Note 1 - The Company and Basis of Presentation
The Company
AzurRx BioPharma, Inc. (“AzurRx” or “Parent”) was incorporated on January 30, 2014 in
the State of Delaware. In June 2014, the Company acquired 100% of
the issued and outstanding capital stock of AzurRx SAS (formerly
“ProteaBio Europe
SAS”), a company
incorporated in October 2008 under the laws of France. Parent and
its wholly-owned subsidiary, AzurRx SAS (“ABS”), are collectively referred to as the
“Company”.
The Company is engaged in the research and
development of non-systemic biologics for the treatment of patients
with gastrointestinal disorders. Non-systemic biologics are
non-absorbable drugs that act locally, i.e. the intestinal lumen,
skin or mucosa, without reaching an individual’s systemic
circulation. The Company is focused on the development of its lead
product candidate, MS1819 for the treatment of exocrine pancreatic
insufficiency (“EPI”) associated with chronic pancreatitis
(“CP”) and cystic fibrosis
(“CF”).
MS1819 – Phase 2a Chronic Pancreatitis Study
In June
2018, the Company completed an open-label, dose escalation Phase 2a
trial of MS1819 in France, Australia, and New Zealand to
investigate both the safety of escalating doses of MS1819, and the
efficacy of MS1819 through the analysis of each patient’s
coefficient of fat absorption (“CFA”) and its change from
baseline. A total of 11 CP patients with EPI were enrolled in the
study and final data indicated a strong safety and efficacy
profile. Although the study was not powered for efficacy, in a
pre-planned analysis, the highest dose (2.2 grams per day) cohort
of MS1819 showed statistically significant and clinically
meaningful increases in CFA compared to baseline with a mean
increase of 21.8% and a p-value of p=0.002 on a per protocol basis.
Maximal absolute CFA response to treatment was up to
62%.
MS1819 – Phase 2 and Phase 2b Cystic Fibrosis Monotherapy
Studies
In
October 2018, the FDA cleared the Company’s Investigational
New Drug (“IND”) application for MS1819 in
patients with EPI due to CF. In connection with the FDA’s
clearance of the IND, the Company initiated a multi-center Phase 2
OPTION bridging dose safety
study in the fourth quarter of 2018 in the United States and
Europe (the “OPTION
Cross-Over Study”). The Company targeted enrollment of
30 to 35 patients for the OPTION Cross-Over Study and dosed the
first patients in February 2019. In June 2019, the Company reached
its enrollment target for the study.
On
September 25, 2019, the Company announced positive results from the
OPTION Cross-Over Study. Results showed that the primary efficacy
endpoint of CFA was comparable to the CFA in a prior phase two
study in patients with CP, while using the same dosage of MS1819.
The dosage used in the OPTION Cross-Over Study was 2.2 grams per
day, which was determined in agreement with the FDA as a bridging
dose from the highest safe dose used in the Phase 2a CP dose
escalation study. Although the study was not powered for
statistical significance, the data demonstrated meaningful efficacy
results, with approximately 50% of the patients showing CFAs high
enough to reach non-inferiority with standard porcine enzyme
replacement therapy (“PERT”). Additionally, the
coefficient of nitrogen absorption (“CNA”) was comparable between the
MS1819 and PERT arms, 93% vs. 97%, respectively, in the OPTION
Cross-Over Study. This important finding confirms that protease
supplementation is not likely to be required with MS1819 treatment.
A total of 32 patients, ages 18 or older, completed the OPTION
Cross-Over Study.
On
October 17, 2019, the Company announced that the Cystic Fibrosis
Foundation Data Safety Monitoring Board (the “CFF DSMB”) completed its review
of the Company’s final results of the OPTION Cross-Over Study
and has found no safety concerns for MS1819, and that the CFF DSMB
supports the Company’s plan to proceed to a higher 4.4 gram
dose of MS1819 with enteric capsules in its next planned
multi-center dose escalation Phase 2 OPTION clinical trial (the
“OPTION 2
Trial”). In December 2019, the Company submitted the
clinical trial protocol to the existing IND at the
FDA.
The
OPTION 2 Trial design will explore the use of 2.2 gram and 4.4 gram
doses using enteric capsules to ensure higher levels of MS1819
release in the duodenum. The new protocol is currently under review
by the FDA and a response is anticipated in March 2020. The Company
expects to launch the OPTION 2 Trial as early as the second quarter
of 2020, subject to regulatory approval, with completion originally
anticipated by the end of 2020, however, these timelines may be
delayed due to the COVID-19 epidemic.
MS1819 – Phase 2 Combination Therapy Study
In
addition to the OPTION Cross-Over Study, the Company launched a
Phase 2 multi-center clinical trial (the “Combination Trial”) in Hungary to
investigate MS1819 in combination with PERT, for CF patients who
suffer from severe EPI, but continue to experience clinical
symptoms of fat malabsorption despite taking the maximum daily dose
of PERTs. The Combination Trial is designed to investigate the
safety, tolerability and efficacy of escalating doses of MS1819, in
conjunction with a stable dose of PERTs, in order to increase CFA
and relieve abdominal symptoms in uncontrolled CF
patients.
On
October 15, 2019, the Company announced that it dosed the first
patients in its Combination Trial. This study is designed to
investigate the safety, tolerability and efficacy of escalating
doses of MS1819 (700 mg, 1120 mg and 2240 mg per day,
respectively), in conjunction with a stable dose of porcine PERTs,
in order to increase the CFA and relieve abdominal symptoms. A
combination therapy of PERT and MS1819 has the potential to: (i)
correct macronutrient and micronutrient maldigestion; (ii)
eliminate abdominal symptoms attributable to maldigestion; and
(iii) sustain optimal nutritional status on a normal diet in CF
patients with severe EPI. Planned enrollment is expected to include
approximately 24 CF patients with severe EPI, at clinical trial
sites in Hungary and additional countries in Europe, including
Spain, with study completion originally anticipated by the end of
2020, however, this timeline may be delayed due to the COVID-19
epidemic.
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles in the United States of America
(“GAAP”).
The
financial statements for the years ended December 31, 2019 and 2018
include the accounts of AzurRx and its wholly-owned subsidiary,
AzurRx SAS. Intercompany transactions and balances have been
eliminated upon consolidation.
The
accompanying consolidated financial statements have been prepared
as if the Company will continue as a going concern. The Company has
incurred significant operating losses and negative cash flows from
operations since inception, had negative working capital at
December 31, 2019 of approximately $877,000, and had an accumulated
deficit of approximately $62.7 million at December 31, 2019. The
Company is dependent on obtaining, and continues to pursue,
additional working capital funding from the sale of securities and
debt in order to continue to execute its development plan and
continue operations. Without adequate working capital, the Company
may not be able to meet its obligations and continue as a going
concern. These conditions raise substantial doubt about the
Company’s ability to continue as a going concern. Management
plans to raise additional capital through additional equity and/or
debt financings, including the LPC Equity Line of Credit (see Note
11). The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Note 2 - Significant Accounting Policies and Recent Accounting
Pronouncements
Use of Estimates
The accompanying consolidated
financial statements are prepared in conformity with GAAP and
include certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
(including goodwill, intangible assets and contingent
consideration), and the reported amounts of revenue and expense
during the reporting period, including contingencies. Accordingly,
actual results may differ from those estimates
Cash and Cash Equivalents
The
Company considers all highly liquid investments with maturities of
three months or less from date of purchase to be cash equivalents.
All cash balances were highly liquid at December 31, 2019 and 2018,
respectively.
Concentrations of Credit Risk
Financial
instruments that potentially expose the Company to concentrations
of credit risk consist of cash. The Company primarily maintains its
cash balances with financial institutions in federally insured
accounts in the U.S. The Company may from time to time have cash in
banks in excess of FDIC insurance limits. At December 31, 2019 and
2018, the Company had $0 and $754,261, respectively, in one account
in the U.S. in excess of these limits. The Company has not
experienced any losses to date resulting from this practice. The
Company mitigates its risk by maintaining the majority of its cash
and equivalents with high quality financial
institutions.
The
Company also has exposure to foreign currency risk as its
subsidiary in France has a functional currency in
Euros.
Cyber-Related Fraud
On
August 8, 2019, management was advised that it was a victim of a
cyber-related fraud whereby a hacker impersonated one of the
Company’s key vendors to redirect payments, totaling
$418,765. The Company, including the Audit Committee, completed its
investigation and is reviewing all available avenues of recovery,
including from the Company’s financial institution to recover
the payments. As of September 30, 2019, the Company had recovered
$50,858 from its financial institution but management is unable to
determine the probability of recovering anything further from the
cyber-related fraud. Therefore, as of December 31, 2019, the
Company recorded a loss of $367,908 which is included in general
and administrative (“G&A”) expense. As a result of
the cyber-related fraud, the Company has instituted additional
controls and procedures and all employees have now undergone
cybersecurity training.
Debt Instruments
Detachable
warrants issued in conjunction with debt are measured at their
relative fair value, if they are determined to be equity
instrument, or their fair value, if they are determined to be
liability instruments, and recorded as a debt
discount. Conversion features that are in the money at
the commitment date constitute a beneficial conversion feature that
is measured at its intrinsic value and recognized as debt discount.
Debt discount is amortized as interest expense over the maturity
period of the debt using the effective interest method. Contingent
beneficial conversion features are recognized when the contingency
has been resolved.
Debt Issuance Costs
Debt
issuance costs are recorded as a direct reduction of the carrying
amount of the related debt. Debt issuance costs are amortized over
the maturity period of the related debt instrument using the
effective interest method.
Equity-Based Payments to Non-Employees
Equity-based
payments to non-employees are measured at fair value on the grant
date per ASU No. 2018-07, Improvements to Nonemployee Share-Based
Payment Accounting.
Fair Value Measurements
The
Company follows Accounting Standards Codification (“ASC”) Topic 820-10, Fair
Value Measurements and Disclosures (“ASC 820”), which among
other things, defines fair value, establishes a consistent
framework for measuring fair value and expands disclosure for each
major asset and liability category measured at fair value on either
a recurring or nonrecurring basis. Fair value is an exit price,
representing the amount that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants. As such, fair value is a market-based
measurement that should be determined based on assumptions that
market participants would use in pricing an asset or
liability.
As a
basis for considering such assumptions, a three-tier fair value
hierarchy has been established, which prioritizes the inputs used
in measuring fair value as follows:
Level
1: Observable inputs such as quoted prices (unadjusted) in active
markets for identical assets or liabilities;
Level
2: Inputs, other than the quoted prices in active markets, that are
observable either directly or indirectly; and
Level
3: Unobservable inputs in which there is little or no market data,
which require the reporting entity to develop its own assumptions,
which reflect those that a market participant would
use.
In
certain cases, the inputs used to measure fair value may fall into
different levels of the fair value hierarchy. In such cases, an
instrument’s level within the fair value hierarchy is based
on the lowest level of input that is significant to the overall
fair value measurement. The Company’s assessment of the
significance of a particular input to the fair value measurement in
its entirety requires judgment and considers factors specific to
the financial instrument.
The
Company recognizes transfers between levels as if the transfers
occurred on the last day of the reporting period.
Foreign Currency Translation
For
foreign subsidiaries with operations denominated in a foreign
currency, assets and liabilities are translated to U.S. dollars,
which is the functional currency, at period end exchange rates.
Income and expense items are translated at average rates of
exchange prevailing during the periods presented. Gains and losses
from translation adjustments are accumulated in a separate
component of stockholders’ equity.
