First Wave BioPharma, Inc. - Quarter Report: 2020 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

 

For the quarterly period ended March 31, 2020

 

OR

 

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

 

From the transition period from               to              

 

Commission File Number 001-37853

 

 

AZURRX BIOPHARMA, INC.

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

 

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

 

760 Parkside Avenue

Downstate Biotechnology Incubator, Suite 304

Brooklyn, New York 11226

(Address of principal executive offices)

 

(646) 699-7855

(Issuer’s telephone number)

 

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

Yes [X]    No [ ]

 

Indicate by check mark whether the registrant has submitted electronically 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	[   ]	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	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	AZRX	Nasdaq Capital Market

 

As of May 14, 2020, there were 28,202,850 shares of the registrant’s common stock, $0.0001 par value, (“common stock”) issued and outstanding.

  

 

 

 

TAB LE OF CONTENTS

 

			Page
PART I.	FINANCIAL INFORMATION
	Item 1.	Consolidated Financial Statements	1
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
	Item 4.	Controls and Procedures	32
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	33
	Item 1A.	Risk Factors	33
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
	Item 3.	Defaults Upon Senior Securities	33
	Item 4.	Mine Safety Disclosures	33
	Item 5.	Other Information	33
	Item 6.	Exhibits	33

 

 

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, 2019 included in our Annual Report filed on Form 10-K, filed with the SEC on March 30, 2020.

 

The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the fiscal year ended December 31, 2020.

 

  

 

 

AZURRX BIOPHARMA, INC.

Consolidated Balance Sheets (unaudited)

 

	March 31,	December 31,
	2020	2019
ASSETS
Current Assets:
Cash	$1,630,007	$175,796
Other receivables	760,232	2,637,303
Prepaid expenses	507,197	595,187
Total Current Assets	2,897,436	3,408,286
Property, equipment, and leasehold improvements, net	73,547	77,391
Other Assets:
Patents	3,275,197	3,407,084
Goodwill	1,844,006	1,886,686
Operating lease right-of-use assets	53,399	82,386
Deposits	40,727	41,047
Total Other Assets	5,213,329	5,417,203
Total Assets	$8,184,312	$8,902,880
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses	$1,039,219	$1,754,682
Accounts payable and accrued expenses - related party	396,853	533,428
Note payable	279,616	444,364
Convertible debt	2,986,328	1,076,938
Other current liabilities	441,173	476,224
Total Current Liabilities	5,143,189	4,285,636
Stockholders' Equity:
Convertible preferred stock - Par value $0.0001 per share; 10,000,000 shares authorized and 0 shares issued and outstanding at March 31, 2019 and December 31, 2018; liquidation preference approximates par value	-	-
Common stock - Par value $0.0001 per share; 100,000,000 shares authorized; 27,157,651 and 26,800,519 shares issued and outstanding, respectively, at March 31, 2020 and December 31, 2019	2,716	2,680
Additional paid-in capital	72,103,490	68,575,851
Accumulated deficit	(67,956,022)	(62,694,732)
Accumulated other comprehensive loss	(1,109,061)	(1,266,555)
Total Stockholders' Equity	3,041,123	4,617,244
Total Liabilities and Stockholders' Equity	$8,184,312	$8,902,880

 

See accompanying notes to consolidated financial statements

 

 

 

AZURRX BIOPHARMA, INC.

Consolidated Statements of Operations and Comprehensive Loss (unaudited)

 

	Three Months	Three Months
	Ended	Ended
	03/31/20	03/31/19
Research and development expenses	$1,553,360	$3,009,676
General and administrative expenses	1,375,091	1,593,968
Loss from operations	(2,928,451)	(4,603,644)
Other:
Interest expense	(2,332,839)	(57,111)
Total other	(2,332,839)	(57,111)
Loss before income taxes	(5,261,290)	(4,660,755)
Income taxes	-	-
Net loss	(5,261,290)	(4,660,755)
Other comprehensive loss:
Foreign currency translation adjustment	157,494	(95,281)
Total comprehensive loss	$(5,103,796)	$(4,756,036)
Basic and diluted weighted average shares outstanding	26,941,803	17,719,902
Loss per share - basic and diluted	$(0.20)	$(0.26)

 

See accompanying notes to consolidated financial statements

 

 

 

AZURRX BIOPHARMA, INC.

Consolidated Statements of Changes in Stockholders' Equity (unaudited)

 

							Accumulated
	Convertible				Additional		Other
	Preferred Stock		Common Stock		Paid In	Accumulated	Comprehensive
	Shares	Amount	Shares	Amount	Capital	Deficit	Loss	Total
Balance, January 1, 2019	-	$-	17,704,925	$1,771	$53,139,259	$(47,517,046)	$(1,150,112)	$4,473,872
Common stock issued to consultants			27,102	2	59,998			60,000
Common stock issued to Mayoly for patents			775,931	77	1,740,882			1,740,959
Stock-based compensation					511,335			511,335
Restricted stock granted to employees/directors			30,000	3	296,282			296,285
Warrant modification					325,320			325,320
Received from stockholder in relation to warrant modification					61,590			61,590
Foreign currency translation adjustment							(95,281)	(95,281)
Net loss						(4,660,755)		(4,660,755)
Balance, March 31, 2019	-	$-	18,537,958	$1,853	$56,134,666	$(52,177,801)	$(1,245,393)	$2,713,325
Balance, January 1, 2020	-	$-	26,800,519	$2,680	$68,575,851	$(62,694,732)	$(1,266,555)	$4,617,244
Common stock issued to settle related payable accounts payable			105,937	11	131,126			131,137
Common stock issued to consultants			101,195	10	87,095			87,105
Common stock issued to Lincoln Park for Equity Purchase agreement			150,000	15	143,985			144,000
Warrants issued in association with convertible debt issuances					1,252,558			1,252,558
Beneficial conversion feature on convertible debt issuances					1,838,422			1,838,422
Stock-based compensation					74,453			74,453
Foreign currency translation adjustment							157,494	157,494
Net loss						(5,261,290)		(5,261,290)
Balance, March 31, 2020	-	$-	27,157,651	$2,716	$72,103,490	$(67,956,022)	$(1,109,061)	$3,041,123

 

See accompanying notes to consolidated financial statements

 

 

AZURRX BIOPHARMA, INC.

