0001654954-18-012327.txt : 20181109 0001654954-18-012327.hdr.sgml : 20181109 20181109164145 ACCESSION NUMBER: 0001654954-18-012327 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 74 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181109 DATE AS OF CHANGE: 20181109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AzurRx BioPharma, Inc. CENTRAL INDEX KEY: 0001604191 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-37853 FILM NUMBER: 181173652 BUSINESS ADDRESS: STREET 1: 760 PARKSIDE AVENUE STREET 2: SUITE 304 CITY: BROOKLYN STATE: NY ZIP: 11226 BUSINESS PHONE: 646-699-7855 MAIL ADDRESS: STREET 1: 760 PARKSIDE AVENUE STREET 2: SUITE 304 CITY: BROOKLYN STATE: NY ZIP: 11226 FORMER COMPANY: FORMER CONFORMED NAME: BioPharma d'Azur, Inc. DATE OF NAME CHANGE: 20140331 10-Q 1 azrx10q_sep302018.htm QUARTERLY REPORT 10-Q
DRAFT
 
 

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2018
 
OR
 
[  ] TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT OF 1934
 
From the transition period from               to              
 
Commission File Number 001-37853
 
 
AZURRX BIOPHARMA, INC.
(Exact name of small business issuer as specified in its charter)
 
Delaware
46-4993860
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
 
760 Parkside Avenue
Downstate Biotechnology Incubator, Suite 304
Brooklyn, New York 11226
(Address of principal executive offices)
 
(646) 699-7855
(Issuer’s telephone number)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]    No [ ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [X]    No [  ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
[   ]
Accelerated filer
[   ]
Non-accelerated filer
[   ] 
Smaller reporting company
[   ]
(Do not check if a smaller reporting company)
Emerging growth company 
[X]
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [    ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ]    No [X]
 
As of November 9, 2018, there were 16,940,462 shares of the registrant’s common stock, $0.0001 par value, issued and outstanding.
  
 
 

 
DRAFT
 
 
 
  TABLE OF CONTENTS
 
 
 
 
 
-i-
DRAFT
 
 
 
PART I
 
FINANCIAL INFORMATION
 
ITEM  1.   CONSOLIDATED FINANCIAL STATEMENTS
 
In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly our financial position, results of operations, and cash flows for the interim periods presented. We have condensed such financial statements in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Therefore, such financial statements do not include all disclosures required by accounting principles generally accepted in the United States of America. In preparing these consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the consolidated financial statements were issued by filing with the SEC.
 
These financial statements should be read in conjunction with our audited financial statements for the year ended December 31, 2017 included in our Annual Report filed on Form 10-K, filed with the SEC on March 16, 2018.
 
The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the fiscal year ended December 31, 2018.
 
 
 
 
-1-
DRAFT
 
 
 
 
AZURRX BIOPHARMA, INC.
 
 
 
 
 
 
Consolidated Balance Sheets (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
 
 
December 31,
 
 
 
2018
 
 
2017
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
Cash
 $4,427,640 
 $573,471 
Other receivables
  1,197,196 
  1,104,134 
Prepaid expenses
  58,457 
  274,963 
Total Current Assets
  5,683,293 
  1,952,568 
 
    
    
Property, equipment, and leasehold improvements, net
  136,963 
  133,987 
 
    
    
Other Assets:
    
    
 In process research and development, net
  271,486 
  307,591 
 License agreements, net
  488,460 
  1,038,364 
 Goodwill
  1,952,724 
  2,016,240 
 Deposits
  45,442 
  30,918 
Total Other Assets
  2,758,112 
  3,393,113 
Total Assets
 $8,578,368 
 $5,479,668 
 
    
    
LIABILITIES AND STOCKHOLDERS' EQUITY
    
    
 
    
    
Current Liabilities:
    
    
Accounts payable and accrued expenses
 $826,410 
 $1,187,234 
Accounts payable and accrued expenses - related party
  639,635 
  868,105 
Note payable
  - 
  159,180 
Convertible debt
  - 
  257,365 
Interest payable
  - 
  7,192 
Total Current Liabilities
  1,466,045 
  2,479,076 
 
    
    
Contingent consideration
  1,580,000 
  1,340,000 
Total Liabilities
  3,046,045 
  3,819,076 
 
    
    
Stockholders' Equity:
    
    
Convertible preferred stock - Par value $0.0001 per share; 10,000,000 shares authorized and 0 shares issued and outstanding at September 30, 2018 and December 31, 2017; liquidation preference approximates par value
  - 
  - 
Common stock - Par value $0.0001 per share; 100,000,000 shares authorized; 16,940,462 and 12,042,574 shares issued and outstanding, respectively, at September 30, 2018 and December 31, 2017
  1,694 
  1,205 
Additional paid-in capital
  50,123,691 
  37,669,601 
Subscriptions receivable
  - 
  (1,071,070)
Accumulated deficit
  (43,497,239)
  (33,983,429)
Accumulated other comprehensive loss
  (1,095,823)
  (955,715)
Total Stockholders' Equity
  5,532,323 
  1,660,592 
Total Liabilities and Stockholders' Equity
 $8,578,368 
 $5,479,668 
 
See accompanying notes to consolidated financial statements
 
 
-2-
DRAFT
 
 
 
AZURRX BIOPHARMA, INC.
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Operations and Comprehensive Loss (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months
 
 
Three Months
 
 
Nine Months
 
 
Nine Months
 
 
 
Ended
 
 
Ended
 
 
Ended
 
 
Ended
 
 
 
