N
ote 1 - The Company, Basis of
Presentation, and Recent Accounting Pronouncements
The Company
AzurRx BioPharma, Inc. (“
AzurRx
”
) 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, i.e. the intestinal lumen,
skin or mucosa, without reaching an individual’s systemic
circulation. The Company’s current product pipeline consists
of two therapeutic proteins under development:
●
MS1819 - a yeast derived recombinant lipase for
exocrine pancreatic insufficiency (“
EPI
”) associated with chronic pancreatitis
(“
CP
”) and cystic fibrosis
(“
CF
”). A lipase is an enzyme that breaks up fat
molecules. MS1819 is considered recombinant because it was created
from new combinations of genetic material in
yeast.
●
AZ1101- an enzymatic combination of bacterial
origin for the prevention of hospital-acquired infections and
antibiotic-associated diarrhea (“
AAD
”) by resistant bacterial strains induced by
parenteral administration of several antibiotic classes, including
the b-lactams. AZX1101 is composed of a molecular backbone linked
to several distinct enzymes that break up individual classes of
antibiotic molecules.
Recent
Developments
TransChem Sublicense
On August 7, 2017, the Company entered into a Sublicense Agreement
with TransChem, Inc., 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
“Licensed Patents
”)
currently held by TransChem (the “
Sublicense Agreement
”). The
Company may terminate the Sublicense Agreement and the licenses
granted therein for any reason and without further liability on 60
days’ notice. Unless terminated earlier, the Sublicense
Agreement will expire upon the expiration of the last Licensed
Patents. Upon execution, the Company paid an upfront fee to
TransChem and agreed to reimburse TransChem for certain expenses
previously incurred in connection with the preparation, filing, and
maintenance of the Agreement Patents. The Company also agreed to
pay TransChem certain future periodic sublicense maintenance fees,
which fees may be credited against future royalties. The Company
may also
be
required to
pay TransChem additional payments and royalties
in the event certain performance-based milestones and commercial
sales involving the Licensed Patents are achieved. Based on
management’s assessment of ASC Topic 450, Contingencies, the
Company has not recorded any contingent liability related to future
payments as the amounts are not deemed probable and are cancelable.
Amounts paid under this Sublicense Agreement through September 30,
2017 amounted to $226,880 and are included in research and
development (“
R&D
”)
expenses.
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.
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 SEC.
We believe that the disclosures
provided herein are adequate to make the information presented not
misleading when these unaudited interim consolidated financial
statements are read in conjunction with the audited financial
statements and notes previously distributed in our Annual Report
Form 10-K for the year ended December 31, 2016, filed with the SEC
on March 31, 2017.
The
unaudited interim consolidated financial statements include the
accounts of AzurRx and its wholly-owned subsidiary, AzurRx Europe
SAS Intercompany transactions and balances have been eliminated
upon consolidation.
The
accompanying unaudited interim consolidated financial statements
have been prepared as if the Company will continue as a going
concern. The Company has incurred significant operating losses and
negative cash flows from operations since inception and had an
accumulated deficit of approximately $31,502,000 at September 30,
2017. The Company currently believes that its cash on hand will
sustain its operations until April 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 operations. Without
adequate funding, the Company may not be able to meet its
obligations. Management believes these conditions raise substantial
doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might
result from the outcome of this
uncertainty.
Use of Estimates
The accompanying
unaudited interim 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 revenue 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 September 30, 2017 and
December 31, 2016, the Company had approximately $1,653,000 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 the earlier of (i) the date of grant if nonforfeitable and fully
vested, or (ii) the date the non-employee's performance is
completed and there is no further associated performance
commitment. The fair value of unvested equity instruments granted
to non-employees is re-measured at each reporting date, and the
resulting change in value, if any, is recognized as expense during
the period the related services are rendered. The expense is
recognized in the same manner as if we had paid cash for the
services provided by the non-employees.
Research and Development
R&D
costs are charged to operations when incurred and are included in
operating expenses. R&D costs consist principally of
compensation of employees and consultants that perform the
Company’s research activities, the fees paid to maintain the
Company’s licenses, and the payments to third parties for
clinical trial and additional product development and
testing.
