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 (“
AES
”), are collectively referred
to as the “
Company
.”
AzurRx,
through its AES subsidiary, is engaged in the research and
development of non-systemic biologics for the treatment of patients
with gastrointestinal disorders. Non-systemic biologics are
non-absorbable drugs that act locally 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
”).
Recent
Developments
TransChem Sublicense
On August 7, 2017, the Company entered into a Sublicense Agreement
with TransChem, Inc. (“
TransChem
”) pursuant to which TransChem granted to
the Company an exclusive license to patents and patent applications
relating to Helicobacter pylori 5’methylthioadenosine
nucleosidase inhibitors (the “
Agreement
Patents
”) from Albert
Einstein University currently held by TransChem (the
“
Sublicense
Agreement
”). The licensed
patents will allow the Company to develop compounds for treating
gastrointestinal, lung and other infections which are specific to
individual bacterial species. H.pylori bacterial infections are a
major cause of chronic gastritis, peptic ulcer disease, gastric
cancer and other diseases.
Unless terminated earlier under the provision of the Sublicense
Agreement, the Sublicense Agreement will expire upon the expiration
of the last Agreement Patent. Upon execution of the Sublicense
Agreement, the Company paid an upfront signing fee to TransChem and
agreed to reimburse TransChem for certain expenses previously
incurred in connection with the preparation, filing and maintenance
of the Agreement Patents. The Company also agreed to pay to
TransChem periodic sublicense maintenance fees, which, in the event
the Company becomes obligated to pay certain royalties under the
Sublicense Agreement, such fees may be credited against those
royalties. In addition to the sublicense maintenance fees, the
Company may be obligated to pay to TransChem additional payments
and royalties in the future, in the event certain performance based
milestones and commercial sales involving the Agreement Patents are
achieved.
June 2017 Private Placement
On June
5, 2017, the Company entered into Securities Purchase Agreements
(the “
Purchase
Agreements
”) with certain accredited investors
(“
Investors
”),
pursuant to which the Company issued an aggregate of 1,428,572
units for $3.50 per unit, with each unit consisting of one share of
Common Stock, one Series A Warrant to purchase 0.25 shares of
Common Stock at $4.00 per share exercisable immediately through
December 31, 2017, and one Series A-1 Warrant to purchase 0.75
shares of Common Stock at $5.50 per share exercisable beginning six
months from the date of issuance through June 5, 2022 (together,
“
Units
”) (the
"
Financing
"). At closing of
the Financing, the Company issued Units resulting in the issuance
of an aggregate of 1,428,572 shares of Common Stock, Series A
Warrants to purchase up to 357,144 shares of Common Stock, and
Series A-1 Warrants to purchase up to 1,071,431 shares of Common
Stock, resulting in gross proceeds of $5,000,000.
Placement agent
fees of $350,475 were paid to Alexander Capital L.P.
(“
Alexander
Capital
”), based on 8% of the aggregate principal
amount of the Units issued to certain investors identified by
Alexander Capital (“
Alexander Investors
”), which
amount includes both an 8% success fee and a 1% expense fee, and
Series A-1 Warrants to purchase 77,950 shares of Common Stock were
issued to Alexander Capital (the “
Placement Agent Warrants
”),
reflecting warrants for that number of shares of Common Stock equal
to 7% of the aggregate number of shares of Common Stock purchased
by Alexander Investors. The Placement Agent Warrants are
exercisable beginning December 2, 2017 at a fixed price of $6.05
per share, through June 5, 2022. The Company also incurred $4,000
in other fees associated with this placement. The placement agent
and other fees are netted against the proceeds in the Consolidated
Statements of Changes in Stockholders' (Deficit)
Equity.
On
June 20, 2017, the Company and Investors executed an amendment to
the Purchase Agreements authorizing the Company to issue up to
$400,000 in additional Units, and on July 5, 2017, the Company
issued additional Units resulting in gross proceeds of $400,000
(“
Subsequent
Closing
”). Placement agent fees of $36,000 were paid
to Alexander Capital, as well as additional Placement Agent
Warrants to purchase 5,760 shares of Common Stock. In connection
with the Subsequent Closing, the Company issued 114,287 shares of
Common Stock, Series A and A-1 Warrants to purchase 28,572 and
85,715 shares, respectively. The placement agent fees are netted
against the proceeds in the Consolidated Statements of Changes in
Stockholders' (Deficit) Equity.