Consolidated Statements of Cash Flows (unaudited)

 

	Three Months	Three Months
	Ended	Ended
	03/31/20	03/31/19
Cash flows from operating activities:
Net loss	$(5,261,290)	$(4,660,755)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation	9,661	17,114
Amortization	131,149	561,289
Non-cash lease expense	(6,065)	(1,030)
Stock-based compensation	54,950	511,335
Common stock issued to settle related party accounts payable	131,137	-
Restricted stock granted to employees/directors	19,503	296,285
Restricted stock granted to consultants	87,105	60,000
Accrued interest on convertible debt	164,281	24,658
Accretion of debt discount	2,059,086	29,104
Net changes in assets and liabilities:
Other receivables	2,064,252	(149,508)
Prepaid expenses	87,906	172,886
Deposits	-	(4,125)
Accounts payable and accrued expenses	(832,955)	514,950
Net cash used in operating activities	(1,291,280)	(2,627,797)
Cash flows from investing activities:
Purchase of property and equipment	(4,340)	(13,352)
Net cash used in investing activities	(4,340)	(13,352)
Cash flows from financing activities:
Proceeds from issuance of common stock, net	144,000	-
Proceeds from issuance of convertible debt, net	3,227,002	2,000,000
Received from stockholder in relation to warrant modification	-	61,590
Repayments of convertible debt	(450,000)	-
Repayments of note payable	(164,748)	(94,448)
Net cash provided by financing activities	2,756,254	1,967,142
Increase (decrease) in cash	1,460,634	(674,007)
Effect of exchange rate changes on cash	(6,423)	(26,478)
Cash, beginning balance	175,796	1,114,343
Cash, ending balance	$1,630,007	$413,858
Supplemental disclosures of cash flow information:
Cash paid for interest	$104,153	$3,933
Cash paid for income taxes	$-	$-
Non-cash investing and financing activities:
Common stock issued for patents purchased from Mayoly	$-	$1,740,959
Warrant modification related to convertible debt issuance	$-	$325,320

 

See accompanying notes to consolidated financial statements

 

 

Note 1 - The Company and Basis of Presentation

 

The Company

 

AzurRx BioPharma, Inc. (“AzurRx” or “Parent”) was incorporated on January 30, 2014 in the State of Delaware. In June 2014, the Company acquired 100% of the issued and outstanding capital stock of AzurRx SAS (formerly “ProteaBio Europe SAS”), a company incorporated in October 2008 under the laws of France. AzurRx and its wholly-owned subsidiary, AzurRx SAS (“ABS”), are collectively referred to as the “Company.”

 

The Company is engaged in the research and development of non-systemic biologics for the treatment of patients with gastrointestinal disorders. Non-systemic biologics are non-absorbable drugs that act locally, i.e. the intestinal lumen, skin or mucosa, without reaching an individual’s systemic circulation.

 

The Company is currently focused on developing its lead drug product candidate, MS1819, a yeast derived recombinant lipase for the treatment of exocrine pancreatic insufficiency (“EPI”) associated with cystic fibrosis (“CF”) and chronic pancreatitis (“CP”).

 

Ongoing and Planned Clinical Studies

 

MS1819 – Phase 2b OPTION 2 Cystic Fibrosis Monotherapy Study

 

On October 17, 2019, the Company announced that the Cystic Fibrosis Foundation Data Safety Monitoring Board (the “CFF DSMB”) completed its review of the Company’s final results of the OPTION Cross-Over Study and has found no safety concerns for MS1819, and that the CFF DSMB supports the Company’s plan to proceed to a higher 4.4 gram dose of MS1819 with enteric capsules in its next planned multi-center dose escalation Phase 2b OPTION clinical trial (the “OPTION 2 Trial”). In December 2019, the Company submitted the clinical trial protocol to the existing IND at the FDA. The clinical trial protocol has been reviewed by the FDA with no comments. In April 2020, the Company received approval to conduct the OPTION 2 Trial in Therapeutics Development Network (TDN) clinical sites in the U.S. as well as Institutional Review Board (IRB) approval to commence the OPTION 2 Trial.

 

The OPTION 2 Trial is designed to investigate the safety, tolerability and efficacy of MS1819 (2.2 gram and 4.4 gram doses in enteric capsules) in a head-to-head manner versus the current standard of care, porcine pancreatic enzyme replacement therapy (PERT) pills. The OPTION 2 Trial will be an open-label, crossover study, conducted in 15 sites in the U.S. and Europe. A total of 30 CF patients 18 years or older will be enrolled.  MS1819 will be administered in enteric capsules to provide gastric protection and allow optimal delivery of enzyme to the duodenum.  Patients will first be randomized into two cohorts: to either the MS1819 arm, where they receive a 2.2 gram daily oral dose of MS1819 for three weeks; or to the PERT arm, where they receive their pre-study dose of PERT pills for three weeks. After three weeks, stools will be collected for analysis of coefficient of fat absorption (CFA). Patients will then be crossed over for another three weeks of the alternative treatment. After three weeks of cross-over therapy, stools will again be collected for analysis of CFA. A parallel group of patients will be randomized and studied in the same fashion, using a 4.4 gram daily dose of MS1819. All patients will be followed for an additional two weeks after completing both crossover treatments for post study safety observation. Patients will be assessed using descriptive methods for efficacy, comparing CFA between MS1819 and PERT arms, and for safety.

 

The Company expects to initiate the OPTION 2 Trial by the end of the second quarter of 2020, with target enrollment completion in the fourth quarter of 2020 and study completion anticipated in the first quarter of 2021, however, these timelines may be delayed due to the novel coronavirus ("COVID-19") pandemic.

 

MS1819 – Phase 2 Combination Therapy Study

 

In addition to the monotherapy studies, the Company launched a Phase 2 multi-center clinical trial (the “Combination Trial”) in Europe to investigate MS1819 in combination with PERT, for CF patients who suffer from severe EPI, but continue to experience clinical symptoms of fat malabsorption despite taking the maximum daily dose of PERTs. The Combination Trial is designed to investigate the safety, tolerability and efficacy of escalating doses of MS1819 (700 mg, 1120 mg and 2240 mg per day, respectively), in conjunction with a stable dose of PERTs, in order to increase CFA and relieve abdominal symptoms in uncontrolled CF patients. A combination therapy of PERT and MS1819 has the potential to: (i) correct macronutrient and micronutrient maldigestion; (ii) eliminate abdominal symptoms attributable to maldigestion; and (iii) sustain optimal nutritional status on a normal diet in CF patients with severe EPI.

 

On October 15, 2019, the Company announced that it dosed the first patients in its Combination Trial in Hungary. Planned enrollment is expected to include approximately 24 CF patients with severe EPI, at clinical trial sites in Hungary and additional countries in Europe including Spain and possibly Turkey. Study completion was originally anticipated by the end of 2020; however, this timeline has been delayed due to the COVID-19 pandemic and topline results are now expected in the first quarter of 2021.

