Notes
to Unaudited Consolidated Financial
Statements
Note 1 - The Company, Basis of Presentation, and Recent Accounting
Pronouncements
The Company
AzurRx
BioPharma, Inc. (“AzurRx” or “Parent”) was
incorporated on January 30, 2014 in the State of Delaware. In June
2014, the Company acquired 100% of the issued and outstanding
capital stock of AzurRx BioPharma SAS (formerly “ProteaBio
Europe SAS”), a company incorporated in October 2008 under
the laws of France that had been a wholly-owned subsidiary of
Protea Biosciences, Inc., or Protea Sub, in turn a wholly-owned
subsidiary of Protea Biosciences Group, Inc., a publicly-traded
company. AzurRx and its wholly-owned subsidiary, AzurRx Europe SAS,
are collectively referred to as the
“Company.”
AzurRx,
through its AzurRx Europe SAS subsidiary, is engaged in the
research and development of non-systemic biologics for the
treatment of patients with gastrointestinal disorders. Non-systemic
biologics are non-absorbable drugs that act locally without
reaching the systemic circulation, i.e. the intestinal lumen, skin
or mucosa. The Company’s current product pipeline consists of
two therapeutic proteins under development:
●
MS1819
- a recombinant (synthetic) lipase, an enzyme derived from a
specialized yeast, which breaks apart fats. Lipases are required to
treat patients whose pancreases don’t work anymore in a
condition known as exocrine pancreatic insufficiency (EPI) which
usually arises from chronic pancreatitis (CP) or cystic fibrosis
(CF).
●
AZ1101-
a recombinant (synthetic) enzyme which is being developed to
prevent hospital-acquired infections which come from resistant
bacterial strains caused by parenteral (intra-venous)
administration of b-lactam antibiotics, as well as prevention of
antibiotic-associated diarrhea (AAD).
Basis
of Presentation
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, 2016,
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 United States Securities and Exchange
Commission. We believe that the disclosures provided herein are
adequate to make the information presented not misleading when
these unaudited interim consolidated financial statements are read
in conjunction with the audited financial statements and notes
previously distributed in our 2016 Annual Report Form
10-K.
The
unaudited interim consolidated financial statements include the
accounts of AzurRx and its wholly-owned subsidiary, AzurRx Europe
SAS (collectively, the “Company”). Intercompany
transactions and balances have been eliminated upon
consolidation.
The accompanying unaudited interim consolidated
financial statements have been prepared as if the Company will
continue as a going concern. The Company has incurred significant
operating losses and negative cash flows from operations since
inception, had a working capital deficiency at March 31, 2017 of
approximately $903,000 and had an accumulated deficit of
approximately $25,696,000. The Company believes that its cash on
hand will sustain its operations until
September 2017.
The Company is dependent on obtaining, and
continues to pursue, the necessary funding from outside sources,
including obtaining additional funding from the sale of securities
in order to continue their operations. Without adequate funding,
the Company may not be able to meet its obligations. Management
believes these conditions raise substantial doubt about its ability
to continue as a going concern through May 2018. The financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
Notes
to Unaudited Consolidated Financial
Statements
Use
of Estimates
The
accompanying unaudited interim consolidated financial statements
are prepared in conformity with accounting principles generally
accepted in the United States of America, 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 March 31, 3017 and
December 31, 2016, the Company had approximately $87,000 and
$1,279,000, respectively, in one account in the U.S. in excess of
these limits. The Company has not experienced any losses to date
resulting from this practice.
The
Company also has exposure to currency risk as its subsidiary in
France has a functional currency in Euros.
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 year-end exchange rates.
Income and expense items are translated at average rates of
exchange prevailing during the year. Gains and losses from
translation adjustments are accumulated in a separate component of
shareholders’ equity (deficit).
Recent Accounting Pronouncements
In
January 2017, the Financial Accounting Standards Board
(“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 does not believe
that the adoption of this pronouncement will have a material impact
on its consolidated financial statements.
In
March 2016, the FASB issued an Accounting Standards Update
(“ASU”) which simplifies several aspects of the
accounting for share based payments, including the income tax
consequences and classification on the statement of cash flows.