09/30/18
 
 
09/30/17
 
 
09/30/18
 
 
09/30/17
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development expenses
 $1,168,874 
 $966,685 
 $3,772,679 
 $2,244,244 
General and administrative expenses
  1,317,132 
  2,009,432 
  5,400,712 
  5,564,800 
Fair value adjustment, contingent consideration
  80,000 
  (250,000)
  240,000 
  110,000 
 
    
    
    
    
Loss from operations
  (2,566,006)
  (2,726,117)
  (9,413,391)
  (7,919,044)
 
    
    
    
    
Other:
    
    
    
    
   Interest expense
  (5,629)
  (408,106)
  (100,418)
  (696,327)
Total other
  (5,629)
  (408,106)
  (100,418)
  (696,327)
 
    
    
    
    
Loss before income taxes
  (2,571,635)
  (3,134,223)
  (9,513,809)
  (8,615,371)
 
    
    
    
    
Income taxes
  - 
  - 
  - 
  - 
 
    
    
    
    
Net loss
  (2,571,635)
  (3,134,223)
  (9,513,809)
  (8,615,371)
 
    
    
    
    
Other comprehensive loss:
    
    
    
    
  Foreign currency translation adjustment
  (36,215)
  439,299 
  (140,108)
  439,299 
Total comprehensive loss
 $(2,607,850)
 $(2,694,924)
 $(9,653,917)
 $(8,176,072)
 
    
    
    
    
Basic and diluted weighted average shares outstanding
  16,889,519 
  11,242,616 
  14,895,323 
  10,318,709 
 
    
    
    
    
Loss per share - basic and diluted
 $(0.15)
 $(0.28)
 $(0.64)
 $(0.83)
 
See accompanying notes to consolidated financial statements
 
 
 
-3-
DRAFT
 
 
 
AZURRX BIOPHARMA, INC.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Changes in Stockholders' Equity (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 Convertible
 
 
 
 
 
 
 
 
Additional
 
 
 
 
 
 
 
 
Other
 
 
 
 
 
 
Preferred Stock
 
 
 Common Stock
 
 
Paid In
 
 
Subscriptions
 
 
Accumulated
 
 
Comprehensive
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Receivable
 
 
Deficit
 
 
Loss
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2017
  - 
 $- 
  9,631,088 
 $963 
 $27,560,960 
 $- 
 $(22,887,047)
 $(1,461,875)
 $3,213,001 
 
    
    
    
    
    
    
    
    
    
Common stock and warrants issued in private placement
    
    
  1,542,858 
  154 
  5,009,071 
    
    
    
  5,009,225 
Common stock issued from conversion of convertible debt
    
    
  189,256 
  19 
  717,107 
    
    
    
  717,126 
Stock-based compensation
    
    
    
    
  588,151 
    
    
    
  588,151 
Restricted stock granted to consultants
    
    
  58,500 
  6 
  225,179 
    
    
    
  225,185 
Warrants issued to consultants
    
    
    
    
  576,902 
    
    
    
  576,902 
Warrants issued in association with convertible debt issuances
    
    
    
    
  246,347 
    
    
    
  246,347 
Beneficial conversion feature on convertible debt issuances
    
    
    
    
  395,589 
    
    
    
  395,589 
Foreign currency translation adjustment
    
    
    
    
    
    
    
  439,299 
  439,299 
Net loss
    
    
    
    
    
    
  (8,615,371)
    
  (8,615,371)
Balance, September 30, 2017
  - 
 $- 
  11,421,702 
 $1,142 
 $35,319,306 
 $- 
 $(31,502,418)
 $(1,022,576)
 $2,795,454 
 
    
    
    
    
    
    
    
    
    
 
    
    
    
    
    
    
    
    
    
Balance, January 1, 2018
  - 
 $- 
  12,042,574 
 $1,205 
 $37,669,601 
 $(1,071,070)
 $(33,983,429)
 $(955,715)
 $1,660,592 
 
    
    
    
    
    
    
    
    
    
Common stock issued from public offering
    
    
  4,160,000 
  416 
  9,577,647 
    
    
    
  9,578,063 
Common stock issued to consultants
    
    
  118,818 
  12 
  360,759 
    
    
    
  360,771 
Common stock issued for warrant exercises
    
    
  503,070 
  49 
  1,253,623 
  1,071,070 
    
    
  2,324,742 
Stock-based compensation
    
    
    
    
  306,966 
    
    
    
  306,966 
Restricted stock granted to employees/directors
    
    
  90,000 
  9 
  457,677 
    
    
    
  457,686 
Convertible debt converted into common stock
    
    
  26,000 
  3 
  68,670 
    
    
    
  68,673 
Warrant modification
    
    
    
    
  428,748 
    
    
    
  428,748 
Foreign currency translation adjustment
    
    
    
    
    
    
    
  (140,108)
  (140,108)
Net loss
    
    
    
    
    
    
  (9,513,809)
    
  (9,513,809)
Balance, September 30, 2018
  - 
 $- 
  16,940,462 
 $1,694 
 $50,123,691 
 $- 
 $(43,497,239)
 $(1,095,823)
 $5,532,323 
  
 See accompanying notes to consolidated financial statements
 
 
-4-
DRAFT
 
 
 
AZURRX BIOPHARMA, INC.
 
