Note 1 - The Company
and Basis of Presentation
Description of Business
AzurRx BioPharma, Inc. (“AzurRx” or “Parent”) was incorporated on January 30, 2014 in
the State of Delaware. In June 2014, AzurRx acquired 100% of the
issued and outstanding capital stock of AzurRx SAS (formerly,
ProteaBio Europe SAS), a company incorporated in October 2008 under
the laws of France. AzurRx and its wholly-owned subsidiary, AzurRx
SAS (“ABS”), are collectively referred to as the
“Company.”
The Company is engaged in the research and development of
non-systemic biologics for the treatment of patients with
gastrointestinal disorders. Non-systemic biologics are
non-absorbable drugs that act locally, i.e. the intestinal lumen,
skin or mucosa, without reaching an individual’s systemic
circulation.
The Company is currently focused on developing its lead drug
candidate, MS1819, a yeast derived recombinant lipase for
the treatment of exocrine pancreatic insufficiency
(“EPI”)
associated with cystic fibrosis (“CF”) and chronic pancreatitis
(“CP”).
MS1819, supplied as an oral
non-systemic biologic capsule, is derived from
the Yarrowia
lipolytica yeast lipase
and breaks up fat molecules in the digestive tract of EPI patients
so that they can be absorbed as nutrients. Unlike the standard of
care, the MS1819 synthetic lipase does not contain any animal
products.
The
Company is currently conducting two
Phase 2 clinical trials of MS1819: the OPTION 2 monotherapy trial
in the U.S. and Europe, and the Combination therapy trial in
Europe, consisting of MS1819 in conjunction with porcine-derived
pancreatic enzyme replacement therapy, the current standard of
care.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited interim consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States of America
(“U.S. GAAP”). In our opinion, the accompanying
unaudited interim consolidated financial statements include all
adjustments, consisting of normal recurring adjustments, which are
necessary to present fairly our financial position, results of
operations, and cash flows. The consolidated balance sheet at
December 31, 2019, has been derived from audited financial
statements of that date. The unaudited interim consolidated results
of operations are not necessarily indicative of the results that
may occur for the full fiscal year. Certain information and
footnote disclosure normally included in financial statements
prepared in accordance with U.S. GAAP have been omitted pursuant to
instructions, rules, and regulations prescribed by the Securities
and Exchange Commission (“SEC”).
The Company believes that the disclosures provided herein are
adequate to make the information presented not misleading when
these unaudited interim consolidated financial statements are read
in conjunction with the audited financial statements and notes
previously distributed in our Annual Report Form 10-K for the year
ended December 31, 2019, filed with the SEC on March 30,
2020.
The
unaudited interim consolidated financial statements include the
accounts of AzurRx and its wholly-owned subsidiary, AzurRx SAS.
Intercompany transactions and balances have been eliminated upon
consolidation.
Going Concern Uncertainty
The accompanying unaudited interim consolidated financial
statements have been prepared as if the Company will continue as a
going concern. The Company has incurred significant operating
losses and negative cash flows from operations since inception and
had an accumulated deficit of approximately $78.0 million at
September 30, 2020. The Company is dependent on obtaining, and
continues to pursue, additional working capital funding from the
sale of securities and debt in order to continue to execute its
development plan and continue operations. Without adequate working
capital, the Company may not be able to meet its obligations and
continue as a going concern. These conditions raise substantial
doubt about our ability to continue as a going concern. The
financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Our primary sources of liquidity come from capital raises
through additional equity and/or debt financings. This may be impacted by the novel
coronavirus ("COVID-19")
pandemic, which is evolving and could
negatively impact our ability to raise additional capital in the
future.
Note 2 - Significant Accounting Policies and Recent Accounting
Pronouncements
Use of Estimates
The
accompanying unaudited consolidated financial statements are
prepared in conformity with U.S. GAAP and include certain estimates
and assumptions which affect the reported amounts of assets and
liabilities at the date of the financial statements (including
goodwill, intangible assets and contingent consideration), and the
reported amounts of revenues and expenses during the reporting
period, including contingencies. Accordingly, actual results may
differ from those estimates.
Cash and Cash Equivalents
The
Company considers all highly liquid investments with maturities of
three months or less from date of purchase to be cash equivalents.
All cash balances were highly liquid at September 30, 2020 and
December 31, 2019, respectively.
Concentrations of Credit Risk
Financial
instruments that potentially expose the Company to concentrations
of credit risk consist of cash. The Company primarily maintains its
cash balances with financial institutions in federally insured
accounts in the U.S. The Company may from time to time have cash in
banks in excess of FDIC insurance limits. At September 30, 2020 and
December 31, 2019, the Company had approximately $11.1 million and
$0, respectively, in one account in the U.S. in excess of these
limits. The Company has not experienced any losses to date
resulting from this practice. The Company mitigates its risk by
maintaining the majority of its cash and cash equivalents with high
quality financial institutions.
The
Company also has exposure to foreign currency risk as its
subsidiary in France has a functional currency in
Euros.
Debt Instruments
Detachable warrants issued in conjunction with debt are measured at
their relative fair value, if they are determined to be equity
instrument, or their fair value, if they are determined to be
liability instruments, and recorded as a debt
discount. Conversion features that are in the money at
the commitment date constitute a beneficial conversion feature that
is measured at its intrinsic value and recognized as debt discount.
Debt discount is amortized as interest expense over the maturity
period of the debt using the effective interest method. Contingent
beneficial conversion features are recognized when the contingency
has been resolved.
Debt Issuance Costs
Debt issuance costs are recorded as a direct reduction of the
carrying amount of the related debt. Debt issuance costs are
amortized over the maturity period of the related debt instrument
using the effective interest method.
Equity-Based Payments to Non-Employees
Equity-based
payments to non-employees are measured at fair value on the grant
date per ASU No. 2018-07, Improvements to Nonemployee Share-Based
Payment Accounting.
Fair Value Measurements
The
Company follows Accounting Standards Codification (“ASC”) Topic 820-10, Fair
Value Measurements and Disclosures (“ASC 820”), which among
other things, defines fair value, establishes a consistent
framework for measuring fair value and expands disclosure for each
major asset and liability category measured at fair value on either
a recurring or nonrecurring basis. Fair value is an exit price,
representing the amount that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants. As such, fair value is a market-based
measurement that should be determined based on assumptions that
market participants would use in pricing an asset or
liability.
As a
basis for considering such assumptions, a three-tier fair value
hierarchy has been established, which prioritizes the inputs used
in measuring fair value as follows:
Level
1: Observable inputs such as quoted prices (unadjusted) in active
markets for identical assets or liabilities;
Level
2: Inputs, other than the quoted prices in active markets, that are
observable either directly or indirectly; and
Level
3: Unobservable inputs in which there is little or no market data,
which require the reporting entity to develop its own assumptions,
which reflect those that a market participant would
use.
In
certain cases, the inputs used to measure fair value may fall into
different levels of the fair value hierarchy. In such cases, an
instrument’s level within the fair value hierarchy is based
on the lowest level of input that is significant to the overall
fair value measurement. The Company’s assessment of the
significance of a particular input to the fair value measurement in
its entirety requires judgment and considers factors specific to
the financial instrument.
The
Company recognizes transfers between levels as if the transfers
occurred on the last day of the reporting period.
Foreign Currency Translation
For
foreign subsidiaries with operations denominated in a foreign
currency, assets and liabilities are translated to U.S. dollars,
which is the functional currency, at period end exchange rates.
Income and expense items are translated at average rates of
exchange prevailing during the periods presented. Gains and losses
from translation adjustments are accumulated in a separate
component of stockholders’ equity.
Goodwill and Intangible Assets
Goodwill
represents the excess of the purchase price of the acquired
business over the fair value of amounts assigned to assets acquired
and liabilities assumed. Goodwill and other intangible assets with
indefinite useful lives are reviewed for impairment annually or
more frequently if events or circumstances indicate impairment may
be present. Any excess in carrying value over the estimated fair
value is charged to results of operations. The Company has not
recognized any impairment charges through September 30,
2020.
Intangible assets subject to amortization consist of in process
research and development, license agreements, and patents reported
at the fair value at date of the acquisition less accumulated
amortization. Amortization expense is provided using the
straight-line method over the estimated useful lives of the assets
as follows:
Patents
7.2 years
In
Process Research &
Development
12 years
License
Agreements
5 years
Impairment of Long-Lived Assets
The
Company periodically evaluates its long-lived assets for potential
impairment in accordance with ASC Topic 360, Property, Plant and
Equipment (“ASC
360”). Potential impairment is assessed when there is
evidence that events or changes in circumstances indicate that the
carrying amount of an asset may not be recovered. Recoverability of
these assets is assessed based on undiscounted expected future cash
flows from the assets, considering a number of factors, including
past operating results, budgets and economic projections, market
trends and product development cycles. If impairments are
identified, assets are written down to their estimated fair value.
The Company has not recognized any impairment charges through
September 30, 2020.
Income Taxes
Income
taxes are recorded in accordance with ASC 740, Accounting for
Income Taxes (“ASC
740”), which provides for deferred taxes using an
asset and liability approach. The Company recognizes deferred tax
assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax
returns. The Company determines its deferred tax assets and
liabilities based on differences between financial reporting and
tax bases of assets and liabilities, which are measured using the
enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Valuation allowances are
provided if, based upon the weight of available evidence, it is
more likely than not that some or all of the deferred tax assets
will not be realized.
The
Company accounts for uncertain tax positions in accordance with the
provisions of ASC 740. When uncertain tax positions exist, the
Company recognizes the tax benefit of tax positions to the extent
that the benefit will more likely than not be realized. The
determination as to whether the tax benefit will more likely than
not be realized is based upon the technical merits of the tax
position as well as consideration of the available facts and
circumstances. At September 30, 2020 and December 31, 2019, the
Company does not have any significant uncertain tax positions. All
tax years are still open for audit.
Leases
Effective
January 1, 2019, the Company adopted Accounting Standards Update
(“ASU”) No.
2016-02, “Leases.” This ASU requires substantially all
leases be recorded on the balance sheet as right of use assets and
lease obligations. The Company adopted the ASU using a modified
retrospective adoption method at January 1, 2019, as outlined in
ASU No. 2018-11, “Leases - Targeted Improvements.”