Recent Accounting Pronouncements
In July
2017, the Financial Accounting Standards Board (“
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 clarifies the deferral of certain provisions in Topic 480. ASU
2017-11 will become effective for annual periods beginning after
December 15, 2018 and interim periods within those periods. Early
adoption is permitted. The Company is currently evaluating the
impact of adopting this guidance.
In
January 2017, the FASB issued guidance to simplify the subsequent
measurement of goodwill impairment. The new guidance eliminates the
two-step process that required identification of potential
impairment and a separate measure of the actual impairment.
Goodwill impairment charges, if any, would be determined by
reducing the goodwill balance by the difference between the
carrying value and the reporting unit’s fair value
(impairment loss is limited to the carrying value). This standard
is effective for annual or any interim goodwill impairment tests
beginning after December 15, 2019. The Company is currently
evaluating the impact of adopting this guidance and believes that
the adoption of this pronouncement will have an impact on the
Company’s measurement of goodwill impairment.
In
February 2016, the FASB issued an ASU which requires lessees to
recognize lease assets and lease liabilities arising from operating
leases on the balance sheet. This ASU is effective for annual and
interim reporting periods beginning after December 15, 2018 using a
modified retrospective approach, with early adoption permitted. The
Company 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 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.
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.
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
September 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 September 30,
2017:
|
|
|
|
|
Contingent
Consideration
|
$
1,310,000
|
$
-
|
$
-
|
$
1,310,000
|
|
|
|
|
|
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
|
110,000
|
Balance at
September 30, 2017
|
$
1,310,000
|
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 September 30, 2017 and December 31, 2016 included projected net
sales over a period of patent exclusivity (8 years), discounted by
(i) the Company’s weighted average cost of capital (32.0% and
30.2%, respectively); (ii) the contractual hurdle amount of $100
million that replaces the strike price input in the traditional
BSM, asset volatility (76.7% and 71%, respectively), that replaces
the equity volatility in the traditional BSM; (iii) risk-free rates
(ranging from 1.4% to 2.3% and 1.6% to 2.4%, respectively); and
(iv) an option-adjusted spread (0.7% 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 financial instruments are as
follows:
|
|
Fair Value Measured at Reporting Date Using
|
|
|
|
|
|
|
|
At
September 30, 2017:
|
|
|
|
|
|
Cash
|
$
2,946,252
|
$
-
|
$
2,946,252
|
$
-
|
$
-
|
Other
receivables
|
$
173,589
|
$
-
|
$
-
|
$
173,589
|
$
173,589
|
Convertible
debt
|
$
336,040
|
$
-
|
$
-
|
$
379,432
|
$
379,432
|
|
|
|
|
|
|
At
December 31, 2016:
|
|
|
|
|
|
Cash
|
$
1,773,525
|
$
-
|
$
1,773,525
|
$
-
|
$
-
|
Other
receivables
|
$
961,038
|
$
-
|
$
-
|
$
961,038
|
$
961,038
|
Convertible
debt
|
$
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 from year end and amounts due from our
collaboration partner, Mayoly. See Note 14.
The
fair value of note payable approximates carrying value due to the
terms of such instruments and applicable interest
rates.
The
fair value of convertible debt is based on the par value plus
accrued interest through the date of reporting due to the terms of
such instruments and interest rates, or the current interest rates
of similar instruments.
Note
3 - Other Receivables
Other
receivables consisted of the following:
|
|
|
|
|
|
R&D
tax
credits
|
$
-
|
$
758,305
|
Other
|
173,589
|
202,733
|
Total
|
$
173,589
|
$
961,038
|
The R&D tax
credits are refundable tax credits for R&D conducted in France.
Other consists primarily of amounts due from our collaboration
partner, Mayoly, and non-income tax related items from French
government entities. See Note 14.