 

Basis of Presentation and Principles of Consolidation

 

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In our opinion, the accompanying unaudited interim consolidated financial statements include all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly our financial position, results of operations, and cash flows. The consolidated balance sheet at December 31, 2019, has been derived from audited financial statements of that date. The unaudited interim consolidated results of operations are not necessarily indicative of the results that may occur for the full fiscal year. Certain information and footnote disclosure normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to instructions, rules, and regulations prescribed by the Securities and Exchange Commission (“SEC”). The Company believes that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited interim consolidated financial statements are read in conjunction with the audited financial statements and notes previously distributed in our Annual Report Form 10-K for the year ended December 31, 2019, filed with the SEC on March 30, 2020.

 

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

 

Going Concern Uncertainty

 

The accompanying unaudited interim consolidated financial statements have been prepared as if the Company will continue as a going concern. The Company has incurred significant operating losses and negative cash flows from operations since inception, had negative working capital at March 31, 2020 of approximately $2.2 million, and had an accumulated deficit of approximately $67.9 million at March 31, 2020. The Company is dependent on obtaining, and continues to pursue, additional working capital funding from the sale of securities and debt in order to continue to execute its development plan and continue operations. Without adequate working capital, the Company may not be able to meet its obligations and continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

We will need to raise additional capital through additional equity and/or debt financings, including utilization of our LPC Equity Line of Credit (see Note 11), in order to fund our ongoing operations and to satisfy our obligations under our convertible debt (see Note 9), and the impact of the COVID-19 pandemic which is evolving rapidly could negatively impact our ability to raise additional capital and our ability to repay, extend or restructure our convertible debt.

 

 

Note 2 - Significant Accounting Policies and Recent Accounting Pronouncements

 

Use of Estimates

 

The accompanying unaudited consolidated financial statements are prepared in conformity with U.S. GAAP and include certain estimates and assumptions which affect the reported amounts of assets and liabilities at the date of the financial statements (including goodwill, intangible assets and contingent consideration), and the reported amounts of revenues and expenses during the reporting period, including contingencies. Accordingly, actual results may differ from those estimates.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with maturities of three months or less from date of purchase to be cash equivalents. All cash balances were highly liquid at March 31, 2020 and December 31, 2019, respectively.

 

Concentrations of Credit Risk

 

Financial instruments that potentially expose the Company to concentrations of credit risk consist of cash. The Company primarily maintains its cash balances with financial institutions in federally insured accounts in the U.S. The Company may from time to time have cash in banks in excess of FDIC insurance limits. At March 31, 2020 and December 31, 2019, the Company had $236,568 and $0, respectively, in one account in the U.S. in excess of these limits. The Company has not experienced any losses to date resulting from this practice. The Company mitigates its risk by maintaining the majority of its cash and cash equivalents with high quality financial institutions.

 

The Company also has exposure to foreign currency risk as its subsidiary in France has a functional currency in Euros.

 

Debt Instruments

 

Detachable warrants issued in conjunction with debt are measured at their relative fair value, if they are determined to be equity instrument, or their fair value, if they are determined to be liability instruments, and recorded as a debt discount.  Conversion features that are in the money at the commitment date constitute a beneficial conversion feature that is measured at its intrinsic value and recognized as debt discount. Debt discount is amortized as interest expense over the maturity period of the debt using the effective interest method. Contingent beneficial conversion features are recognized when the contingency has been resolved.

 

Debt Issuance Costs

 

Debt issuance costs are recorded as a direct reduction of the carrying amount of the related debt. Debt issuance costs are amortized over the maturity period of the related debt instrument using the effective interest method.

 

Equity-Based Payments to Non-Employees

 

Equity-based payments to non-employees are measured at fair value on the grant date per ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting.

 

Fair Value Measurements

 

The Company follows Accounting Standards Codification (“ASC”) Topic 820-10, Fair Value Measurements and Disclosures (“ASC 820”), which among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.

 

 

 

As a basis for considering such assumptions, a three-tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities;

 

Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

 

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions, which reflect those that a market participant would use.

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the overall fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.

 

The Company recognizes transfers between levels as if the transfers occurred on the last day of the reporting period.

 

Foreign Currency Translation

 

For foreign subsidiaries with operations denominated in a foreign currency, assets and liabilities are translated to U.S. dollars, which is the functional currency, at period end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the periods presented. Gains and losses from translation adjustments are accumulated in a separate component of stockholders’ equity.

 

Goodwill and Intangible Assets

 

Goodwill represents the excess of the purchase price of the acquired business over the fair value of amounts assigned to assets acquired and liabilities assumed. Goodwill and other intangible assets with indefinite useful lives are reviewed for impairment annually or more frequently if events or circumstances indicate impairment may be present. Any excess in carrying value over the estimated fair value is charged to results of operations. The Company has not recognized any impairment charges through March 31, 2020.

 

Intangible assets subject to amortization consist of in process research and development, license agreements, and patents reported at the fair value at date of the acquisition less accumulated amortization. Amortization expense is provided using the straight-line method over the estimated useful lives of the assets as follows:

 

Patents                                                          7.2 years

In Process Research & Development            12 years

License Agreements                                        5 years

 

Impairment of Long-Lived Assets

 

The Company periodically evaluates its long-lived assets for potential impairment in accordance with ASC Topic 360, Property, Plant and Equipment (“ASC 360”). Potential impairment is assessed when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. Recoverability of these assets is assessed based on undiscounted expected future cash flows from the assets, considering a number of factors, including past operating results, budgets and economic projections, market trends and product development cycles. If impairments are identified, assets are written down to their estimated fair value. The Company has not recognized any impairment charges through March 31, 2020.

 

Income Taxes

Income taxes are recorded in accordance with ASC 740, Accounting for Income Taxes (“ASC 740”), which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. The Company determines its deferred tax assets and liabilities based on differences between financial reporting and tax bases of assets and liabilities, which are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

 

 

 

The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. At March 31, 2020 and December 31, 2019, the Company does not have any significant uncertain tax positions. All tax years are still open for audit.