Under this method of adoption, there is no impact to the
comparative condensed consolidated statements of operations and
condensed consolidated balance sheets. The Company determined that
there was no cumulative-effect adjustment to beginning retained
earnings on the consolidated balance sheet. In addition, the
Company elected the package of practical expedients permitted under
the transition guidance within the new standard, which among other
things, allowed carryforward of historical lease classifications.
Adoption of this standard did not materially impact the
Company’s results of operations and had no impact on the
consolidated statements of cash flows.
Research and Development
Research
and development (“R&D”) costs are charged to
operations when incurred and are included in operating expense.
R&D costs consist principally of compensation of employees and
consultants that perform the Company’s research and
development and clinical activities, the fees paid to maintain the
Company’s licenses, and the payments to third parties for
manufacturing drug supply and clinical trials, laboratory and other
supply expenses 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 (the “2014
Plan”) which took effect on May 12, 2014, and the 2020
Omnibus Equity Incentive Plan, which took effect on September 11,
2020 (the “2020
Plan”). From the effective date of the 2020 Plan, no
new awards have been or will be made under the 2014 Plan. The
Company accounts for its stock-based compensation awards to
employees and Board members in accordance with ASC Topic 718,
Compensation—Stock Compensation (“ASC 718”). ASC 718 requires all
stock-based payments to employees and Board members, including
grants of employee stock options, to be recognized in the
statements of operations by measuring the fair value of the award
on the date of grant and recognizing this fair value as stock-based
compensation using a straight-line method over the requisite
service period, generally the vesting period.
For
awards with performance conditions that affect their vesting, such
as the occurrence of certain transactions or the achievement of
certain operating or financial milestones, recognition of fair
value of the award occurs when vesting becomes
probable.
The
Company estimates the grant date fair value of stock option awards
using the Black-Scholes option-pricing model. The use of the
Black-Scholes option-pricing model requires management to make
assumptions with respect to the expected term of the option, the
expected volatility of the Common Stock consistent with the
expected life of the option, risk-free interest rates and expected
dividend yields of the Common Stock.
Sublicense Agreement
As more
fully discussed in Note 14, the Company entered into a sublicense
agreement with TransChem, Inc. (“TransChem”), pursuant to which
TransChem granted the Company an exclusive license to certain
patents and patent applications. Any payments made to TransChem in
connection with this sublicense agreement are recorded as R&D
expense.
Subsequent Events
The
Company considered events or transactions occurring after the
balance sheet date but prior to the date the consolidated financial
statements are available to be issued for potential recognition or
disclosure in its consolidated financial statements.
Recent Accounting Pronouncements
In
January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill
and Other, Simplifying the Accounting for Goodwill Impairment. ASU
2017-04 removes Step 2 of the goodwill impairment test, which
requires a hypothetical purchase price allocation. A goodwill
impairment will now be the amount by which a reporting unit’s
carrying value exceeds its fair value, not to exceed the carrying
amount of goodwill. All other goodwill impairment guidance will
remain largely unchanged. Entities will continue to have the option
to perform a qualitative assessment to determine if a quantitative
impairment test is necessary. This new guidance will be applied
prospectively and is effective for annual or any interim goodwill
impairment tests in fiscal years beginning after December 15, 2019.
This ASU, which the Company adopted as of January 1, 2020, did not
have a material effect on the Company’s consolidated
financial statements.
In
August 2020, the Financial Accounting Standards Board
(“FASB”) issued an accounting pronouncement (ASU
2020-06) related to the measurement and disclosure requirements for
convertible instruments and contracts in an entity's own equity.
The pronouncement simplifies and adds disclosure requirements for
the accounting and measurement of convertible instruments and the
settlement assessment for contracts in an entity's own equity. As a
smaller reporting company, as defined by the SEC, this
pronouncement is effective for fiscal years, and for interim
periods within those fiscal years, beginning after December 15,
2023. The Company is currently evaluating the impact of this ASU on
the financial statements.
Note 3 - Fair Value
Disclosures
Fair
value is the price that would be received from the sale of an asset
or paid to transfer a liability assuming an orderly transaction in
the most advantageous market at the measurement date. U.S. GAAP
establishes a hierarchical disclosure framework that prioritizes
and ranks the level of observability of inputs used in measuring
fair value.
The
fair value of the Company's financial instruments are as
follows:
|
|
|
Fair Value Measured a
Reporting Date Using
|
|
|
|
|
|
|
|
|
|
At
September 30, 2020:
|
|
|
|
|
|
|
Cash
|
$11,368,680
|
|
$11,368,680
|
|
$11,368,680
|
|
Other
receivables
|
$20,688
|
|
$
|
$20,688
|
$20,688
|
|
|
|
|
|
|
|
|
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
September 30, 2020, the fair
value of other receivables approximates carrying value as these
consist primarily of refundable tax credits.
At
December 31, 2019, the fair value of other receivables approximates
carrying value as these consist primarily of French R&D tax
credits that are normally received the following year.
The
fair value of the note payable in connection with the financing of
directors and officer’s liability insurance approximates
carrying value due to the terms of such instruments and applicable
interest rates.
The
convertible debt is based on its fair value less unamortized debt
discount plus accrued interest through the date of reporting (see
Note 9).
Note 4 - Other Receivables
Other
receivables consisted of the following:
|
|
|
|
|
|
|
|
|
R&D
tax credits
|
$-
|
$2,566,281
|
|
Other
|
20,688
|
71,022
|
|
Total
other receivables
|
$20,688
|
$2,637,303
|
At
September 30, 2020, the R&D
tax credits were comprised of a portion of the 2019 refundable tax
credits for research conducted in France.
At
December 31, 2019, the R&D tax credits were comprised of the
2017, 2018, and 2019 refundable tax credits for research conducted
in France. In the nine months ended September 30, 2020, the Company received
both the 2017 and 2018 and partial 2019 refundable tax credits
totaling approximately $2,289,096. At December 31, 2019, Other
consisted of amounts due from U.S. R&D tax
credits.
Note 5 - Property, Equipment and Leasehold
Improvements
Property,
equipment and leasehold improvements consisted of the
following:
|
|
|
|
|
|
|
|
|
Laboratory
equipment
|
$193,661
|
$193,661
|
|
Computer
equipment
|
77,850
|
74,836
|
|
Office
equipment
|
36,703
|
36,703
|
|
Leasehold
improvements
|
29,162
|
35,711
|
|
Total
property, plant and equipment
|
337,376
|
340,911
|
|
Less
accumulated depreciation
|
(283,306)
|
(263,520)
|
|
Property,
plant and equipment, net
|
$54,070
|
$77,391
|
Depreciation
expense for the three months ended September 30, 2020 and 2019 was
$8,188 and $17,220, respectively. Depreciation expense for the nine
months ended September 30, 2020
and 2019 was $26,556 and $51,261, respectively.
For the
three months ended September 30, 2020, $4,881 of depreciation is
included in R&D expense and $3,307 of depreciation is included
in G&A expense. For the nine months ended September 30, 2020,
$14,372 of depreciation is included in R&D expense and $12,184
of depreciation is included in G&A expense.
For the
three months ended September 30, 2019, $11,842 of depreciation has
been reclassified to R&D expense and $5,149 of depreciation
remains in G&A expense. For the nine months ended September 30,
2019, $35,442 of depreciation is included in R&D expense and
$15,343 of depreciation is included in G&A
expense.
Note 6 - Intangible Assets and Goodwill
Patents
Pursuant
to the Mayoly APA entered into on March 27, 2019, in which the
Company purchased all rights, title and interest in and to MS1819
(see Note 14), the Company recorded Patents in the amount of
$3,802,745 as follows:
|
Common
stock issued at signing to Mayoly
|
$1,740,959
|
|
Due
to Mayoly at 12/31/19 - €400,000
|
449,280
|
|
Due
to Mayoly at 12/31/20 - €350,000
|
393,120
|
|
Assumed
Mayoly liabilities and forgiveness of Mayoly debt
|
1,219,386
|
|
|
$3,802,745
|
Intangible
assets are as follows:
|
|
|
|
|
|
|
|
|
Patents
|
$3,802,745
|
$3,802,745
|
|
Less
accumulated amortization
|
(791,322)
|
(395,661)
|
|
Patents,
net
|
$3,011,423
|
$3,407,084
|
Amortization
expense for the three months ended September 30, 2020 and 2019 was
$131,887 and $131,887, respectively. Amortization expense for the
nine months ended September 30, 2020 and 2019 was $395,661 and
$825,063, respectively.
Amortization
expense for the nine months ended September 30, 2019 included
$384,234 from In process
research and development and License agreements written off as a
result of the Mayoly APA.
As of
September 30, 2020, amortization expense related to patents is
expected to be as follows for the next five years (2020 through
2025):
|
2020
(balance of year)
|
$395,661
|
|
2021
|
527,548
|
|
2022
|
527,548
|
|
2023
|
527,548
|
|
2024
|
527,548
|
|
2025
|
527,548
|
Goodwill is as follows:
|
|
|
|
Balance
at January 1, 2019
|
$1,924,830
|
|
Foreign
currency translation
|
(38,144)
|
|
Balance
at December 31, 2019
|
1,886,686
|
|
Foreign
currency translation
|
81,833
|
|
Balance
at September 30, 2020
|
$1,968,519
|
Note 7 - Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses consisted of the
following:
|
|
|
|
|
|
|
|
|
Trade
payables
|
$1,422,066
|
$1,683,505
|
|
Accrued
expenses
|
263,937
|
71,177
|
|
Total
accounts payable and accrued expenses
|
$1,686,003
|
$1,754,682
|
At
September 30, 2020, and December 31, 2019, trade payables included
$0, and $1,683,505, respectively, due to related
parties.
Note 8 - Notes Payable
Directors and Officer’s Liability Insurance
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 September 30, 2020 was $0.
CARES ACT PPP Loan
In
April 2020, the Company applied for and received a CARES Act Paycheck Protection Program
(“PPP”) loan of $179,418 through the Small Business
Administration (SBA). In May 2020, the Company returned the loan of
$179,418 after analysis of the updated guidance from the
U.S. Department of Treasury and the SBA regarding the eligibility
for such loans.