Note
4 - Property, Equipment and Leasehold Improvements
Property, equipment
and leasehold improvements consisted of the following:
|
|
|
|
|
|
Laboratory
equipment
|
$
165,611
|
$
165,611
|
Computer
equipment
|
44,364
|
19,718
|
Office
equipment
|
36,334
|
29,006
|
Leasehold
improvements
|
29,163
|
29,163
|
Total
property, plant and equipment
|
275,472
|
243,498
|
Less
accumulated depreciation
|
(127,795
)
|
(91,876
)
|
Property,
plant and equipment, net
|
$
147,677
|
$
151,622
|
|
|
|
Depreciation
expense for the three months ended September 30, 2017 and 2016 was
$12,727 and $11,167, respectively. Depreciation expense for the
nine months ended September 30, 2017 and 2016 was $35,851 and
$33,097, 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
|
$
427,038
|
$
382,560
|
Less
accumulated amortization
|
(117,139
)
|
(81,029
)
|
In
process research and development, net
|
$
309,899
|
$
301,531
|
|
|
|
License
agreements
|
$
3,483,855
|
$
3,120,991
|
Less
accumulated amortization
|
(2,293,538
)
|
(1,586,504
)
|
License
agreements, net
|
$
1,190,317
|
$
1,534,487
|
Amortization
expense for the three months ended September 30, 2017 and 2016 was
$164,877 and $174,077, respectively. Amortization expense for the
nine months ended September 30, 2017 and 2016 was $520,734 and
$522,324, respectively.
As of September 30,
2017, amortization expense is expected to be as follows for the
next five years:
2017
(balance of the year)
|
$
183,089
|
2018
|
732,358
|
2019
|
354,940
|
2020
|
35,587
|
2021
|
35,587
|
2022
|
35,587
|
Goodwill
is as follows:
|
|
Balance at December
31, 2016
|
$
1,767,550
|
Foreign currency
translation
|
205,506
|
Balance at
September 30, 2017
|
$
1,973,056
|
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 (i) 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); (ii) royalty payments equal to
2.5% of net sales of Business Product up to $100,000,000 and 1.5%
of net sales of Business Product in excess of $100,000,000; and
(iii) 10% of the Transaction Value (as defined in the SPA) received
in connection with a sale or transfer of the pharmaceutical
development business of Protea Europe. See Note
2.
Note 7 - Accounts Payable and Accrued Expenses
Accounts payable
and accrued expenses consisted of the following:
|
|
|
|
|
|
Trade
payables
|
$
1,287,922
|
$
1,072,358
|
Accrued
payroll
|
245,529
|
325,172
|
Total
accounts payable and accrued expenses
|
$
1,533,451
|
$
1,397,530
|
Note
8 - Note Payable
On October 11,
2016, the Company entered into a 9-month financing agreement for
its directors and officer’s liability insurance in the amount
of $232,000 that bears interest at an annual rate of 2.7%. Monthly
payments, including principal and interest, were $26,069 per month.
Amounts due under this financing agreement have been fully repaid
at September 30, 2017. The balance due under this financing
agreement at December 31, 2016 was $155,187.
Note
9 - Original Issue Discounted Convertible Notes and
Warrants
Lincoln Park OID Debenture
On
April 11, 2017, the Company entered into a Note Purchase Agreement
with Lincoln Park Capital Fund, LLC (“
LPC
”), pursuant to which the
Company issued a 12% Senior Secured Original Issue Discount
Convertible Debenture (the “
Debenture
”) to LPC. The principal
and original issue discount of $1,120,000 due under the terms of
the Debenture were due on the Maturity Date, which is defined as
the earlier to occur of (i) November 10, 2017 or (ii) on the fifth
business day following the receipt by the Company or its
wholly-owned subsidiary, AES, of certain tax credits that the
Company is expected to receive prior to November 10, 2017 (the
“
Tax Credit
”).
Subsequent to September 30, 2017, on November 10, 2017, the Company
and LPC modified the Debenture to extend the Maturity Date to
November 29, 2017, subject to the Company’s right to extend
the Maturity Date to July 11, 2018 (the “
Extension Option
”).
As
consideration for the extension of the Maturity Date, the Company
is obligated to issue 30,000 shares of the Company’s common
stock to LPC no later than November 15,
2017.