 
 
 
 
 
Consolidated Statements of Cash Flows (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months
 
 
Nine Months
 
 
 
Ended
 
 
Ended
 
 
 
09/30/18
 
 
09/30/17
 
Cash flows from operating activities:
 
 
 
 
 
 
   Net loss
 $(9,513,809)
 $(8,615,371)
   Adjustments to reconcile net loss to net cash used in
    
    
   operating activities:
    
    
         Depreciation
  46,073 
  35,851 
         Amortization
  558,716 
  520,734 
         Fair value adjustment, contingent consideration
  240,000 
  110,000 
         Stock-based compensation
  306,966 
  588,151 
         Restricted stock granted to employees/directors
  457,686 
  - 
         Restricted stock granted/accrued to consultants
  360,771 
  225,179 
         Warrants issued to consultants
  - 
  576,902 
         Accreted interest on convertible debt
  - 
  96,558 
         Convertible debt beneficial conversion feature
  - 
  368,850 
         Accreted interest on debt discount - warrants
  97,837 
  229,695 
         Warrant modification
  428,748 
  - 
     Changes in assets and liabilities:
    
    
         Other receivables
  (134,052)
  861,507 
         Prepaid expenses
  216,236 
  165,213 
         Deposits
  (15,000)
  5,625 
         Accounts payable and accrued expenses
  (571,616)
  115,602 
         Interest payable
  (7,192)
  - 
Net cash used in operating activities
  (7,528,636)
  (4,715,504)
 
    
    
Cash flows from investing activities:
    
    
     Purchase of property and equipment
  (48,359)
  (31,953)
Net cash used in investing activities
  (48,359)
  (31,953)
 
    
    
Cash flows from financing activities:
    
    
     Net proceeds from issuances of common stock and warrants
 9,578,063
  5,009,225 
     Net proceeds from common stock issued for warrant exercises
  2,324,742 
  - 
     Proceeds from issuances of convertible debt
  - 
  1,000,000 
     Repayments of convertible debt
  (286,529)
  - 
     Repayments of note payable
  (159,180)
  (155,187)
Net cash provided by financing activities
  11,457,096
  5,854,038 
 
    
    
Increase in cash
  3,880,101
  1,106,581 
 
    
    
Effect of exchange rate changes on cash
  (25,932)
  66,146 
 
    
    
Cash, beginning balance
  573,471 
  1,773,525 
 
    
    
Cash, ending balance
 $4,427,640 
 $2,946,252 
 
    
    
Supplemental disclosures of cash flow information:
    
    
     Cash paid for interest
 $2,581 
 $1,224 
 
    
    
     Cash paid for income taxes
 $- 
 $- 
 
    
    
Non-cash investing and financing activities:
    
    
 
    
    
   Conversion of convertible debt into common stock
 $68,673 
 $717,107 
 
See accompanying notes to consolidated financial statements
 
 
 
-5-
DRAFT
 
 
Notes to Unaudited Consolidated Financial Statements
 
Note 1 - The Company, Recent Development, and Basis of Presentation
 
The Company
 
AzurRx BioPharma, Inc. (“AzurRx” or “Parent”) was incorporated on January 30, 2014 in the State of Delaware. In June 2014, the Company acquired 100% of the issued and outstanding capital stock of AzurRx BioPharma SAS (formerly “ProteaBio Europe SAS”), a company incorporated in October 2008 under the laws of France that had been a wholly-owned subsidiary of Protea Biosciences, Inc., or Protea Sub, in turn a wholly-owned subsidiary of Protea Biosciences Group, Inc., a publicly-traded company. AzurRx and its wholly-owned subsidiary, AzurRx Biopharma SAS (“ABS”), are collectively referred to as the “Company.”
 
AzurRx, through its ABS subsidiary, is engaged in the research and development of non-systemic biologics for the treatment of patients with gastrointestinal disorders. Non-systemic biologics are non-absorbable drugs that act locally, i.e. the intestinal lumen, skin or mucosa, without reaching an individual’s systemic circulation.
 
Within our current product pipeline, our two most advanced therapeutic programs are described below:
 
MS1819-SD
 
MS1819-SD is a yeast derived recombinant lipase for exocrine pancreatic insufficiency (“EPI”) associated with chronic pancreatitis (“CP”) and cystic fibrosis (“CF”). A lipase is an enzyme that breaks up fat molecules. MS1819-SD is considered recombinant because it was created from new combinations of genetic material in yeast called Yarrowia lipolytica. The Company recently completed an open-label, dose escalation Phase IIa trial of MS1819-SD in France, Australia, and New Zealand to investigate both the safety of escalating doses of MS1819-SD, and the efficacy of MS1819-SD through the analysis of each patient’s coefficient of fat absorption (“CFA”) and its change from baseline. A total of 11 patients with EPI were enrolled in the study and initial data show a strong safety and efficacy profile. Both clinical activity and a clear dose response were observed, with the highest MS1819-SD dose cohort showing greater than 21% improvement in CFA in evaluable patients. Additionally, maximal absolute CFA response to treatment was up to 57%, with an inverse relationship to baseline CFA. Favorable trends were also observed on other evaluated endpoints, including Bristol stool scale, number of daily evacuations and weight of stool, and these were consistent with the CFA results. On October 16, 2018, the Company announced that the U.S. Food and Drug Administration (“FDA”) cleared the Company’s Investigational New Drug (“IND”) application for MS1819-SD in patients with EPI due to CF. The Company currently anticipates formal data from the Phase IIa study in the fall of 2018 and expects to begin a planned Phase IIb study focused on enrolling patients with CF by the end of 2018.
 