Note 9 – Convertible Notes
ADEC Notes
On
February 14, 2019, the Company entered into a Note Purchase
Agreement (the “ADEC
NPA”) with ADEC Private Equity Investments, LLC
(“ADEC”),
pursuant to which the Company issued to ADEC two Senior Convertible
Notes (“Note A”
and “Note B,”
respectively, each an “ADEC
Note,” and together, the “ADEC Notes”), in the
principal amount of $1,000,000 per ADEC Note, resulting in gross
proceeds to the Company of $2,000,000 (the “ADEC Note Offering”). ADEC is
controlled by a significant stockholder of the
Company.
The
ADEC Notes accrued interest at a rate of 10% per annum; provided,
however, that in the event the Company should elect to repay the
full balance due under the terms of both ADEC Notes prior to
December 31, 2019, then the interest rate would be reduced to 6%
per annum. Interest would be payable at the time all outstanding
principal amounts owed under each ADEC Note were repaid. The ADEC
Notes were scheduled to 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 was 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 could 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 did not alter any other terms of the ADEC
Warrants. The ADEC Warrant Amendment resulted in a debt discount of
$325,320 that was accreted to additional interest expense over the
lives of the ADEC Notes.
In
December 2019, the Company repaid $1,550,000 principal amount of
the ADEC Notes and on January 2, 2020 repaid the remaining
principal balance of $450,000 plus outstanding accrued interest of
$104,153. As of September 30, 2020, no ADEC Notes were
outstanding.
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 Note Investors (the “Promissory NPAs”) (the
“Promissory Note
Offering”).
In
December 2019, the Company issued Promissory Notes to the Note
Investors in the aggregate principal amount of $3,386,300. The
Promissory Notes were scheduled to mature on September 20, 2020,
accrue interest at a rate of 9% per annum, and were 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 could be prepaid by the
Company at any time prior to the maturity date in cash without
penalty or premium (the “Prepayment Option”).
On
January 2, 2020, January 3, 2020, and January 9, 2020, the Company
issued Promissory Notes to the Note Investors in the aggregate
principal amount of $3,517,700.
As
additional consideration for the execution of the Promissory NPA,
each Note Investor also received Note Warrants to purchase that
number of shares of Common Stock equal to one-half (50%) of the
Promissory Note Conversion Shares issuable upon conversion of the
Promissory Notes (the “Note Warrant Shares”). The Note
Warrants have an exercise price of $1.07 per share and expire five
years from the date of issuance. In addition, all of the Note
Warrants, other than those issued in the December 20, 2019 closing
(covering an aggregate of 2,374,345 shares of Common Stock) contain
a provision prohibiting exercise until the expiration of six months
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 Note Warrant Shares, but
that registration statement was not declared effective and was
subsequently withdrawn by the Company. On July 27, 2020, the
Company filed a separate registration statement in connection with
the Series B Private Placement and the Exchange described in Note
11, which also covers the Note Warrant Shares. That registration
statement was declared effective on September 21,
2020.
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 “January
Placement Agent Warrants”), representing 7% of the
Promissory Note Conversion Shares issuable upon conversion of the
Promissory Notes issued to the Note Investors. The January
Placement Agent Warrants expire five years from the date of
issuance. The January Placement Agent Warrants in connection with
the December 2019 closings have an exercise price of $1.21 per
share.
In
connection with the three closings in January 2020 of the
Promissory Note
Offering, the Company paid aggregate placement agent fees of
$276,770, which fees were based on (i) 9% of the aggregate
principal amount of the Promissory Notes issued to the Note
Investors introduced by the placement agent, and (ii) a
non-accountable expense allowance of 1% of the gross proceeds from
the Promissory Note
Offering. In addition, the placement agent was issued January
Placement Agent Warrants, to purchase an aggregate of 199,732
shares of Common Stock. 41,495 of these January Placement Agent
Warrants have an exercise price of $1.21 per share and 158,237 of
these January Placement Agent Warrants have an exercise price of
$1.42 per share.
The
Company determined the Prepayment Option feature represents a
contingent call option. The Company evaluated the Prepayment Option
in accordance with ASC 815-15-25. The Company determined that the
Prepayment Option feature is clearly and closely related to the
debt host instrument and is not an embedded derivative requiring
bifurcation. Additionally, the Company determined the Conversion
Option represents an embedded call option. The Company evaluated
the Conversion Option in accordance with ASC 815-15-25. The Company
determined that the Conversion Option feature meets the scope
exception from ASC 815 and is not an embedded derivative requiring
bifurcation.
The
Company evaluated the Promissory Notes for a beneficial conversion
feature in accordance with ASC 470-20. The Company determined that
at each commitment date the effective conversion price was below
the closing stock price (market value), and the Convertible Notes
contained a beneficial conversion feature.
Pursuant
to the December 2019 closings of the Promissory Note Offering, the
principal amount of $3,386,300 was first allocated based on the
relative fair value of the Promissory Notes and the Note Warrants.
The fair value of the Note Warrants amounted to $912,648. Then the
beneficial conversion feature was calculated, which amounted to
$1,359,284. The Company incurred debt issuance costs of $588,017
related to the offering. The initial carrying value of the
Promissory Notes issued amounted to $526,351.
Pursuant
to the January 2020 closings of the Promissory Note Offering, the
principal amount of $3,517,700 was first allocated based on the
relative fair value of the Promissory Notes and the Note Warrants.
The fair value of the Note Warrants amounted to $2,439,272. Then
the beneficial conversion feature was calculated, which amounted to
$1,838,422. The Company incurred debt issuance costs of $472,326
related to the offering. The initial carrying value of the
Promissory Notes issued amounted to $128,524.
On June
1, 2020, the Company entered into an amendment to a certain
Promissory Note in the principal amount of $100,000 issued on
December 20, 2019 to Edward J. Borkowski, the chairman of the
Board, to increase the Conversion Price to $1.07 per share (the
“Note
Amendment”). The Company
evaluated the Note Amendment transaction in accordance with ASC
470-50 and determined the Note Amendment did not constitute a
substantive modification of the Promissory Note and that the
transaction should be accounted for as a debt modification with no
accounting treatment required.
During
the three months ended September 30, 2020, the Company recognized
$404,222 of interest expense related to these Promissory Notes,
including amortization of debt discount related to the value of the
Note Warrants of $120,165, amortization of the beneficial
conversion feature of $193,555, amortization of debt discount
related to debt issuance costs of $63,264, and accrued interest
expense of $27,238.
During
the nine months ended September 30, 2020, the Company recognized
$4,912,396 of interest expense related to these Promissory Notes,
including amortization of debt discount related to the value of the
Note Warrants of $1,461,728, amortization of the beneficial
conversion feature of $2,347,763, amortization of debt discount
related to debt issuance costs of $771,675, and accrued interest
expense of $332,230.
Exchange of Promissory Notes into Series B Convertible Preferred
Stock
As more
fully discussed in Note 11, on July 16, 2020, in connection with
the Series B Private Placement, 937.004177 shares of Series B
Preferred Stock, Series B Warrants to purchase 4,684,991 shares of
Common Stock, and Exchange Warrants to purchase 1,772,937 shares of
Common Stock were issued to certain holders of the Promissory Notes
in exchange for such Promissory Notes for aggregate consideration
of approximately $7.2 million consisting of approximately $6.9
million aggregate outstanding principal amount, together with
accrued and unpaid interest thereon through the date of the Series
B Private Placement of approximately $0.3 million.
The
Company prepaid the remaining outstanding balance of $25,000
aggregate principal amount of Promissory Notes, together with
accrued and unpaid interest thereon through the prepayment date of
$1,307, held by those holders who did not participate in the
Exchange. Following these transactions, no Promissory Notes remain
outstanding.
Accounting for the Exchange of Promissory Notes into Series B
Private Placement
The Company determined the Exchange of the Promissory Notes into
Series B Preferred Stock and related warrants should be recognized
as an extinguishment of the Promissory Notes, which resulted in a
loss on extinguishment of approximately $0.6
million. Additionally, the Company recorded interest expense
of approximately $0.8 million related to the remaining unamortized
discount resulting from initial beneficial conversion feature of
the Promissory Notes on closing date of the
Exchange.
Convertible
Debt consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
debt
|
$-
|
$-
|
$-
|
$3,836,300
|
|
Unamortized
debt discount - revalued warrants
|
-
|
-
|
-
|
(118,356)
|
|
Unamortized
debt discount - warrants
|
-
|
-
|
-
|
(878,979)
|
|
Unamortized
debt discount - BCF
|
-
|
-
|
-
|
(1,307,755)
|
|
Unamortized
debt discount - debt issuance costs
|
-
|
-
|
-
|
(566,815)
|
|
Accrued
interest
|
-
|
-
|
-
|
112,543
|
|
Total
convertible debt
|
$-
|
$-
|
$-
|
$1,076,938
|
Note 10 – Other Liabilities
Other
liabilities consisted of the following:
|
|
|
|
|
Current
|
|
|
|
Due
to Mayoly
|
$410,026
|
$392,989
|
|
Lease
liabilities
|
74,156
|
83,235
|
|
Other
liabilities
|
8,633
|
-
|
|
|
$492,815
|
$476,224
|
|
|
|
|
|
|
|
|
|
Long-term
|
|
|
|
Lease
liabilities
|
31,469
|
-
|
|
|
$31,469
|
$-
|
Note 11 – Equity
Our certificate
of incorporation, as amended and restated on December 20, 2019 (the
“Charter”)
authorizes the issuance of up to 150,000,000 shares of Common
Stock, par value $0.0001 per share, and 10,000,000 shares of
preferred stock, par value $0.0001 per share.
On
December 19, 2019, the Company held its Annual Meeting of
Stockholders (the “2019
Annual Meeting”), whereby, the shareholders approved,
among others, 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 2019 Annual
Meeting, with the exact ratio to be determined by the Board (the
“Reverse
Split”). As of September 30, 2020, the Board had not
elected to effect a Reverse Split. The authorization for the
Reverse Split will expire on December 19, 2020.
Common Stock
The
Company had 28,881,984 and 26,800,519 shares of its Common Stock
issued and outstanding at September 30, 2020 and December 31, 2019,
respectively.