The
principal and original issue discount amount of the Debenture is
convertible into shares of the Company’s common stock at
LPC’s option, at a conversion price equal to $3.872
(“
Conversion
Price
”). Provided certain conditions related to
compliance with the terms of the Debenture are satisfied, the
closing price of the Company’s common stock exceeds 150% of
the Conversion Price, the median daily volume for the preceding 30
days exceeds 50,000 shares per day, among other conditions, the
Company may, at its option, force conversion of the Debenture for
an amount equal to the outstanding balance of the principal and
original issue discount of the Debenture. During the quarter ended
September 30, 2017, LPC elected to convert $732,799 of the
Debenture pursuant to which LPC received 189,256 shares of common
stock.
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 upon 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 were registered
pursuant to a registration statement on Form S-1 declared effective
by the SEC on August 11, 2017.
The
Company accounted for the warrant feature of the Debenture 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 Debenture.
The
proceeds received from the issuance of the Debenture were allocated
based on the relative fair values of the Debenture and the LPC
Warrant.
The
Company determined that there was a beneficial conversion feature
(“
BCF
”) on the
Debenture 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 Debenture. 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 LPC
Warrant and the BCF is 363%.
For the three and
nine months ended September 30, 2017, the Company recorded $408,048
and $695,103, respectively, of interest expense related to the
original issue discount, warrant features, and beneficial
conversion features of the Debenture. For the three and nine months
ended September 30, 2017, $51,349 and $96,558, respectively, of
these amounts was accreted interest expense related to the original
issue discount feature of the Debenture that also increased the
outstanding balance of convertible debt by the same amount. For the
three and nine months ended September 30, 2017, $136,885 and
$229,695, respectively, of these amounts was amortization of the
debt discount related to the warrant features of the
Debenture
.
For
the three and nine months ended September 30, 2017, $219,814 and
$368,850, respectively, of these amounts was amortization of the
debt discount related to the beneficial conversion feature of the
Debenture that also increased the outstanding balance of
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 nine months ended September 30, 2016, the Company
recorded $724,246 and $1,820,604, respectively, of interest expense
related to the original issue discount, warrant features, and
beneficial conversion features of these notes. For the three and
nine months ended September 30, 2016, $380,206 and $1,017,705,
respectively, of these amounts 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 nine months ended September 30,
2016, $310,784 and $766,230, respectively, of these amounts was
amortization of the debt discount related to the warrant features
of the notes. For the three and nine months ended September 30,
2016, $33,256 and $36,669, respectively, of these amounts 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.
Upon consummation
of the Company’s initial public offering (“
IPO
”) on October 11, 2017, 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 September 30, 2016 by recording a fair value
adjustment for the three and nine months ended September 30, 2016
of ($285,271) and ($1,873,311), respectively.
There
was no original issue discounted convertible notes outstanding at
December 31, 2016.
Convertible Debt
consisted of:
|
|
|
|
|
|
Convertible
debt
|
$
346,021
|
$
-
|
Accreted
OID interest
|
33,411
|
-
|
Unamortized
debt discount - warrants
|
(16,652
)
|
-
|
Unamortized
debt discount - BCF
|
(26,740
)
|
-
|
Total
convertible debt
|
$
336,040
|
$
-
|
|
|
|
Note 10 -
Equity
Common Stock
At
September 30, 2017 and December 31, 2016, the Company had
11,421,702 and 9,631,088, respectively, of shares of its common
stock issued and outstanding.
Stock Option Plan
The
Company’s Board of Directors (the “
Board
”) 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 nine months ended September 30, 2017, the Company granted
355,000 and 545,000, respectively, of stock options under the 2014
Plan. See Note 12. There were no such options granted in the three
and nine months ended September 30, 2016.
Series A Convertible Preferred Stock
At September 30,
2017 and December 31, 2016, there were no shares of Series A
Convertible Preferred Stock (“
Series A Preferred
”) issued and
outstanding, and all terms of the Series A Preferred are still in
effect.
Restricted Stock
During
the three months ended September 30, 2017, 222,444
shares of restricted common stock
were granted to employees and consultants with a total value of
$895,368. During the three months ended September 30, 2017, 42,077
restricted shares of common stock vested with a value of
$171,581.