Under the new standard, all excess tax benefits and deficiencies
will be recognized as income tax expense or benefit in the income
statement. Additionally, excess tax benefits will be classified as
an operating activity on the statement of cash flows. This ASU is
effective for annual and interim periods beginning after December
15, 2016 and early adoption is permitted. The amendments requiring
recognition of excess tax benefits and tax deficiencies in the
income statement must be applied prospectively, and entities can
elect to apply the amendments related to the presentation of excess
tax benefits on the statement of cash flows using either a
prospective or retrospective transition method. The adoption of
this pronouncement does not have a material impact on the
Company’s unaudited interim consolidated financial
statements. The Company has recorded a valuation allowance to
offset the benefit of its gross net operating loss carryforwards
and therefore has no tax provision.
In
February 2016, the FASB issued an ASU which requires lessees to
recognize lease assets and lease liabilities arising from operating
leases on the balance sheet. This ASU is effective for annual and
interim reporting periods beginning after December 15, 2018 using a
modified retrospective approach, with early adoption permitted. The
Company is currently evaluating the standard to determine the
impact of its adoption on its unaudited interim consolidated
financial statements. The Company would have to capitalize its
operating leases on its balance sheet.
Notes
to Unaudited Consolidated Financial
Statements
In
November 2015, the FASB issued an ASU that requires all deferred
tax liabilities and assets to be classified as noncurrent on the
balance sheet. This ASU is effective for annual and interim
reporting periods beginning after December 15, 2016, with early
adoption permitted. In addition, this guidance can be applied
either prospectively or retrospectively to all periods presented.
This currently has no impact on the Company’s unaudited
interim consolidated financial statements as the Company’s
deferred tax assets have a full valuation allowance.
In May
2014, the FASB issued an ASU which supersedes the most current
revenue recognition requirements. The new revenue recognition
standard requires entities to recognize revenue in a way that
depicts the transfer of goods or services to customers in an amount
that reflects the consideration which the entity expects to be
entitled to in exchange for those goods or services. This guidance
is effective for annual and interim reporting periods beginning
after December 15, 2017, with early adoption permitted for annual
periods after December 31, 2016. The Company is still in its
startup phase and is not generating revenues at this time;
therefore, this standard will have no impact on its consolidated
financial statements until such time as revenues are generated.
When revenues are generated, the Company will evaluate the standard
to determine the impact of its adoption on its unaudited interim
consolidated financial statements.
Note
2 -
Fair Value
Disclosures
Fair
value is the price that would be received from the sale of an asset
or paid to transfer a liability assuming an orderly transaction in
the most advantageous market at the measurement date. U.S. GAAP
establishes a hierarchical disclosure framework that prioritizes
and ranks the level of observability of inputs used in measuring
fair value.
At
March 31, 2017 and December 31, 2016, the Company had Level 3
instruments consisting of contingent consideration in connection
with the Protea Europe SAS acquisition, see Note 6.
The
following tables summarize the Company’s financial
instruments measured at fair value on a recurring
basis:
|
|
Fair
Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
|
At March 31,
2017:
|
|
|
|
|
|
Contingent
Consideration
|
$
1,300,000
|
$
-
|
$
-
|
$
1,300,000
|
|
|
|
|
|
|
|
At December 31,
2016:
|
|
|
|
|
|
Contingent
Consideration
|
$
1,200,000
|
$
-
|
$
-
|
$
1,200,000
|
The
following table provides a reconciliation of the fair value of
liabilities using Level 3 significant unobservable
inputs:
|
|
|
|
|
|
|
Balance at December
31, 2016
|
$
1,200,000
|
|
Change in fair
value
|
100,000
|
|
Balance at March
31, 2017
|
$
1,300,000
|
Notes
to Unaudited Consolidated Financial
Statements
The
contingent consideration was valued by incorporating a series of
Black-Scholes Option Pricing Models (“BSM”) into a
discounted cash flow framework. Significant unobservable inputs
used in this calculation at March 31, 2017 and December 31, 2016
included projected net sales over a period of patent exclusivity (8
years), discounted by the Company’s weighted average cost of
capital (33.0% and 30.2%, respectively), the contractual hurdle
amount of $100 million that replaces the strike price input in the
traditional BSM, asset volatility (73% and 71%, respectively), that
replaces the equity volatility in the traditional BSM, risk-free
rates (ranging from 1.3% to 2.3% and 1.6% to 2.4%, respectively),
and an option-adjusted spread (1.2% and 1.3%, respectively) that is
applied to these payments to account for the payer’s risk and
arrive at a fair value of the expected payment.