 

Leases

 

Effective January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, “Leases.” This ASU requires substantially all leases be recorded on the balance sheet as right of use assets and lease obligations. The Company adopted the ASU using a modified retrospective adoption method at January 1, 2019, as outlined in ASU No. 2018-11, “Leases - Targeted Improvements.” Under this method of adoption, there is no impact to the comparative condensed consolidated statements of operations and condensed consolidated balance sheets. The Company determined that there was no cumulative-effect adjustment to beginning retained earnings on the consolidated balance sheet. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed carryforward of historical lease classifications. Adoption of this standard did not materially impact the Company’s results of operations and had no impact on the consolidated statements of cash flows.

 

Research and Development

 

Research and development (“R&D”) costs are charged to operations when incurred and are included in operating expense. R&D costs consist principally of compensation of employees and consultants that perform the Company’s research activities, the fees paid to maintain the Company’s licenses, and the payments to third parties for manufacturing drug supply and clinical trials, and amortization of intangible assets.

 

Stock-Based Compensation

 

The Company’s board of directors (the “Board”) and stockholders have adopted and approved the Amended and Restated 2014 Omnibus Equity Incentive Plan which took effect on May 12, 2014. The Company accounts for its stock-based compensation awards to employees and Board members in accordance with ASC Topic 718, Compensation—Stock Compensation (“ASC 718”). ASC 718 requires all stock-based payments to employees and Board members, including grants of employee stock options, to be recognized in the statements of operations by measuring the fair value of the award on the date of grant and recognizing this fair value as stock-based compensation using a straight-line method over the requisite service period, generally the vesting period.

 

For awards with performance conditions that affect their vesting, such as the occurrence of certain transactions or the achievement of certain operating or financial milestones, recognition of fair value of the award occurs when vesting becomes probable.

 

The Company estimates the grant date fair value of stock option awards using the Black-Scholes option-pricing model. The use of the Black-Scholes option-pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the Common Stock consistent with the expected life of the option, risk-free interest rates and expected dividend yields of the Common Stock.

 

Sublicense Agreement

 

As more fully discussed in Note 14, the Company entered into a sublicense agreement with TransChem, Inc. (“TransChem”), pursuant to which TransChem granted the Company an exclusive license to certain patents and patent applications. Any payments made to TransChem in connection with this sublicense agreement are recorded as R&D expense.

 

 

 

Subsequent Events

 

The Company considered events or transactions occurring after the balance sheet date but prior to the date the consolidated financial statements are available to be issued for potential recognition or disclosure in its consolidated financial statements.

 

Recent Accounting Pronouncements

 

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other, Simplifying the Accounting for Goodwill Impairment. ASU 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. This new guidance will be applied prospectively and is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. This ASU, which the Company adopted as of January 1, 2020, did not have a material effect on the Company’s consolidated financial statements.

 

Note 3 - Fair Value Disclosures

 

Fair value is the price that would be received from the sale of an asset or paid to transfer a liability assuming an orderly transaction in the most advantageous market at the measurement date. U.S. GAAP establishes a hierarchical disclosure framework that prioritizes and ranks the level of observability of inputs used in measuring fair value.

 

The fair value of the Company's financial instruments are as follows:

 

		Fair Value Measured at Reporting Date Using
	Carrying Amount	Level 1	Level 2	Level 3	Fair Value
At March 31, 2020:
Cash	$1,630,007	$-	$1,630,007	$-	$1,630,007
Other receivables	$760,232	$-	$-	$760,232	$760,232
Note payable	$279,616	$-	$-	$279,616	$279,616
Convertible debt	$2,986,328	$-	$-	$2,986,328	$2,986,328
At December 31, 2019:
Cash	$175,796	$-	$175,796	$-	$175,796
Other receivables	$2,637,303	$-	$-	$2,637,303	$2,637,303
Note payable	$444,364	$-	$-	$444,364	$444,364
Convertible debt	$1,076,938	$-	$-	$1,076,938	$1,076,938

 

At March 31, 2020, the fair value of other receivables approximates carrying value as these consist primarily of French R&D tax credits that are normally received the following year.

 

At December 31, 2019, the fair value of other receivables approximates carrying value as these consist primarily of French R&D tax credits that are normally received the following year.

 

The fair value of the note payable in connection with the financing of directors and officer’s liability insurance approximates carrying value due to the terms of such instruments and applicable interest rates.

 

The convertible debt is based on its fair value less unamortized debt discount plus accrued interest through the date of reporting (see Note 9).

 

 

 

Note 4 - Other Receivables

 

Other receivables consisted of the following:

	March 31,	December 31,
	2020	2019
R&D tax credits	$695,511	$2,566,281
Other	64,721	71,022
Total other receivables	$760,232	$2,637,303

 

At March 31, 2020, the R&D tax credits were comprised of the 2019 refundable tax credits for research conducted in France.

 

At December 31, 2019, the R&D tax credits were comprised of the 2017, 2018, and 2019 refundable tax credits for research conducted in France. In the quarter ended March 31, 2020, the Company received both the 2017 and 2018 refundable tax credits totaling approximately $1,770,000.

 

At December 31, 2019, Other consisted of amounts due from U.S. R&D tax credits.

 

Note 5 - Property, Equipment and Leasehold Improvements

 

Property, equipment and leasehold improvements consisted of the following:

 

	March 31,	December 31,
	2020	2019
Laboratory equipment	$193,661	$193,661
Computer equipment	74,836	74,836
Office equipment	36,703	36,703
Leasehold improvements	35,711	35,711
Total property, plant and equipment	340,911	340,911
Less accumulated depreciation	(267,364)	(263,520)
Property, plant and equipment, net	$73,547	$77,391

 

Depreciation expense for the three months ended March 31, 2020 and 2019 was $9,661 and $17,114, respectively.

 

For the three months ended March 31, 2020, $4,771 of depreciation is included in R&D expense and $4,890 of depreciation is included in G&A expense.

 

For the three months ended March 31, 2019, $12,095 of depreciation has been reclassified to R&D expense and $5,019 of depreciation remains in G&A expense.

 

Note 6 - Intangible Assets and Goodwill

 

Patents

 

Pursuant to the Mayoly APA entered into on March 27, 2019, in which the Company purchased all rights, title and interest in and to MS1819 (see Note 14), the Company recorded Patents in the amount of $3,802,745 as follows:

 

Common stock issued at signing to Mayoly	$1,740,959
Due to Mayoly at 12/31/19 - €400,000	449,280
Due to Mayoly at 12/31/20 - €350,000	393,120
Assumed Mayoly liabilities and forgiveness of Mayoly debt	1,219,386
	$3,802,745

 

 

 

Intangible assets are as follows:

 

	March 31,	December 31,
	2020	2019
Patents	$3,802,745	$3,802,745
Less accumulated amortization	(527,548)	(395,661)
Patents, net	$3,275,197	$3,407,084

 

Amortization expense for the three months ended March 31, 2020 and 2019 was $131,149 and $561,289, respectively. Amortization expense for the three months ended March 31, 2019 included $384,234 from In process research and development and License agreements written off as a result of the Mayoly APA.