Goodwill and Intangible Assets
Goodwill represents
the excess of the purchase price of the acquired business over the
fair value of amounts assigned to assets acquired and liabilities
assumed. Goodwill and other intangible assets with indefinite
useful lives are reviewed for impairment annually or more
frequently if events or circumstances indicate impairment may be
present. Any excess in carrying value over the estimated fair value
is charged to results of operations. The Company has not recognized
any impairment charges through December 31, 2019.
Intangible
assets subject to amortization consist of in process research and
development, license agreements, and patents reported at the fair
value at date of the acquisition less accumulated amortization.
Amortization expense is provided using the straight-line method
over the estimated useful lives of the assets as
follows:
Patents
7.2 years
In
Process Research &
Development
12 years
License
Agreements
5 years
Impairment of Long-Lived Assets
The
Company periodically evaluates its long-lived assets for potential
impairment in accordance with ASC Topic 360, Property, Plant and
Equipment (“ASC
360”). Potential impairment is assessed when there is
evidence that events or changes in circumstances indicate that the
carrying amount of an asset may not be recovered. Recoverability of
these assets is assessed based on undiscounted expected future cash
flows from the assets, considering a number of factors, including
past operating results, budgets and economic projections, market
trends and product development cycles. If impairments are
identified, assets are written down to their estimated fair value.
The Company has not recognized any impairment charges through
December 31, 2019.
Income Taxes
Income
taxes are recorded in accordance with ASC 740, Accounting for
Income Taxes (“ASC
740”), which provides for deferred taxes using an
asset and liability approach. The Company recognizes deferred tax
assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax
returns. The Company determines its deferred tax assets and
liabilities based on differences between financial reporting and
tax bases of assets and liabilities, which are measured using the
enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Valuation allowances are
provided if, based upon the weight of available evidence, it is
more likely than not that some or all of the deferred tax assets
will not be realized.
The
Company accounts for uncertain tax positions in accordance with the
provisions of ASC 740. When uncertain tax positions exist, the
Company recognizes the tax benefit of tax positions to the extent
that the benefit will more likely than not be realized. The
determination as to whether the tax benefit will more likely than
not be realized is based upon the technical merits of the tax
position as well as consideration of the available facts and
circumstances. At December 31, 2019 and 2018, the Company does not
have any significant uncertain tax positions. All tax years are
still open for audit.
Leases
Effective January
1, 2019, the Company adopted Accounting Standards Update
(“ASU”) No.
2016-02, “Leases”. This ASU requires substantially all
leases be recorded on the balance sheet as right of use assets and
lease obligations. The Company adopted the ASU using a modified
retrospective adoption method at January 1, 2019, as outlined in
ASU No. 2018-11, “Leases - Targeted Improvements”.
Under this method of adoption, there is no impact to the
comparative consolidated statement of operations and consolidated
balance sheet. The Company determined that there was no
cumulative-effect adjustment to beginning retained earnings on the
consolidated balance sheet. In addition, the Company elected the
package of practical expedients permitted under the transition
guidance within the new standard, which among other things, allowed
carryforward of historical lease classifications. Adoption of this
standard did not materially impact the Company’s results of
operations and had no impact on the consolidated statement of cash
flows.
Research and Development
Research and
development (“R&D”) costs are charged to
operations when incurred and are included in operating expense.
R&D costs consist principally of compensation of employees and
consultants that perform the Company’s research activities,
the fees paid to maintain the Company’s licenses, and the
payments to third parties for manufacturing drug supply and
clinical trials, and amortization of intangible
assets.
Stock-Based Compensation
The
Company’s board of directors (the “Board”) and stockholders have
adopted and approved the Amended and Restated 2014 Omnibus Equity
Incentive Plan which took effect on May 12, 2014. The Company
accounts for its stock-based compensation awards to employees and
Board members in accordance with ASC Topic 718,
Compensation—Stock Compensation (“ASC 718”). ASC 718
requires all stock-based payments to employees and Board members,
including grants of employee stock options, to be recognized in the
statements of operations by measuring the fair value of the award
on the date of grant and recognizing this fair value as stock-based
compensation using a straight-line method over the requisite
service period, generally the vesting period.
For
awards with performance conditions that affect their vesting, such
as the occurrence of certain transactions or the achievement of
certain operating or financial milestones, recognition of fair
value of the award occurs when vesting becomes
probable.
The
Company estimates the grant date fair value of stock option awards
using the Black-Scholes option-pricing model. The use of the
Black-Scholes option-pricing model requires management to make
assumptions with respect to the expected term of the option, the
expected volatility of the Common Stock consistent with the
expected life of the option, risk-free interest rates and expected
dividend yields of the Common Stock.
Sublicense Agreement
As more
fully discussed in Note 15, the Company entered into a sublicense
agreement with TransChem, Inc. (“TransChem”), pursuant to which
TransChem granted the Company an exclusive license to certain
patents and patent applications. Any payments made to TransChem in
connection with this sublicence agreement are recorded as research
and development expense.
Subsequent Events
The
Company considered events or transactions occurring after the
balance sheet date but prior to the date the consolidated financial
statements are available to be issued for potential recognition or
disclosure in its consolidated financial statements.
Recent Accounting Pronouncements
In
January 2017, the FASB issued 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.
Note
3 - Fair Value
Disclosures
Fair
value is the price that would be received from the sale of an asset
or paid to transfer a liability assuming an orderly transaction in
the most advantageous market at the measurement date. GAAP
establishes a hierarchical disclosure framework that prioritizes
and ranks the level of observability of inputs used in measuring
fair value.
As of
December 31, 2019, and 2018, the fair value of the Company's
financial instruments were as follows:
|
|
Fair Value Measured at Reporting Date Using
|
|
|
|
|
|
|
|
At
December 31, 2019:
|
|
|
|
|
|
Cash
|
$175,796
|
$-
|
$175,796
|
$-
|
$175,796
|
Other
receivables
|
$2,637,303
|
$-
|
$-
|
$2,637,303
|
$2,637,303
|
Note
payable
|
$444,364
|
$-
|
$-
|
$444,364
|
$444,364
|
Convertible
debt
|
$1,076,938
|
$-
|
$-
|
$1,076,938
|
$1,076,938
|
|
|
|
|
|
|
At
December 31, 2018:
|
|
|
|
|
|
Cash
|
$1,114,343
|
$-
|
$1,114,343
|
$-
|
$1,114,343
|
Other
receivables
|
$3,172,676
|
$-
|
$-
|
$3,172,676
|
$3,172,676
|
Note
payable
|
$255,032
|
$-
|
$-
|
$255,032
|
$255,032
|
At
December 31, 2019, the fair value of other receivables approximates
carrying value as these consist primarily of French R&D tax
credits that are normally received the following year.
At
December 31, 2018, the fair value of other receivables approximates
carrying value as these consist primarily of French R&D tax
credits that are normally received the following year and amounts
due from the Company’s former collaboration partner, Mayoly
(see Note 14).
The
fair value of the note payable in connection with the financing of
directors and officer’s liability insurance approximates
carrying value due to the terms of such instruments and applicable
interest rates.
The
convertible debt is based on its fair value less unamortized debt
discount plus accrued interest through the date of reporting (see
Note 9).
Note
4 - Other Receivables
As of
December 31, 2019, and 2018, other receivables consisted of the
following:
|
|
|
|
|
|
R&D
tax credits
|
$2,566,281
|
$2,162,373
|
Other
|
71,022
|
1,010,303
|
Total
other receivables
|
$2,637,303
|
$3,172,676
|
At
December 31, 2019, the research and development (“R&D”) tax credits were
comprised of the 2017, 2018, and 2019 refundable tax credits for
research conducted in France. At December 31, 2018, the R&D tax
credits were comprised of the 2017 and 2018 refundable tax credits
for research conducted in France. The French tax authorities have
examined the tax credits for the years 2016 through 2018, which is
in the normal course of business. In February 2020, the Company
received the 2018 refundable tax credit of approximately
$1,130,000.
At
December 31, 2019, Other consisted of amounts due from U.S. R&D
tax credits. At December 31, 2018, Other consisted primarily of
amounts due from the Company’s former collaboration partner,
Mayoly.
Note 5 - Property, Equipment and Leasehold
Improvements
As of
December 31, 2019, and 2018, property, equipment and leasehold
improvements consisted of the following:
|
|
|
|
|
|
Laboratory
equipment
|
$193,661
|
$190,406
|
Computer
equipment
|
74,836
|
75,417
|
Office
equipment
|
36,703
|
37,262
|
Leasehold
improvements
|
35,711
|
29,163
|
Total
property, plant and equipment
|
340,911
|
332,248
|
Less
accumulated depreciation
|
(263,520)
|
(203,394)
|
Property,
plant and equipment, net
|
$77,391
|
$128,854
|
Depreciation
expense for the years ended December 31, 2019 and 2018 was $63,096
and $61,909, respectively.
For the
year ended December 31, 2019, $42,283 of depreciation is included
in research and development (“R&D”) expense and $20,813 of
depreciation is included in general and administrative
(“G&A”)
expense.
For the
year ended December 31, 2018, $49,316 of depreciation has been
reclassified to R&D expense and $12,593 of depreciation remains
in G&A expense.
Note
6 - Intangible Assets and Goodwill
Patents
Pursuant to the
Mayoly APA entered into on March 27, 2019, in which the Company
purchased all remaining rights, title and interest in and to MS1819
(see Note 14) from Mayoly, the Company recorded Patents in the
amount of $3,802,745 as follows:
Common
stock issued at signing to Mayoly, subject to vesting
|
$1,740,959
|
Due
to Mayoly at 12/31/19 - €400,000
|
449,280
|
Due
to Mayoly at 12/31/20 - €350,000
|
393,120
|
Assumed
Mayoly liabilities and forgiveness of Mayoly debt
|
1,219,386
|
|
|
|
$3,802,745
|
As of
December 31, 2019, and 2018, intangible assets were as
follows:
|
|
|
|
|
|
In
process research and development
|
$-
|
$416,600
|
Less
accumulated amortization
|
-
|
(157,671)
|
In
process research and development, net
|
$-
|
$258,929
|
|
|
|
License
agreements
|
$-
|
$3,398,702
|
Less
accumulated amortization
|
-
|
(3,087,154)
|
License
agreements, net
|
$-
|
$311,548
|
|
|
|
Patents
|
$3,802,745
|
$-
|
Less
accumulated amortization
|
(395,661)
|
-
|
Patents,
net
|
$3,407,084
|
$-
|
Amortization
expense for the years ended December 31, 2019, and 2018 was
$779,895 and $736,537, respectively.
For the
year ended December 31, 2019, $779,895 of amortization is included
R&D expense and $0 of amortization is included in G&A
expense. Amortization expense for the year ended December 31, 2019
included $384,234 from in process research and development and
license agreements written off as a result of the Mayoly
APA.
For the
year ended December 31, 2018, $785,852 of amortization has been
reclassified to R&D expense and $0 of amortization remains in
G&A expense. Amortization expense for the year ended December
31, 2018 included $736,537 from in process research and development
and license agreements written off as a result of the Mayoly
APA.
As of
December 31, 2019, amortization expense related to patents is
expected to be approximately $527,548 for each of the next five
years (2020 through 2024).