During
the nine months ended September 30, 2017, 280,944 shares of
restricted common stock were granted to employees and consultants
with a total value of $1,116,853. During the nine months ended
September 30, 2017, 93,464 restricted shares of common stock vested
with a value of $367,319. The restricted common stock granted in
the three and nine months ended September 30, 2017 have vesting
terms ranging from immediately to three years, or based on the
Company achieving certain milestones as set forth in the following
paragraph.
As of September 30, 2017, the Company had
unrecognized restricted common stock expense of $749,534. $324,534
of this unrecognized expense will be recognized over the average
remaining vesting term of the restricted common stock of 2.80
years. $425,000 of this unrecognized expense vests (i) 75% upon FDA
acceptance of an Investigational New Drug
(“IND”
)
application in the United States; and (ii) 25% upon the Company
completing a Phase IIa clinical trial for MS1819. Neither of these
milestones are considered probable at September 30,
2017.
No
restricted common stock was granted in the three and nine months
ended September 30, 2016.
On July 24, 2017,
the Company entered into a consulting agreement that includes a
grant of 40,000 restricted shares of common stock to the consultant
contingent upon the approval of the Board which, as of November 13,
2017, has not yet been granted.
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 warrant to purchase 0.25 shares of common stock
at $4.00 per share exercisable immediately through December 31,
2017 (“
Series A
Warrant
”), and one warrant to purchase 0.75 shares of
common stock at $5.50 per share (“
Series A-1 Warrant
”) exercisable
beginning six months from the date of issuance through June 5, 2022
(together, “
Units
”) (the "
Financing
"). At closing of the June
2017 Private Placement, 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 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 at a fixed price of $6.05
per share beginning December 2, 2017 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 to authorize the Company to issue up to
$400,000 of 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 114,283 shares of
common stock and 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 June 2017
Private Placement, 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 the registration
statement on Form S-1 declared effective by the SEC on August 11,
2017.
Note
11 - Warrants
Stock
warrant transactions for the nine months ended September 30, 2017
and 2016 were as follows:
|
|
|
|
|
|
Price
Per
|
Exercise
|
|
|
|
|
|
|
|
|
Warrants outstanding and exercisable at January 1,
2016
|
662,474
|
$
7.37
|
$
7.37
|
|
|
|
|
Granted
during the period
|
430,326
|
$
5.58
|
$
5.58
|
Expired
during the period
|
-
|
-
|
-
|
Exercised
during the period
|
-
|
-
|
-
|
Warrants outstanding and exercisable at September 30,
2016
|
1,092,800
|
$
5.58 - $7.37
|
$
5.78
|
|
|
|
|
Warrants outstanding and exercisable at January 1,
2017
|
1,858,340
|
$
4.76 - $7.37
|
$
5.66
|
|
|
|
|
Granted
during the period
|
2,040,824
|
$
3.53 - $6.50
|
$
5.16
|
Expired
during the period
|
-
|
-
|
-
|
Exercised
during the period
|
-
|
-
|
-
|
Warrants outstanding and exercisable at September 30,
2017
|
3,899,164
|
$
3.53 - $7.37
|
$
5.40
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Average
|
|
|
|
Exercise Price
|
$
3.53 - $4.00
|
435,714
|
0.75
|
|
$
4.01 - $5.50
|
2,121,316
|
4.42
|
|
$
5.51 - $6.50
|
1,192,811
|
3.74
|
|
$
6.51 - $7.37
|
149,323
|
3.52
|
|
Total
|
3,899,164
|
3.77
|
$5.40
|
During the three months ended September 30, 2017,
no warrants were issued to consultants. 24,599 warrants issued to
consultants were earned and expensed in the three months ended
September 30, 2017 with a value of $64,962. During the nine months
ended September 30, 2017, 250,000 warrants were issued to
consultants. 239,037
warrants
issued to consultants were earned and expensed in the nine months
ended September 30, 2017 with a value of $550,012. The earned and
expensed amounts were included in G&A expenses. The 10,963
remaining warrants will vest in the fourth quarter of
2017.