 

As of March 31, 2020, amortization expense related to patents is expected to be as follows for the next five years (2020 through 2024):

 

2020 (balance of year)	$395,661
2021	527,548
2022	527,548
2023	527,548
2024	527,548

 

Goodwill is as follows:

 

	Goodwill
Balance at January 1, 2019	$1,924,830
Foreign currency translation	(38,144)
Balance at December 31, 2019	1,886,686
Foreign currency translation	(42,680)
Balance at March 31, 2020	$1,844,006

 

Note 7 - Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses consisted of the following:

 

	March 31,	December 31,
	2020	2019
Trade payables	$925,284	$1,683,505
Accrued expenses	113,935	71,177
Total accounts payable and accrued expenses	$1,039,219	$1,754,682

 

Note 8 - Note Payable

 

On December 5, 2019, the Company entered into a 9-month financing agreement for its directors and officer’s liability insurance in the amount of $498,783 that bears interest at an annual rate of 5.461%. Monthly payments, including principal and interest, are $56,689 per month. The balance due under this financing agreement at March 31, 2020 was $279,616.

 

 

 

Note 9 – Convertible Notes

 

ADEC Notes

 

On February 14, 2019, the Company entered into a Note Purchase Agreement (the “ADEC NPA”) with ADEC Private Equity Investments, LLC (“ADEC”), pursuant to which the Company issued to ADEC two Senior Convertible Notes (“Note A” and “Note B,” respectively, each an “ADEC Note,” and together, the “ADEC Notes”), in the principal amount of $1,000,000 per ADEC Note, resulting in gross proceeds to the Company of $2,000,000 (the “ADEC Note Offering”). ADEC is controlled by a significant stockholder of the Company.

 

The ADEC Notes accrue interest at a rate of 10% per annum; provided, however, that in the event the Company elects to repay the full balance due under the terms of both ADEC Notes prior to December 31, 2019, then the interest rate will be reduced to 6% per annum. Interest is payable at the time all outstanding principal amounts owed under each ADEC Note is repaid. The ADEC Notes mature on the earlier to occur of (i) the tenth business day following the receipt by ABS of certain tax credits that the Company expects to receive prior to July 2019 in the case of Note A (the “2019 Tax Credit”) and July 2020 in the case of Note B (the “2020 Tax Credit”), respectively, or (ii) December 31, 2019 in the case of Note A and December 31, 2020 in the Case of Note B (the “Maturity Dates”). As a condition to entering into the ADEC NPA, ABS and ADEC also entered into a Pledge Agreement, pursuant to which ABS agreed to pledge an interest in each of the 2019 Tax Credit and 2020 Tax Credit to ADEC in order to guarantee payment of all amounts due under the terms of the ADEC Notes.

 

Each of the ADEC Notes is convertible, at ADEC’s option, into shares of Common Stock, at a conversion price equal to $2.50 per share;provided, however, that pursuant to the term of the ADEC Notes, ADEC may not convert all or a portion of the ADEC Notes if such conversion would result in the significant stockholder and/or entities affiliated with him beneficially owning in excess of 19.99% of the shares of Common Stock issued and outstanding immediately after giving effect to the issuance of the shares issuable upon conversion of the ADEC Notes (the “ADEC Note Conversion Shares”).

 

As additional consideration for entering into the ADEC NPA, the Company entered into a warrant amendment agreement, whereby the Company agreed to reduce the exercise price of 1,009,565 outstanding warrants previously issued by the Company to ADEC and its affiliates (the “ADEC Warrants”) to $1.50 per share (the “ADEC Warrant Amendment”). The ADEC Warrant Amendment does not alter any other terms of the ADEC Warrants. The ADEC Warrant Amendment resulted in a debt discount of $325,320 that is accreted to additional interest expense over the lives of the ADEC Notes.

 

In December 2019, the Company repaid $1,550,000 principal amount of the ADEC Notes and on January 2, 2020 repaid the remaining principal balance of $450,000 plus outstanding accrued interest of $104,153.

 

Senior Convertible Promissory Note Offering

 

On December 20, 2019, the Company began an offering of (i) Senior Convertible Promissory Notes (each a “Promissory Note,” and together, the “Promissory Notes”) in the principal amount of up to $8.0 million to certain accredited investors (the “Note Investors”), and (ii) warrants (“Note Warrants”) to purchase shares of Common Stock, each pursuant to Note Purchase Agreements entered into by and between the Company and each of the Investors (the “Promissory NPAs”) (the “Promissory Note Offering”).

 

In December 2019, the Company issued Promissory Notes to the Note Investors in the aggregate principal amount of $3,386,300. The Promissory Notes mature on September 20, 2020, accrue interest at a rate of 9% per annum, and are convertible, at the sole option of the holder, into shares of Common Stock (the “Promissory Note Conversion Shares”) at a price of $0.97 per share (the “Conversion Option”). The Promissory Notes may be prepaid by the Company at any time prior to the maturity date in cash without penalty or premium (the “Prepayment Option”).

 

On January 2, 2020, January 3, 2020, and January 9, 2020, the Company issued Promissory Notes to the Note Investors in the aggregate principal amount of $3,517,700.

 

 

As additional consideration for the execution of the Promissory NPA, each Note Investor also received Note Warrants to purchase that number of shares of Common Stock equal to one-half (50%) of the Promissory Note Conversion Shares issuable upon conversion of the Promissory Notes (the “Warrant Shares”). The Note Warrants have an exercise price of $1.07 per share and expire five years from the date of issuance. The Company and each Note Investor executed a Registration Rights Agreement (the “RRA”), pursuant to which the Company agreed to file a registration statement. The Company filed a registration statement with the SEC on February 7, 2020 covering the Promissory Note Conversion Shares and Warrant Shares.

 

In connection with the four closings in December 2019 of the Promissory Note Offering, the Company paid aggregate placement agent fees of $338,630, which fees were based on (i) 9% of the aggregate principal amount of the Promissory Notes issued to the Note Investors introduced by the placement agent, and (ii) a non-accountable expense allowance of 1% of the gross proceeds from the Promissory Note Offering. In addition, the placement agent was issued warrants, containing substantially the same terms and conditions as the Note Warrants, to purchase an aggregate of 244,372 shares of Common Stock (the “Placement Agent Warrants”), representing 7% of the Promissory Note Conversion Shares issuable upon conversion of the Promissory Notes issued to the Note Investors. The Placement Agent Warrants expire five years from the date of issuance. The Placement Agent Warrants in connection with the December 2019 closings have an exercise price of $1.21 per share.