Each holder of Common Stock is entitled to one vote for each share
of Common Stock held on all matters submitted to a vote of the
stockholders. Our Charter and Amended and Restated Bylaws (the
“Bylaws”) do not provide for cumulative voting
rights.
In
addition, the holders of our Common Stock will be entitled to
receive ratably such dividends, if any, as may be declared by the
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.
Holders of our Common Stock have no preemptive, conversion or
subscription rights, and there are no redemption or sinking fund
provisions applicable to the Common Stock. The rights, preferences
and privileges of the holders of Common Stock are subject to, and
may be adversely affected by, the rights of the holders of shares
of any series of our preferred stock that we may designate and
issue in the future.
Preferred Stock
We have 10,000,000 shares of preferred stock, par value $0.0001 per
share, authorized and available for issuance in one or more series.
The Board is authorized to divide the preferred stock into any
number of series, fix the designation and number of each such
series, and determine or change the designation, relative rights,
preferences, and limitations of any series of preferred stock. The
Board of may increase or decrease the number of shares initially
fixed for any series, but no decrease may reduce the number below
the shares then outstanding and duly reserved for
issuance.
On July 16, 2020, we authorized 5,194.805195 shares as Series B
Preferred Stock and issued 2,912.583005 shares of Series B Preferred Stock, with 2,282.222190
shares of Series B Preferred Stock remaining authorized but
unissued. Following such transactions, we currently have
2,912.583005 shares of preferred stock issued and outstanding with
9,997,087.416995 shares of preferred stock remaining authorized but
unissued.
Series B Convertible Preferred Stock
Pursuant to the Certificate of Designation of Rights and
Preferences of the Series B Preferred Stock (the
“Series B Certificate of
Designation”), the terms
of the Series B Preferred Stock are as follows:
Ranking
The Series B Preferred Stock will rank senior to the Common Stock
with respect to distributions of assets upon the liquidation,
dissolution or winding up of the Company.
Stated Value
Each share of Series B Preferred Stock has a stated value of
$7,700, subject to adjustment for stock splits, combinations and
similar events (the “Series B Stated
Value”).
Dividends
Each holder of shares of Series B Preferred Stock, in preference
and priority to the holders of all other classes or series of stock
of the Company, is entitled to receive dividends, commencing from
the date of issuance. Such dividends may be paid by the Company
only when, as and if declared by the Board, out of assets legally
available therefor, semiannually in arrears on the last day of June
and December in each year, commencing December 31, 2020, at the
dividend rate of 9.0% per year, which is cumulative and continues
to accrue on a daily basis whether or not declared and whether or
not the Company has assets legally available therefor. The Company
may pay such dividends at its option either in cash or in kind in
additional shares of Series B Preferred Stock (rounded down to the
nearest whole share), provided the Company must pay in cash the
fair value of any such fractional shares in excess of $100.00. At
September 30, 2020 the dividend payable to the holders of the
Series B Preferred Stock aggregated to approximately
$408,043.
Liquidation Preference; Liquidation Rights
Under the Certificate of Designations, each share of Series B
Preferred Stock carries a liquidation preference equal to the
Series B Stated Value (as adjusted thereunder) plus accrued and
unpaid dividends thereon (the “Liquidation
Preference”).
If the Company voluntarily or involuntarily liquidates, dissolves
or winds up its affairs, each holder of the Series B Preferred
Stock will be entitled to receive out of the Company’s assets
available for distribution to stockholders, after satisfaction of
liabilities to creditors, if any, but before any distribution of
assets is made on the Common Stock or any of the Company’s
shares of stock ranking junior as to such a distribution to the
Series B Preferred Stock, a liquidating distribution in the amount
of the Stated Value of all such holder’s Series B Preferred
Stock plus all accrued and unpaid dividends thereon. At September
30, 2020, the value of the liquidation preference of the Series B
Preferred stocks aggregated to approximately $22.6
million.
Conversion
Each share of Series B Preferred Stock will be convertible at the
holder’s option at any time, into Common Stock at a
conversion rate equal to the quotient of (i) the Series B Stated
Value divided by (ii) the initial conversion price of $0.77,
subject to specified adjustments for stock splits, cash or stock
dividends, reorganizations, reclassifications other similar events
as set forth in the Series B Certificate of Designations. In
addition, at any time after the six month anniversary of the Series
B Closing Date, if the closing sale price per share of Common Stock
exceeds 250% of the initial conversion price, or $1.925, for 20
consecutive trading days, then all of the outstanding shares of
Series B Preferred Stock will automatically convert (the
“Automatic
Conversion”) into such
number of shares of Common Stock as is obtained by multiplying the
number of shares of Series B Preferred Stock to be so converted,
plus the amount of any accrued and unpaid dividends thereon, by the
Series B Stated Value per share and dividing the result by the then
applicable conversion price. The Series B Preferred Stock contains
limitations that prevent the holder thereof from acquiring shares
of Common Stock upon conversion (including pursuant to the
Automatic Conversion) that would result in the number of shares
beneficially owned by such holder and its affiliates exceeding
9.99% of the total number of shares of Common Stock outstanding
immediately after giving effect to the conversion, which percentage
may be increased or decreased at the holder’s election not to
exceed 19.99%.
Most Favored Nations Exchange Right
In the event the Company effects any issuance by the Company or any
of its subsidiaries of Common Stock or Common Stock equivalents for
cash consideration, or a combination of units thereof (a
“Subsequent
Financing”), each holder
of the Series B Preferred Stock has the right, subject to certain
exceptions set forth in the Series B Certificate of Designations,
at its option, to exchange (in lieu of cash subscription payments)
all or some of the Series B Preferred Stock then held (with a value
per share of Series B Preferred Stock equal to the Liquidation
Preference) for any securities or units issued in a Subsequent
Financing on dollar-for-dollar basis.
Voting
The holders of the Series B Preferred Stock, voting as a separate
class, will have customary consent rights with respect to certain
corporate actions of the Company. The Company may not take the
following actions without the prior consent of the holders of at
least a majority of the Series B Preferred Stock then outstanding:
(a) authorize, create, designate, establish, issue or sell an
increased number of shares of Series B Preferred Stock or any other
class or series of capital stock ranking senior to or on parity
with the Series B Preferred Stock as to dividends or upon
liquidation; (b) reclassify any shares of Common Stock or any other
class or series of capital stock into shares having any preference
or priority as to dividends or upon liquidation superior to or on
parity with any such preference or priority of Series B Preferred
Stock; (c) amend, alter or repeal the Certificate of Incorporation
or Bylaws of the Company and the powers, preferences, privileges,
relative, participating, optional and other special rights and
qualifications, limitations and restrictions thereof, which would
adversely affect any right, preference, privilege or voting power
of the Series B Preferred Stock; (d) issue any indebtedness or debt
security, other than trade accounts payable, insurance premium
financings and/or letters of credit, performance bonds or other
similar credit support incurred in the ordinary course of business,
or amend, renew, increase, or otherwise alter in any material
respect the terms of any such indebtedness existing as of the date
of first issuance of shares of Series B Preferred Stock; (e)
redeem, purchase, or otherwise acquire or pay or declare any
dividend or other distribution on (or pay into or set aside for a
sinking fund for any such purpose) any capital stock of the
Company; (f) declare bankruptcy, dissolve, liquidate, or wind up
the affairs of the Company; (g) effect, or enter into any agreement
to effect, a Change of Control (as defined in the Certificate of
Designations); or (h) materially modify or change the nature of the
Company’s business.
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. From the adoption and approval
of the 2020 Plan on September 11, 2020, no new awards have been or
will be made under the 2014 Plan.
The
2014 Plan allowed 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
could 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 included all shares of Common Stock and all
shares of Common Stock issuable upon the conversion of outstanding
preferred stock and other convertible securities but did 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 was automatically be increased
concurrently with the Company’s issuance of fully paid and
non- assessable shares of As Converted Shares. Shares were deemed
to have been issued under the 2014 Plan solely to the extent
actually issued and delivered pursuant to an award.
On July 16, 2020, the Board approved an amendment to the 2014 Plan.
The amendment eliminates individual grant limits under the 2014
Plan that were intended to comply with the exemption for
“performance-based compensation” under
Section 162(m) of the Internal Revenue Code, which section has
been repealed.
The
Company issued an aggregate of 795,006 and 0 stock options, during
the nine months ended September 30, 2020 and 2019, respectively,
under the 2014 Plan (see Note 13). Upon adoption of the 2020
Omnibus Equity Incentive Plan on September 11, 2020, the Company
will no longer make grants under the 2014 Plan.
2020 Equity Incentive Plan
The
Company’s Board and stockholders adopted and approved the
2020 Omnibus Equity Incentive Plan (the “2020 Plan”), which took effect on
September 11 ,2020. The 2020 Plan allows for the issuance of
securities, including stock options to employees, Board members and
consultants. The initial number of
shares of Common Stock available for issuance under the 2020 Plan
is 10,000,000 shares, which will, on January 1 of each calendar
year, unless the Board decides otherwise, automatically increase to
equal ten percent (10%) of the total number of shares of Common
Stock outstanding on December 31 of the immediately preceding
calendar year, calculated on an As Converted Basis. As Converted
Shares include all outstanding shares of Common Stock and all
shares of Common Stock issuable upon the conversion of outstanding
preferred stock, warrants and other convertible securities, but
will not include any shares of Common Stock issuable upon the
exercise of options and other convertible securities issued
pursuant to either the 2014 Plan or the 2020 Plan. The number of
shares permitted to be issued as “incentive stock
options” (“ISOs”) from is 15,000,000 under the 2020
Plan.
As of
September 30, 2020, no grants were issued under the 2020 Plan and
an aggregate of 10,000,000 total shares are available under the
2020 Plan.
Equity Line with Lincoln Park
On
November 13, 2019, the Company entered into a purchase agreement
(the “Equity Line
Agreement”), together with a registration rights
agreement (the “Lincoln Park
Registration Rights Agreement”), with Lincoln Park.
Under the terms of the Equity Line Agreement, Lincoln Park has
committed to purchase up to $15,000,000 of our Common Stock (the
“Equity Line”).