B-Lactamase Program
 
The Company’s b-lactamase program focuses on products with an enzymatic combination of bacterial origin for the prevention of hospital-acquired infections and antibiotic-associated diarrhea (“AAD”) by resistant bacterial strains induced by parenteral administration of several antibiotic classes. Currently, the Company has two compounds in pre-clinical development in this program, AZX1101 and AZX1103. Both AZX1101 and AZX1103 are composed of several distinct enzymes that break up individual classes of antibiotic molecules. AZX1103 is a b-lactamase enzyme combination that has shown positive pre-clinical activity, with degradation of amoxicillin in the presence of clavulanic acid in the upper gastrointestinal tract in the Gottingen minipig model. Currently, the Company is focused on advancing pre-clinical development of AZX1103 and expects to file an Investigational New Drug application (an “IND”) for AZX1103 with the U.S. Food and Drug Administration (“FDA”) in 2019. At this time, the Company is currently assessing its plans for the continuation of the development of AZX1101.
 
 
 
 
-6-
DRAFT
 
 
Notes to Unaudited Consolidated Financial Statements
 
Recent Developments
 
Public Offering of Common Stock
 
On May 3, 2018, the Company completed an underwritten, public offering of 4,160,000 shares of its common stock, par value $0.0001 per share, at a public offering price per share of $2.50, resulting in gross proceeds of $10.4 million (the “May 2018 Public Offering”) with associated expenses of approximately $800,000. The May 2018 Public Offering was completed pursuant to the terms of an underwriting agreement executed by the Company and Oppenheimer & Co. Inc. (“Oppenheimer”) on May 1, 2018. After deducting the underwriting discount paid to Oppenheimer, legal fees, and other offering expenses payable by the Company, the Company received net proceeds of approximately $9.6 million.
 
In addition to the underwriting discount received by Oppenheimer, the Company also issued unregistered warrants to Oppenheimer to purchase up to 208,000 shares of its common stock (the “Underwriter Warrants”). The Underwriter Warrants, valued at $349,232, became exercisable six months from the date of issuance, expire on May 1, 2023 and have an exercise price of $2.55 per share. As a result of certain investors participating in the Offering, the Company also paid a financial advisory fee to Alexander Capital, LP, consisting of a cash payment of approximately $104,000 and the issuance of warrants valued at $67,194, substantially similar to the Underwriter Warrants, to purchase up to 36,400 shares of its common stock at an exercise price of $2.75 per share.
 
Sanction of Cystic Fibrosis Therapeutics Development Network f or the Study of MS1819-SD in CF Patients
 
On November 1, 2018, the Company announced that the Company's Phase II study protocol to investigate MS1819-SD in CF patients with EPI has received sanction from the Therapeutics Development Network, a collaborative network of CF clinical trial specialists supported by the Cystic Fibrosis Foundation.
 
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, 2017, 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”). We believe that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited interim consolidated financial statements are read in conjunction with the audited financial statements and notes previously distributed in our Annual Report Form 10-K for the year ended December 31, 2017, filed with the SEC on March 16, 2018.
 
The unaudited interim consolidated financial statements include the accounts of AzurRx and its wholly-owned subsidiary, AzurRx Europe SAS. Intercompany transactions and balances have been eliminated upon consolidation.
 
The accompanying unaudited interim consolidated financial statements have been prepared as if the Company will continue as a going concern. The Company has incurred significant operating losses and negative cash flows from operations since inception, had working capital at September 30, 2018 of approximately $4,217,000, and had an accumulated deficit of approximately $43,497,000 at September 30, 2018. The Company currently believes that its cash on hand will sustain its operations until June 2019. The Company is dependent on obtaining, and continues to pursue, additional working capital funding from the sale of securities in order to continue to execute the 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. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 
 
-7-
DRAFT
 
 
Notes to Unaudited Consolidated Financial Statements
 
Note 2 - Significant Accounting Policies and Recent Accounting Pronouncements
 
Use of Estimates
The accompanying 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.
 
Concentrations
Financial instruments that potentially expose the Company to concentrations of credit risk consist of cash. The Company primarily maintains its cash balances with financial institutions in federally-insured accounts in the U.S. The Company may from time to time have cash in banks in excess of FDIC insurance limits. At September 30, 2018 and December 31, 2017, the Company had $3,902,190 and $78,859, respectively, in one account in the U.S. in excess of these limits. The Company has not experienced any losses to date resulting from this practice.
 
The Company also has exposure to foreign currency risk as its subsidiary in France has a functional currency in Euros.
 
Equity-Based Payments to Non-Employees
The Company accounts for equity instruments, including restricted stock, stock options and warrants, issued to non-employees in accordance with authoritative guidance for equity-based payments to non-employees. All transactions in which goods or services are received in exchange for equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date of the fair value of the equity instrument issued is the earlier of (i) the date of grant if nonforfeitable and fully vested, or (ii) the date the non-employee's performance is completed and there is no further associated performance commitment. The fair value of unvested equity instruments granted to non-employees is re-measured at each reporting date, and the resulting change in value, if any, is recognized as expense during the period the related services are rendered. The expense is recognized in the same manner as if we had paid cash for the services provided by the non-employees.
 
Research and Development
Research and development (“R&D”) costs are charged to operations when incurred and are included in operating expenses. R&D costs consist principally of compensation of employees and consultants that perform the Company’s research activities, the fees paid to maintain the Company’s licenses, and the payments to third parties for clinical trial and additional product development and testing.
 
Foreign Currency Translation
For foreign subsidiaries with operations denominated in a foreign currency, assets and liabilities are translated to U.S. dollars, which is the functional currency, at period end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the periods presented. Gains and losses from translation adjustments are accumulated in a separate component of shareholders’ equity.
 