 

In connection with the three closings in January 2020 of the Promissory Note Offering, the Company paid aggregate placement agent fees of $276,770, which fees were based on (i) 9% of the aggregate principal amount of the Promissory Notes issued to the Note Investors introduced by the placement agent, and (ii) a non-accountable expense allowance of 1% of the gross proceeds from the Promissory Note Offering. In addition, the placement agent was issued Placement Agent Warrants, to purchase an aggregate of 199,732 shares of Common Stock. 41,495 of these Placement Agent Warrants have an exercise price of $1.21 per share and 158,237 of these Placement Agent Warrants have an exercise price of $1.42 per share.

 

The Company determined the Prepayment Option feature represents a contingent call option. The Company evaluated the Prepayment Option in accordance with ASC 815-15-25. The Company determined that the Prepayment Option feature is clearly and closely related to the debt host instrument and is not an embedded derivative requiring bifurcation. Additionally, the Company determined the Conversion Option represents an embedded call option. The Company evaluated the Conversion Option in accordance with ASC 815-15-25. The Company determined that the Conversion Option feature meets the scope exception from ASC 815 and is not an embedded derivative requiring bifurcation.

 

The Company evaluated the Promissory Notes for a beneficial conversion feature in accordance with ASC 470-20. The Company determined that at each commitment date the effective conversion price was below the closing stock price (market value), and the Convertible Notes contained a beneficial conversion feature.

 

Pursuant to the December 2019 closings of the Promissory Note Offering, the principal amount of $3,386,300 was first allocated based on the relative fair value of the Promissory Notes and the Note Warrants. The fair value of the Note Warrants amounted to $912,648. Then the beneficial conversion feature was calculated, which amounted to $1,359,284. The Company incurred debt issuance costs of $588,017 related to the offering. The initial carrying value of the Promissory Notes issued amounted to $526,351.

 

Pursuant to the January 2020 closings of the Promissory Note Offering, the principal amount of $3,517,700 was first allocated based on the relative fair value of the Promissory Notes and the Note Warrants. The fair value of the Note Warrants amounted to $2,439,272. Then the beneficial conversion feature was calculated, which amounted to $1,838,422. The Company incurred debt issuance costs of $472,326 related to the offering. The initial carrying value of the Promissory Notes issued amounted to $128,524.

 

During the three months ended March 31, 2020, the Company recognized $2,209,163 of interest expense related to these Promissory Notes, including amortization of debt discount related to the value of the Note Warrants of $658,126, amortization of the beneficial conversion feature of $1,053,366, amortization of debt discount related to debt issuance costs of $347,594, and accrued interest expense of $150,077.

 

 

 

Convertible Debt consisted of:

 

	Total	Promissory Notes	ADEC Notes	Total
	March 31,	March 31,	March 31,	December 31,
	2020	2020	2020	2019
Convertible debt	$6,904,000	$6,904,000	$-	$3,836,300
Unamortized debt discount - revalued warrants	-	-	-	(118,356)
Unamortized debt discount - warrants	(1,299,280)	(1,299,280)	-	(878,979)
Unamortized debt discount - BCF	(2,092,811)	(2,092,811)	-	(1,307,755)
Unamortized debt discount - debt issuance costs	(684,048)	(684,048)	-	(566,815)
Accrued interest	158,467	158,467	-	112,543
Total convertible debt	$2,986,328	$2,986,328	$-	$1,076,938

 

Note 10 – Other Liabilities

 

Other liabilities consisted of the following:

 

	March 31,	December 31,
Current	2020	2019
Due to Mayoly	$386,925	$392,989
Lease liabilities	54,248	83,235
	$441,173	$476,224

Note 11 – Equity

 

On December 19, 2019, the Company held its Annual Meeting of Stockholders (the “Annual Meeting”), whereby, the shareholders approved, among others, the following proposals: (i) amending the Company’s Certificate of Incorporation to increase the authorized shares of its Common Stock to 150,000,000 shares from 100,000,000 shares, and (ii) amending the Company’s Charter to authorize the Board to effect a reverse stock split of both the issued and outstanding and authorized shares of Common Stock, at a specific ratio, ranging from one-for-two (1:2) to one-for-five (1:5), any time prior to the one-year anniversary date of the Annual Meeting, with the exact ratio to be determined by the Board (the “Reverse Split”). As of March 31, 2020, the Board had not elected to effect a Reverse Split.

 

Common Stock

 

The Company had 27,157,651 and 26,800,519 shares of its Common Stock issued and outstanding at March 31, 2020 and December 31, 2019, respectively.

 

The holders of our Common Stock are entitled to one vote per share. In addition, the holders of our Common Stock will be entitled to receive ratably such dividends, if any, as may be declared by our Board out of legally available funds;however, the current policy of our Board is to retain earnings, if any, for operations and growth. Upon liquidation, dissolution or winding-up, the holders of our Common Stock will be entitled to share ratably in all assets that are legally available for distribution.

 

Voting

 

Each holder of common stock has one vote for each share held.

 

 

 

2014 Equity Incentive Plan

 

The Company’s Board and stockholders adopted and approved the Amended and Restated 2014 Omnibus Equity Incentive Plan (the “2014 Plan”), which took effect on May 12, 2014. The 2014 Plan allows for the issuance of securities, including stock options to employees, Board members and consultants. The number of shares of Common Stock reserved for issuance under the 2014 Plan shall not exceed ten percent (10%) of the issued and outstanding shares of Common Stock on an as converted basis (the “As Converted Shares”) on a rolling basis. For calculation purposes, the As Converted Shares shall include all shares of Common Stock and all shares of Common Stock issuable upon the conversion of outstanding preferred stock and other convertible securities but shall not include any shares of Common Stock issuable upon the exercise of options, or other convertible securities issued pursuant to the 2014 Plan. The number of authorized shares of Common Stock reserved for issuance under the 2014 Plan shall automatically be increased concurrently with the Company’s issuance of fully paid and non- assessable shares of As Converted Shares. Shares shall be deemed to have been issued under the 2014 Plan solely to the extent actually issued and delivered pursuant to an award.