The
fair value of the Company's other receivables and notes payable are
as follows:
|
|
|
Fair
Value Measured at Reporting Date Using
|
Fair
|
|
|
|
|
|
|
|
|
At March 31,
2017:
|
|
|
|
|
|
|
Other
Receivables
|
$
1,010,963
|
$
-
|
$
-
|
$
1,010,963
|
$
1,010,963
|
|
Notes
Payable
|
$
77,855
|
$
-
|
$
-
|
$
77,855
|
$
77,855
|
|
|
|
|
|
|
|
|
At December 31,
2016:
|
|
|
|
|
|
|
Other
Receivables
|
$
961,038
|
$
-
|
$
-
|
$
961,038
|
$
961,038
|
|
Notes
Payable
|
$
155,187
|
$
-
|
$
-
|
$
155,187
|
$
155,187
|
The
fair value of Other Receivables approximates carrying value as
these consist primarily of French R&D tax credits that are
normally received within 9 months of year end and amounts due from
collaboration partner Mayoly, see Note 14.
The
fair value of Notes Payable approximates carrying value due to the
terms of such instruments and applicable interest
rates.
The
carrying amounts of the Company’s financial instruments,
including accounts payable and accrued liabilities approximate fair
value due to their short maturities.
Note
3 - Other Receivables
Other
receivables consisted of the following:
|
|
|
|
|
|
|
|
|
Research &
development tax credits
|
$
771,065
|
$
758,305
|
|
Other
|
239,898
|
202,733
|
|
|
$
1,010,963
|
$
961,038
|
The
research & development tax credits are refundable tax credits
for research conducted in France. Other is primarily amounts due
from collaboration partner Mayoly, see Note 15, and non-income tax
related items from French government entities.
Notes
to Unaudited Consolidated Financial
Statements
Note
4 - Property, Equipment, and Leasehold Improvements
Property, equipment
and leasehold improvements consisted of the following:
|
|
|
|
|
|
|
|
|
Laboratory
Equipment
|
$
165,611
|
$
165,611
|
|
Computer
Equipment
|
20,474
|
19,718
|
|
Office
Equipment
|
28,830
|
29,006
|
|
Leasehold
Improvements
|
29,163
|
29,163
|
|
|
244,078
|
243,498
|
|
Less accumulated
depreciation
|
(102,720
)
|
(91,876
)
|
|
|
$
141,358
|
$
151,622
|
Depreciation
expense for the three months ended March 31, 2017 and 2016 was
$10,597 and $10,845, respectively. Depreciation expense is included
in General and Administrative (“G&A”)
expenses.
Note
5 - Intangible Assets and Goodwill
Intangible assets
are as follows:
|
|
|
|
|
|
|
|
|
In Process research
& development
|
$
388,997
|
$
382,560
|
|
Less accumulated
amortization
|
(90,496
)
|
(81,029
)
|
|
|
$
298,501
|
$
301,531
|
|
|
|
|
|
License
agreements
|
$
3,173,507
|
$
3,120,991
|
|
Less accumulated
amortization
|
(1,771,875
)
|
(1,586,504
)
|
|
|
$
1,401,632
|
$
1,534,487
|
Amortization
expense for the three months ended March 31, 2017 and 2016 was
$166,188 and $171,997, respectively. Amortization expense is
included in G&A expenses.
As of
March 31, 2017, amortization expense is expected to be as follows
for the next 5 years:
|
2017
|
$
500,338
|
|
2018
|
667,118
|
|
2019
|
323,321
|
|
2020
|
32,416
|
|
2021
|
32,416
|
Goodwill
is as follows:
|
Balance at December
31, 2016
|
$
1,767,650
|
|
Foreign currency
translation
|
29,642
|
|
Balance at March
31, 2017
|
$
1,797,292
|
Notes
to Unaudited Consolidated Financial
Statements
Note
6 - Contingent Consideration
On June
13, 2014, the Company completed a stock purchase agreement (the
“SPA”) with Protea Biosciences Group, Inc.