As
of December 31, 2019, and 2018, goodwill was as
follows:
|
|
Balance
at January 1, 2018
|
$2,016,240
|
Foreign
currency translation
|
(91,410)
|
Balance
at December 31, 2018
|
1,924,830
|
Foreign
currency translation
|
(38,144)
|
Balance
at December 31, 2019
|
$1,886,686
|
Note 7 - Accounts Payable and Accrued Expense
As of
December 31, 2019, and 2018, accounts payable and accrued expense
consisted of the following:
|
|
|
|
|
|
Trade
payables
|
$1,683,505
|
$1,532,110
|
Accrued
expense
|
71,177
|
285,061
|
Accrued
payroll
|
-
|
253,225
|
Total
accounts payable and accrued expense
|
$1,754,682
|
$2,070,396
|
Note
8 - Note Payable
On
December 5, 2019, the Company entered into a 9-month financing
agreement for its directors and officer’s liability insurance
in the amount of $498,783 that bears interest at an annual rate of
5.461%. Monthly payments, including principal and interest, are
$56,689 per month. The balance due under this financing agreement
at December 31, 2019 was $444,364.
On
December 14, 2018, the Company entered into a 9-month financing
agreement for its directors and officer’s liability insurance
in the amount of $286,203 that bears interest at an annual rate of
5.99%. Monthly payments, including principal and interest, are
$32,599 per month. The balance due under this financing agreement
at December 31, 2018 was $255,032.
Note
9 – Convertible Debt
The ADEC Note Offering
On February
14, 2019, the Company entered into a Note Purchase Agreement (the
“ADEC NPA”)
with ADEC Private Equity Investments, LLC (“ADEC”), pursuant to which
the Company issued to ADEC two Senior Convertible Notes
(“Note A” and
“Note B,”
respectively, each an “ADEC
Note,” and together, the “ADEC Notes”), in the
principal amount of $1,000,000 per ADEC Note, resulting in gross
proceeds to the Company of $2,000,000 (the “ADEC Note Offering”). ADEC is
controlled by a significant stockholder of the
Company.
The
ADEC Notes accrue interest at a rate of 10% per annum; provided, however, that in the event
the Company elects to repay the full balance due under the terms of
both ADEC Notes prior to December 31, 2019, then the interest rate
will be reduced to 6% per annum. Interest is payable at the time
all outstanding principal amounts owed under each ADEC Note is
repaid. The ADEC Notes mature on the earlier to occur of (i) the
tenth business day following the receipt by ABS of certain tax
credits that the Company expects to receive prior to July 2019 in
the case of Note A (the “2019 Tax Credit”) and July
2020 in the case of Note B (the “2020 Tax Credit”),
respectively, or (ii) December 31, 2019 in the case of Note A and
December 31, 2020 in the Case of Note B (the “Maturity Dates”). As a
condition to entering into the ADEC NPA, ABS and ADEC also entered
into a Pledge Agreement, pursuant to which ABS agreed to pledge an
interest in each of the 2019 Tax Credit and 2020 Tax Credit to ADEC
in order to guarantee payment of all amounts due under the terms of
the ADEC Notes.
Each of
the ADEC Notes is convertible, at ADEC’s option, into shares
of Common Stock, at a conversion price equal to $2.50 per share;
provided, however, that pursuant to the term of
the ADEC Notes, ADEC may not convert all or a portion of the ADEC
Notes if such conversion would result in the significant
stockholder and/or entities affiliated with him beneficially owning
in excess of 19.99% of the shares of Common Stock issued and
outstanding immediately after giving effect to the issuance of the
shares issuable upon conversion of the ADEC Notes (the
“ADEC Note Conversion
Shares”).
As
additional consideration for entering into the ADEC NPA, the
Company entered into a warrant amendment agreement, whereby the
Company agreed to reduce the exercise price of 1,009,565
outstanding warrants previously issued by the Company to ADEC and
its affiliates (the “ADEC
Warrants”) to $1.50 per share (the “ADEC Warrant Amendment”). The
ADEC Warrant Amendment does not alter any other terms of the ADEC
Warrants. The ADEC Warrant Amendment resulted in a debt discount of
$325,320 that is accreted to additional interest expense over the
lives of the ADEC Notes.
In
connection with the above transaction, the Company also entered
into a registration rights agreement with ADEC. The registration
statement was filed with the Securities and Exchange Commission
(“SEC”) on
April 25, 2019.
During
the year ended December 31, 2019, the Company recognized $311,116
of interest expense related to the ADEC Notes, including
amortization of debt discount of $206,963 related to the ADEC
Warrant Amendment.
In
December 2019, the Company repaid $1,550,000 principal amount of
the ADEC Notes and in January 2020 repaid the remaining principal
balance of $450,000 plus outstanding accrued interest of
$104,153.
December 2019 Senior Convertible Promissory Note
Offering
On
December 20, 2019, the Company began an offering of (i) Senior
Convertible Promissory Notes (each a “Promissory Note,” and together,
the “Promissory
Notes”) in the principal amount of up to $8.0 million
to certain accredited investors (the “Note Investors”), and (ii)
warrants (“Note
Warrants”) to purchase shares of Common Stock, each
pursuant to Note Purchase Agreements entered into by and between
the Company and each of the Investors (the “Promissory NPAs”) (the
“Promissory Note
Offering”).
On
December 20, 2019, December 24, 2019, December 30, 2019, and
December 31, 2019, the Company issued Promissory Notes to the Note
Investors in the aggregate principal amount of $3,386,300. The
Promissory Notes mature on September 20, 2020, accrue interest at a
rate of 9% per annum, and are convertible, at the sole option of
the holder, into shares of Common Stock (the “Promissory Note Conversion
Shares”) at a price of $0.97 per share (the
“Conversion
Option”). The Promissory Notes may be prepaid by the
Company at any time prior to the maturity date in cash without
penalty or premium (the “Prepayment Option”).
As
additional consideration for the execution of the Promissory NPA,
each Note Investor also received Note Warrants to purchase that
number of shares of Common Stock equal to one-half (50%) of the
Promissory Note Conversion Shares issuable upon conversion of the
Promissory Notes (the “Warrant Shares”). The Note
Warrants have an exercise price of $1.07 per share and expire five
years from the date of issuance. The Company and each Note Investor
executed a Registration Rights Agreement (the “RRA”), pursuant to which the
Company agreed to file a registration statement. The Company filed
a registration statement with the SEC on February 7, 2020 covering
the Promissory Note Conversion Shares and Warrant
Shares.
In
connection with the four closings in December 2019 of the
Promissory Note
Offering, the Company paid aggregate placement agent fees of
$338,630, which fees were based on (i) 9% of the aggregate
principal amount of the Promissory Notes issued to the Note
Investors introduced by the placement agent, and (ii) a
non-accountable expense allowance of 1% of the gross proceeds from
the Promissory Note
Offering. In addition, the placement agent was issued warrants,
containing substantially the same terms and conditions as the Note
Warrants, to purchase an aggregate of 244,372 shares of Common
Stock (the “Placement Agent
Warrants”), representing 7% of the Promissory Note
Conversion Shares issuable upon conversion of the Promissory Notes
issued to the Note Investors. The Placement Agent Warrants have an
exercise price of $1.21 per share and expire five years from the
date of issuance.
The
Company determined the Prepayment Option feature represents a
contingent call option. The Company evaluated the Prepayment Option
in accordance with ASC 815-15-25. The Company determined that the
Prepayment Option feature is clearly and closely related to the
debt host instrument and is not an embedded derivative requiring
bifurcation. Additionally, the Company determined the Conversion
Option represents an embedded call option. The Company evaluated
the Conversion Option in accordance with ASC 815-15-25. The Company
determined that the Conversion Option feature meets the scope
exception from ASC 815 and is not an embedded derivative requiring
bifurcation.
The
Company evaluated the Promissory Notes for a beneficial conversion
feature in accordance with ASC 470-20. The Company determined that
at each commitment date the effective conversion price was below
the closing stock price (market value), and the Convertible Notes
contained a beneficial conversion feature.
Pursuant to the
December 2019 closings of the Promissory Note Offering, the
principal amount of $3,386,300 was first allocated based on the
relative fair value of the Promissory Notes and the Note Warrants.
The fair value of the Note Warrants amounted to $912,648. Then the
beneficial conversion feature was calculated, which amounted to
$1,359,284. The Company incurred debt issuance costs of $588,017
related to the offering. The initial carrying value of the
Promissory Notes issued amounted to $526,351.
During
the year ended December 31, 2019, the Company recognized $114,791
of interest expense related to these Promissory Notes, including
amortization of debt discount related to the value of the Note
Warrants of $33,669, amortization of the beneficial conversion
feature of $51,529, amortization of debt discount related to debt
issuance costs of $21,203, and accrued interest expense of
$8,390.
As of
December 31, 2019, and 2018, convertible debt consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
debt
|
$3,836,300
|
$3,386,300
|
$450,000
|
$-
|
Unamortized
debt discount - revalued warrants
|
(118,356)
|
-
|
(118,356)
|
-
|
Unamortized
debt discount - warrants
|
(878,979)
|
(878,979)
|
-
|
-
|
Unamortized
debt discount - BCF
|
(1,307,755)
|
(1,307,755)
|
-
|
-
|
Unamortized
debt discount - debt issuance costs
|
(566,815)
|
(566,815)
|
-
|
-
|
Accrued
interest
|
112,543
|
8,390
|
104,153
|
-
|
Total
convertible debt
|
$1,076,938
|
$641,141
|
$435,797
|
$-
|
LPC OID Debenture
On
April 11, 2017, the Company entered into a Note Purchase Agreement
with Lincoln Park Capital Fund, LLC (“LPC”), pursuant to which
the Company issued a 12% Senior Secured Original Issue Discount
Convertible Debenture (the “OID Debenture”) to
LPC.
On July
11, 2018, the Company paid off the remaining amount of $286,529 due
under the terms of this OID Debenture.
For the
year ended December 31, 2018, the Company recorded $97,837 of
interest expense related to the amortization of the debt discount
and beneficial conversion feature related to the warrant features
of the OID Debenture.
Note
10 – Other Liabilities
As of
December 31, 2019, and 2018, other liabilities consisted of the
following:
|
|
|
|
|
|
Due
to Mayoly
|
$392,989
|
$-
|
Lease
liabilities
|
83,235
|
-
|
|
$476,224
|
$-
|
Note 11 – Equity, Common Stock and Incentive
Plan
On
December 19, 2019, the Company held its Annual Meeting of
Stockholders (the “Annual
Meeting”), whereby, the shareholders approved, among
others, the following proposals: (i) amending the Company’s
Certificate of Incorporation to increase the authorized shares of
its Common Stock to 150,000,000 shares from 100,000,000 shares, and
(ii) amending the Company’s Charter to authorize the Board to
effect a reverse stock split of both the issued and outstanding and
authorized shares of Common Stock, at a specific ratio, ranging
from one-for-two (1:2) to one-for-five (1:5), any time prior to the
one-year anniversary date of the Annual Meeting, with the exact
ratio to be determined by the Board (the “Reverse Split”). As of December
31, 2019, the Board had not elected to effect a Reverse
Split.
Common Stock
The
Company had 26,800,519 and 17,704,925 shares of its Common Stock
issued and outstanding at December 31, 2019 and 2018,
respectively.
The
holders of our Common Stock are entitled to one vote per share. In
addition, the holders of our Common Stock will be entitled to
receive ratably such dividends, if any, as may be declared by our
Board out of legally available funds; however, the current policy of our
Board is to retain earnings, if any, for operations and growth.
Upon liquidation, dissolution or winding-up, the holders of our
Common Stock will be entitled to share ratably in all assets that
are legally available for distribution.