During the three months ended September 30, 2017,
114,283 warrants were issued in association with the June 2017
Private Placement of the Company’s common stock with a value
of $185,452, which had no effect on expense or stockholders’
equity. During the nine months ended September 30, 2017,
1,542,858
warrants
were issued in association with the June 2017 Private Placement of
the Company’s common stock with a value of $2,503,673, which
had no effect on expenses or stockholders’
equity.
During the three and nine months ended September
30, 2017, 83,710
warrants
were issued to investment bankers
in association with the June 2017 Private
Placement of the Company’s common stock that vested
immediately with a value of $154,529,
which had no effect on expenses or
stockholders’ equity.
During
the three months ended September 30, 2016, no warrants were issued
to investment bankers. During the nine months ended September 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 September 30, 2017 and
2016 was $2.13 and $1.34, respectively. The weighted average fair
value of warrants granted to non-employees during the nine months
ended September 30, 2017 and 2016 was $2.40 and $1.34,
respectively. The fair values were estimated on the grant dates
using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
September
30
,
2017
Expected life (in
years)
5
Volatility
87%
Risk-free interest
rate
1.82%-1.92%
Dividend
yield
—%
The
expected term of the warrants is based on the actual term of the
warrants. Volatility is based on the historical volatility of
several public entities that are similar to the Company. The
Company bases volatility this way because it does not have
sufficient historical transactions in its own shares on which to
solely base expected volatility. The risk-free interest rate is
based on the U.S. Treasury rates at the date of grant with maturity
dates approximately equal to the expected term at the grant date.
The Company has not historically declared any dividends and does
not expect to in the future.
Note
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 September 30, 2017, 355,000 stock
options were granted with exercise prices ranging from $3.60 to
$4.39 and lives ranging from five to ten years. 7,500 options
vested in the three months ended September 30, 2017 having a fair
value of $29,018. The weighted average fair value of stock options
granted to employees during the three months ended September 30,
2017 was $2.48.
During the nine months ended September 30, 2017, 545,000 stock
options were granted with exercise prices ranging from $3.60 to
$4.48 and lives ranging from five to ten years. 150,000 options
vested in the nine months ended September 30, 2017 having a fair
value of $580,351. The weighted average fair value of stock options
granted to employees during the nine months ended September 30,
2017 was $2.96.
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 - 10
Volatility
71% - 90%
Risk-free interest
rate
1.78% - 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 nine months ended September 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 2014 Plan is as follows:
|
|
|
Weighted Average Remaining
|
|
|
|
Exercise
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding at January 1, 2017
|
-
|
-
|
|
|
|
|
|
|
|
Granted
during the period
|
545,000
|
$
4.05
|
7.38
|
$
-
|
Expired
during the period
|
-
|
-
|
|
|
Exercised
during the period
|
-
|
-
|
|
|
Stock options outstanding at September 30, 2017
|
545,000
|
$
4.05
|
7.38
|
$
-
|
|
|
|
|
|
Exercisable at September 30, 2017
|
150,000
|
$
4.48
|
7.38
|
$
-
|
|
|
|
|
|
Non-vested stock options outstanding at January 1,
2017
|
-
|
-
|
|
|
|
|
|
|
|
Granted
during the period
|
395,000
|
$
3.89
|
6.64
|
$
-
|
Expired
during the period
|
-
|
-
|
|
|
Exercised
during the period
|
-
|
-
|
|
|
Non-vested stock options outstanding at September 30,
2017
|
395,000
|
$
3.89
|
6.64
|
$
-
|
|
|
|
|
|
548,087 options were available for future issuance under the 2014
Plan as of September 30, 2017.
As of September 30, 2017, the Company had unrecognized stock-based
compensation expense of $1,034,409. $154,756 of this unrecognized
expense will be recognized over the average remaining vesting term
of the options of 1.35 years. $879,650 of this unrecognized expense
vests (i) 75% upon FDA acceptance of a U.S. IND application for
MS1819, and (ii) 25% upon the Company completing a Phase IIa
clinical trial for MS1819. Neither of these milestones are
considered probable at September 30, 2017.