(“Protea Group”). Pursuant to the SPA, the Company is
obligated to pay Protea certain contingent consideration in U.S.
dollars upon the satisfaction of certain events, including (a) a
onetime milestone payment of $2,000,000 due within (10) days of
receipt of the first approval by the Food and Drug Administration
(“FDA”) of a New Drug Application (“NDA”)
or Biologic License Application (“BLA”) for a Business
Product (as such term is defined in the SPA). (b) royalty payments
equal to 2.5% of net sales of Business Product up to $100,000,000
and 1.5% of net sales of Business Product in excess of $100,000,000
and (c) ten percent (10%) of the Transaction Value (as defined in
the SPA) received in connection with a sale or transfer of the
pharmaceutical development business of Protea Europe, see Note
2.
Note 7 - Accounts Payable
Accounts payable
and accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
Trade
payables
|
$
1,341,930
|
$
1,072,358
|
|
Accrued
expenses
|
98,750
|
73,750
|
|
Accrued
payroll
|
256,067
|
325,172
|
|
|
$
1,696,747
|
$
1,471,280
|
Note
8 – Notes Payable
On
October 11, 2016, the Company entered into a 9-month financing
agreement for its Directors and Officers Liability insurance in the
amount of $232,000 that bears interest at an annual rate of 2.7%.
Monthly payments including principal and interest are $26,069 per
month. Notes Payable at March 31, 2017 and December 31, 2016 was
$77,855 and $155,487, respectively.
Note
9 - Original Issue Discounted Convertible Notes and
Warrants
On
March 31, 2016, the Company issued original issue discounted
convertible notes at 92% of the principal amount of the notes due
on November 4, 2016 with a conversion price of $4.65 per share,
issued 39,446 new warrants with a strike price of $5.58 per share,
and adjusted the strike price to $5.58 share on 528,046 warrants.
On the IPO Date, these notes converted into 2,642,160 shares of
common stock.
The
Company accounted for the warrant feature of the notes by recording
a warrant liability based upon the fair value of the warrants on
the dates of issuance. The warrant liability was adjusted to the
fair value at March 31, 2016 by recording a fair value adjustment
of $69,576.
There
were no original issues discounted convertible notes outstanding at
December 31, 2016.
Note 10 -
Equity
Common Stock
At
March 31, 2017 and December 31, 2016, the Company had issued and
outstanding 9,631,088 shares of its common stock.
Stock Option Plan
The
Company’s board of directors and stockholders have adopted
and approved the Amended and Restated 2014 Omnibus Equity Incentive
Plan (the
“2014 Plan”), which took effect on May
12, 2014. During the three months ended March 31, 2017 and 2016,
the Company granted 190,000 and 0, respectively, of stock options
under the 2014 Plan, see Note 12.
Notes
to Unaudited Consolidated Financial
Statements
Series
A Convertible Preferred Stock
At
March 31, 2017 and December 31, 2016, there were no Series A
outstanding and all terms of the Series A are still in
effect.
Restricted Stock
During
the three months ended March 31, 2017 and 2016, there were 21,000
shares and 0 shares, respectively, of restricted stock granted but
not yet issued with a value of $81,060 and $0,
respectively.
Note
11 – Warrants
Stock
warrant transactions for the three months ended March 31, 2017 and
2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
outstanding and exercisable at January 1, 2016
|
662,474
|
$
7.37
|
$
7.37
|
|
|
|
|
|
|
Granted during the
period
|
44,705
|
$
5.58
|
$
5.58
|
|
Expired during the
period
|
-
|
-
|
-
|
|
Exercised during
the period
|
-
|
-
|
-
|
|
Warrants
outstanding and exercisable at March 31, 2016
|
707,179
|
$
5.58 - 7.37
|
$
5.84
|
|
|
|
|
|
|
Warrants
outstanding and exercisable at January 1, 2017
|
1,858,340
|
$
4.76 - $7.37
|
$
5.66
|
|
|
|
|
|
|
Granted during the
period
|
200,000
|
$
5.50 - $6.50
|
$
6.25
|
|
Expired during the
period
|
-
|
-
|
-
|
|
Exercised during
the period
|
-
|
-
|
-
|
|
Warrants
outstanding and exercisable at March 31, 2017
|
2,058,340
|
$
4.76 - $7.37
|
$
5.72
|
|
|
|
|
|
|
|
|
|
Weighted
Average
|
|
|
|
|
Exercise
Price
|
|
$
4.76
|
32,376
|
3.40
|
|
|
$
5.50
|
767,540
|
4.56
|
|
|
$
5.58
|
959,101
|
4.12
|
|
|
$
6.50
|
150,000
|
4.47
|
|
|
$
6.60
|
48,000
|
4.54
|
|
|
$
7.37
|
101,323
|
3.69
|
|
|
|
2,058,340
|
4.29
|
$5.72
|
During the three months ended March 31, 2017,
200,000 warrants were issued to consultants. 166,667
of these warrants vested in the three
months ended March 31, 2017 with a value of $402,318. This amount
was included in G&A expenses. The remaining 33,333 of these
warrants will vest in the 2nd quarter of 2017. During the three
months ended March 31, 2016, 5,260 warrants were issued to
consultants that vested immediately with a value of $7,048. This
amount was included in G&A expenses.