The
Company also entered into a Registration Rights Agreement granting
the Investors certain registration rights with respect to the
shares of Common Stock issued in connection with the Financing, as
well as the shares of Common Stock issuable upon exercise of the
Series A Warrants and Series A-1 Warrants.
All of these shares have been registered pursuant
to registration statement on Form S-1 declared effective by the SEC
on
August 11,
2017.
Lincoln Park Financing
On
April 11, 2017, the Company entered into a Note Purchase Agreement
with Lincoln Park Capital Fund, LLC (“
LPC
”), pursuant to which the
Company issued to LPC a 12% Senior Secured Original Issue Discount
Convertible Debenture in the principal amount of $1,000,000 with an
original issue discount of $120,000 (the “
Debenture
”). See Note 9
below.
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 SEC. We believe that the disclosures provided herein
are adequate to make the information presented not misleading when
these unaudited interim consolidated financial statements are read
in conjunction with the audited financial statements and notes
previously distributed in our 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 and had an
accumulated deficit of approximately $28,368,000. The Company
believes that its cash on hand will sustain its operations until
March 2018. The Company is dependent on obtaining, and continues to
pursue, the necessary funding from outside sources, including
obtaining additional funding from the sale of securities in order
to continue 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 August 2018. The financial statements do
not include any adjustments that might result from the outcome of
this uncertainty.
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 June 30, 2017 and
December 31, 2016, the Company had approximately $3,027,000 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 period end exchange rates.
Income and expense items are translated at average rates of
exchange prevailing during the periods presented. Gains and losses
from translation adjustments are accumulated in a separate
component of shareholders’ equity (deficit).
Equity-Based Payments to Non-employees
The
Company accounts for equity instruments, including restricted
stock, stock options and warrants, issued to non-employees in
accordance with authoritative guidance for equity-based payments to
non-employees. All transactions in which goods or services are
received in exchange for equity instruments are accounted for based
on the fair value of the consideration received or the fair value
of the equity instrument issued, whichever is more reliably
measurable. The measurement date of the fair value of the equity
instrument issued is (i) the earlier of the date of grant if
nonforfeitable and fully vested, or (ii) the date the
non-employee's performance is completed and there is no further
associated performance commitment. The fair value of unvested
equity instruments granted to non-employees is re-measured at each
reporting date, and the resulting change in value, if any, is
recognized as expense during the period the related services are
rendered. The expense is recognized in the same manner as if we had
paid cash for the services provided by the
non-employees.
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 (rent for office and research facilities) on its
balance sheet.
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 follow the provisions
of the new standard.
In July 2017, the FASB issued Accounting Standards Update (ASU)
2017-11, Earnings per Share (Topic 260), Distinguishing Liabilities
from Equity (Topic 480) and Derivatives and Hedging (Topic 815).
ASU 2017-11 provides guidance on accounting for financial
instruments with down round features and clarify the deferral of
certain provisions in Topic 480. ASU 2017-11 will become effective
for annual periods beginning after December 15, 2018 and interim
periods within those periods. The Company is currently evaluating
the impact of adopting this guidance.
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 June
30, 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 June 30,
2017:
|
|
|
|
|
|
Contingent
Consideration
|
$
1,560,000
|
$
-
|
$
-
|
$
1,560,000
|
|
|
|
|
|
|
|
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
|
360,000
|
|
Balance at June 30,
2017
|
$
1,560,000
|
The
contingent consideration was valued by incorporating a series of
Black-Scholes Option Pricing Models (“
BSM
”) into a discounted cash flow
framework. Significant unobservable inputs used in this calculation
at June 30, 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 (31.6% and 30.2%,
respectively), the contractual hurdle amount of $100 million that
replaces the strike price input in the traditional BSM, asset
volatility (70.9% and 71%, respectively), that replaces the equity
volatility in the traditional BSM, risk-free rates (ranging from
1.4% to 2.3% and 1.6% to 2.4%, respectively), and an
option-adjusted spread (0.8% 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, note payable, and
convertible debt are as follows:
|
|
|
Fair Value Measured at Reporting Date Using
|
|
|
|
|
|
|
|
|
|
At
June 30, 2017:
|
|
|
|
|
|
|
Other
Receivables
|
$
978,738
|
$
-
|
$
-
|
$
978,738
|
$
978,738
|
|
Note
Payable
|
$
26,010
|
$
-
|
$
-
|
$
26,010
|
$
26,010
|
|
Convertible
Debt
|
$
645,119
|
$
-
|
$
-
|
$
1,045,209
|
$
1,045,209
|
|
|
|
|
|
|
|
|
At
December 31, 2016:
|
|
|
|
|
|
|
Other
Receivables
|
$
961,038
|
$
-
|
$
-
|
$
961,038
|
$
961,038
|
|
Note
Payable
|
$
155,187
|
$
-
|
$
-
|
$
155,187
|
$
155,187
|
The
fair value of Other Receivables approximates carrying value as
these consist primarily of French R&D tax credits that are
normally received within nine months of year end and amounts due
from collaboration partner Mayoly, see Note 14.