Note 13 - Interest Expense
During
the three months ended September 30, 2017 and 2016, the Company
incurred $408,106 and $724,867, respectively, of interest expense.
During the three months ended September 30, 2017 and 2016, $408,048
and $724,246, respectively, of these amounts 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
September 30, 2017 and 2016, the Company incurred $0 and $621,
respectively, of interest expense in connection with promissory
notes issued by the Company. During the three months ended
September 30, 2017 and 2016, the Company also incurred $58 and $0,
respectively, of miscellaneous interest expense.
During
the nine months ended September 30, 2017 and 2016, the Company
incurred $696,327 and $1,826,610, respectively, of interest
expense. During the nine months ended September 30, 2017 and 2016,
$695,103 and $1,820,603, respectively, of these amounts 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 nine months
ended September 30, 2017 and 2016, the Company incurred $0 and
$6,007, respectively, of interest expense in connection with
promissory notes issued by the Company. During the nine months
ended September 30, 2017 and 2016, the Company also incurred $1,224
and $0, respectively, of miscellaneous interest
expense.
Note
14 - Agreements
Mayoly Agreement
During
the three months ended September 30, 2017 and 2016, the Company was
reimbursed $220,607 and $365,697, respectively, from Mayoly under
the Mayoly Agreement. During the nine months ended September 30,
2017 and 2016, the Company was reimbursed $581,325 and $594,356,
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 (Thijs)
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.
Mr. Spoor was
originally entitled to 380,000 10-year stock options pursuant to
the 2014 Plan. In the first quarter of 2017,100,000 options having
a value of $386,900 were granted and expensed. On September 29,
2017, Mr. Spoor was granted 100,000 shares of restricted common
stock subject to vesting conditions as follows: (i) 75% upon FDA
acceptance of a U.S. IND application for MS1819, and (ii) 25% upon
the Company completing a Phase IIa clinical trial for MS1819, in
satisfaction of the Company’s obligation to issue the
additional 280,000 options to Mr. Spoor described
above.
Also on
September 29, 2017, the Board approved a 2016 annual incentive
bonus equal to 40% of Mr. Spoor’s
current base salary
pursuant to his employment agreement in the amount of
$170,000.
On September 26,
2017, the Company entered into an employment agreement with Maged
Shenouda, a member of the Company’s Board of Directors,
pursuant to which Mr. Shenouda serves as the Company’s Chief
Financial Officer. Mr. Shenouda’s employment agreement
provides for the issuance of stock options to purchase 100,000
shares of the Company’s common stock, issuable pursuant to
the 2014 Plan. These options will vest as follows, so long as Mr.
Shenouda is serving as either Executive Vice-President of Corporate
Development or as Chief Financial Officer: (i) 75% upon FDA
acceptance of a U.S. IND application for MS1819, and (ii) 25% upon
the Company completing a Phase IIa clinical trial for MS1819. The
option is exercisable for $4.39 per share, and will expire on
September 25, 2027.
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
$28,294 and $38,582, respectively, in the three months ended
September 30, 2017 and 2016. Rental expense amounted to $93,858 and
$99,246, respectively, in the nine months ended September 30, 2017
and 2016.
Minimum
future annual rental payments are as follows:
2017
(balance of the year)
|
$
32,427
|
2018
|
$
90,177
|
2019
|
$
79,777
|
2020
|
$
79,777
|
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
September 30, 2017 and December 31, 2016, the Company had no tax
provision for either jurisdiction.
At
September 30, 2017 and December 31, 2016, the Company had gross
deferred tax assets of approximately $11,283,000 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
$11,283,000 and $7,875,000, respectively, has been established at
September 30, 2017 and December 31, 2016.
At
September 30, 2017, the Company has gross net operating loss
(“
NOL
”)
carry-forwards for U.S. federal and state income tax purposes of
approximately $13,941,000 and $12,510,000, respectively, which
expire in the years 2034 through 2037, respectively. 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
September 30, 2017 and December 31, 2016, the Company had
approximately $11,825,000 and $8,374,000, respectively, in net
operating losses which it can carryforward indefinitely to offset
against future French income.