Notes
to Unaudited Consolidated Financial
Statements
The
weighted average fair value of warrants granted to non-employees
during the three months ended March 31, 2017 and 2016 were $2.47
and $1.34. The fair values were estimated on the grant dates using
the Black-Scholes option-pricing model with the following
weighted-average assumptions:
|
|
March 31,
|
|
March 31,
|
|
|
2017
|
|
2016
|
|
Expected
life (in years)
|
5
|
|
5
|
|
Volatility
|
90
%
|
|
118
%
|
|
Risk-free
interest rate
|
1.90% -
1.92 %
|
|
1.28
%
|
|
Dividend
yield
|
-
%
|
|
-
%
|
The
expected term of the warrants is based on the actual term of the
warrants. Volatility is based on the historical volatility of
several public entities that are similar to the Company. The
Company bases volatility this way because it does not have
sufficient historical transactions in its own shares on which to
solely base expected volatility. The risk-free interest rate is
based on the U.S. Treasury rates at the date of grant with maturity
dates approximately equal to the expected term at the grant date.
The Company has not historically declared any dividends and does
not expect to in the future.
Note
12 – 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 months ended March 31, 2017, 190,000 stock options were
granted with an exercise price of $4.48 and a life of 10 years.
135,000 of these options vested in the three months ended March 31,
2017. The weighted average fair value of stock options granted to
employees during the three months ended March 31, 2017 was $3.87.
The fair values were estimated on the grant dates using the
Black-Scholes option-pricing model with the following
weighted-average assumptions:
|
Expected
life (in years)
|
10
|
|
|
Volatility
|
90
|
%
|
|
Risk-free
interest rate
|
2.48
|
%
|
|
Dividend
yield
|
—
|
%
|
The
expected term of the options is based on expected future employee
exercise behavior. Volatility is based on the historical volatility
of several public entities that are similar to the Company. The
Company bases volatility this way because it does not have
sufficient historical transactions in its own shares on which to
solely base expected volatility. The risk-free interest rate is
based on the U.S. Treasury rates at the date of grant with maturity
dates approximately equal to the expected term at the grant date.
The Company has not historically declared any dividends and does
not expect to in the future.
During
the three months ended March 31, 2016, no stock options were
granted.
The
Company realized no income tax benefit from stock option exercises
in each of the periods presented due to recurring losses and
valuation allowances.
Notes
to Unaudited Consolidated Financial
Statements
Stock
option activity under the Plan is as follows:
|
|
|
Weighted Average
Exercise Price
|
Weighted Average Remaining Contract
Life in
Years
|
Aggregate
Intrinsi
c Value
|
|
|
|
|
|
|
|
Stock
options outstanding at January 1, 2017
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Granted during the
period
|
190,000
|
$
4.48
|
9.85
|
$
-
|
|
Expired during the
period
|
-
|
-
|
|
|
|
Exercised during
the period
|
-
|
-
|
|
|
|
Stock
options outstanding at March 31, 2017
|
190,000
|
$
4.48
|
9.85
|
$
-
|
|
|
|
|
|
|
|
Exercisable
at March 31, 2017
|
135,000
|
$
4.48
|
9.85
|
$
-
|
568,109
options are available for future grant.
During
the three months ending March 31, 2017, 135,000 options vested
having a fair value of $522,315.
As
of March 31, 2017, the Company had unrecognized stock-based
compensation expense of $212,795 related to stock options that will
be recognized over the average remaining vesting term of the
options of 1.85 years.