The
fair value of Note Payable approximates carrying value due to the
terms of such instruments and applicable interest
rates.
The fair value of
Convertible Debt is based on the par value plus accrued interest
through the date of reporting due to the terms of such instruments
and interest rates, or the current interest rates of similar
instruments.
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 and
development tax credits
|
$
818,695
|
$
758,305
|
|
Other
|
160,043
|
202,733
|
|
|
$
978,738
|
$
961,038
|
The
research and development tax credits are refundable tax credits for
research conducted in France. Other is primarily amounts due from
collaboration partner Mayoly, see Note 14, and non-income tax
related items from French government entities.
Note
4 - Property, Equipment and Leasehold Improvements
Property, equipment
and leasehold improvements consisted of the following:
|
|
|
|
|
|
|
|
|
Laboratory
Equipment
|
$
165,611
|
$
165,611
|
|
Computer
Equipment
|
33,394
|
19,718
|
|
Office
Equipment
|
36,334
|
29,006
|
|
Leasehold
Improvements
|
29,163
|
29,163
|
|
|
264,502
|
243,498
|
|
Less accumulated
depreciation
|
(114,289
)
|
(91,876
)
|
|
|
$
150,213
|
$
151,622
|
Depreciation
expense for the three months ended June 30, 2017 and 2016 was
$12,527 and $11,085, respectively. Depreciation expense for the six
months ended June 30, 2017 and 2016 was $23,124 and $21,930,
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
and development
|
$
415,000
|
$
382,560
|
|
Less accumulated
amortization
|
(105,191
)
|
(81,029
)
|
|
|
$
309,809
|
$
301,531
|
|
|
|
|
|
License
agreements
|
$
3,385,648
|
$
3,120,991
|
|
Less accumulated
amortization
|
(2,059,602
)
|
(1,586,504
)
|
|
|
$
1,326,046
|
$
1,534,487
|
Amortization
expense for the three months ended June 30, 2017 and 2016 was
$171,487 and $176,430, respectively. Amortization expense for the
six months ended June 30, 2017 and 2016 was $355,857 and $348,247,
respectively. Amortization expense is included in G&A
expenses.
As of
June 30, 2017, amortization expense is expected to be as follows
for the next 5 years:
|
2017 (balance of
the year)
|
$
355,856
|
|
2018
|
711,713
|
|
2019
|
344,934
|
|
2020
|
34,583
|
|
2021
|
34,583
|
|
2022 (first six
months)
|
17,292
|
Goodwill
is as follows:
|
|
|
|
Balance at December
31, 2016
|
$
1,767,550
|
|
Foreign currency
translation
|
149,886
|
|
Balance at June 30,
2017
|
$
1,917,436
|
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 and Accrued Expenses
Accounts payable
and accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
Trade
payables
|
$
773,040
|
$
1,072,358
|
|
Accrued
payroll
|
250,457
|
325,172
|
|
|
$
1,023,497
|
$
1,397,530
|
Note
8 – Note 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 June 30, 2017 and December 31, 2016 was
$26,010 and $155,187, respectively.
Note
9 - Original Issue Discounted Convertible Notes and
Warrants
LPC OID Debenture
On April 11, 2017,
the Company entered into a Note Purchase Agreement with LPC,
pursuant to which the Company issued to LPC a 12% Senior Secured
Original Issue Discount Convertible Debenture in the principal
amount of $1,000,000 with an original issue discount of $120,000.