Revenue Recognition
The Company is still in its development stage and is not generating revenues. When revenues are generated, the Company will follow the provisions of FASB Accounting Standards Codification (“ASC” or the “Codification”) Topic 606, Revenue From Contracts With Customers.
 
Recent Accounting Pronouncements
In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which amends the Codification to expand the scope of FASB ASC Topic 718, Compensation—Stock Compensation, to include share-based payment transactions for acquiring goods and services from non-employees. Guidance on accounting for non-employee share-based payment arrangements, which differs significantly in many respects from that for employee share-based payment transactions, was included in FASB ASC Subtopic 505-50, Equity—Equity Based Payments to Non-Employees. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods. The Company is currently assessing this pronouncement and believes this will not have a significant impact on the Company’s financial statements.
 
 
 
-8-
DRAFT
 
 
Notes to Unaudited Consolidated Financial Statements
 
In July 2017, the FASB issued ASU 2017-11, Earnings per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815). ASU 2017-11 provides guidance on accounting for financial instruments with down round features and clarifies the deferral of certain provisions in Topic 480. ASU 2017-11 will become effective for annual periods beginning after December 15, 2018 and interim periods within those periods. Early adoption is permitted. The adoption of this pronouncement did not have an impact on the Company’s financial statements.
 
In January 2017, the FASB issued guidance to simplify the subsequent measurement of goodwill impairment. The new guidance eliminates the two-step process that required identification of potential impairment and a separate measure of the actual impairment. Goodwill impairment charges, if any, would be determined by reducing the goodwill balance by the difference between the carrying value and the reporting unit’s fair value (impairment loss is limited to the carrying value). This standard is effective for annual or any interim goodwill impairment tests beginning after December 15, 2019. The Company believes that the adoption of this pronouncement will not have an impact on the Company’s measurement of goodwill impairment.
 
In February 2016, the FASB issued an ASU which requires lessees to recognize lease assets and lease liabilities arising from operating leases on the balance sheet. This ASU is effective for annual and interim reporting periods beginning after December 15, 2018 using a modified retrospective approach, with early adoption permitted. The Company believes that the adoption of this pronouncement will not have a material impact on the Company's financial statements. We believe that the most significant changes relate to the recognition of new right-of-use assets and lease liabilities on the balance sheet for office space and research facilities.
 
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.
 
At September 30, 2018 and December 31, 2017, the Company had Level 3 instruments consisting of contingent consideration in connection with the Protea Europe SAS acquisition, see Note 7.
 
The following tables summarize the Company’s financial instruments measured at fair value on a recurring basis:
 
 
 
Fair Value Measurements at Reporting Date Using
 
 
 
Total
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
At September 30, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration
 $1,580,000 
 $- 
 $- 
 $1,580,000 
 
    
    
    
    
At December 31, 2017:
    
    
    
    
Contingent consideration
 $1,340,000 
 $- 
 $- 
 $1,340,000 
 
The following table provides a reconciliation of the fair value of liabilities using Level 3 significant unobservable inputs:
 
 
 
Contingent
 
 
 
Consideration
 
Balance at December 31, 2017
 $1,340,000 
Change in fair value
  240,000 
Balance at September 30, 2018
 $1,580,000 
 
 
 
-9-
DRAFT
 
 
Notes to Unaudited Consolidated Financial Statements
 
The contingent consideration was valued by incorporating a series of Black-Scholes Option Pricing Models (“BSM”) into a discounted cash flow framework. Significant unobservable inputs used in this calculation at September 30, 2018 and December 31, 2017 included projected net sales over a period of patent exclusivity (seven years), discounted by (i) the Company’s weighted average cost of capital (32.6% and 32.4%, respectively), (ii) the contractual hurdle amount of $100 million that replaces the strike price input in the traditional BSM, (iii) asset volatility (85.3% and 83.1%, respectively), that replaces the equity volatility in the traditional BSM, (iv) risk-free rates (ranging from 2.48% to 3.02% and 1.8% to 2.4%, respectively), and (v) an option-adjusted spread (1.29% and 0.6%, respectively) that is applied to these payments to account for the payer’s risk and arrive at a fair value of the expected payment.
 
The fair value of the Company's financial instruments are as follows:
 
 
 
 
 
 
Fair Value Measured at Reporting Date Using
 
 
 
 
 
 
Carrying Amount
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Fair Value
 
At September 30, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 $4,427,640 
 $- 
 $4,427,640 
 $- 
 $4,427,640 
Other receivables
 $1,197,196 
 $- 
 $- 
 $1,197,196 
 $1,197,196 
 
    
    
    
    
    
At December 31, 2017:
    
    
    
    
    
Cash
 $573,471 
 $- 
 $573,471 
 $- 
 $573,471 
Other receivables
 $1,104,134 
 $- 
 $- 
 $1,104,134 
 $1,104,134 
Notes payable
 $159,180 
 $- 
 $- 
 $159,180 
 $159,180 
Convertible debt
 $257,365 
 $- 
 $- 
 $387,201 
 $387,201 
 
    
    
    
    
    
 
The fair value of other receivables approximates carrying value as these consist primarily of French R&D tax credits that are normally received within nine months from year end and amounts due from our collaboration partner Laboratoires Mayoly Spindler SAS (“Mayoly”). See Note 15.
 
The fair value of note payable approximates carrying value due to the terms of such instruments and applicable interest rates.
 