2014 Equity Incentive Plan
The
Company’s Board and stockholders adopted and approved the
Amended and Restated 2014 Omnibus Equity Incentive Plan (the
“2014 Plan”),
which took effect on May 12, 2014. The 2014 Plan allows for the
issuance of securities, including stock options to employees, Board
members and consultants. The number of shares of Common Stock
reserved for issuance under the 2014 Plan shall not exceed ten
percent (10%) of the issued and outstanding shares of Common Stock
on an as converted basis (the “As Converted Shares”) on a
rolling basis. For calculation purposes, the As Converted Shares
shall include all shares of Common Stock and all shares of Common
Stock issuable upon the conversion of outstanding preferred stock
and other convertible securities but shall not include any shares
of Common Stock issuable upon the exercise of options, or other
convertible securities issued pursuant to the 2014 Plan. The number
of authorized shares of Common Stock reserved for issuance under
the 2014 Plan shall automatically be increased concurrently with
the Company’s issuance of fully paid and non- assessable
shares of As Converted Shares. Shares shall be deemed to have been
issued under the 2014 Plan solely to the extent actually issued and
delivered pursuant to an award.
The
Company issued an aggregate of 1,193,500 and 539,000 stock options,
during the years ended December 31, 2019 and 2018, respectively,
under the 2014 Plan (see Note 13). As of December 31, 2019, there
were an aggregate of 3,584,986 total shares available under the
2014 Plan, of which 1,677,500 are issued and outstanding, 632,667
shares are reserved subject to issuance of restricted stock and
RSUs and 1,274,819 shares are available for potential issuances.
The Company may issue securities outside of the 2014
Plan.
Series A Convertible Preferred Stock
Pursuant to a stock
purchase agreement with the Protea Group, on June 13, 2014, the
Company issued 100 shares of Series A Convertible Preferred Stock
(“Series A
Preferred”). At December 31, 2019 and 2018, there were
no Series A Preferred outstanding and all terms of the Series A
Preferred are still in effect.
The
terms of the Series A Preferred are described below:
Voting
The
Series A Preferred holders are entitled to vote, together with the
holders of Common Stock as one class, on all matters to which
holders of Common Stock shall be entitled to vote, in the same
manner and with the same effect as the Common Stock holders with
the same number of votes per share that equals the number of shares
of Common Stock into which the Series A Preferred is convertible at
the time of such vote.
Dividends
The
holders of the Series A Preferred shall be entitled to receive
dividends, when, as, and if declared by the board of directors,
ratably with any declaration or payment of any dividend on Common
Stock. To date there have been no dividends declared or paid by the
board of directors.
Liquidation
The
holders of the Series A Preferred shall be entitled to receive,
before and in preference to, any distribution of any assets of the
Company to the holders of Common Stock, an amount equal to $0.0001
per share, plus any declared but unpaid dividends. The liquidation
preference approximates par value as of December 31, 2019 and 2018,
respectively.
Conversion
The
Series A Preferred was initially convertible into 33% of the issued
and outstanding shares of Common Stock on a fully diluted basis,
assuming the conversion, exercise, or exchange for shares of Common
Stock of all convertible securities issued and outstanding
immediately prior to such conversion, including the Series A
Preferred stock, all outstanding warrants and options, and all
outstanding convertible debt, notes, debentures, or any other
securities which are convertible, exercisable, or exchangeable for
shares of Common Stock. The Series A Preferred was convertible at
the holder’s option any time commencing on the one-year
anniversary of the initial issuance date. The Series A Preferred
was subject to mandatory conversion at any time commencing on the
one-year anniversary of the initial issuance date upon the vote or
written consent by the holders of a majority of the Series A
Preferred then outstanding or upon the occurrence of certain
triggering events, including a public offering coupled with an
equity-linked financing with an offering price that values the
Company prior to consummation of such financing at not less than
$12,000,000 and the aggregate gross proceeds to the Company (before
deduction of underwriting discounts and registration expense) are
not less than $6,000,000. On November 11, 2015, the Company and the
Protea Group agreed that the Series A Preferred would be
convertible into 2,439,365 shares of Common Stock. During the year
ended December 31, 2016, Protea Group converted all shares of
Series A Preferred into Common Stock.
LPC Equity Line of Credit
On
November 13, 2019, the Company entered into a purchase agreement
(the “LPC Purchase
Agreement”), together with a registration rights
agreement (the “LPC
Registration Rights Agreement”), with LPC. Under the
terms of the LPC Purchase Agreement, LPC has committed to purchase
up to $15,000,000 of our Common Stock (the “LPC Equity Line of Credit”). Upon
execution of the LPC Purchase Agreement, the Company issued LPC
487,168 shares of Common Stock (the “Commitment Shares”) as a fee for
its commitment to purchase shares of our Common Stock under the LPC
Purchase Agreement. The remaining shares of our Common Stock that
may be issued under the LPC Purchase Agreement may be sold by the
Company to LPC at our discretion from time-to-time over a 30-month
period commencing after the satisfaction of certain conditions set
forth in the Purchase Agreement, subject to the continued
effectiveness of a registration statement covering such shares of
Common Stock sold to LPC by the Company (see “Recent
Developments” above). The registration statement was filed
with the SEC on December 31, 2019 and was declared effective on
January 14, 2020.
Under the LPC Purchase Agreement, on any business
day over the term of the LPC Purchase Agreement, the Company has
the right, in its sole discretion, to present LPC with a purchase
notice (each, a “Purchase
Notice”) directing LPC to
purchase up to 150,000 shares of Common Stock per business day (the
“Regular
Purchase”). In each case,
LPC’s maximum commitment in any single Regular Purchase may
not exceed $1,000,000. The LPC Purchase Agreement provides for a
purchase price per Purchase Share (the “Purchase
Price”) equal to the
lesser of:
●
|
the lowest sale price of Common Stock on the purchase date;
and;
|
|
|
●
|
the average of the three lowest closing sale prices for the Common
Stock during the ten consecutive business days ending on the
business day immediately preceding the purchase date of such
shares;
|
In addition, on any date on which the Company
submits a Purchase Notice to LPC, the Company also has the right,
in its sole discretion, to present LPC with an accelerated purchase
notice (each, an “Accelerated Purchase
Notice”) directing LPC to
purchase an amount of stock (the “Accelerated
Purchase”) equal to up to
the lesser of (i) three times the number of shares purchased
pursuant to such Regular Purchase; and (ii) 30% of the aggregate
shares of Common Stock traded during all or, if certain trading
volume or market price thresholds specified in the LPC Purchase
Agreement are crossed on the applicable Accelerated Purchase date,
the portion of the normal trading hours on the applicable
Accelerated Purchase date prior to such time that any one of such
thresholds is crossed (such period of time on the applicable
Accelerated Purchase Date, the “Accelerated Purchase
Measurement Period”),
provided that LPC will not be required to buy shares pursuant to an
Accelerated Purchase Notice that was received by LPC on any
business day on which the last closing trade price of Common Stock
on the Nasdaq Capital Market (or alternative national exchange) is
below $0.25 per share. The purchase price per share for each such
Accelerated Purchase will be equal to the lesser
of:
●
|
97% of the volume weighted average price of the Company’s
common stock during the applicable Accelerated Purchase Measurement
Period on the applicable Accelerated Purchase date;
and
|
|
|
●
|
the closing sale price of Common Stock on the applicable
Accelerated Purchase Date.
|
The Company may also direct LPC on any business
day on which an Accelerated Purchase has been completed and all of
the shares to be purchased thereunder have been properly delivered
to LPC in accordance with the LPC Purchase Agreement, to purchase
an amount of stock (the “Additional Accelerated
Purchase”) equal to up to
the lesser of (i) three times the number of shares purchased
pursuant to such Regular Purchase; and (ii) 30% of the aggregate
number of shares of Common Stock traded during a certain portion of
the normal trading hours on the applicable Additional Accelerated
Purchase date as determined in accordance with the Purchase
Agreement (such period of time on the applicable Additional
Accelerated Purchase date, the “Additional Accelerated
Purchase Measurement Period”), provided that the closing price of the
Company’s common stock on the business day immediately
preceding such business day is not below $0.25 per share.
Additional Accelerated Purchases will be equal to the lower
of:
●
|
97% of the volume weighted average price of the Company’s
common stock during the applicable Additional Accelerated Purchase
Measurement Period on the applicable Additional Accelerated
Purchase date; and
|
|
|
●
|
the closing sale price of Common Stock on the applicable Additional
Accelerated Purchase.
|
Common Stock Issuances
2019 Issuances
During
the year ended December 31, 2019, pursuant to the Mayoly APA, the
Company issued Mayoly 400,481 shares of Common Stock (the
“Closing Payment
Shares”) as part of the closing payment on March 27,
2019 with a grant date fair value of $917,101, that was recognized
as part of stockholders’ equity.
During
the year ended December 31, 2019, the Company issued an aggregate
of 92,995 shares of its Common Stock to consultants as payment of
$135,000 of accounts payable and 97,403 shares of its Common Stock
to a consultant with a grant date fair value of $75,000 for
services provided.
During
the year ended December 31, 2019, the Company issued an aggregate
of 120,000 shares of its Common Stock to outside members of its
Board as payment of Board fees with an aggregate grant date fair
value of $173,400, that was recorded as part of G&A
expense.
April 2019 Registered Direct Public Offering
In
April 2019, the Company completed a public offering of 1,294,930
shares of Common Stock at a public offering price of $2.13 per
share, resulting in net proceeds of approximately $2,500,000, after
deducting the selling agent fees and other offering expense payable
by the Company (the “April
2019 Public Offering”). The April 2019 Public Offering
was completed pursuant to our effective shelf registration
statement on Form S-3 (File No. 333-226065) and the prospectus
supplement filed on April 2, 2019.
In
connection with the April 2019 Public Offering, the Company entered
into a selling agent agreement, pursuant to which the Company paid
(i) a cash fee equal to 7% of the aggregate gross proceeds of the
April 2019 Public Offering, and (ii) issued warrants to purchase an
aggregate of 38,848 shares of Common Stock (the “April 2019 Selling Agent
Warrants”), an amount equal to 3% of the aggregate
number of shares of Common Stock sold in the April 2019 Public
Offering (see Note 12).
May 2019 Registered Direct Public Offering
In May
2019, the Company completed a second public offering of 1,227,167
shares of Common Stock at a public offering price of $2.35 per
share, resulting in net proceeds of approximately $2,550,000, after
deducting the selling agent fees and other offering expense payable
by the Company (the “May
2019 Public Offering”). The May 2019 Public Offering
was completed pursuant to our effective shelf registration
statement on Form S-3 (File No. 333-226065) and the prospectus
supplement filed on May 9, 2019.
In
connection with the May 2019 Public Offering, the Company entered
into a selling agent agreement, pursuant to which the Company (i)
paid a cash fee equal to 7.0% of the aggregate gross proceeds of
the May 2019 Public Offering, and (ii) issued warrants to purchase
up to an aggregate of 36,815 shares of Common Stock (the
“May 2019 Selling Agent
Warrants”), an amount equal to 3.0% of the aggregate
number of shares of Common Stock sold in the May 2019 Public
Offering (see Note 12).