Upon execution of the Equity Line Agreement, the Company issued
Lincoln Park 487,168 shares of Common Stock (the
“Commitment
Shares”) as a fee for its commitment to purchase
shares of our Common Stock under the Equity Line Agreement. The
remaining shares of our Common Stock that may be issued under the
Equity Line Agreement may be sold by the Company to Lincoln Park at
our discretion from time-to-time over a 30-month period commencing
after the satisfaction of certain conditions set forth in the
Equity Line Agreement, subject to the continued effectiveness of a
registration statement covering such shares of Common Stock sold to
Lincoln Park by the Company. The registration statement was filed
with the SEC on December 31, 2019 and was declared effective on
January 14, 2020.
Under
the Equity Line Agreement, on
any business day over the term of the Equity Line Agreement, the Company has the right,
in its sole discretion, to present Lincoln Park with a purchase notice (each, a
“Purchase
Notice”) directing
Lincoln Park to purchase up to 150,000
shares of Common Stock per business day (the
“Regular
Purchase”). In each
case, Lincoln Park’s
maximum commitment in any single Regular Purchase may not exceed
$1,000,000. The Equity Line
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 Lincoln Park, the
Company also has the right, in its sole discretion, to
present Lincoln Park with an
accelerated purchase notice (each, an “Accelerated Purchase
Notice”) directing
Lincoln Park 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
Equity Line 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 Lincoln Park will
not be required to buy shares pursuant to an Accelerated Purchase
Notice that was received by Lincoln Park 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 Lincoln Park 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
Lincoln Park in accordance with
the Equity Line Agreement, to
purchase an amount of stock (the “Additional Accelerated
Purchase”) equal to up to
the lesser of (i) three times the number of shares purchased
pursuant to such Regular Purchase; and (ii) 30% of the aggregate
number of shares of Common Stock traded during a certain portion of
the normal trading hours on the applicable Additional Accelerated
Purchase date as determined in accordance with the Purchase
Agreement (such period of time on the applicable Additional
Accelerated Purchase date, the “Additional Accelerated
Purchase Measurement Period”), provided that the closing price of the
Company’s common stock on the business day immediately
preceding such business day is not below $0.25 per share.
Additional Accelerated Purchases will be equal to the lower
of:
|
●
|
97% of the volume weighted average price of the
Company’s common stock during the applicable Additional
Accelerated Purchase Measurement Period on the applicable
Additional Accelerated Purchase date; and
|
|
|
|
|
●
|
the closing sale price of Common Stock on the applicable
Additional Accelerated Purchase.
|
During the three and nine months ended September 30, 2020,
the Company issued an aggregate of 0, and 1,495,199 shares of
Common Stock, respectively, in connection with the Equity Line
Agreement, resulting in net proceeds to the Company of
approximately $0, and $988,348, respectively.
Pursuant
to the terms of the Equity Line Agreement, without first obtaining
stockholder approval, the aggregate number of shares that the
Company is permitted to sell to Lincoln Park thereunder, when
aggregated with certain other private offerings of Common Stock, as
applicable, may not exceed 19.99% of the Common Stock outstanding
immediately prior to the execution of the Equity Line Agreement on
November 13, 2019, unless the average price of all applicable sales
thereunder exceeds $0.70 per share calculated by reference to the
“Minimum Price” under Nasdaq Listing Rule 5635(d). On
September 11, 2020, the Company received stockholder approval for
the issuances of the full $15 million available under the Equity
Line Agreement. Generally, there is approximately $14 million of
availability left for issuance pursuant to the Equity Line
Agreement.
Common Stock Issuances
During
the three months ended September 30, 2020, holders of shares of Series B Preferred Stock
converted 34.127448 shares of Series B Preferred Stock into an
aggregate of 341,274 shares of Common Stock at the stated
conversion price of $0.77 per share, plus the issuance of 4,610
shares of Common Stock for accrued dividends of $3,551 through such
conversion dates.
During
the three months ended September 30, 2020, the Company issued an
aggregate of 31,646 shares
of its Common Stock to consultants with a total grant date fair
value of approximately
$25,000 for investor
relations services provided, which was
recorded as stock-based compensation and included as part of
general and administrative expense.
During
the nine months ended September
30, 2020, the Company issued an
aggregate of 132,841 shares of its Common Stock to
consultants with a total grant date fair value of approximately $112,105 for investor relations services
provided, which was recorded was
recorded as stock-based compensation and included as part of
general and administrative expense.
During
the nine months ended September
30, 2020, the Company issued an
aggregate of 105,937 shares of its Common Stock to outside Board
members as payment of Board fees with an aggregate grant date fair
value of approximately $131,137 that was recorded as stock-based
compensation, included as part of general and administrative
expense. The aggregate effective settlement price was $1.24 per
share, and each individual stock issuance was based on the closing
stock price of the Common Stock on the initial date the payable was
accrued.
During the three and nine
months ended September 30,
2019, the Company issued 21,677 and 62,518 shares of Common Stock,
respectively, to a consultant as payment of $22,500
and $112,500, respectively, of
accounts payable related to investor relations
services.
During
the three and nine months ended September 30, 2019, the Company
issued an aggregate of 0 and 60,000 shares of its Common Stock,
respectively, to outside Board members as payment of Board fees
with an aggregate grant date fair value of approximately $0 and $123,000, respectively that was
recorded as stock-based compensation,
included as part of general and administrative
expense.
During
the period from April 6, 2020 through May 22, 2020, the Company
sold an aggregate of 1,345,199 shares of Common Stock pursuant to
the Equity Line, from which the Company derived approximately
$869,000 in net proceeds. The sales of these shares were exempt
from registration under the Securities Act of 1933, as amended, in
reliance upon Section 4(a)(2) (or Regulation D promulgated
thereunder).
Restricted Stock and Restricted Stock Units
Restricted
stock refers to shares of Common Stock subject to vesting based on
certain service, performance, and market conditions. Restricted
stock unit awards (“RSUs”) refer to an award under
the 2014 Plan, which constitutes a promise to grant shares of
Common Stock at the end of a specified restriction
period.
During the three months ended September 30, 2020, an aggregate of 1,746 unvested
restricted shares of Common Stock, subject to service
conditions, vested with a total grant
date fair value of approximately $6,289 and was recorded as
stock-based compensation, included as part of general and
administrative expense.
During the nine months ended September 30, 2020, an aggregate of 10,080 unvested
restricted shares of Common Stock, subject to service
conditions, vested with a total grant
date fair value of approximately $36,289 and was recorded as
stock-based compensation, included as part of general and
administrative expense.
During the three and nine months ended September
30, 2020, an aggregate of 0, and 4,000
unvested restricted shares of Common Stock were forfeited,
respectively.
During the three months ended September 30, 2019, the Company
issued 21,677 restricted shares of Common Stock to a consultant as
payment of $22,500 of accounts payable for investor relations
services. During the nine months ended September 30, 2019, the
Company issued 62,518 shares of Common Stock to a consultant as
payment of $112,500 of accounts payable for investor relations
services.
During the three months ended September 30, 2019, an aggregate of 43,750 unvested
restricted shares of Common Stock vested with a total grant date fair value of
approximately $63,434. 13,750 of these restricted shares vested
during the three months ended September 30, 2019 due to the terms
of such grants with a total grant date fair value of approximately
$44,834. 30,000 of these restricted shares were issued during the
three months ended September 30, 2019 to our directors as a part of
Board compensation with a total grant date fair value of
approximately $18,600.
During the nine months ended September 30, 2019, an aggregate of 223,417 unvested
restricted shares of Common Stock vested with a total grant date fair value of
approximately $556,888. 33,334 of these restricted shares with a
total grant date fair value of approximately $101,335 vested during
the nine months ended September 30, 2019 due to the Company achieving certain
clinical milestones. 41,250 of these restricted shares with a total
grant date fair value of approximately $134,501 vested during the
nine months ended September 30, 2019 due to the satisfaction of
service conditions 30,000 of these restricted shares were issued
during the three months ended September 30, 2019 to our directors
as a part of Board compensation with a total grant date fair value
of approximately $142,200.
As of September 30, 2020, the
Company had unrecognized restricted common stock expense of
approximately $393,250. Approximately $196,625 of this unrecognized
expense vests upon the first commercial sale in the United States
of MS1819 and approximately $196,625 of this unrecognized expense
vests upon the total market capitalization of the Company exceeding
$1.0 billion for 20 consecutive trading days. These milestones were
not considered probable at September 30, 2020.
Series B Private Placement
The Series B Private Placement and the Exchange
On July 16, 2020 (the “Series B Closing
Date”), the
Company consummated a private placement offering (the
“Series B Private
Placement”) whereby the
Company entered into a Convertible Preferred Stock and Warrant
Securities Purchase Agreement (the “Series B Purchase
Agreement”) with certain
accredited and institutional investors (the
“Series B
Investors”). Pursuant to
the Series B Purchase Agreement, the Company issued an aggregate of
2,912.583005 shares of Series B Convertible Preferred Stock, par
value $0.0001 per share (the “Series B Preferred
Stock”), at a price of
$7,700.00 per share, initially convertible into an aggregate of
29,125,756 shares of Common Stock at $0.77 per share, together with
warrants (the “Series B
Warrants”) to purchase an
aggregate of 14,562,826 shares of Common Stock at an exercise price
of $0.85 per share. The amount of the Series B Warrants is equal to
50% of the shares of Common Stock into which the Series B Preferred
Stock is initially convertible.
In connection with the Series B Private Placement, an aggregate of
1,975.578828 shares of Series B Preferred Stock initially
convertible into 19,755,748 shares of Common Stock and related
9,877,835 Series B Warrants were issued for cash consideration,
resulting in aggregate gross
proceeds of approximately $15.2 million and aggregate
net proceeds to the Company of
approximately $13.2 million after deducting placement agent
compensation and offering expenses.