The fair value of convertible debt is based on the par value plus accrued interest through the date of reporting due to the terms of such instruments and interest rates, or the current interest rates of similar instruments.
 
Note 4 - Other Receivables
 
Other receivables consisted of the following:
 
 
 
September 30,
 
 
December 31,
 
 
 
2018
 
 
2017
 
R&D tax credits
 $924,815 
 $954,897 
Other
  272,381 
  149,237 
Total other receivables
 $1,197,196 
 $1,104,134 
 
The R&D tax credits are refundable tax credits for research conducted in France. Other consists primarily of amounts due from collaboration partner Mayoly, (see Note 15), and non-income tax related items from French government entities.
 
 
 
-10-
DRAFT
 
 
Notes to Unaudited Consolidated Financial Statements
 
Note 5 - Property, Equipment and Leasehold Improvements
 
Property, equipment and leasehold improvements consisted of the following:
 
 
 
September 30,
 
 
December 31,
 
 
 
2018
 
 
2017
 
Laboratory equipment
 $190,406 
 $165,611 
Computer equipment
  67,693 
  44,364 
Office equipment
  37,263 
  36,334 
Leasehold improvements
  29,163 
  29,163 
Total property, plant and equipment
  324,525 
  275,472 
Less accumulated depreciation
  (187,562)
  (141,485)
Property, plant and equipment, net
 $136,963 
 $133,987 
 
Depreciation expense for the three months ended September 30, 2018 and 2017 was $15,653 and $12,727, respectively. Depreciation expense for the nine months ended September 30, 2018 and 2017 was $46,073 and $35,851, respectively. Depreciation expense is included in general and administrative (“G&A”) expense.
 
Note 6 - Intangible Assets and Goodwill
 
Intangible assets are as follows:
 
 
 
September 30,
 
 
December 31,
 
 
 
2018
 
 
2017
 
In process research and development
 $422,638 
 $436,385 
Less accumulated amortization
  (151,152)
  (128,794)
In process research and development, net
 $271,486 
 $307,591 
 
    
    
License agreements
 $3,447,955 
 $3,560,107 
Less accumulated amortization
  (2,959,495)
  (2,521,743)
License agreements, net
 $488,460 
 $1,038,364 
 
Amortization expense for the three months ended September 30, 2018 and 2017 was $181,217 and $164,877, respectively. Amortization expense for the nine months ended September 30, 2018 and 2017 was $558,716 and $520,734, respectively.
 
As of September 30, 2018, amortization expense is expected to be as follows for the next five years:
 
2018 (balance of year)
 $181,203 
2019
  351,282 
2020
  35,220 
2021
  35,220 
2022
  35,220 
2023
  35,220 
 
Goodwill is as follows:
 
 
 
Goodwill
 
Balance at December 31, 2017
 $2,016,240 
Foreign currency translation
  (63,516)
Balance at September 30, 2018
 $1,952,724 
 
 
 
-11-
DRAFT
 
 
Notes to Unaudited Consolidated Financial Statements
 
Note 7 - Contingent Consideration
 
On June 13, 2014, the Company executed a stock purchase agreement (the “SPA”) with Protea Biosciences Group, Inc. (“Protea Group”). Pursuant to the SPA, the Company is obligated to pay Protea certain contingent consideration in U.S. dollars upon the satisfaction of certain events, including (i) a one-time milestone payment of $2,000,000 due within (10) days of receipt of the first approval by the FDA of a New Drug Application (“NDA”) or Biologic License Application (“BLA”) for a Business Product (as such term is defined in the SPA). (ii) royalty payments equal to 2.5% of net sales of Business Product up to $100,000,000 and 1.5% of net sales of Business Product in excess of $100,000,000, and (iii) 10% of the Transaction Value (as defined in the SPA) received in connection with a sale or transfer of the pharmaceutical development business of Protea Europe, see Note 3.
 
Note 8 - Accounts Payable and Accrued Expenses
 
Accounts payable and accrued expenses consisted of the following:
 
 
 
September 30,
 
 
December 31,
 
 
 
2018
 
 
2017
 
Trade payables
 $503,924 
 $705,041 
Accrued expenses
  164,400 
  262,200 
Accrued payroll
  158,086 
  219,993 
Total accounts payable and accrued expenses
 $826,410 
 $1,187,234 
 
Note 9 - Note Payable
 
On October 30, 2017, the Company entered into a nine-month financing agreement for its directors and officer’s liability insurance in the amount of $237,137 that bears interest at an annual rate of 5.537%. Monthly payments, including principal and interest, are $26,960 per month. The balance due under this financing agreement at September 30, 2018 and December 31, 2017 was $0 and $159,180, respectively.
 
Note 10 - Original Issue Discounted Convertible Notes and Warrants
 
LPC OID Debenture
On April 11, 2017, the Company entered into a Note Purchase Agreement with Lincoln Park Capital Fund, LLC (“LPC”), pursuant to which the Company issued a 12% Senior Secured Original Issue Discount Convertible Debenture (the “Debenture”) to LPC. The principal and original issue discount of $1,120,000 due under the terms of the Debenture were due on the Maturity Date, which is defined as the earlier to occur of (i) November 10, 2017 or (ii) on the fifth business day following the receipt by the Company or its wholly-owned subsidiary, ABS, of certain tax credits that the Company received prior to November 10, 2017 (the “Tax Credit”). In connection with the issuance of the Debenture, the Company issued to LPC a warrant giving LPC the right to purchase 164,256 shares of the Company’s common stock at an exercise price of $4.2592 per share (“LPC Series A Warrant”) that terminates five years after the date of issuance.
 