At
September 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
September 30, 2017, diluted net loss per share did not include the
effect of 3,899,164 shares of common stock issuable upon the
exercise of outstanding warrants, 545,000 shares of common stock
issuable upon the exercise of outstanding options, or 100,000
shares of common stock issuable upon the conversion of convertible
debt, as their effect would be antidilutive during the periods
prior to conversion.
At
September 30, 2016, diluted net loss per share did not include the
effect of 1,092,800 shares of common stock issuable upon the
exercise of outstanding warrants or 2,160,239 shares of common
stock issuable upon the conversion of 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 (Thijs) Spoor, the Company’s current Chief Executive
Officer and President, as a consultant for business strategy,
financial modeling, and fundraising. Included in accounts payable
at September 30, 2017 and December 31, 2016 is $478,400 and
$508,300, respectively, 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 September 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 September 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 common stock
to Mr. Borkowski, and 30,000 shares of restricted common stock to
each of Mr. Shenouda and Dr. Alastair Riddell, both members of our
Board of Directors. 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, or in
each case subject to the earlier determination of a majority of the
Board.
Starting
on October 1, 2016 until his appointment as the Company’s
Chief Financial Officer on September 25, 2017, the Company used the
services of Maged Shenouda as a financial consultant. Expense
recorded in G&A expenses in the accompanying statements of
operations related to Mr. Shenouda for the three months ended
September 30, 2017 and 2016 was $20,000 and $0, respectively.
Expense recorded in G&A expenses in the accompanying statements
of operations related to Mr. Shenouda for the nine months ended
September 30, 2017 and 2016 was $80,000 and $0, respectively.
Included in accounts payable at September 30, 2017 and December 31,
2016 is $110,000 and $70,000, respectively, for Mr.
Shenouda’s services.
On
February 3, 2017, the Board granted 30,000 options each to Messrs.
Borkowski and Shenouda, and Dr. Riddell, with a total value of
$348,210, of which $29,018 and $193,451, respectively, was earned
and charged to expense in the three and nine months ended September
30, 2017.
During
the three and nine months ended September 30, 2017, the Company
recorded Board fees of $10,000 and $25,000, respectively, for each
of Messrs. Borkowski and Shenouda, and Dr. Riddell, and $10,000 and
$20,000, respectively, for Mr. Charles Casamento, a recent addition
to our Board of Directors.
On June 26, 2017, the Board granted 30,000 shares of restricted
common stock each to each of Messrs. Borkowski and Shenouda, and
Dr. Riddell, and 25,000 shares of restricted common stock to Mr.
Casamento with a total value of $460,000, of which $340,000 was
earned and accrued for in the three and nine months ended September
30, 2017. This restricted common stock vests ratably over the term
of service of the calendar year. None of this restricted common
stock has been issued as of September 30,
2017.
On
September 29, 2017, the Board granted 100,000 shares of restricted
common stock to Johan (Thijs) Spoor, the Company’s Chief
Executive Officer, subject to vesting conditions as follows: (i)
75% upon FDA acceptance of a U. S. IND application for MS1819, and
(ii) 25% upon the Company completing a Phase IIa clinical trial for
MS1819 with a total value of $425,000 to be expensed when the above
milestones are probable.
Note
19 - Subsequent Events
Modification of Lincoln Park Debenture
On November 10, 2017, the Company modified its Debenture issued to
LPC on April 11, 2017, resulting in an extension of the Maturity
Date, as set forth in the Debenture, from November 10, 2017 to
November 29, 2017. The Debenture, as modified, allows the Company
to elect to extend the Maturity Date to July 11, 2018, provided it
provides written notice of its intent to do so no later than
November 27, 2017.
As consideration for the extension of the
Maturity Date, the Company is obligated to issue 30,000 shares of
Common Stock to LPC no later than November 15, 2017.
We have
evaluated subsequent events through November 13 and noted that no
additional subsequent events have occurred that are reasonably
likely to impact the financial statements.