The principal and original issue discount of $1,120,000 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, 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 and original issue discount amount of the Debenture is
convertible into shares of the Company’s common stock,
$0.0001 par value (“
Common
Stock
”) at LPC’s option, at a conversion price
equal to $3.872 (“
Conversion
Price
”). Provided certain conditions related to
compliance with the terms of the Debenture are satisfied, the
closing price of the Company’s Common Stock exceeds 150% of
the Conversion Price, the median daily volume for the preceding 30
days exceeds 50,000 shares per day, among other conditions, the
Company may, at its option, force conversion of the Debentures for
an amount equal to 100% of the principal and original issue
discount of the Debenture.
In
connection with the issuance of the Debenture, the Company issued
to LPC a warrant giving LPC the right to purchase 164,256 shares of
the Company’s Common Stock at an exercise price of $4.2592
per share (“
LPC
Warrant
”). In the event the Company exercises its
Extension Option, which is exercisable conditioned on the receipt
of the Tax Credit by the Company prior to November 10, 2017, the
Company is obligated to issue an additional LPC Warrant to purchase
164,256 shares of the Company’s Common Stock; provided that
the exercise price of such additional LPC 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 LPC Warrants will terminate five years after the date
of issuance.
The
obligations under the Debenture are guaranteed by AES, as well as a
security agreement providing LPC with a secured interest in the Tax
Credit.
The
Company also entered into a Registration Rights Agreement granting
LPC certain registration rights with respect to the shares of
Common Stock issuable upon conversion of the Debenture, and upon
exercise of the LPC Warrants.
All of
these shares have been registered pursuant to registration
statement on Form S-1 declared effective by the SEC on
August 11,
2017.
The
Company accounted for the warrant feature of the notes based upon
the relative fair value of the warrants on the date of issuance of
$246,347 which was recorded as additional paid in capital and a
discount to the note.
The
proceeds received were allocated based on the relative fair values
of the note and the warrants.
The Company
determined that there was a beneficial conversion feature on the
convertible debt in the amount of $395,589 at the date of issuance.
This amount was recorded as additional paid in capital and a
discount to the note. Under the Company’s option to force
conversion, all of the unamortized discount remaining at the date
of conversion shall be recognized immediately upon conversion at
that date as interest expense.
The
effective interest rate after the allocation of proceeds to the
warrants and the BCF is 363%.
For the
three and six months ended June 30, 2017, the Company recorded
$287,055 of interest expense related to the original issue
discount, warrant features, and beneficial conversion features of
this note. For the three and six months ended June 30, 2017,
$45,209 of this amount was accreted interest expense related to the
original issue discount feature of the note
that also increased the
outstanding balance of the convertible debt by the same amount. For
the three and six months ended June 30, 2017, $92,810 of this
amount was amortization of the debt discount related to the warrant
features of the note. For the three and six months ended June 30,
2017, $149,036 of this amount was amortization of the debt discount
related to the beneficial conversion feature of the note that also
increased the outstanding balance of the convertible debt by the
same amount.
March 2016 OID Notes
On
March 31, 2016, the Company issued original issue discounted
convertible notes at 92% of the principal amount of the notes due
on November 4, 2016 with a conversion price of $4.65 per share,
issued 39,446 new warrants with a strike price of $5.58 per share,
and adjusted the strike price to $5.58 share on 528,046
warrants.
For the
three and six months ended June 30, 2016, the Company recorded
$385,370 and $1,096,358, respectively, of interest expense related
to the original issue discount, warrant features, and beneficial
conversion features of these notes. For the three and six months
ended June 30, 2016, $288,888 and $637,498, respectively, of this
amount was accreted interest expense related to the original issue
discount feature of the notes that also increased the outstanding
balance of the convertible debt by the same amount. For the three
and six months ended June 30, 2016, $93,068 and $455,446,
respectively, of this amount was amortization of the debt discount
related to the warrant features of the notes. For the three and six
months ended June 30, 2016, $3,414 of this amount was amortization
of the debt discount related to the beneficial conversion feature
of the note that also increased the outstanding balance of the
convertible debt by the same amount.
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 June 30, 2016 by recording a fair value adjustment
for the three and six months ended June 30, 2016 of $69,576 and
($1,588,040), respectively.
There
was no original issue discounted convertible notes outstanding at
December 31, 2016.