On November 10, 2017, the Company and LPC modified the Debenture to extend the Maturity Date to November 29, 2017, subject to the Company’s right to extend the Maturity Date to July 11, 2018 (the “Extension Option”) in exchange for 30,000 shares of the Company’s common stock which were valued at $90,300 and charged to interest expense. The Company exercised its Extension Option on November 29, 2017 and issued LPC an additional warrant to purchase 164,256 shares of the Company’s common stock at an exercise price of $3.17 per share (“LPC Series B Warrant”) that terminates five years after the date of issuance. The Company accounted for the LPC Series B Warrant feature of the Debenture based upon the relative fair value of the warrants on the date of issuance of the Debenture of $164,325, which was recorded as additional paid in capital and a discount to the Debenture.
 
 
 
-12-
DRAFT
 
 
Notes to Unaudited Consolidated Financial Statements
 
The principal and original issue discount amount of the Debenture is convertible into shares of the Company’s common stock at LPC’s option, at a conversion price equal to $3.872 (“Conversion Price”). Provided certain conditions related to compliance with the terms of the Debenture are satisfied, the closing price of the Company’s common stock exceeds 150% of the Conversion Price, the median daily volume for the preceding 30 days exceeds 50,000 shares per day, among other conditions, the Company may, at its option, force conversion of the Debenture for an amount equal to the outstanding balance of the principal and original issue discount of the Debenture. During the year ended December 31, 2017, LPC elected to convert $717,126 of the Debenture pursuant to which LPC received 189,256 shares of common stock. On January 10, 2018, LPC elected to convert $100,672 of the Debenture pursuant to which LPC received 26,000 shares of common stock.
 
On July 11, 2018, the Company paid off the remaining amount due under the terms of this Debenture in the amount of $286,529.
 
The obligations under the Debenture were guaranteed by ABS, as well as a security agreement providing LPC with a secured interest in the Tax Credit.
 
For the three months ended September 30, 2018 and 2017, the Company recorded $5,505 and $408,048, respectively, of interest expense related to the amortization of the debt discount and beneficial conversion feature related to the warrant features of the Debenture. For the nine months ended September 30, 2018 and 2017, the Company recorded $97,837 and $695,103, respectively, of interest expense related to the amortization of the debt discount and beneficial conversion feature related to the warrant features of the Debenture.
 
At December 31, 2017, Convertible Debt consisted of:
 
 
 
December 31,
 
 
 
2017
 
Convertible debt
 $352,713 
Accreted OID interest
  34,488 
Unamortized debt discount - warrants
  (129,836)
Total convertible debt
 $257,365 
 
Note 11 - Equity
 
Common Stock
At September 30, 2018 and December 31, 2017, the Company had 16,940,462 and 12,042,574, respectively, of shares of its common stock issued and outstanding.
 
Stock Option Plan
The Company’s board of directors and stockholders have adopted and approved the Amended and Restated 2014 Omnibus Equity Incentive Plan (the “2014 Plan”), which took effect on May 12, 2014. During the three months ended September 30, 2018 and 2017, no stock options were granted under the 2014 Plan. During the nine months ended September 30, 2018 and 2017, the Company granted 539,000 and 190,000, respectively, of stock options under the 2014 Plan, see Note 13.
 
Series A Convertible Preferred Stock
At September 30, 2018 and December 31, 2017, there were no Series A Convertible Preferred Stock (“Series A Preferred”) outstanding and all terms of the Series A Preferred are still in effect.
 
 
 
-13-
DRAFT
 
 
Notes to Unaudited Consolidated Financial Statements
 
June 2017 Private Placement
On June 5, 2017, the Company entered into Securities Purchase Agreements (the “Purchase Agreements”) with certain accredited investors (“Investors”), pursuant to which the Company issued an aggregate of 1,428,572 units for $3.50 per unit, with each unit consisting of one share of Common Stock, one Series A Warrant to purchase 0.25 shares of Common Stock at $4.00 per share exercisable immediately through December 31, 2017, and one Series A-1 Warrant to purchase 0.75 shares of Common Stock at $5.50 per share exercisable beginning six months from the date of issuance through June 5, 2022 (together, “Units”) (the “Financing”). At closing of the Financing, the Company issued Units resulting in the issuance of an aggregate of 1,428,572 shares of Common Stock, Series A Warrants to purchase up to 357,144 shares of Common Stock, and Series A-1 Warrants to purchase up to 1,071,431 shares of Common Stock, resulting in gross proceeds of $5,000,000.
 
Placement agent fees of $350,475 were paid to Alexander Capital L.P. (“Alexander Capital”), based on 8% of the aggregate principal amount of the Units issued to certain investors identified by Alexander Capital (“Alexander Investors”), which amount includes both an 8% success fee and a 1% expense fee, and Series A-1 Warrants to purchase 77,950 shares of Common Stock were issued to Alexander Capital (the “Placement Agent Warrants”), reflecting warrants for that number of shares of Common Stock equal to 7% of the aggregate number of shares of Common Stock purchased by Alexander Investors. The Placement Agent Warrants are exercisable beginning December 2, 2017 at a fixed price of $6.05 per share, through June 5, 2022. The Company also incurred $4,000 in other fees associated with this placement. The placement agent and other fees are netted against the proceeds in the Consolidated Statements of Changes in Stockholders' Equity.
 