Note 13 - Interest Expense
During
the three months ended March 31, 2017 and 2016, the Company
incurred $874 and $713,680, respectively, of interest expense.
During the three months ended March 31, 2017 and 2016, $0 and
$710,988, respectively, of this amount was in connection with the
convertible notes issued by the Company in the form of accretion of
original issue debt discount and amortization of debt discount
related to the warrants. During the three months ended March 31,
2017 and 2016, the Company incurred $0 and $2,693, respectively, of
interest expense in connection with promissory notes issued by the
Company. During the three months ended March 31, 2017 and 2016, the
Company also incurred $874 and $0, respectively, of miscellaneous
interest expense.
Note
14 – Agreements
Mayoly Agreement
During
the three months ended March 31, 2017 and 2016, the Company was
reimbursed $253,419 and $0, respectively, from Mayoly under the
Mayoly Agreement.
The
Mayoly Agreement includes a €1,000,000 payment due to Mayoly
upon the U.S. FDA approval of MS1819. At this time, based on
management’s assessment of ASC Topic 450, Contingencies, the
Company has not recorded any contingent liability related to this
payment.
Employment Agreement
On
January 3, 2016, the Company entered into an employment agreement
with its President and Chief Executive Officer, Johan Spoor. The
employment agreement provides for a term expiring January 2, 2019.
Mr. Spoor was granted 100,000 shares of restricted common
stock.
Subject
to any required consents from third parties, Mr. Spoor shall also
be entitled to 380,000 10-year stock options pursuant to the 2014
Plan. As of March 31, 2017, 100,000 options have been
granted.
Notes
to Unaudited Consolidated Financial
Statements
Note
15 – Leases
The
Company leases its office and research facilities under operating
leases which are subject to various rent provisions and escalation
clauses expiring at various dates through 2020. The escalation
clauses are indeterminable and considered not material and have
been excluded from minimum future annual rental payments. Rental
expense, which is calculated on a straight-line basis, amounted to
$34,027 and $30,555, respectively, in the three months ended March
31, 2017 and 2016.
Minimum
future annual rental payments are as follows:
|
2017 (balance of
the year)
|
$
79,838
|
|
2018
|
$
71,468
|
|
2019
|
$
71,468
|
|
2020
|
$
71,468
|
|
2021
|
$
-
|
Note
16 - Income Taxes
The
Company is subject to taxation at the federal level in both the
United States and France and at the state level in the United
States. At March 31, 2017 and December 31, 2016, the Company had no
tax provision for both jurisdictions.
At
March 31, 2017 and December 31, 2016, the Company had gross
deferred tax assets of approximately $9,039,000 and $7,875,000,
respectively. As the Company cannot determine that it is more
likely than not that the Company will realize the benefit of the
deferred tax asset, a valuation allowance of approximately
$9,039,000 and $7,875,000, respectively, has been established at
March 31, 2017 and December 31, 2016.
At
March 31, 2017, the Company has gross net operating loss
carry-forwards for U.S. federal and state income tax purposes of
approximately $10,635,000 and $10,744,000, respectively, which
expire in the years 2034 through 2037.
At
March 31, 2017 and December 31, 2016, the Company has approximately
$9,139,000 and $8,374,000, respectively, in net operating losses
which it can carryforward indefinitely to offset against future
French income.
At
March 31, 2017 and 2016, 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
At
March 31, 2017, diluted net loss per share did not include the
effect of 2,058,340 shares of common stock issuable upon the
exercise of outstanding warrants and 190,000 shares of common stock
issuable upon the exercise of outstanding options, as their effect
would be antidilutive during the periods prior to
conversion.
At
March 31, 2016, diluted net loss per share did not include the
effect of 707,179 shares of common stock issuable upon the exercise
of outstanding warrants. 1,715,063 shares of common stock issuable
upon the conversion of promissory notes and convertible debt. and
878,171 shares of common stock issuable upon the conversion of the
Series A, as their effect would be antidilutive.
Notes
to Unaudited Consolidated Financial
Statements
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 M. 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
March 31, 2017 and December 31, 2016 is $508,300 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 March 31, 2017 and December 31, 2016 is $38,453 for
RHMS for Ms. Rigby-Hutton’s services.