July 2019 Underwritten Public Offering
In July
2019, the Company completed an underwriting public offering of
5,000,000 shares of Common Stock at a public offering price of
$1.00 per share, resulting in net proceeds of approximately
$4,500,000, after deducting the underwriting discount, and other
offering expense payable by the Company (the “July 2019 Public Offering”). The
July 2019 Public Offering was conducted pursuant to our effective
shelf registration statement on Form S-3 (File No. 333-231954),
filed with the Securities and Exchange Commission (the
“SEC”) on June
5, 2019, and declared effective on June 25, 2019, including the
base prospectus dated June 4, 2019 included therein and the related
prospectus supplement filed on July 19, 2019.
In
connection with the July 2019 Public Offering, the Company entered
into an underwriting agreement, pursuant to which the Company (i)
paid an cash fee equal to 7.0% of the aggregate gross proceeds of
the July 2019 Public Offering, and (ii) issued warrants to purchase
up to an aggregate of 200,000 shares of Common Stock (the
“May 2019 Underwriting
Warrants”), an amount equal to 3.0% of the aggregate
number of shares of Common Stock sold in the July 2019 Public
Offering (see Note 12).
Purchase Agreement with Lincoln Park Capital Fund, LLC
In connection with
entering into the LPC Purchase Agreement on November 13, 2019, the
Company issued LPC 487,168 shares of Common Stock (the
“Commitment
Shares”) as a fee for its commitment to purchase
shares of our Common Stock under the LPC Purchase Agreement. The
Commitment Shares had a grant date fair value of $297,172 and had
no effect on expenses or stockholders’
equity.
2018 Issuances
During
the year ended December 31, 2018, the Company issued an aggregate
of 120,000 shares of its Common Stock to outside members of its
Board as payment of Board fees with an aggregate grant date fair
value of $306,300, that was recorded as part of G&A
expense.
Restricted Stock and Restricted Stock Units
During
the year ended December 31, 2019, pursuant to the Mayoly APA, the
Company issued Mayoly 200,240 shares of restricted Common Stock
that vested on December 31, 2019 and 175,210 shares of restricted
Common Stock that vest on December 31, 2020. During the year ended
December 31, 2019, the Company recognized $823,858 as part of
stockholders’ equity.
During the year ended December 31, 2019, the
Company issued James Sapirstein, its new Chief Executive Officer a
restricted stock unit (“RSU”) for 200,000 shares of Common Stock
subject to milestone-based vesting with a grant date fair value of
$104,000. These RSUs will vest as follows: (i) 100,000 shares upon
the first commercial sale in the United States of MS1819, and (ii)
100,000 shares upon the total market capitalization of the Company
exceeding $1.0 billion for 20 consecutive trading days. The Company
will recognize the expense related to these milestones when the
milestones become probable.
During
the year ended December 31, 2019, an aggregate of 188,333 unvested
shares of restricted Common Stock that were issued to former
executives were canceled with a total grant date fair value of
approximately $499,832 due to their resignations from the
Company.
During
the year ended December 31, 2019, an aggregate of 92,167 unvested
shares of restricted Common Stock, subject to milestone-based
vesting, vested with a total grant date fair value of $280,187.
58,833 of these 92,167 restricted shares of Common Stock with a
total grant date fair value of $178,852 vested during the year
ended December 31, 2019 due to the Company dosing the first
patients in the OPTION Cross-Over Study for MS1819 in CF patients.
33,334 of these 138,835 restricted shares of Common Stock having a
total grant date fair value of $101,335 vested during the year
ended December 31, 2019 due to the Company completing enrollment in
the OPTION Cross-Over Study for MS1819 in CF patients. The Company
recognized $280,187 as stock expense during the year ended December
31, 2019 for the vesting of these shares of restricted Common
Stock.
During
the year ended December 31, 2019, an aggregate of 48,668 unvested
shares of restricted Common Stock, subject to time-based vesting,
vested with a total grant date fair value of $154,004. The Company
recognized $154,004 as stock expense during the year ended December
31, 2019 for the vesting of these shares of restricted Common
Stock.
As
of December 31, 2019, the Company had an aggregate unrecognized
restricted Common Stock expense of $154,689, of which $50,689 will
be recognized over the average remaining vesting term of 0.65 years
and $104,000 will be recognized when vesting of certain milestones
will be probable.
During
the year ended December 31, 2018, an aggregate of 51,000 shares of
restricted Common Stock were granted and accrued to employees with
a total grant date fair value of $155,040.
During
the year ended December 31, 2018, 100,000 shares of restricted
Common Stock were granted and accrued to Johan (Thijs) Spoor, the
former Chief Executive Officer, subject to milestone-based vesting
with a total grant date fair value of $304,000.
During
the year ended December 31, 2018, 100,000 shares of restricted
Common Stock were granted and accrued to Johan (Thijs) Spoor, the
former Chief Executive Officer, subject to time-based vesting over
three years with a grant date fair value of $304,000.
During
the year ended December 31, 2018, The Company issued an aggregate
of 192,067 shares of restricted Common Stock were granted or
accrued to employees and consultants with a total grant date fair
value of $682,271.
During
the year ended December 31, 2018, 5,000 shares of restricted Common
Stock were canceled with a grant date fair value of
$15,200.
During
the year ended December 31, 2018, an aggregate of 315,235 shares of
restricted Common Stock vested with a total grant date fair value
of $1,093,293. An aggregate of 158,833 of these shares of
restricted Common Stock with a total grant date fair value of
$603,852 vested due to the Company achieving certain clinical
milestones for MS1819.
Note
12 - Warrants
For
the year ended December 31, 2019, in connection with the December
2019 closings of the Promissory Note Offering, the Company issued
Note Warrants to investors to purchase an aggregate of 1,745,538
shares of Common Stock with the issuance of the Promissory Notes as
referenced in Note 9. These Note Warrants were issued between
December 20, 2019 and December 31, 2019, are exercisable commencing
six (6) months following the issuance date at $1.07 per share and
expire five years from issuance. The total grant date fair value of
these warrants was determined to be approximately $1,250,398, as
calculated using the Black-Scholes model, and were recorded as a
debt discount based on their relative fair value.
For
the year ended December 31, 2019, in connection with the December
2019 closings of the Promissory Note Offering, the Company issued
placement agent warrants to purchase an aggregate of 244,372 shares
of Common Stock. These placement agent warrants were issued between
December 20, 2019 and December 31, 2019, vested immediately, are
exercisable at $1.21 per share and expire five years from issuance.
The total grant date fair value of these placement agent warrants
was determined to be approximately $169,025, as calculated using
the Black-Scholes model, and was charged to debt discount that will
be amortized over the life of the debt.
During
the year ended December 31, 2019, in connection with the April 2019
Public Offerings, the Company issued the April 2019 Selling Agent
Warrants to purchase an aggregate of 38,848 shares of Common Stock.
The April 2019 Selling Agent Warrants will become exercisable April
2, 2020, expire on April 2, 2024 and have an exercise price of
$2.55 per share. The total grant date fair value of these
investment banking warrants was determined to be approximately
$60,991, as calculated using the Black-Scholes model, and had no
effect on expenses or stockholders’ equity.
During
the year ended December 31, 2019, in connection with the May 2019
Public Offerings, the Company issued the May 2019 Selling Agent
Warrants to purchase an aggregate of 36,815 shares of Common Stock.
The May 2019 Selling Agent Warrants will become exercisable on May
9, 2020, expire on May 9, 2024 and have an exercise price of $2.82
per share. The total grant date fair value of these investment
banking warrants was determined to be approximately $55,591, as
calculated using the Black-Scholes model, and had no effect on
expenses or stockholders’ equity.
During
the year ended December 31, 2019, in connection with the July 2019
Public Offerings, the Company issued the July 2019 Underwriting
Warrants to purchase an aggregate of 200,000 shares of Common
Stock. The July 2019 Underwriting Warrants are exercisable
immediately, expire on July 17, 2024 and have an exercise price of
$1.25 per share. The total grant date fair value of these
investment banking warrants was determined to be approximately
$116,600, as calculated using the Black-Scholes model, and had no
effect on expenses or stockholders’ equity.
In
February 2019, as additional consideration for issuing the ADEC
Notes and pursuant to the ADEC Warrant Amendment, the Company
agreed to reduce the exercise price of certain outstanding warrants
previously issued by the Company to ADEC and its affiliates (see
Note 9).
During
the year ended December 31, 2018, warrants to purchase an aggregate
of 244,400 shares of Common Stock were issued to investment bankers
in connection with the May 2018 Public Offering. These investment
banking warrants were issued on May 3, 2018, vested immediately,
are exercisable at prices ranging from $2.25 to $2.75 per share and
expire five years from issuance. The grant date fair value of these
investment banking warrants was determined to be approximately
$416,426, as calculated using the Black-Scholes model, and had no
effect on expenses or stockholders’ equity.
In
January 2018, the Company offered certain warrant holders the
opportunity to exercise their warrants at a reduced strike price of
$2.50, and if so elected, would also have the opportunity to
reprice other warrants that they continued to hold unexercised to
$3.25. The offer, which was effective on January 12, 2018, was for
the repricing only and did not modify the life of the warrants.
Warrant holders of approximately 503,000 shares of Common Stock
exercised their warrants and had other warrants modified on
approximately 197,000 shares of Common Stock, which resulted in a
charge of approximately $429,000 in the year ended December 31,
2018.
Warrant
transactions for the years ending December 31, 2019 and 2018 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding and exercisable at January 1,
2018
|
3,371,385
|
$3.17 - $7.37
|
$5.28
|
|
|
|
|
Granted
during the period
|
244,400
|
$2.55 - $2.75
|
$2.58
|
Expired
during the period
|
-
|
-
|
-
|
Exercised
during the period
|
(503,070)
|
$2.50
|
$2.50
|
Warrants outstanding and exercisable at December 31,
2018
|
3,112,715
|
$2.55 - $7.37
|
$4.83
|
|
|
|
|
|
|
|
|
Warrants outstanding and exercisable at January 1,
2019
|
3,112,715
|
$2.55 - $7.37
|
$4.83
|
|
|
|
|
Granted
during the period
|
2,265,573
|
$1.07 - $2.82
|
$1.15
|
Expired
during the period
|
-
|
-
|
-
|
Exercised
during the period
|
-
|
-
|
-
|
Warrants outstanding and exercisable at December 31,
2019
|
5,378,288
|
$1.25 - $7.37
|
$2.53
|
Warrants
exercisable at December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
$1.07 - $1.99
|
3,199,475
|
3.95
|
|
$2.00 - $2.99
|
320,063
|
3.57
|
|
$3.00 - $3.99
|
636,972
|
2.31
|
|
$4.00 - $4.99
|
196,632
|
2.01
|
|
$5.00 - $5.99
|
805,476
|
2.13
|
|
$6.00 - $6.99
|
187,750
|
1.76
|
|
$7.00 - $7.37
|
31,920
|
0.96
|
|
|
5,378,288
|
3.30
|
$2.53
|
The
weighted average fair value of warrants granted during the years
ended December 31, 2019 and 2018, was $0.71 and $1.70 per share,
respectively. The grant date fair values were calculated using the
Black-Scholes model with the following weighted average
assumptions:
|
|
|
|
|
|
Expected
life (in years)
|
5
|
5
|
Volatility
|
71 - 80%
|
84%
|
Risk-free
interest rate
|
1.64 - 2.37%
|
2.70%
|
Dividend
yield
|
-%
|
-%
|
Note
13 – Stock Options
Under
the 2014 Plan, the fair value of stock options granted is estimated
on the grant date using the Black-Scholes 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 year ended December 31, 2019, the Company issued stock options
to purchase an aggregate of 120,000 shares of Common Stock with a
strike price of $1.75 per share and a term of five years to certain
Board members that vest quarterly over one (1) year. These options
had a total fair value of approximately $126,000, as calculated
using the Black-Scholes model and were recorded as stock-based
compensation.