An aggregate of 937.004177 shares of Series B Preferred Stock
initially convertible into 9,370,008 shares of Common Stock and
related Series B Warrants to purchase 4,684,991 shares of Common
Stock were issued to certain Series B Investors (the
“Exchange
Investors”) in exchange
for consideration consisting of approximately $6.9 million
aggregate outstanding principal amount, together with accrued and
unpaid interest thereon through the Series B Closing Date of
approximately $0.3 million, of certain Senior Convertible
Promissory Notes (the “Promissory
Notes”) issued between
December 20, 2019 and January 9, 2020 (the
“Exchange”), pursuant to an Exchange Addendum (the
“Exchange
Addendum”) executed by
the Company and the Exchange Investors. As additional consideration
to the Exchange Investors, the Company also issued certain
additional warrants (the “Exchange
Warrants”) to purchase an
aggregate of 1,772,937 shares of Common Stock at an exercise price
of $0.85 per share. The amount of the Exchange Warrants is equal to
25% of the shares of Common Stock into which such Promissory Notes
were originally convertible upon the initial issuance
thereof.
Pursuant to the Series B Private Placement and the Series B
Purchase Agreement, for purposes of complying with Nasdaq Listing
Rule 5635(c) and 5635(d), the Company was required to hold a
meeting of its stockholders not later than 60 days following the
Series B Closing Date to seek approval (the
“Stockholder
Approval”) for, among
other things, the issuance of shares of Common Stock upon (i) full
conversion of the Series B Preferred Stock; and (ii) full exercise
of the Series B Warrants and the Exchange Warrants. In the event
the Stockholder Approval was not received on or prior to the 90th
day following the Series B Closing Date, subject to extension upon
the prior written approval of the holders of at least a majority of
the Series B Preferred Stock then outstanding, the Company would
have been required to repurchase all of the then outstanding shares
of Series B Preferred Stock at a price equal to 150% of the stated
value thereof plus accrued and
unpaid dividends thereon, in cash. On September 11, 2020, the
Company received Stockholder Approval.
The
Company prepaid the remaining outstanding balance of $25,000
aggregate principal amount of Promissory Notes, together with
accrued and unpaid interest thereon through the prepayment date of
$1,307, held by those holders who did not participate in the
Exchange. Following these transactions, no Promissory Notes remain
outstanding.
In
connection with the Series B Private Placement, the Company paid
the placement agent 9.0% of the gross cash proceeds received by the
Company from investors introduced by the placement agent and 4.0%
of the gross cash proceeds received by the Company for all other
investors, or approximately $1.3 million. The Company also paid the
placement agent a non-accountable cash fee equal to 1.0% of the
gross cash proceeds and a cash financial advisory fee equal to 3.0%
of the outstanding principal balance of the Promissory Notes that
were submitted in the Exchange, or approximately $0.3 million in
additional cash fees in the aggregate. In addition, the Company
issued to the placement agent warrants to purchase up to 1,377,458
shares of Common Stock (the “July Placement Agent Warrants”). The
July Placement Agent Warrants have substantially the same terms as
the Series B Warrants, except the July Placement Agent Warrants
have an exercise price of $0.96 per share, are not callable,
provide for cashless exercise and are not exercisable until the
earlier of stockholder approval of the Series B Private Placement
and the date that is six months following the issuance
thereof.
Accounting for the Series B Private Placement
Upon receiving Shareholder Approval on September 11, 2020, the
Company classified the Series B Preferred Stock as permanent equity
because no features provide for redemption by the holders of the
Series B Preferred Stock or conditional redemption, which is not
solely within the Company’s control, and there are no
unconditional obligations in that (1) the Company must or may
settle in a variable number of its equity shares and (2) the
monetary value is predominantly fixed, varying with something other
than the fair value of the Company’s equity shares or varying
inversely in relation to the Company’s equity
shares.
Because the Series B Preferred Stock contain certain embedded
features that could affect the ultimate settlement of the Series B
Preferred Stock, the Company analyzed the instrument for embedded
derivatives that require bifurcation. The Company’s analysis
began with determining whether the Series B Preferred Stock is more
akin to equity or debt. The Company evaluated the
following criteria/features in this determination: redemption,
voting rights, collateral requirements, covenant provisions,
creditor and liquidation rights, dividends, conversion rights and
exchange rights. The Company determined that the Series B Preferred
Stock was more akin to equity than to debt when evaluating the
economic characteristics and risks of the entire Series B Preferred
Stock, including the embedded features. The Company then evaluated
the embedded features to determine whether their economic
characteristics and risks were clearly and closely related to the
economic characteristics and risks of the Series B Preferred Stock.
Since the Series B Preferred Stock was determined to be more akin
to equity than debt, and the underlying that causes the value of
the embedded features to fluctuate would be the value of the
Company’s common stock, the embedded features were considered
clearly and closely related to the Series B Preferred Stock. As a
result, the embedded features would not need to be bifurcated from
the Series B Preferred Stock.
Any beneficial conversion features related to the exercise of the
Most Favored Nation exchange right or the application of the
Mandatory Conversion provision will be recognized upon the
occurrence of the contingent events based on its intrinsic value at
the commitment date.
The Company concluded the freestanding Series B Warrants did not
contain any provision that would require liability classification
and therefore should be classified in stockholder’s equity,
based on their relative fair value.
The proceeds from the Series B Private Placement were allocated to
the Series B Preferred Stock and Series B Warrants based on their
relative fair values. The total
proceeds of approximately $22,426,890 were allocated as follows:
$16,474,374 to the Series B Preferred Stock, and $5,952,515 to the
Series B Warrants. After allocation of the
proceeds, the effective conversion price of the Series B Preferred
Stock was determined to be beneficial and, as a result, the Company
recorded a deemed dividend of $8,155,212 equal to the intrinsic
value of the beneficial conversion feature and recognized on the
closing date and recorded as a reduction of income available to
common stockholders in computing basic and diluted loss per
share.
The total offering costs of approximately $2,014,218 were
recognized in equity.
Note 12 – Warrants
For the nine months ended September 30, 2020, in connection with the January 2020 closings of
the Promissory Note Offering, the Company issued Note Warrants to
investors to purchase an aggregate of 1,813,257 shares of Common
Stock with the issuance of the Promissory Notes as referenced in
Note 9. These Note Warrants were issued between January 2, 2020 and
January 9, 2020, are exercisable commencing six (6) months
following the issuance date at $1.07 per share and expire five
years from issuance. The total grant date fair value of these
warrants was determined to be approximately $1,574,886, as
calculated using the Black-Scholes model, and were recorded as a
debt discount based on their relative fair
value.
For the nine months ended September 30, 2020, in connection with the January 2020 closings of
the Promissory Note Offering, the Company issued the January
Placement Agent Warrants to purchase an aggregate of 199,732 shares
of Common Stock to the placement agent and/or their designees. The
January Placement Agent Warrants were issued between January 2,
2020 and January 9, 2020, vested immediately, and expire five years
from issuance. 41,495 of these January Placement Agent Warrants are
exercisable at $1.21 per share and 158,237 are exercisable at $1.42
per share. The total grant date fair value of the January Placement
Agent Warrants was determined to be approximately $174,130, as
calculated using the Black-Scholes model, and was charged to debt
discount that will be amortized over the life of the
debt.
For the three and nine months ended September 30,
2020, in connection with the closing
of the Series B Private Placement, the Company issued Series B
Warrants to investors to purchase an aggregate of 14,562,826 shares
of Common Stock with the issuance of the Series B Preferred Stock
as referenced in Note 11. These Series B Warrants were issued on
July 16, 2020, are exercisable commencing six (6) months following
the issuance date at $0.85 per share and expire five years from
issuance. The total grant date fair value of the Series B Warrants
was determined to be approximately $8,103,277, as calculated using
the Black-Scholes model, and were recorded as equity based on their
relative fair value (See Note 11).
For the three and nine months ended September 30,
2020, in connection with the closing
of the Exchange (See Note 11), the Company issued Exchange Warrants
to certain investors to purchase an aggregate of 1,772,937 shares
of Common Stock with the issuance of the Series B Preferred Stock
as referenced in Note 11. These Exchange Warrants were issued on
July 16, 2020, are exercisable commencing six (6) months following
the issuance date at $0.85 per share and expire five years from
issuance. The total grant date fair value of the Exchange warrants
was determined to be approximately $986,526, as calculated using
the Black-Scholes model, and were recorded as part of the loss on
extinguishment (See Note 9).
For the three and nine months ended September 30,
2020, in connection with the closing
of the Series B Private Placement, the Company issued the July
Placement Agent Warrants to purchase an aggregate of
1,377,458 shares of Common Stock to
the placement agent and/or their designees as referenced in Note
11. The July Placement Agent Warrants were issued on July 16, 2020,
are exercisable commencing six (6) months following the issuance
date at $0.96 per share and expire five years from issuance. The
total grant date fair value of the July Placement Agent Warrants
was determined to be approximately $744,378, as calculated using
the Black-Scholes model, and were recorded as equity (See Note
11).
For the three and nine months ended September 30, 2020,
in connection with the Spoor
Settlement and Release (See Note 18), on July 14, 2020 the Company
granted Mr. Spoor warrants to purchase an aggregate of 150,000
shares of Common Stock. The warrants were immediately exercisable,
have an exercise price equal to $1.00 per share, a five-year term
and may be exercised pursuant to a cashless exercise provision
commencing six months from the issuance date. The total grant date
fair value of these warrants was determined to be approximately
$85,770, as calculated using the Black-Scholes model, and were
included in the gain on settlement (See Note
18).
During the nine months ended September 30, 2020, warrants to purchase an aggregate of
59,774 shares of Common Stock expired with exercise prices ranging
between $3.25 and $7.37 per share.