From
October 1, 2015 through December 31, 2015, the Company used the
services of Edward Borkowski, a member of the Board of Directors
and the Company’s audit committee chair, as a financial
consultant. Included in accounts payable at March 31, 2017 and
December 31, 2016 is $90,000 for Mr. Borkowski’s
services.
In July
2016, the Company granted 45,000 shares of restricted stock to
Board member Mr. Borkowski and 30,000 shares of restricted stock to
each of Board members Messrs. Shenouda and Riddell. The shares of
restricted stock will be issued as follows: (i) 50% upon the first
commercial sale in the United States of MS1819, and (ii) 50% upon
our total market capitalization exceeding $1 billion dollars for 20
consecutive trading days, in each case subject to the earlier
determination of a majority of the Board.
Starting on October
1, 2016, the Company has used the services of Maged Shenouda, a
member of the Board of Directors, as a financial consultant.
Expense recorded in G&A expense in the accompanying statements
of operations related to Mr. Shenouda for the three months ended
March 31, 2017 and 2016 was $30,000 and $0, respectively. Included
in accounts payable at March 31, 2017 and December 31, 2016 is
$100,000 and $70,000, respectively, for Mr. Shenouda’s
services.
On
February 3, 2017, the Board granted 30,000 options each to Board
members Borkowksi, Shenouda, and Riddell with a total value of
$348,210 of which $135,415 was earned and charged to expense in the
three months ended March 31, 2017.
On
February 3, 2017, the Board granted 100,000 immediately vesting
options to Mr. Spoor with a value of $386,900 which was charged to
expense in the three months ended March 31, 2017.
During
the three months ended March 31, 2017, the Company accrued $7,500
each for Board members Borkowksi, Shenouda, and Riddell and $2,500
for new Board member Mr. Charles Casamento.
Note
19 - Subsequent Events
On
April 11, 2017, the Company entered into a Securities Purchase
Agreement (the “Purchase Agreement”) with Lincoln Park
Capital Fund, LLC (“LPC”), pursuant to which the
Company issued to LPC a 12% Senior Secured Original Issue Discount
Convertible Debenture in the principal amount of $1.0 million with
an original issue discount of $120,000 (the
“Debenture”). The principal and original issue discount
of $1.12 million due under the terms of the Debenture are due on
the earlier to occur of (i) November 10, 2017 or (ii) on the fifth
business day following the receipt by the Company or its
wholly-owned subsidiary, AzurRx Europe SAS (“AES”), of
certain tax credits that the Company is expected to receive prior
to November 10, 2017 (the “Tax Credit”) (the
“Maturity Date”). The Company has the option to extend
the Maturity Date to July 11, 2018, conditioned on the receipt of
the Tax Credit by the Company or AES prior to November 10, 2017
(“Extension Option”).
The
principal amount of the Debenture is convertible into shares of the
Company’s common stock at LPC’s option, at a conversion
price equal to $3.872 (“Conversion Price”). Provided
certain conditions are satisfied, the Company may, at its option,
force conversion of the Debentures for an amount equal to 100% of
the principal amount of the Debenture.
Notes
to Unaudited Consolidated Financial
Statements
In
connection with the issuance of the Debenture, the Company issued
to LPC a warrant giving LPC the right to purchase 164,256 shares of
the Company’s Common Stock at an exercise price of $4.2592
per share (“Warrant”). In the event the Company
exercises its Extension Option, the Company is obligated to issue
an additional Warrant to LPC to purchase 164,256 shares of the
Company’s Common Stock; provided that the exercise price of
such additional Warrant shall be equal to 110% of the average
closing price of the Company’s Common Stock for the ten
consecutive trading days prior to the date of issuance. The
Warrants will terminate five years after the date of
issuance.
The
proceeds received will be allocated based on the relative fair
value of the Debenture and the Warrants, which will effectively
increase the discount on the notes. The Debenture will be further
evaluated for any beneficial conversion feature. The Warrants will
be recorded as additional paid in capital.
The
obligations under the Debenture are guaranteed by AES, as well as a
security agreement providing LPC with a secured interest in the Tax
Credit.
The
Company also entered into a Registration Rights Agreement granting
LPC certain registration rights with respect to the shares of
Common Stock issuable upon conversion of the Debenture, and upon
exercise of the Warrants.
We have
evaluated subsequent events, through the filing date and noted no
additional subsequent events that are reasonably likely to impact
the financial statements.