During
the year ended December 31, 2019, the Company issued stock options
to purchase 150,000 shares of Common Stock with a strike price of
$1.75 per share and a term of five years to Johan (Thijs) Spoor,
the former Chief Executive Officer that vest upon the completion of
enrollment of the next trial of MS1819 in the U.S. These stock
options had a grant date fair value of approximately $151,950, as
calculated using the Black-Scholes model. These unvested stock
options were cancelled as a result of Mr. Spoor’s
resignation.
During
the year ended December 31, 2019, the Company issued stock options
to purchase 100,000 shares of Common Stock with a strike price of
$1.75 per share and a term of five years to Maged Shenouda, the
former Chief Financial Officer that vest upon the completion of
enrollment of the next trial of MS1819 in the U.S. These stock
options had a grant date fair value of approximately $101,300, as
calculated using the Black-Scholes model. These unvested stock
options were cancelled as a result of Mr. Shenouda’s
resignation.
During
the year ended December 31, 2019, the Company issued stock options
to purchase an aggregate of 523,500 shares of Common Stock with a
strike price of $1.75 per share and a term of five years to certain
employees with milestone-based vesting based on certain clinical
milestones for MS1819. These options had a total grant date fair
value of approximately $549,675, as calculated using the
Black-Scholes model. 454,250 of these stock options will vest upon
enrollment completion of the next MS1819 clinical trial in the U.S.
for CF (the OPTION 2 Trial), and 69,250 of these stock options will
vest upon enrollment completion of the ongoing Combination Trial in
Europe. The Company will recognize the expense related to these
milestones when the milestones become probable.
The
weighted average fair value of stock options granted to employees
during the year ended December 31, 2019 was $0.89 per
share.
During
the year ended December 31, 2019, stock options to purchase an
aggregate of 304,500 shares of Common Stock vested having a fair
value of $574,335. 242,000 of these stock options with a fair value
of $501,666 vested due to the Company achieving certain clinical
milestones for MS1819.
During
the year ended December 31, 2019, stock options to purchase an
aggregate of 510,000 shares of Common Stock were canceled with
strike prices ranging from of $1.75 to $4.48 per
share.
During
the year ended December 31, 2018, stock options to purchase an
aggregate of 539,000 shares of Common Stock were granted with a
strike price of $3.04 per share and a term of five
years.
During
the year ended December 31, 2018, stock options to purchase an
aggregate of 600,750 shares of Common Stock vested having a fair
value of $1,441,475. Stock options to purchase an aggregate of
570,750 shares of Common Stock with a fair value of $1,325,404
vested due to the Company achieving certain clinical milestones for
MS1819.
During
the year ended December 31, 2018, 90,000 stock options were
canceled with exercise prices ranging from of $3.04 to
$3.60.
The
weighted average fair value of stock options granted to employees
during the year ended December 31, 2018 was $2.07 per
share.
The
fair values were estimated on the grant dates using the
Black-Scholes option-pricing model with the following
weighted-average assumptions:
|
|
|
|
|
|
Contractual
term (in years)
|
5 - 10
|
5
|
Volatility
|
72% - 75%
|
85%
|
Risk-free
interest rate
|
1.54% - 1.84%
|
2.82%
|
Dividend
yield
|
-%
|
-%
|
The
expected term of the options is based on expected future employee
exercise behavior. Volatility is based on the historical volatility
of the Company’s Common Stock if available or of several
public entities that are similar to the Company. The Company bases
volatility this way because it may not have sufficient historical
transactions in its own shares on which to solely base expected
volatility. The risk-free interest rate is based on the U.S.
Treasury rates at the date of grant with maturity dates
approximately equal to the expected term at the grant date. The
Company has not historically declared any dividends and does not
expect to in the future.
The
Company realized no income tax benefit from stock option exercises
in each of the periods presented due to recurring losses and
valuation allowances.
During
the years ended December 31, 2019 and 2018, stock option activity
under the 2014 Plan was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding at January 1, 2018
|
545,000
|
$4.05
|
7.13
|
$-
|
|
|
|
|
|
Granted
during the period
|
539,000
|
$3.04
|
5.00
|
$-
|
Expired
during the period
|
-
|
-
|
|
|
Canceled
during the period
|
(90,000)
|
$3.26
|
4.41
|
$-
|
Exercised
during the period
|
-
|
-
|
|
|
Stock options outstanding at December 31, 2018
|
994,000
|
$3.58
|
5.42
|
$-
|
|
|
|
|
|
Exercisable at December 31, 2018
|
749,500
|
$3.74
|
5.71
|
$-
|
|
|
|
|
|
Non-vested stock options outstanding at January 1,
2018
|
387,500
|
$3.89
|
6.39
|
$-
|
|
|
|
|
|
Granted
during the period
|
539,000
|
$3.04
|
5.00
|
$-
|
Vested
during the period
|
(600,750)
|
$3.50
|
5.00
|
$-
|
Expired
during the period
|
-
|
-
|
|
|
Canceled
during the period
|
(81,250)
|
$3.26
|
4.41
|
$-
|
Exercised
during the period
|
-
|
-
|
|
|
Non-vested stock options outstanding at December 31,
2018
|
244,500
|
$3.05
|
4.53
|
$-
|
Stock options outstanding at January 1, 2019
|
994,000
|
$3.58
|
5.42
|
$-
|
|
|
|
|
|
Granted
during the period
|
1,193,500
|
$1.44
|
5.79
|
$-
|
Expired
during the period
|
-
|
-
|
|
|
Canceled
during the period
|
(510,000)
|
$2.80
|
4.50
|
$-
|
Exercised
during the period
|
-
|
-
|
|
|
Stock options outstanding at December 31, 2019
|
1,677,500
|
$2.17
|
5.37
|
$-
|
|
|
|
|
|
Exercisable at December 31, 2019
|
794,000
|
$3.36
|
4.04
|
$-
|
|
|
|
|
|
Non-vested stock options outstanding at January 1,
2019
|
244,500
|
$3.05
|
4.53
|
$-
|
|
|
|
|
|
Granted
during the period
|
1,193,500
|
$1.44
|
5.79
|
$-
|
Vested
during the period
|
(304,500)
|
$2.79
|
3.72
|
$-
|
Expired
during the period
|
-
|
-
|
|
|
Canceled
during the period
|
(250,000)
|
$1.75
|
4.45
|
$-
|
Exercised
during the period
|
-
|
-
|
|
|
Non-vested stock options outstanding at December 31,
2019
|
883,500
|
$1.33
|
6.26
|
$-
|
As of December 31, 2019, the Company had
unrecognized stock-based compensation expense of $733,575. $63,000
of this unrecognized expense will be recognized over the average
remaining vesting term of the options of 0.50 years.
$517,262 of this unrecognized expense
will vest upon enrollment completion next MS1819 clinical trial in the U.S. for CF (the
OPTION 2 Trial). $72,713 of this unrecognized expense will vest
upon enrollment completion of the ongoing Combination Trial in
Europe. $40,300 of this unrecognized expense vests upon the Company
initiating a Phase III clinical trial in the U.S. for MS1819.
$40,300 of this unrecognized expense vests upon initiating a U.S.
Phase I clinical trial for any product other than MS1819. The
Company will recognize the expense related to these milestones when
the milestones become probable.
Note 14 - Interest Expense
During
the years ended December 31, 2019, the Company incurred $433,939 of
interest expense, including amortization of debt discount of
$425,907 and miscellaneous interest expense of $8,032.
During
the years ended December 31, 2018, the Company incurred $101,846 of
interest expense, including amortization of debt discount of
$97,837 and miscellaneous interest expense of $4,010.
Note
15 - Agreements
Mayoly Agreement
During
the years ended December 31, 2019 and 2018, the Company charged
$403,020 and $621,724, respectively, to Mayoly under the JDLA that
was in effect during both periods.
On
March 27, 2019, the Company entered into the Mayoly APA pursuant to
which the Company assumed the JDLA and purchased substantially all
remaining rights, title and interest in and to MS1819 (see
“Recent Developments” above).
INRA Agreement
In
February 2006, Mayoly and INRA TRANSFERT, on behalf of INRA and
CNRS (French government research centers), entered into a Usage and
Cross-Licensing Agreement granting Mayoly exclusive worldwide
rights to exploit Yarrowia
lipolytica and other lipase proteins based on their patents
for use in humans. The INRA Agreement provides for the payment by
Mayoly of royalties on net sales, subject to Mayoly’s right
to terminate such obligation upon the payment of a lump sum
specified in the agreement. Upon execution of the Mayoly APA, all
rights, obligations and interests under the INRA Agreement were
transferred to the Company.
TransChem Sublicense
On
August 7, 2017, the Company entered into a sublicense agreement
with TransChem, pursuant to which TransChem granted the Company an
exclusive license to patents and patent applications relating to
Helicobacter pylori 5’methylthioadenosine nucleosidase
inhibitors (the “TransChem Licensed Patents”) currently held
by TransChem (the “TransChem
Sublicense Agreement”). The Company may terminate the
TransChem Sublicense Agreement and the licenses granted therein for
any reason and without further liability on 60 days’ notice.
Unless terminated earlier, the TransChem Sublicense Agreement will
expire upon the expiration of the last TransChem 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 TransChem Licensed Patents. The Company also
agreed to pay TransChem certain future periodic sublicense
maintenance fees, which fees may be credited against future
royalties. The Company may also be required to pay TransChem
additional payments and royalties in the event certain
performance-based milestones and commercial sales involving the
TransChem Licensed Patents are achieved. The TransChem Licensed
Patents will allow the Company to develop compounds for treating
gastrointestinal and other infections which are specific to
individual bacterial species. H. pylori bacterial infections are a
major cause of chronic gastritis, peptic ulcer disease, gastric
cancer and other diseases. Amounts paid under the TransChem
Sublicense Agreement during the years ended December 31, 2019 and
2018 were $50,000 and $136,880, respectively, and are included in
R&D expense.
On
March 11, 2020, the Company provided TransChem with 60 days’
notice of its intent to terminate the TransChem Sublicense
Agreement.
Employment Agreements
James Sapirstein
Effective October
8, 2019, the Company entered into an employment agreement with Mr.
Sapirstein to serve as its President and Chief Executive Officer
for a term of three years, subject to further renewal upon
agreement of the parties. The employment agreement with Mr.
Sapirstein provides for a base salary of $450,000 per year. In
addition to the base salary, Mr. Sapirstein is eligible to receive
(i) a cash bonus of up to 40% of his base salary on an annual
basis, based on certain milestones that are yet to be determined;
(ii) 1% of net fees received by the Company upon entering into
license agreements with any third-party with respect to any product
current in development or upon the sale of all or substantially all
assets of the Company; (iii) a grant of 200,000 restricted shares
(RSUs) of Common Stock which are subject to vest as follows (a)
100,000 shares upon the first commercial sale of MS1819 in the
U.S., and (b) 100,000 shares upon the total market capitalization
of the Company exceeding $1.0 billion for 20 consecutive trading
days; (iv) a grant of 300,000 10-year stock options to purchase
shares of Common Stock with a strike price equal to $0.52 per
share, which are subject to vest as follows (a) 50,000 shares upon
the Company initiating its next Phase II clinical trial in the U.S.
for MS1819, (b) 50,000 shares upon the Company completing its next
or subsequent Phase II clinical trial in the U.S. for MS1819, (c)
100,000 shares upon the Company initiating a Phase III clinical
trial in the U.S. for MS1819, and (d) 100,000 shares upon the
Company initiating a Phase I clinical trial in the U.S. for any
product other than MS1819. Mr. Sapirstein is entitled to receive 20
days of paid vacation, participate in full employee health benefits
and receive reimbursement for all reasonable expenses incurred in
connection with his services to the Company.