Convertible Debt
consisted of:
|
|
|
|
|
|
|
|
|
Convertible
Debt
|
$
1,000,000
|
$
-
|
|
Accreted OID
Interest
|
45,209
|
-
|
|
Unamortized Debt
Discount - Warrants
|
(153,537
)
|
-
|
|
Unamortized Debt
Discount - BCF
|
(246,553
)
|
-
|
|
|
$
645,119
|
$
-
|
Note 10 -
Equity
Common Stock
At June
30, 2017 and December 31, 2016, the Company had 11,118,160 and
9,631,088, respectively, of shares of its common stock issued and
outstanding.
Stock Option Plan
The
Company’s board of directors and stockholders have adopted
and approved the Amended and Restated 2014 Omnibus Equity Incentive
Plan (the “2014 Plan”), which took effect on May 12,
2014. During the three and six months ended June 30, 2017, the
Company granted 0 and 190,000, respectively, of stock options under
the 2014 Plan, see Note 12. There were no such options granted in
the three and six months ended June 30, 2016.
Series A Convertible Preferred Stock
At June
30, 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 June 30, 2017, 37,500 shares of restricted
stock was granted to consultants with a total value of $140,425.
During the three months ended June 30, 2017, 30,387 of these shares
vested with a value of $114,678. During the six months ended June
30, 2017, 58,500 shares of restricted stock was granted to
consultants with a total value of $221,485. During the six months
ended June 30, 2017, 51,387 of these shares vested with a value of
$195,738. The restricted stock granted in the three and six months
ended June 30, 2017 have a vesting term ranging from immediately to
six months. There was no such restricted stock granted in the three
and six months ended June 30, 2016.
On June 24, 2017,
the Company entered into a consulting agreement that includes a
grant of 43,000 restricted shares to the consultant contingent upon
Board approval, which, as of the date of this report, has not yet
been granted.
Note
11 – Warrants
Stock
warrant transactions for the six months ended June 30, 2017 and
2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
outstanding and exercisable at January 1, 2016
|
662,474
|
$
7.37
|
$
7.37
|
|
|
|
|
|
|
Granted during the
period
|
407,570
|
$
5.58
|
$
5.58
|
|
Expired during the
period
|
-
|
-
|
-
|
|
Exercised during
the period
|
-
|
-
|
-
|
|
Warrants
outstanding and exercisable at June 30, 2016
|
1,070,044
|
$
5.58 - 7.37
|
$
5.75
|
|
|
|
|
|
|
Warrants
outstanding and exercisable at January 1, 2017
|
1,858,340
|
$
4.76 - $7.37
|
$
5.66
|
|
|
|
|
|
|
Granted during the
period
|
1,920,781
|
$
3.53 - $6.50
|
$
5.16
|
|
Expired during the
period
|
-
|
-
|
-
|
|
Exercised during
the period
|
-
|
-
|
-
|
|
Warrants
outstanding and exercisable at June 30, 2017
|
3,779,121
|
$
3.53 - $7.37
|
$
5.41
|
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
|
Exercise
Price
|
|
$
3.53 - $4.00
|
407,144
|
1.04
|
|
|
$
4.01 - $5.50
|
2,035,603
|
4.66
|
|
|
$
5.51 - $6.60
|
1,235,051
|
3.99
|
|
|
$
6.61 - $7.37
|
101,323
|
3.44
|
|
|
|
3,779,121
|
4.02
|
$
5.41
|
During the three months ended June 30, 2017,
50,000 warrants were issued to consultants. 47,771 warrants issued
to consultants were earned and expensed in the three months ended
June 30, 2017 with a value of $82,732. During the six months ended
June 30, 2017, 250,000 warrants were issued to consultants.
214,438
warrants issued to
consultants were earned and expensed in the six months ended June
30, 2017 with a value of $485,050. The earned and expensed amounts
were included in G&A expenses. 24,599 of the remaining warrants
will vest in the 3rd quarter of 2017 and 10,963 of the remaining
warrants will vest in the 4th quarter of
2017.