Warrant
transactions for the nine months ended September 30, 2020 and 2019
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding and exercisable at January 1,
2019
|
3,112,715
|
$2.55 - 7.37
|
$4.83
|
|
|
|
|
|
|
Granted
during the period
|
275,663
|
$2.55 – 2.82
|
$2.68
|
|
Expired
during the period
|
-
|
-
|
-
|
|
Exercised
during the period
|
-
|
-
|
-
|
|
Warrants outstanding and exercisable at September 30,
2019
|
3,388,378
|
$1.50 - 7.37
|
$3.51
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding and exercisable at January 1,
2020
|
5,378,288
|
$1.07 - 7.37
|
$2.53
|
|
|
|
|
|
|
Granted
during the period
|
19,881,654
|
$0.85 - 1.42
|
$0.88
|
|
Expired
during the period
|
(59,774)
|
$3.25 - 7.37
|
$5.15
|
|
Exercised
during the period
|
-
|
-
|
-
|
|
Warrants outstanding and exercisable at September 30,
2020
|
25,200,168
|
$0.85 - 7.37
|
$1.22
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
$0.00 - 0.99
|
17,718,665
|
4.79
|
|
|
|
$1.00 - 1.99
|
5,362,464
|
3.65
|
|
|
|
$2.00 - 2.99
|
320,063
|
2.82
|
|
|
|
$3.00 - 3.99
|
635,019
|
1.57
|
|
|
|
$4.00 - 4.99
|
164,256
|
1.53
|
|
|
|
$5.00 - 5.99
|
783,132
|
1.42
|
|
|
|
$6.00 - 6.99
|
187,750
|
1.01
|
|
|
|
$7.00 - 7.37
|
28,819
|
0.28
|
|
|
Totals
|
|
25,200,168
|
4.28
|
$1.22
|
The weighted average fair value of warrants granted during the nine
months ended September 30, 2020
was $0.88 per share. The fair value was estimated on the grant
dates using the Black-Scholes option-pricing model with the
following weighted average assumptions:
|
|
|
|
|
|
|
Expected
life (in years)
|
5
|
|
Volatility
|
84.7%
|
|
Risk-free
interest rate
|
0.28-1.67%
|
|
Dividend
yield
|
-%
|
Note 13 - Stock Options
Under the 2014 Plan and the 2020 Plan, the fair value of options
granted is estimated on the grant date using the Black-Scholes
option valuation model. This valuation model for stock-based
compensation expense requires the Company to make assumptions and
judgments about the variables used in the calculation, including
the expected term (weighted-average period of time that the options
granted are expected to be outstanding), the volatility of the
common stock price and the assumed risk-free interest rate. The
Company recognizes stock-based compensation expense for only those
shares expected to vest over the requisite service period of the
award. No compensation cost is recorded for options that do not
vest and the compensation cost from vested options, whether
forfeited or not, is not reversed.
During the three months ended September 30, 2020, the Company
issued stock options to purchase an aggregate of 2,040,000 shares
of Common Stock with a strike price of $0.85 per share and a term
of ten years to its employees. These options had a total grant date
fair value of approximately $1,449,130, as calculated using the
Black-Scholes model.
During the three months ended September 30, 2020, the Board
approved an amended and restated option grant to its chief
financial officer, amending and restating a grant previously made
on January 2, 2020, to reduce the amount of shares issuable upon
exercise of such option to be the maximum number of shares Mr.
Schneiderman was eligible to receive under the 2014 Incentive Plan
on the original grant date, or 300,000 shares, due to the 2014
Incentive Plan provisions relating to the Section 162(m)
limitations described above. The Board also approved the issuance
of a replacement option covering the balance of shares intended to
be issued at that time, or 35,006 shares. The original stock option
has an exercise price of $1.03, the closing sale price of Common
Stock on January 2, 2020, which was the date of its original grant,
and the replacement stock option has an exercise price of $0.85,
the closing sale price of the Common Stock on its date of grant.
Both the original stock option and the replacement stock option
vest over a term of three years, in 36 equal monthly installments
on each monthly anniversary of January 2, 2020. On the issuance
date, 6,336 shares had vested, and 28,670 shares were unvested with
$24,102 of unrecognized expense. The Company determined the
cancellation and reissue of these stock options resulted in an
effective repricing of the stock options and modification
accounting should be applied under ASC 718. The fair value of the
original stock options immediately prior to the modification was
$23,454 and the grant date fair value of the replacement stock
options was $24,154. The Company will recognize a total of $24,802
over the remaining requisite service period through January 1,
2023.
During the nine months ended September 30, 2020, the Company
issued stock options to
purchase an aggregate of 335,006 shares of Common Stock with a strike price of
$1.03 per share and a term of ten years to its chief financial
officer that vest quarterly over three years. These options had a
total grant date fair value of approximately $281,405, as
calculated using the Black-Scholes model.
During the nine months ended September 30, 2020, the Company issued
stock options to purchase an aggregate of 460,000 shares of Common
Stock with a strike price of $0.97 per share and a term of ten
years to its non-executive directors. These options had a total
grant date fair value of approximately $210,284, as calculated
using the Black-Scholes model.
During the nine months ended September 30, 2020, stock options to
purchase an aggregate of 235,006 shares of Common Stock were
cancelled with strike prices ranging between $0.97 and $3.60 per
share.
During the three months ended September 30, 2020, stock options to
purchase an aggregate of 234,252 shares of Common Stock, subject
to service conditions, vested
with a total grant date fair value of approximately $139,392 and
recorded as stock-based compensation, of which $119,514 was
included as part of general and administrative expense and $19,878
was included as part of research and development
expense.
During the nine months ended September 30, 2020, stock options to
purchase an aggregate of 600,086 shares of Common Stock, subject
to service conditions, vested
with a total grant date fair value of approximately $360,519 and
recorded as stock-based compensation, of which $340,640 was
included as part of general and administrative expense and $19,878
was included as part of research and development
expense.
During the nine months ended September 30, 2020, stock options to
purchase an aggregate of 50,000 shares of Common Stock, subject to
performance conditions vesting, vested with a total grant date fair
value of approximately $20,150 and were recorded as stock-based
compensation, and included as part of general and administrative
expense due to the Company initiating the Option 2 Clinical
Trial.
During the three and nine months ended September 30, 2020, stock
options to purchase an aggregate of 35,006, and 235,006 shares of
Common Stock were cancelled, respectively, with strike prices
ranging between $0.97 and $3.60 per share.
During the three and nine months ended September 30, 2019, stock
options to purchase an aggregate of 893,500 shares of Common Stock
were granted with an exercise price of $1.75 and a term of five
years. During the three months ended September 30, 2019, no options
vested. During the nine months ended September 30, 2019, stock
options to purchase an aggregate 244,500 shares of Common Stock
vested with a total grant date fair value of approximately
$511,335. stock options to purchase an aggregate 242,000 shares of
Common Stock with a total grant date fair value of approximately
$501,666 vested due to the Company achieving certain clinical
milestones.
The fair values were estimated on the grant dates using the
Black-Scholes option-pricing model with the following
weighted-average assumptions:
|
|
|
|
|
|
|
Expected
life (in years)
|
10
|
|
Volatility
|
84.0%
|
|
Risk-free
interest rate
|
0.62- 1.88%
|
|
Dividend
yield
|
-%
|
The
expected term of the options is based on expected future employee
exercise behavior. Volatility is based on the historical volatility
of the Company’s Common Stock if available or of several
public entities that are similar to the Company. The Company bases
volatility this way because it may not have sufficient historical
transactions in its own shares on which to solely base expected
volatility. The risk-free interest rate is based on the U.S.
Treasury rates at the date of grant with maturity dates
approximately equal to the expected term at the grant date. The
Company has not historically declared any dividends and does not
expect to in the future.
Since the adoption of the 2020 Plan on September 11, 2020, no
awards have yet been made thereunder. During the nine months ended
September 30, 2020 and 2019, stock option activity under the 2014
Plan was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding at January 1, 2019
|
994,000
|
$3.58
|
5.42
|
$-
|
|
|
|
|
|
|
|
Granted
during the period
|
893,500
|
$1.70
|
4.96
|
-
|
|
Expired
during the period
|
-
|
-
|
-
|
-
|
|
Canceled
during the period
|
-
|
-
|
-
|
-
|
|
Exercised
during the period
|
-
|
-
|
-
|
-
|
|
Stock options outstanding at September 30, 2019
|
1,887,500
|
$2.58
|
4.69
|
$-
|
|
|
|
|
|
|
|
Exercisable at September 30, 2019
|
994,000
|
$3.58
|
5.17
|
$-
|
|
|
|
|
|
|
|
Non-vested stock options outstanding at January 1,
2019
|
244,500
|
$3.05
|
4.53
|
$-
|
|
|
|
|
|
|
|
Granted
during the period
|
893,500
|
$1.70
|
4.96
|
-
|
|
Vested
during the period
|
(274,500)
|
$2.91
|
3.88
|
-
|
|
Expired
during the period
|
-
|
-
|
-
|
-
|
|
Canceled
during the period
|
-
|
-
|
-
|
-
|
|
Exercised
during the period
|
-
|
-
|
-
|
-
|
|
Non-vested stock options outstanding at September 30,
2019
|
863,500
|
$1.70
|
4.77
|
$-
|
|
Stock options outstanding at January 1, 2020
|
1,677,5000
|
$2.17
|
5.37
|
$-
|
|
|
|
|
|
|
|
Granted
during the period
|
2,870,012
|
$0.89
|
9.79
|
$-
|
|
Expired
during the period
|
-
|
-
|
|
|
|
Canceled
during the period
|
(235,006)
|
$1.94
|
3.28
|
$-
|
|
Exercised
during the period
|
-
|
-
|
|
|
|
Stock options outstanding at September 30, 2020
|
4,312,506
|
$1.38
|
7.94
|
$-
|
|
|
|
|
|
|
|
Exercisable at September 30, 2020
|
1,084,834
|
$2.59
|
5.60
|
$-
|
|
Non-vested stock options outstanding at January 1,
2020
|
883,500
|
$1.33
|
6.26
|
$-
|
|
|
|
|
|
|
|
Granted
during the period
|
2,870,012
|
$0.98
|
10.00
|
$-
|
|
Vested
during the period
|
(593,750)
|
$2.59
|
6.88
|
$-
|
|
Expired
during the period
|
-
|
-
|
-
|
|
|
Canceled
during the period
|
(160,006)
|
$1.30
|
7.10
|
$-
|
|
Exercised
during the period
|
-
|
-
|
-
|
|
|
Non-vested stock options outstanding at September 30,
2020
|
2,999,756
|
$0.98
|
8.75
|
$-
|
As of September 30, 2020, the Company had unrecognized stock-based
compensation expense of approximately $2,190,131. Approximately
$1,189,036 of this unrecognized expense will be recognized over the
average remaining vesting term of the options of.8.75 years.