 

The Company issued an aggregate of 335,006 and 0 stock options, during the three months ended March 31, 2020 and 2019, respectively, under the 2014 Plan (see Note 13). As of March 31, 2020, there were an aggregate of 4,245,905 total shares available under the 2014 Plan, of which 1,997,506 are issued and outstanding, 632,667 shares are reserved subject to issuance of restricted stock and RSUs and 1,615,732 shares are available for potential issuances. The Company may issue securities outside of the 2014 Plan.

 

Series A Convertible Preferred Stock

 

At March 31, 2020 and December 31, 2019, there were no shares of Series A Convertible Preferred Stock (“Series A Preferred”) outstanding. However, all terms of the Series A Preferred are still in effect.

 

LPC Equity Line of Credit

 

On November 13, 2019, the Company entered into a purchase agreement (the “LPC Purchase Agreement”), together with a registration rights agreement (the “LPC Registration Rights Agreement”), with LPC. Under the terms of the LPC Purchase Agreement, LPC has committed to purchase up to $15,000,000 of our Common Stock (the “LPC Equity Line of Credit”). Upon execution of the LPC Purchase Agreement, the Company issued LPC 487,168 shares of Common Stock (the “Commitment Shares”) as a fee for its commitment to purchase shares of our Common Stock under the LPC Purchase Agreement. The remaining shares of our Common Stock that may be issued under the LPC Purchase Agreement may be sold by the Company to LPC at our discretion from time-to-time over a 30-month period commencing after the satisfaction of certain conditions set forth in the Purchase Agreement, subject to the continued effectiveness of a registration statement covering such shares of Common Stock sold to LPC by the Company. The registration statement was filed with the SEC on December 31, 2019 and was declared effective on January 14, 2020.

 

Under the LPC Purchase Agreement, on any business day over the term of the LPC Purchase Agreement, the Company has the right, in its sole discretion, to present LPC with a purchase notice (each, a “Purchase Notice”) directing LPC to purchase up to 150,000 shares of Common Stock per business day (the “Regular Purchase”). In each case, LPC’s maximum commitment in any single Regular Purchase may not exceed $1,000,000. The LPC Purchase Agreement provides for a purchase price per Purchase Share (the “Purchase Price”) equal to the lesser of:

 

●	the lowest sale price of Common Stock on the purchase date; and;
●	the average of the three lowest closing sale prices for the Common Stock during the ten consecutive business days ending on the business day immediately preceding the purchase date of such shares;

 

In addition, on any date on which the Company submits a Purchase Notice to LPC, the Company also has the right, in its sole discretion, to present LPC with an accelerated purchase notice (each, an “Accelerated Purchase Notice”) directing LPC to purchase an amount of stock (the “Accelerated Purchase”) equal to up to the lesser of (i) three times the number of shares purchased pursuant to such Regular Purchase; and (ii) 30% of the aggregate shares of Common Stock traded during all or, if certain trading volume or market price thresholds specified in the LPC Purchase Agreement are crossed on the applicable Accelerated Purchase date, the portion of the normal trading hours on the applicable Accelerated Purchase date prior to such time that any one of such thresholds is crossed (such period of time on the applicable Accelerated Purchase Date, the “Accelerated Purchase Measurement Period”), provided that LPC will not be required to buy shares pursuant to an Accelerated Purchase Notice that was received by LPC on any business day on which the last closing trade price of Common Stock on the Nasdaq Capital Market (or alternative national exchange) is below $0.25 per share. The purchase price per share for each such Accelerated Purchase will be equal to the lesser of:

 

●	97% of the volume weighted average price of the Company’s common stock during the applicable Accelerated Purchase Measurement Period on the applicable Accelerated Purchase date; and
●	the closing sale price of Common Stock on the applicable Accelerated Purchase Date.

 

 

 

The Company may also direct LPC on any business day on which an Accelerated Purchase has been completed and all of the shares to be purchased thereunder have been properly delivered to LPC in accordance with the LPC Purchase Agreement, to purchase an amount of stock (the “Additional Accelerated Purchase”) equal to up to the lesser of (i) three times the number of shares purchased pursuant to such Regular Purchase; and (ii) 30% of the aggregate number of shares of Common Stock traded during a certain portion of the normal trading hours on the applicable Additional Accelerated Purchase date as determined in accordance with the Purchase Agreement (such period of time on the applicable Additional Accelerated Purchase date, the “Additional Accelerated Purchase Measurement Period”), provided that the closing price of the Company’s common stock on the business day immediately preceding such business day is not below $0.25 per share. Additional Accelerated Purchases will be equal to the lower of:

 

●	97% of the volume weighted average price of the Company’s common stock during the applicable Additional Accelerated Purchase Measurement Period on the applicable Additional Accelerated Purchase date; and
●	the closing sale price of Common Stock on the applicable Additional Accelerated Purchase.

 

During the three months ended March 31, 2020, the Company issued 150,000 shares of Common Stock in connection with the LPC Purchase Agreement, resulting in gross proceeds to the Company of $144,000.

 

Common Stock Issuances

 

During the three months ended March 31, 2020, the Company issued an aggregate of 101,195 shares of its Common Stock to consultants with a grant date fair value of $87,105 for services provided, that was recorded as part of G&A expense.

 

During the three months ended March 31, 2020, the Company issued its outside Board members an aggregate of 105,937 shares of Common Stock for the settlement of accounts payable in the aggregate amount of $131,137. The aggregate effective settlement price was $1.24 per share, and each individual stock issuance was based on the closing stock price of the Common Stock on the initial date the payable was accrued.

 

During the three months ended March 31, 2019, the Company issued 27,102 shares of its common stock to a consultant as payment of $60,000 of accounts payable.

 

During the three months ended March 31, 2019, the Company issued an aggregate of 30,000 shares of its Common Stock to outside members of its Board as payment of Board fees with an aggregate grant date fair value of $296,285, that was recorded as part of G&A expense.

 

Restricted Stock and Restricted Stock Units

 

During the three months ended March 31, 2020, an aggregate of 5,417 unvested restricted shares of Common Stock subject to time-based vesting, vested with a total grant date fair value of $19,500.

 

During the three months ended March 31, 2019, an aggregate of 72,583 unvested restricted shares of Common Stock subject to milestone-based vesting, vested with a total grant date fair value of $223,685. 58,833 of these 72,583 shares with a total grant date fair value of $178,852 vested during the three months ended March 31, 2019 due to the Company achieving certain clinical milestones. 13,750 of these 72,583 shares with a total grant date fair value of $44,833 vested during the three months ended March 31, 2019 due to the terms of such grants.