During
the three months ended June 30, 2016, 35,858 warrants were issued
to investment bankers in association with the placement of original
issue discounted convertible notes that vested immediately with a
value of $48,050. During the six months ended June 30, 2016, 41,118
warrants were issued to investment bankers in association with the
placement of original issue discounted convertible notes that
vested immediately with a value of $55,097. These amounts were
included in G&A expenses
The
weighted average fair value of warrants granted to non-employees
during the three months ended June 30, 2017 and 2016 was $2.13 and
$1.34. The weighted average fair value of warrants granted to
non-employees during the six months ended June 30, 2017 and 2016
was $2.40 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life (in
years)
|
5
|
5
|
|
Volatility
|
87
%
|
118
%
|
|
Risk-free interest
rate
|
1.82% - 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 and six months ended June 30, 2017, 190,000 stock options
were granted with an exercise price of $4.48 and a life of 10
years. 7,500 of these options vested in the three months ended June
30, 2017. 142,500 of these options vested in the six months ended
June 30, 2017. The weighted average fair value of stock options
granted to employees during the three and six months ended June 30,
2017 was $3.87. The fair values were estimated on the grant dates
using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
|
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 and six months ended June 30, 2016, no stock options were
granted.
The
Company realized no income tax benefit from stock option exercises
in each of the periods presented due to recurring losses and
valuation allowances.
Stock
option activity under the Plan is as follows:
|
|
|
|
Weighted
Average
Remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options outstanding at January 1, 2017
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Granted during the
period
|
190,000
|
$
4.48
|
9.60
|
$
-
|
|
Expired during the
period
|
-
|
-
|
|
|
|
Exercised during
the period
|
-
|
-
|
|
|
|
Stock
options outstanding at June 30, 2017
|
190,000
|
$
4.48
|
9.60
|
$
-
|
|
|
|
|
|
|
|
Exercisable
at June 30, 2017
|
142,500
|
$
4.48
|
9.60
|
$
-
|
716,816
options are available for future grant as of June 30,
2017.
During
the three months ending June 30, 2017, 7,500 options vested having
a fair value of $29,018. During the six months ending June 30,
2017, 142,500 options vested having a fair value of
$551,333.
As
of June 30, 2017, the Company had unrecognized stock-based
compensation expense of $183,777 related to stock options that will
be recognized over the average remaining vesting term of the
options of 1.60 years.
Note 13 - Interest Expense
During
the three months ended June 30, 2017 and 2016, the Company incurred
$287,347 and $388,063, respectively, of interest expense. During
the three months ended June 30, 2017 and 2016, $287,055 and
$385,370, 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 June 30,
2017 and 2016, the Company incurred $0 and $2,692, respectively, of
interest expense in connection with promissory notes issued by the
Company. During the three months ended June 30, 2017 and 2016, the
Company also incurred $292 and $0, respectively, of miscellaneous
interest expense.
During
the six months ended June 30, 2017 and 2016, the Company incurred
$288,221 and $1,101,743, respectively, of interest expense. During
the six months ended June 30, 2017 and 2016, $287,055 and
$1,096,358, 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 six months ended June 30, 2017
and 2016, the Company incurred $0 and $5,385, respectively, of
interest expense in connection with promissory notes issued by the
Company. During the six months ended June 30, 2017 and 2016, the
Company also incurred $1,166 and $0, respectively, of miscellaneous
interest expense.
Note
14 – Agreements
Mayoly Agreement
During
the three months ended June 30, 2017 and 2016, the Company was
reimbursed $107,299 and $228,660, respectively, from Mayoly under
the Mayoly Agreement. During the six months ended June 30, 2017 and
2016, the Company was reimbursed $360,718 and $228,660,
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 in
2016.
Subject to any
required consents from third parties, Mr. Spoor shall also be
entitled to 380,000 10-year stock options pursuant to the 2014
Plan. In the first quarter of 2017, 100,000 options were granted
and expensed.
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
$31,537 and $30,109, respectively, in the three months ended June
30, 2017 and 2016. Rental expense amounted to $65,564 and $60,664,
respectively, in the six months ended June 30, 2017 and
2016.
Minimum
future annual rental payments are as follows:
|
2017 (balance of
the year)
|
$
63,730
|
|
2018
|
$
87,928
|
|
2019
|
$
77,528
|
|
2020
|
$
77,528
|
Note
16 - Income Taxes
The
Company is subject to taxation at the federal level in both the
United States and France and at the state level in the United
States. At June 30, 2017 and December 31, 2016, the Company had no
tax provision for both jurisdictions.