Approximately $440,213 of this unrecognized expense will vest upon
enrollment completion of the next MS1819 Phase II clinical trial in the U.S.
for CF (the OPTION 2 Trial). Approximately $41,213 of this
unrecognized expense will vest upon enrollment completion of the
ongoing Combination Trial in Europe. Approximately $20,150 of this
unrecognized expense will vest upon trial completion of the
next MS1819 Phase II clinical trial in
the U.S. for CF (the OPTION 2 Trial). Approximately $40,300 of this
unrecognized expense vests upon the Company initiating a Phase III
clinical trial in the U.S. for MS1819. Approximately $40,300 of
this unrecognized expense vests upon initiating a U.S. Phase I
clinical trial for any product other than MS1819. Approximately,
$139,640 of this unrecognized expense vests upon the public release
of topline data of the complete Combination Trial results.
Approximately, $139,640 of this unrecognized expense vests upon the
public release of topline data of the complete OPTION 2 Trial
results. Approximately, $139,640 of this unrecognized expense vests
upon signing of a definitive term sheet with Board approval for
either (i) a strategic licensing, distribution or commercialization
agreement for MS1819 with a bona fide partner, or (ii) the
substantial sale of the Company or the MS1819 asset, on or before
December 31, 2021. The Company will recognize the expense related
to these milestones when the milestones become
probable.
Note 14 - Agreements
Mayoly Agreement
On March 27, 2019, the Company and Laboratories Mayoly
Spinder (“Mayoly”) entered into an Asset Purchase Agreement
(the “Mayoly APA”), pursuant
to which the Company purchased all rights, title and interest in
and to MS1819. Upon execution of the Mayoly APA, the Joint
Development and License Agreement (the “JDLA”) previously executed by AzurRx SAS and
Mayoly was terminated. In addition, the Company granted to Mayoly
an exclusive, royalty-bearing right to revenue received from
commercialization of MS1819 within certain
territories.
During the three and nine months ended September 30, 2019, the
Company charged $0 and $403,020, respectively, to Mayoly under the
JDLA that was in effect during both periods.
TransChem Sublicense
On August 7, 2017, the Company and TransChem entered into the
TransChem Sublicense Agreement pursuant to which TransChem granted
to us an exclusive license to certain patents (the
“TransChem
Licensed Patents”)
relating to H. pylori 5’methylthioadenosine nucleosidase
inhibitors. We may terminate the Sublicense Agreement and the
licenses granted therein for any reason and without further
liability on 60 days’ notice. Unless terminated earlier, the
Sublicense Agreement will expire upon the expiration of the last
Licensed Patents. Upon execution, we 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 Licensed Patents. We also agreed to pay
TransChem certain future periodic sublicense maintenance fees,
which fees may be credited against future royalties. We may also be
required to pay TransChem additional payments and royalties in the
event certain performance-based milestones and commercial sales
involving the Licensed Patents are achieved. The TransChem Licensed
Patents will allow us to develop compounds for treating
gastrointestinal, lung and other infections that 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.
On March 11, 2020, the Company provided TransChem with sixty (60)
days prior written notice of its intent to terminate the TransChem
Sublicense Agreement.
No payments were made under this Sublicense Agreement during
in the three and nine months
ended September 30, 2020 and 2019,
respectively.
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) an award grant of 200,000 restricted
stock units (“RSUs”) which are scheduled 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 an exercise price
equal to $0.56 per share, which are scheduled 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 (as such term is defined in
Mr. Sapirstein’s employment agreement) for a period of twelve
months following the termination date; (ii) payment of Mr.
Sapirstein’s premiums to cover COBRA for a period of twelve
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 an exercise price of
$1.03 per share, which shall vest in three equal portions on each
anniversary date of the execution of Mr. Schneiderman’s
employment agreement, commencing on January 2, 2021, 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 Mr. Schneiderman’s
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 Mr.
Schneiderman’s employment agreement, he 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 six
months following the termination date or the remaining term of the
employment agreement; (iv) payment of premiums to cover COBRA for a
period of six 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 Mr. Schneiderman’s
employment agreement without Cause, in connection with a Change of
Control, he 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
Dr. 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 Dr. Pennington’s employment agreement
at any time, with or without Cause, as such term is defined in Dr.
Pennington’s 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 Dr.
Pennington’s employment agreement, Dr. Pennington will
receive six months’ severance payable over such
period.
Note 15 - 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.
During the three months ended September 30, 2020, the Company
entered into a month-to-month lease for office space in Delray
Beach, FL and one-year residential lease in Delray Beach,
FL.
During the nine months ended September 30, 2020, the Company
entered into a two-year lease extension (amendment) to is Hayward,
CA office. The Company determined that the lease modification did
not grant an additional right of use and concluded that the
modification was not a separate new lease, but rather that it
should reassess and remeasure the entire modified lease on the
effective date of the modification. The Company accounted for the
lease amendment prospectively.
The
Company’s leases expire at various dates through 2022. The
escalation clauses are indeterminable and considered not material
and have been excluded from minimum future annual rental
payments.
Lease
expense amounted to $55,418 and $52,057, respectively, in the
three months ended September 30, 2020 and 2019.
Lease
expense amounted to $128,663 and $153,723, respectively, in
the nine months ended September 30, 2020 and 2019.
The
weighted-average remaining lease term and weighted-average discount
rate under operating leases at September 30, 2020 are:
|
|
|
|
|
|
|
Lease term and discount rate
|
|
|
Weighted-average
remaining lease term
|
1.16 years
|
|
Weighted-average
discount rate
|
6.0%
|
Maturities of
operating lease liabilities at September 30, 2020 are as
follows:
|
2020
|
$30,565
|
|
2021
|
55,420
|
|
2022
|
23,375
|
|
Total
lease payments
|
109,360
|
|
Less
imputed interest
|
(3,736)
|
|
Present
value of lease liabilities
|
$105,624
|
Note 16 - Income Taxes
The
Company is subject to taxation at the federal level in both the
United States and France and at the state level in the United
States. At September 30, 2020 and December 31, 2019, the Company
had no tax provision for either jurisdiction.
At
September 30, 2020 and December 31, 2019, the Company had gross
deferred tax assets of approximately $20,059,000 and $16,372,000,
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
$20,059,000 and $16,372,000, respectively, has been established at
September 30, 2020 and December 31, 2019. The change in the
valuation allowance in the nine months ended September 30, 2020 and
2019 was $3,687,000 and $2,108,000, respectively.
At
September 30, 2020, the Company has gross net operating loss
(“NOL”)
carryforwards for U.S. federal and state income tax purposes of
approximately $35,077,000 and $26,572,000, respectively. The
Company’s ability to use its NOL carryforwards may be limited
if it experiences an “ownership change” as defined in
Section 382 (“Section
382”) of the Internal Revenue Code of 1986, as
amended. An ownership change generally occurs if certain
stockholders increase their aggregate percentage ownership of a
corporation’s stock by more than 50 percentage points over
their lowest percentage ownership at any time during the testing
period, which is generally the three-year period preceding any
potential ownership change.
At
September 30, 2020 and December 31, 2019, the Company had
approximately $22,120,000 and $19,425,000, respectively, in net operating
losses which it can carryforward indefinitely to offset against
future French income.
At
September 30, 2020 and December 31, 2019, the Company had taken no
uncertain tax positions that would require disclosure under ASC
740, Accounting for Income Taxes.
Note 17 - Net Loss per Common Share
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
September 30, 2020, diluted net loss per share did not include the
effect of 29,314,408 shares of Common Stock issuable upon the
conversion of Series B Preferred Stock including accrued and unpaid
dividends, 25,200,168 shares of Common Stock issuable upon the
exercise of outstanding warrants, 387,000 shares of Common Stock
pursuant to unearned and unissued restricted stock and RSUs, and
4,312,506 shares of Common Stock issuable upon the exercise of
outstanding options as their effect would be antidilutive during
the periods prior to conversion.
At
September 30, 2019, diluted net loss per share did not include the
effect of 3,388,378 shares of Common Stock issuable upon the
exercise of outstanding warrants, 416,000 shares of restricted
Common Stock not yet issued, and 1,887,500 shares of Common Stock
issuable upon the exercise of outstanding options as their effect
would be antidilutive during the periods prior to
conversion.
Note 18 - 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. In addition, Mr. Spoor
resigned as a member of the Board on April 29,
2020.
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 by the Company, 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.
All unvested shares of restricted stock and stock options subject
to time and other performance-based vesting conditions have been
forfeited in connection with Mr. Spoor's resignation as the
Company’s President and Chief Executive Officer. Mr.
Spoor also declined the right to receive 241,667 earned, but
unissued shares of restricted stock on April 29, 2020 in connection
with his resignation from the Board.
On July 9, 2020, the Company
and Johan (Thijs) Spoor, its
former Chief Executive Officer, entered into a settlement and general release (the
“Spoor Settlement and
Release”), effective July
9, 2020 (the “Spoor Settlement
Date”), of certain claims
relating to Mr. Spoor's separation from the Company on October 8,
2019. In connection with the Spoor Settlement and Release, on July
14, 2020 the Company granted Mr. Spoor warrants to purchase an
aggregate of 150,000 shares of Common Stock, which had a grant date
fair value of $85,770 (See Note 12). In addition, Mr. Spoor legally
released all claims to a discretionary bonus in the amount of
$255,000, which was originally accrued by the Company in June 2019
but was subsequently reversed during the quarter ended December 31,
2019, legally released all claims to $348,400 due to JIST
Consulting, a company controlled by Mr. Spoor and the
Company also paid Mr. Spoor's
legal expenses in the amount of $51,200. During the three
and nine months ended September 30, 2020, the Company recognized a
gain on settlement of $211,430 in connection with the Spoor
Settlement and Release.
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 September 30, 2020 and 2019 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.
On July
2, 2020, the Company and Maged Shenouda, its former Chief Financial
Officer also entered into a settlement and general release (the
“Shenouda Settlement and
Release”), of certain claims relating to Mr.
Shenouda’s s separation from the Company effective November
30, 2019. In connection with the Shenouda Settlement and Release,
the Company paid a total of $15,000 to Mr. Shenouda, which amount
includes $10,000 of accounts payable of the Company due to Mr.
Shenouda for services provided and $5,000 for legal expenses, and
Mr. Shenouda legally released
all claims to a discretionary
bonus in the amount of $100,000 originally accrued by the Company
in June 2019, but was subsequently
reversed during the quarter ended December 31,
2019.