In the
event that Mr. Sapirstein’s employment is terminated by the
Company for Cause, as defined in his employment agreement, or by
Mr. Sapirstein voluntarily, then he will not be entitled to receive
any payments beyond amounts already earned, and any unvested equity
awards will terminate. In the event that Mr. Sapirstein’s
employment is terminated as a result of an Involuntary Termination
Other than for Cause, as defined in his employment agreement, Mr.
Sapirstein will be entitled to receive the following compensation:
(i) severance in the form of continuation of his salary (at the
Base Salary rate in effect at the time of termination, but prior to
any reduction triggering Good Reason) for a period of 12 months
following the termination date; (ii) payment of Executive’s
premiums to cover COBRA for a period of 12 months following the
termination date; and (iii) a prorated annual bonus.
Daniel Schneiderman
Effective January
2, 2020, the Company entered into an employment agreement with Mr.
Schneiderman to serve as the Company’s Chief Financial
Officer for a term of three years, subject to further renewal upon
agreement of the parties. The employment agreement with Mr.
Schneiderman provides for a base salary of $285,000 per year. In
addition to the base salary, Mr. Schneiderman is eligible to
receive (a) an annual milestone cash bonus based on certain
milestones that will be established by the Company’s Board or
the Compensation Committee, and (b) a grant of stock options to
purchase 335,006 shares of Common Stock with a strike price of
$1.03 per share, which shall vest in three equal portions on each
anniversary date of the Effective Date commencing on the first
anniversary date of the agreement. Mr. Schneiderman is
entitled to receive 20 days of paid vacation, participate in full
employee health benefits and receive reimbursement for all
reasonable expenses incurred in connection with his service to the
Company. The Company may terminate Mr. Schneiderman’s
employment agreement at any time, with or without Cause, as such
term is defined in his employment agreement.
In the
event that Mr. Schneiderman’s employment is terminated by the
Company for Cause, as defined in his employment agreement, or by
Mr. Schneiderman voluntarily, then he will not be entitled to
receive any payments beyond amounts already earned, and any
unvested equity awards will terminate. If the Company terminates
his employment agreement without Cause, not in connection with a
Change of Control, as such term is defined in his employment
agreement, Mr. Schneiderman will be entitled to (i) all salary owed
through the date of termination; (ii) any unpaid annual milestone
bonus; (iii) severance in the form of continuation of his
salary for the greater of a period of 6 months following the
termination date or the remaining term of the employment agreement;
(iv) payment of premiums to cover COBRA for a period of 6 months
following the termination date; (v) a prorated annual bonus equal
to the target annual milestone bonus, if any, for the year of
termination multiplied by the formula set forth in the agreement.
If the Company terminates his employment agreement without Cause,
in connection with a Change of Control, as such term is defined in
his employment agreement, Mr. Schneiderman will be entitled to the
above and immediate accelerated vesting of any unvested options or
other unvested awards.
Dr. James E. Pennington
Effective May 28,
2018, the Company entered into an employment agreement with Mr.
Pennington to serve as its Chief Medical Officer. The employment
agreement with Dr. Pennington provides for a base annual salary of
$250,000. In addition to his salary, Dr. Pennington is eligible to
receive an annual milestone bonus, awarded at the sole discretion
of the Board based on his attainment of certain financial, clinical
development, and/or business milestones established annually by the
Board or Compensation Committee. The Company may terminate Mr.
Pennington’s employment agreement at any time, with or
without Cause, as such term is defined in his employment agreement.
In the event of termination by the Company other than for Cause,
Dr. Pennington is entitled to three months’ severance payable
over such period. In the event of termination by the Company other
than for Cause in connection with a Change of Control as such term
is defined in his employment agreement, Dr. Pennington will receive
six months’ severance payable over such period.
On June
28, 2018, Mr. Pennington was granted stock options to purchase
75,000 shares of Common Stock with a strike price equal to $3.04
per share, issuable pursuant to the 2014 Plan, subject to vesting
conditions as follows: (i) 50% upon U.S. acceptance of an IND for
MS1819, and (ii) 50% upon the first CF patient dosed with MS1819
anywhere in the world.
On June
13, 2019, Mr. Pennington was granted stock options to purchase
110,000 shares of Common Stock with a strike price equal to $1.75
per share, issuable pursuant to the 2014 Plan, that vest upon the
completion of enrollment of the next MS1819 clinical trial in the
U.S. for CF (the OPTION 2 Trial).
On June
13, 2019, the Board approved and accrued an incentive bonus in the
amount of $75,000, which was paid during the year ended December
31, 2019.
Johan (Thijs) Spoor
On
January 3, 2016, the Company entered into an employment agreement
with its former President and Chief Executive Officer, Johan Spoor.
The employment agreement provided for a term expiring January 2,
2019. Although Mr. Spoor’s employment agreement has expired,
he remained employed as the Company’s President and Chief
Executive Officer under the terms of his prior employment agreement
through his resignation as the Company’s President and Chief
Executive Officer effective October 8, 2019. Mr. Spoor continues to
serve as a director on the Board of the Company.
The
employment agreement with Mr. Spoor provided for a base salary of
$425,000 per year. At the sole discretion of the Board or the
Compensation Committee of the Board, following each calendar year
of employment, Mr. Spoor was eligible to receive an additional cash
bonus based on his attainment of certain financial, clinical
development, and/or business milestones to be established annually
by the Board or the Compensation Committee.
Mr.
Spoor was originally entitled to 10-year stock options to purchase
380,000 shares of Common Stock, pursuant to the 2014 Plan. During
the year ended December 31, 2017, stock options to purchase 100,000
shares of Common Stock with a strike price of $4.48 per share with
a grant date fair value of $386,900 were granted and
vested.
On
September 29, 2017, Mr. Spoor was granted 100,000 shares of
restricted Common Stock subject to milestone-based vesting, in
satisfaction of the Company’s obligation to issue the
additional 280,000 options to Mr. Spoor described above, with an
estimated grant date fair value of $425,000. During the year ended
December 31, 2018, all 100,000 shares of restricted Common Stock
vested. These stock options were cancelled as a result of Mr.
Spoor’s resignation.
On June
28, 2018, Mr. Spoor was granted and accrued 100,000 shares of
restricted Common Stock subject to milestone-based vesting. During
the year ended December 31, 2018, 33,333 of these shares of
restricted Common Stock vested. During the year ended December 31,
2019, 66,667 of these shares of restricted Common Stock
vested.
On June
28, 2018, Mr. Spoor was granted 100,000 shares of restricted Common
Stock subject to time-based vesting over three years. During the
year ended December 31, 2018, 8,333 shares of restricted Common
Stock vested. During the year ended December 31, 2019, 33,334
shares of restricted Common Stock vested. The 58,333 unvested
shares of restricted Common Stock were forfeited upon Mr.
Spoor’s resignation.
On June
28, 2018, the Board approved and accrued an incentive bonus in the
amount of $212,500, which was paid during the year ended December
31, 2018.
On June
13, 2019, Mr. Spoor was granted stock options to purchase 150,000
shares of Common Stock, subject to milestone-based vesting, with a
strike price of $1.75 per share. These unvested stock options were
cancelled as a result of Mr. Spoor’s
resignation.
On June
29, 2019, the Company accrued an incentive bonus in the amount of
$255,000. Subsequent to Mr. Spoor’s resignation, the
Compensation Committee reviewed the accrued bonus and determined
that such amount was not owed by the Company, which determination
is being challenged by Mr. Spoor.
Mr.
Spoor received no additional or severance compensation and all
unvested stock options and shares of restricted Common Stock
granted to Mr. Spoor were cancelled as a result of Mr.
Spoor’s resignation. There are 241,667 earned and unissued
shares of restricted Common Stock due to Mr. Spoor.
Maged Shenouda
On
September 26, 2017, the Company entered into an employment
agreement with Maged Shenouda, pursuant to which Mr. Shenouda
served as the Company’s Chief Financial Officer.
Mr.
Shenouda’s employment agreement provided for the issuance of
stock options to purchase 100,000 shares of Common Stock, pursuant
to the 2014 Plan, with a strike price of $4.39 per share and a term
of ten years. These stock options vested as follows so long as Mr.
Shenouda served 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.
During the year ended December 31, 2018, these stock options
vested.
On June
28, 2018, Mr. Shenouda was granted stock options to purchase
100,000 shares of Common Stock, pursuant to the 2014 Plan, with a
strike price of $3.04 per share and a term of five years, subject
to vesting conditions as follows: (i) 50% upon U.S. acceptance of
an IND for MS1819, and (ii) 50% upon the first CF patient doses
with MS1819 anywhere in the world.
During
the year ended December 31, 2018, stock options to purchase 50,000
shares of Common Stock, pursuant to the 2014 Plan, vested and
approximately $103,650 was recognized and expensed as stock-based
compensation. During the year ended December 31, 2019, stock
options to purchase 50,000 shares of Common Stock vested due to the
first dosing of CF patients with MS1819 anywhere in the world and
approximately $103,650 was recognized and expensed as stock-based
compensation.
On June
28, 2018, the Board approved and accrued an incentive bonus in the
amount of $82,500, which was paid during the year ended December
31, 2018.
On June
13, 2019, Mr. Shenouda was granted stock options to purchase
100,000 shares of Common Stock, pursuant to the 2014 Plan, with a
strike price of $1.75 per share and a term of five years, that vest
upon the completion of enrollment of the next trial of MS 1819 in
the U.S. These unvested stock options were cancelled as a result of
Mr. Shenouda’s resignation.
On June
28, 2019, the Compensation Committee approved the accrual of an
incentive bonus in the amount of $100,000. Subsequent to Mr.
Shenouda’s resignation, the Compensation Committee reviewed
the accrued bonus and determined that such amount was not owed, and
the Company reversed the accrual in the quarter ended December 31,
2019.
Mr.
Shenouda resigned from his position as the Company’s Chief
Financial Officer effective November 30, 2019. Mr. Shenouda
received no additional or severance compensation and all unvested
stock options and shares of restricted Common Stock granted to Mr.
Shenouda were cancelled as a result of Mr. Shenouda’s
resignation. Mr. Shenouda has a period of twelve months following
his resignation to exercise all vested stock options.
Note
16 - Leases
The
Company adopted ASU 2016-02, Leases, as of January 1, 2019, using
the modified retrospective approach. Prior year financial
statements were not recast under the new standard.
The
Company leases its office and research facilities under operating
leases which are subject to various rent provisions and escalation
clauses expiring at various dates through 2020. The escalation
clauses are indeterminable and considered not material and have
been excluded from minimum future annual rental
payments.
For the
years ended December 31, 2019 and 2018, lease expense amounted to
$198,061 and $147,051, respectively.
The
weighted-average remaining lease term and weighted-average discount
rate under operating leases at December 31, 2019 were:
|
|
|
|
Lease term and discount rate
|
|
Weighted-average
remaining lease term
|
|
Weighted-average
discount rate
|
6.0%
|
Maturities of
operating lease liabilities at December 31, 2019 were as
follows:
2020
|
87,008
|
Total
lease payments
|
87,008
|
Less
imputed interest
|
(3,773)
|
Present
value of lease liabilities
|
$83,235
|
Note
17 - 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 December 31, 2019 and 2018, the Company had no tax
provision for either jurisdictions.