At June
30, 2017 and December 31, 2016, the Company had gross deferred tax
assets of approximately $10,212,000 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 $10,212,000 and
$7,875,000, respectively, has been established at June 30, 2017 and
December 31, 2016.
At June 30, 2017,
the Company has gross net operating loss (“
NOL
”) carry-forwards for U.S.
federal and state income tax purposes of approximately $11,820,000
and $11,930,000, respectively, which expire in the years 2034
through 2037. The Company’s ability to use its NOL
carryforwards may be limited if it experiences an “ownership
change” as defined in Section 382 (“Section 382”)
of the Internal Revenue Code of 1986, as amended. An ownership
change generally occurs if certain stockholders increase their
aggregate percentage ownership of a corporation’s stock by
more than 50 percentage points over their lowest percentage
ownership at any time during the testing period, which is generally
the three-year period preceding any potential ownership
change.
At June
30, 2017 and December 31, 2016, the Company has approximately
$10,673,000 and $8,374,000, respectively, in net operating losses
which it can carryforward indefinitely to offset against future
French income.
At June
30, 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 June
30, 2017, diluted net loss per share did not include the effect of
3,779,121 shares of common stock issuable upon the exercise of
outstanding warrants, 190,000 shares of common stock issuable upon
the exercise of outstanding options, and 289,256 shares of common
stock issuable upon the conversion of convertible debt as their
effect would be antidilutive during the periods prior to
conversion.
At June
30, 2016, diluted net loss per share did not include the effect of
1,070,044 shares of common stock issuable upon the exercise of
outstanding warrants and 2,642,160 shares of common stock issuable
upon the conversion of promissory notes and convertible debt as
their effect would be anti-dilutive.
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
June 30, 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 June 30, 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 June 30, 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
June 30, 2017 and 2016 was $30,000 and $0, respectively. Expense
recorded in G&A expense in the accompanying statements of
operations related to Mr. Shenouda for the six months ended June
30, 2017 and 2016 was $60,000 and $0, respectively. Included in
accounts payable at June 30, 2017 and December 31, 2016 is $80,000
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 $29,018 and $164,433, respectively, was earned
and charged to expense in the three and six months ended June 30,
2017.
On
February 3, 2017, the Board granted 100,000 immediately vesting
options to Mr. Spoor with a value of $386,900 of which $0 and
$386,900, respectively, was charged to expense in the three and six
months ended June 30, 2017.
During
the three and six months ended June 30, 2017, the Company recorded
Board fees of $7,500 and $15,000, respectively, for each Board
member Borkowksi, Shenouda, and Riddell and $7,500 and $10,000,
respectively, for new Board member Mr. Charles
Casamento.
Note
19 - Subsequent Events
On July
5, 2017, the Company issued additional Units in connection with the
Subsequent Closing resulting in gross proceeds of $400,000.
Placement agent fees of $36,000 were paid to Alexander Capital, as
well as additional Placement Agent Warrants to purchase 5,760
shares of Common Stock. In connection with the Subsequent Closing,
the Company issued 114,287 shares of Common Stock, and Series A and
A-1 Warrants to purchase 28,572 and 85,715 shares,
respectively.
On August 7, 2017, the Company entered into the
Sublicense Agreement with TransChem pursuant to which TransChem
granted to the Company an exclusive license to patents and patent
applications relating to Helicobacter pylori
5’methylthioadenosine nucleosidase inhibitors (the
“
Agreement
Patents
”) from Albert
Einstein University currently held by TransChem. Unless terminated
earlier under the provision of the Sublicense Agreement, the
Sublicense Agreement will expire upon the expiration of the last
Agreement Patent. Upon execution of the Sublicense Agreement, the
Company paid an upfront signing fee to TransChem and agreed to
reimburse TransChem for certain expenses previously incurred in
connection with the preparation, filing and maintenance of the
Agreement Patents. The Company also agreed to pay to TransChem
periodic sublicense maintenance fees, which, in the event the
Company becomes obligated to pay certain royalties under the
Sublicense Agreement, such fees may be credited against those
royalties. In addition to the sublicense maintenance fees, the
Company may be obligated to pay to TransChem additional payments
and royalties in the future, in the event certain performance based
milestones and commercial sales involving the Agreement Patents are
achieved.
We have
evaluated subsequent events, through the filing date and noted no
additional subsequent events that are reasonably likely to impact
the financial statements.