for the six months ended June
30, 2019 was $6,895,228, which consisted of $5,023,956 from the
sale of Common Stock offered in our April and May 2019 Public
Offerings, $2,000,00 from the issuance of the Notes to ADEC, and
$61,590 received from a stockholder in relation to a warrant
modification offset by repayment of a note payable of $190,318. Net
cash provided by financing activities for the six months ended June
30, 2018 was $11,770,340, which consisted of $2,324,742 from the
issuance of Common Stock in connection with the exercise of
Repriced Warrants, $9,577,942 from the sale of Common Stock offered
in our May 2018 Public Offering, offset by repayment of a note
payable of $132,344.
Consolidated Results of Operations for the Three and Six Months
Ended June 30, 2019 and 2018
Research and
development (“R&D”) expense was $2,738,768
and $925,776, respectively, for the three months ended June 30,
2019 and 2018, an increase of $1,812,992. R&D expense was
$4,857,301 and $2,603,805, respectively, for the six months ended
June 30, 2019 and 2018, an increase of $2,253,496. The increases in
R & D expenses for the three and six months ended June 30, 2019
as compared to the same periods in 2018 are primarily due to the
startup of a research and development function in the U.S.
including expenses for our OPTION study that were not present in
the same period in 2018. We expect R&D expense to increase in
future periods as our product candidates continue through clinical
trials and we seek strategic collaborations.
General
and administrative (“G&A”) expense was $2,193,423
and $2,167,247, respectively, for the three months ended June 30,
2019 and 2018, an increase of $26,176 due primarily to an increase
in investor relations due to efforts to increase the visibility of
the Company. G&A expense was $4,678,533 and $4,083,580,
respectively, for the six months ended June 30, 2019 and 2018, an
increase of $594,953. The increase for the six months ended June
30, 2019 as compared to the same period in 2018 was due primarily
to an increase in non-cash restricted stock and stock-based
compensation granted accumulating to $170,860 due primarily to
achieving certain performance-based milestones related to such
grants, an increase in compensation of $279,300 due to increased
personnel, and an increase in investor relations of $136,946. We
expect G&A expense to increase going forward as we proceed
closer to commercialization of our product candidates.
Fair
value adjustment of our contingent consideration was $0 and
$170,000, respectively, for the three months ended June 30, 2019
and 2018. Fair value adjustment of our contingent consideration was
$0 and $160,000, respectively, for the six months ended June 30,
2019 and 2018. The difference in fair value adjustments in the
three-and six- month periods ended June 30, 2019 as compared to the
same periods in 2018 is due to the contingent consideration being
eliminated in 2018.
Interest expense
was $110,646 and $46,154, respectively, for the three months ended
June 30, 2019 and 2018, an increase of $64,492. Interest expense
was $167,757 and $94,789, respectively, for the six months ended
June 30, 2019 and 2018, an increase of $72,968. The higher interest
expense in the three- and six- month periods ended June 30, 2019 as
compared to the same periods in 2018 is primarily due to Notes
issued in 2019.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISKS
Not
applicable.
ITEM 4. CONTROLS AND
PROCEDURES
Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Securities
Exchange Act of 1934, as amended,
(the “Exchange
Act”) our Chief Executive
Officer (“CEO”) and our Chief Financial Officer
(“CFO”) conducted an evaluation as of the end of
the period covered by this Quarterly Report on Form 10-Q, of the
effectiveness of our disclosure controls and procedures as defined
in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on
that evaluation, our CEO and our CFO each concluded that our
disclosure controls and procedures are effective to provide
reasonable assurance that information required to be disclosed in
the reports that we file or submit under the Exchange Act, (i) is
recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules
and forms and (ii) is accumulated and communicated to our
management, including our CEO and our CFO, as appropriate to allow
timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial
reporting identified in management’s evaluation pursuant to
Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period
covered by this Quarterly Report on Form 10-Q that materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART
II
OTHER INFORMATION
|
ITEM 1. LEGAL
PROCEEDINGS
|
None.
|
ITEM 1A. RISK FACTORS
|
Our results of operations and financial condition
are subject to numerous risks and uncertainties described in our
Annual Report on Form 10-K for our fiscal year ended December 31,
2018, filed on April 1, 2019. You should carefully consider these
risk factors in conjunction with the other information contained in
this Quarterly Report. Should any of these risks materialize, our
business, financial condition and future prospects could be
negatively impacted. As of August 12, 2019, there have been no
material changes to the disclosures made in the above referenced
Form 10-K.
|
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE
OF PROCEEDS
|
None.
|
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
|
None.
|
ITEM 4. MINE SAFETY DISCLOSURES
|
|
|
Not
applicable.
|
ITEM 5. OTHER INFORMATION
|
None.
|
ITEM 6. EXHIBITS
|
|
|
|
(b)
|
Exhibits
|
|
Exhibit No.
|
|
Description
|
|
|
Underwriting
Agreement, by and between AzurRx BioPharma, Inc. and H.C.
Wainwright & Co., LLC as representative of the several
underwriters, dated July 17, 2019 (incorporated by reference to
Exhibit 1.1 to the Current Report on Form 8-K, filed on July 22,
2019).
|
|
|
|
Form of
Selling Agent Warrant (incorporated by reference to Exhibit 4.1 to
the Current Report on Form 8-K, filed on April 3,
2019).
|
|
|
|
Form of
Selling Agent Warrant (incorporated by reference to Exhibit 4.1 to
the Current Report on Form 8-K, filed on May 14,
2019).
|
|
|
|
Form of
Common Stock Purchase Warrant, dated July 2019 incorporated by
reference to Exhibit 1.1 to the Current Report on Form 8-K, filed
on July 22, 2019).
|
|
|
|
Selling
Agent Agreement, by and between AzurRx BioPharma, Inc. and
Alexander Capital, L.P., dated April 1, 2019 (incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K, filed
on April 3, 2019).
|
|
|
|
Selling
Agent Agreement, by and between AzurRx BioPharma, Inc. and
Alexander Capital, L.P., dated May 9, 2019 (incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K, filed
on May 14, 2019).
|
|
|
|
Certification
of the Principal Executive Officer, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
Certification
of the Principal Financial Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
Certification
of the Principal Executive Officer and Principal
Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
|
|
101.INS
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XBRL
Instance Document
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101.SCH
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XBRL
Taxonomy Extension Schema
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101.CAL
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XBRL
Taxonomy Extension Calculation Linkbase
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101.DEF
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XBRL
Taxonomy Extension Definition Linkbase
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101.LAB
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XBRL
Taxonomy Extension Label Linkbase
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101.PRE
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XBRL
Taxonomy Extension Presentation Linkbase
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly
authorized.
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AZURRX
BIOPHARMA, INC.
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By
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/s/ Johan M.
(Thijs) Spoor
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Johan
M. (Thijs) Spoor
President and Chief Executive Officer
(Principal Executive Officer)
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By
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/s/ Maged
Shenouda
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Maged
Shenouda
Chief Financial Officer
(Principal Financial and Accounting Officer)
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Date:
August 12, 2019
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-28-