 

As of March 31, 2020, the Company had unrecognized restricted common stock expense of $424,439. $31,189 of this unrecognized expense will be recognized over the average remaining vesting term of 0.4 years. $196,625 of this unrecognized expense vests upon the first commercial sale in the United States of MS1819 and $196,625 of this unrecognized expense vests upon the total market capitalization of the Company exceeding $1.0 billion for 20 consecutive trading days. These milestones were not considered probable at March 31, 2020.

 

As of March 31, 2019, the Company had unrecognized restricted common stock expense of $438,528. $337,193 of this unrecognized expense will be recognized over the average remaining vesting term of the restricted common stock of 2.04 years. $101,335 of this unrecognized expense vests upon the enrollment of the first 30 patients in a CF trial. This milestone was not considered probable at March 31, 2019.

 

 

 

Note 12 - Warrants

 

For the three months ended March 31, 2020, in connection with the January 2020 closings of the Promissory Note Offering, the Company issued Note Warrants to investors to purchase an aggregate of 1,813,257 shares of Common Stock with the issuance of the Promissory Notes as referenced in Note 9. These Note Warrants were issued between January 2, 2020 and January 9, 2020, are exercisable commencing six (6) months following the issuance date at $1.07 per share and expire five years from issuance. The total grant date fair value of these warrants was determined to be approximately $1,574,886, as calculated using the Black-Scholes model, and were recorded as a debt discount based on their relative fair value.

 

For the three months ended March 31, 2020, in connection with the January 2020 closings of the Promissory Note Offering, the Company issued placement agent warrants to purchase an aggregate of 199,732 shares of Common Stock. These placement agent warrants were issued between January 2, 2020 and January 9, 2020, vested immediately, and expire five years from issuance. 41,495 of these Placement Agent Warrants are exercisable at $1.21 per share and 158,237 are exercisable at $1.42 per share. The total grant date fair value of these placement agent warrants was determined to be approximately $174,130, as calculated using the Black-Scholes model, and was charged to debt discount that will be amortized over the life of the debt.

 

Warrant transactions for the three months ended March 31, 2020 and 2019 were as follows:

 

		Exercise	Weighted
		Price Per	Average
	Warrants	Share	Exercise Price
Warrants outstanding and exercisable at January 1, 2019	3,112,715	$2.55 - 7.37	$4.83
Granted during the period	-	-	-
Expired during the period	-	-	-
Exercised during the period	-	-	-
Warrants outstanding and exercisable at March 31, 2019	3,112,715	$2.55 - 7.37	$3.53
Warrants outstanding and exercisable at January 1, 2020	5,378,288	$1.07 - 7.37	$2.53
Granted during the period	2,012,989	$1.07 - 1.42	$1.10
Expired during the period	-	-	-
Exercised during the period	-	-	-
Warrants outstanding and exercisable at March 31, 2020	7,391,277	$1.07 - 7.37	$2.14

 

 

 

 

	Number of	Weighted Average	Weighted
	Shares Under	Remaining Contract	Average
Exercise Price	Warrants	Life in Years	Exercise Price
$1.07 - $1.99	5,212,464	4.12
$2.00 - $2.99	320,063	3.32
$3.00 - $3.99	636,972	2.06
$4.00 - $4.99	196,632	1.76
$5.00 - $5.99	805,476	1.88
$6.00 - $6.99	187,750	1.51
$7.00 - $7.37	31,920	0.71
Total	7,391,277	3.52	$2.14

 

 

 

 

	March 31,
	2020
Expected life (in years)	5
Volatility	81.9%
Risk-free interest rate	1.64%
Dividend yield	-%

 

Note 13 - Stock Options

 

Under the 2014 Plan, the fair value of options granted is estimated on the grant date using the Black-Scholes option valuation model. This valuation model for stock-based compensation expense requires the Company to make assumptions and judgments about the variables used in the calculation, including the expected term (weighted-average period of time that the options granted are expected to be outstanding), the volatility of the common stock price and the assumed risk-free interest rate. The Company recognizes stock-based compensation expense for only those shares expected to vest over the requisite service period of the award. No compensation cost is recorded for options that do not vest and the compensation cost from vested options, whether forfeited or not, is not reversed.

 

During the three months ended March 31, 2020, the Company issued stock options to purchase an aggregate of 335,006 shares of Common Stock with a strike price of $1.03 per share and a term of ten years to its chief financial officer that vest quarterly over three years. These options had a total fair value of approximately $281,405, as calculated using the Black-Scholes model. During the three months ended March 31, 2020, stock options to purchase an aggregate of 15,000 shares of Common Stock were cancelled with strike prices ranging between $1.75 and $3.60 per share.

 

During the three months ended March 31, 2020, stock options to purchase an aggregate of 57,917 shares of Common Stock, subject to time-based vesting, vested with a total grant date fair value of $54,950 and were recorded as G&A stock-based compensation.

 

During the three months ended March 31, 2019, the Company did not issue any stock options.

 

During the three months ended March 31, 2019, stock options to purchase an aggregate of 244,500 shares of Common Stock with a total grant date fair value of $511,335 vested. 242,000 of these options with a total grant date fair value of $501,666 vested due to the Company achieving certain clinical milestones for MS1819.

 

 

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

 

	March 31,
	2020
Expected life (in years)	10
Volatility	80.5%
Risk-free interest rate	1.88%
Dividend yield	-%

 

The expected term of the options is based on expected future employee exercise behavior. Volatility is based on the historical volatility of the Company’s Common Stock if available or of several public entities that are similar to the Company. The Company bases volatility this way because it may not have sufficient historical transactions in its own shares on which to solely base expected volatility. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected term at the grant date. The Company has not historically declared any dividends and does not expect to in the future.

 

 

 

During the three months ended March 31, 2020 and 2019, stock option activity under the 2014 Plan was as follows:

 

 

	Number	Average	Remaining Contract	Intrinsic
	of Shares	Exercise Price	Life in Years	Value
Stock options outstanding at January 1, 2019	994,000	$3.58	5.42	$-
Granted during the period	-	-
Expired during the period	-	-
Canceled during the period	-	-
Exercised during the period	-	-
Stock options outstanding at March 31, 2019	994,000	$3.58	5.17	$-
Exercisable at March 31, 2019	749,500	$3.74	5.71	$-
Non-vested stock options outstanding at January 1, 2019	244,500	$3.05	4.53	$-
Granted during the period	-	-
Vested during the period	(244,500)	$3.05	4.53
Expired during the period	-	-
Canceled during the period	-	-
Exercised during the period	-	-
Non-vested stock options outstanding at March 31, 2019	-	$-	-	$-