At
December 31, 2019 and 2018, the Company had gross deferred tax
assets of approximately $16,372,000 and $12,490,000, respectively.
As the Company cannot determine that it is more likely than not
that the Company will realize the benefit of the deferred tax
asset, a valuation allowance of approximately $16,372,000 and
$12,490,000, respectively, has been established at December 31,
2019 and 2018. The change in the valuation allowance in 2019 and
2018 was $3,882,000 and $2,572,000, respectively.
As of
December 31, 2019, and 2018, the significant components of the
Company’s net deferred tax assets consisted of:
|
|
|
|
|
|
Gross
deferred tax assets:
|
|
|
Net
operating loss carry-forwards
|
$16,197,000
|
$12,019,000
|
Temporary
differences:
|
|
|
Stock
compensation
|
199,000
|
303,000
|
Accruals
|
136,000
|
124,000
|
Other
|
131,000
|
44,000
|
Amortization
|
(291,000)
|
-
|
Deferred
tax asset valuation allowance
|
(16,372,000)
|
(12,490,000)
|
Net
deferred tax asset
|
$-
|
$-
|
Income
taxes computed using the federal statutory income tax rate differs
from the Company’s effective tax rate primarily due to the
following:
|
|
|
|
|
|
Income
taxes benefit (expense) at statutory rate
|
21%
|
21%
|
State
income tax
|
14%
|
14%
|
Non-deductible
expense
|
(5%)
|
(6%)
|
Change
in valuation allowance
|
(30%)
|
(29%)
|
|
0%
|
0%
|
At
December 31, 2019, the Company has gross net operating loss
(“NOL”)
carryforwards for U.S. federal and state income tax purposes of
approximately $29,320,000 and $27,764,000, respectively. The
NOL’s expire between the years 2034 and 2039. The
Company’s ability to use its NOL carryforwards may be limited
if it experiences an “ownership change” as defined in
Section 382 (“Section
382”) of the Internal Revenue Code of 1986, as
amended. An ownership change generally occurs if certain
stockholders increase their aggregate percentage ownership of a
corporation’s stock by more than 50 percentage points over
their lowest percentage ownership at any time during the testing
period, which is generally the three-year period preceding any
potential ownership change.
At
December 31, 2019 and 2018, the Company had approximately
$19,475,000 and $15,406,000, respectively, in net operating losses
which it can carryforward indefinitely to offset against future
French income.
At
December 31, 2019 and 2018, the Company had taken no uncertain tax
positions that would require disclosure under ASC 740, Accounting
for Income Taxes.
Note
18 - Net Loss per Common Share
Basic
net loss per share is computed by dividing net loss available to
Common Stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflect,
in periods in which they have a dilutive effect, the impact of
common shares issuable upon exercise of stock options and warrants
and conversion of convertible debt that are not deemed to be
anti-dilutive. The dilutive effect of the outstanding stock options
and warrants is computed using the treasury stock
method.
At
December 31, 2019, diluted net loss per share did not include the
effect of 3,671,055 shares of Common Stock issuable upon the
conversion of convertible debt, 5,378,288 shares of Common Stock
issuable upon the exercise of outstanding warrants, 632,667 shares
of restricted stock not yet issued, and 1,677,500 shares of Common
Stock issuable upon the exercise of outstanding options as their
effect would be antidilutive during the periods prior to
conversion.
At
December 31, 2018, diluted net loss per share did not include the
effect of 3,112,715 shares of Common Stock issuable upon the
exercise of outstanding warrants, 416,000 shares of restricted
stock not yet issued, and 994,000 shares of Common Stock issuable
upon the exercise of outstanding options as their effect would be
antidilutive during the periods prior to conversion.
Note
19 - Related Party Transactions
Johan (Thijs) Spoor
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 former Chief Executive
Officer and President, as a consultant for business strategy,
financial modeling, and fundraising. Included in accounts payable
at December 31, 2019 and 2018, is $348,400 and $478,400,
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. On October 8, 2019, Mr.
Spoor resigned as Chief Executive Officer and President of the
Company.
On June
29, 2019, the Company accrued an incentive bonus in the amount of
$255,000 payable to Mr. Spoor. Subsequent to Mr. Spoor’s
resignation, the Compensation Committee reviewed the accrued bonus
and determined that such amount was not owed, which determination
is being challenged by Mr. Spoor. As a result of management’s
determination, the Company reversed the accrual in the quarter
ended December 31, 2019.
In
addition, Mr. Spoor is entitled to
241,667 shares of restricted Common Stock with a grant date fair
value of $855,668 that have not been issued. Management is
currently negotiating with Mr. Spoor regarding the amounts, if any,
that should be paid to Mr. Spoor relating to payments due to JIST,
any bonus payable, as well as the equity awards due to Mr.
Spoor.
Maged Shenouda
From
October 1, 2016 until his appointment as the Company’s Chief
Financial Officer on September 25, 2017, the Company employed the
services of Maged Shenouda as a financial consultant. Included in
accounts payable at December 31, 2019 and 2018 is $10,000 and
$50,000, respectively, for Mr. Shenouda’s services. On
November 1, 2019, Mr. Shenouda submitted his resignation as Chief
Financial Officer of the Company, effective November 30,
2019.
On June
29, 2019, the Company accrued an incentive bonus in the amount of
$100,000 payable to Mr. Shenouda. Subsequent to Mr.
Shenouda’s resignation, the Compensation Committee reviewed
the accrued bonus and determined that such amount should not be
paid, and the Company reversed the accrual in the quarter ended
December 31, 2019.
Christine Rigby-Hutton
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 December 31, 2019 and 2018 is $38,453 for RHMS for
Ms. Rigby-Hutton’s services.
Note 20 - Employee Benefit Plans
401(k) Plan
The
Company sponsors a multiple employer defined contribution benefit
plan, which complies with Section 401(k) of the Internal Revenue
Code covering substantially all employees of the
Company.
All
employees are eligible to participate in the plan. Employees may
contribute from 1% to 100% of their compensation and the Company
matches an amount equal to 100% on the first 6% of the employee
contribution and may also make discretionary profit-sharing
contributions.
Employer
contributions under this 401(k) plan amounted to $63,109 and
$40,901 for the years ended December 31, 2019 and 2018,
respectively.
Note 21 – Subsequent Events
Coronavirus Disease (COVID-19)
Beginning around
January 2020, the COVID-19 outbreak originating in Wuhan, China
has spread globally and may
impact the Company’s operations and delay current and
planned clinical trial operations in Europe and the U.S.,
including, but not limited to clinical trial recruitment and
participation. Given the uncertainty of the situation, the duration
of the business disruption and related financial impact cannot be
reasonably estimated at this time. The impact of COVID-19 is
evolving rapidly and its future effects are uncertain, management
is responding to this crisis and anticipates the need to secure
additional financing in response to any potential disruptions or
delays due to the COVID-19 outbreak.
Termination of TransChem License Agreement
On
March 11, 2020, the Company provided TransChem with sixty (60) days
prior written notice of its intent to terminate the TransChem
Sublicense Agreement and the licenses granted
thereunder.
Issuance of shares of Common Stock to Settle Accounts
Payable
Effective March 11,
2020, The Company issued its outside Board members an aggregate of
105,937 shares of Common Stock for the settlement of accounts
payable in the aggregate amount of $131,149. The aggregate
effective settlement price was $1.24 per share, and each individual
stock issuance was based on the closing stock price of the Common
Stock on the initial date the payable was accrued.
Benefit of French Tax Credit Received
On
March 2, 2020, the Company announced that it has benefited from
certain tax credits applicable to French technology companies
through its wholly-owned subsidiary, AzurRx SAS resulting in a
credit of over 1 million Euros in the French Crédit
d’impôt Recherche ("CIR"), a French tax credit aimed at
stimulating research activities.
LPC Equity Line of Credit
In
February 2020, the Company issued 150,000 shares of Common Stock in
connection with the LPC Purchase Agreement, resulting in gross
proceeds to the Company of $144,000.
Continued Nasdaq Listing
On March 23, 2020, the Company received a letter
from the Listing Qualifications Staff of The Nasdaq Stock Market,
LLC ("Nasdaq") indicating that, based upon the closing bid
price of the Company's Common Stock for the last 30 consecutive
business days, the Company is not currently in compliance with the
requirement to maintain a minimum bid price of $1.00 per share for
continued listing on the Nasdaq Capital Market, as set forth in
Nasdaq Listing Rule 5550(a)(2) (the "Notice").
The
Notice has no immediate effect on the continued listing status of
the Company's Common Stock on the Nasdaq Capital Market, and,
therefore, the Company's listing remains fully
effective.
The
Company will continue to monitor the closing bid price of its
Common Stock and seek to regain compliance with all applicable
Nasdaq requirements within the allotted compliance periods. To
regain compliance, the closing bid price of the Company's Common
Stock must be at least $1.00 per share for 10 consecutive business
days at some point during the period of 180 calendar days from the
date of the Notice, or until September 21, 2020. If the Company
does not regain compliance with the minimum bid price requirement
by September 21, 2020, Nasdaq may grant the Company a second period
of 180 calendar days to regain compliance. To qualify for this
additional compliance period, the Company would be required to meet
the continued listing requirement for market value of publicly held
shares and all other initial listing standards for the Nasdaq
Capital Market, other than the minimum bid price requirement. In
addition, the Company would also be required to notify Nasdaq of
its intent to cure the minimum bid price deficiency. If the Company
does not regain compliance within the allotted compliance periods,
including any extensions that may be granted by Nasdaq, Nasdaq will
provide notice that the Company's Common Stock will be subject to
delisting. The Company would then be entitled to appeal that
determination to a Nasdaq hearings panel. There can be no assurance
that the Company will regain compliance with the minimum bid price
requirement during the 180-day compliance period, secure a second
period of 180 days to regain compliance, or maintain compliance
with the other Nasdaq listing requirements.
January 2020 Closings of the Promissory Note Offering
On
January 2, 2020, January 3, 2020, and January 9, 2020, the Company
issued the Note Investors Promissory Notes in the aggregate
principal amount of $3,517,700 and Note Warrants to purchase an
aggregate of 1,813,257 shares of Common Stock for total net
proceeds of $3,240,930.
In
connection with the three closings in January 2020 of the
Promissory Note
Offering, the Company paid aggregate placement agent fees of
$276,770, which fees were based on (i) 9% of the aggregate
principal amount of the Promissory Notes issued to the Note
Investors introduced by the placement agent, and (ii) a
non-accountable expense allowance of 1% of the gross proceeds from
the Promissory Note
Offering. In addition, the Company issued Placement Agent Warrants
to purchase an aggregate of 199,732 shares of Common
Stock.
On
January 9, 2020, the Company concluded the Promissory Note
Offering. In aggregate, the Company issued the Note Investors
Promissory Notes in the aggregate principal amount of $6,904,000
and Note Warrants to purchase an aggregate of 3,558,795 shares of
Common Stock for total net proceeds of $6,234,600. Additionally,
the Company issued Placement Agent Warrants to purchase an
aggregate of 444,108 shares of Common Stock.
On
January 2, 2020, the Company repaid the remaining principal balance
of $450,000 plus outstanding accrued interest of $104,153 on the
ADEC Notes.