On June 20, 2017, the Company and Investors executed an amendment to the Purchase Agreements authorizing the Company to issue up to $400,000 in additional Units, and on July 5, 2017, the Company issued additional Units resulting in gross proceeds of $400,000 (“Subsequent Closing”). Placement agent fees of $36,000 were paid to Alexander Capital, as well as additional Placement Agent Warrants to purchase 5,760 shares of Common Stock. In connection with the Subsequent Closing, the Company issued 114,287 shares of Common Stock, Series A and Series A-1 Warrants to purchase 28,572 and 85,715 shares, respectively. The placement agent fees are netted against the proceeds in the Consolidated Statements of Changes in Stockholders' Equity.
 
Restricted Stock
During the three months ended September 30, 2018, 30,000 shares of restricted common stock were granted or accrued to employees and consultants with a total value of $77,100. During the three months ended September 30, 2018, 5,000 shares of restricted common stock were canceled to employees and consultants with a total value of $15,200. During the three months ended September 30, 2018, 43,750 shares of restricted common stock vested with a value of $97,424 of which an aggregate of 30,000 shares with a value of $77,100 have been issued to our directors as a part of Board compensation. During the nine months ended September 30, 2018, 409,000 shares of restricted common stock were granted or accrued to employees and consultants with a total value of $1,241,560. During the nine months ended September 30, 2018, 5,000 shares of restricted common stock were canceled to employees and consultants with a total value of $15,200. During the nine months ended September 30, 2018, 202,584 shares of restricted common stock vested with a value of $653,406 of which an aggregate of 90,000 shares with a value of $267,600 have been issued to our directors as a part of Board compensation. The restricted common stock granted have vesting terms ranging from immediately to three years or based on the Company achieving certain milestones as set forth below.
 
As of September 30, 2018, the Company had unrecognized restricted common stock expense of $1,204,653. $426,863 of this unrecognized expense will be recognized over the average remaining vesting term of the restricted common stock of 2.48 years. $497,604 of this unrecognized expense will vest in the fourth quarter of 2018 as the FDA has accepted the MS1819 IND application in the U. S. $178,853 of this unrecognized expense vests upon the first dosing of a CF patient with MS1819 anywhere in the world. $101,333 vests upon the enrollment of the first 30 patients in a CF trial. As of September 30, 2018, the probability of these milestones being reached could not be determined.
 
During the three months ended September 30, 2017, 222,444 shares of restricted common stock were granted to employees and consultants with a total value of $895,368. During the three months ended September 30, 2017, 42,077 restricted shares of common stock vested with a value of $171,581. During the nine months ended September 30, 2017, 280,944 shares of restricted common stock were granted to employees and consultants with a total value of $1,116,853. During the nine months ended September 30, 2017, 93,464 restricted shares of common stock vested with a value of $367,319.
 
 
 
-14-
DRAFT
 
 
Notes to Unaudited Consolidated Financial Statements
 
On July 24, 2017, the Company entered into a consulting agreement that includes a grant of 40,000 shares of restricted common stock to the consultant contingent upon the approval of the Board, which as of November 9, 2018 has not been obtained.
 
On January 2, 2018, the Company entered into a consulting agreement that includes a grant of 43,000 shares of restricted common stock upon the approval of the Board. The Board approved this restricted stock grant on June 28, 2018 and the shares were issued on July 19, 2018.
 
Note 12 - Warrants
 
In January 2018, the Company offered warrant holders the opportunity to exercise their warrants at a reduced strike price of $2.50, and if so elected, would also have the opportunity to reprice other warrants that they continue to hold unexercised to $3.25. The offer, which was effective January 12, 2018, was for the repricing only and did not modify the life of the warrants. Warrant holders of approximately 503,000 shares exercised their warrants and also had other warrants modified on approximately 197,000 shares, which resulted in a charge of approximately $429,000 in the nine months ended September 30, 2018. Cash proceeds on the exercise of these warrants as well as the stock subscriptions as of December 31, 2017 of $1,071,070 amounted to approximately $2,300,000 in January 2018.
 
Stock warrant transactions for the periods January 1 through September 30, 2018 and 2017 are as follows:
 
 
 
 
 
 
Exercise
 
 
 Weighted
 
 
 
 
 
 
Price Per
 
 
Average
 
 
 
Warrants
 
 
Share
 
 
Exercise Price
 
 
 
 
 
 
 
 
 
 
 
Warrants outstanding and exercisable at January 1, 2017
  1,858,340 
 $4.76 - $7.37 
 $5.66 
 
    
    
    
Granted during the period
  2,040,824 
 $3.53 - $6.50 
 $5.16 
Expired during the period
  - 
  - 
  - 
Exercised during the period
  - 
  - 
  - 
Warrants outstanding and exercisable at September 30, 2017
  3,899,164 
 $3.53 - $7.37 
 $5.40 
 
    
    
    
Warrants outstanding and exercisable at January 1, 2018
  3,371,385 
 $3.17 - $7.37 
 $5.28 
 
    
    
    
Granted during the period
  244,400 
 $2.55 - $2.75 
 $2.58 
Expired during the period
  - 
  - 
  - 
Exercised during the period
  (503,070)
 $2.50 
 $2.50 
Warrants outstanding and exercisable at September 30, 2018
  3,112,715 
 $2.55 - $7.37 
 $4.83 
 
 
 
 
 
Number of
 
 
Weighted Average
 
Weighted
 
 
 
 
Shares Under
 
 
Remaining Contract
 
Average
 
Exercise Price
 
 
Warrants
 
 
Life in Years
 
Exercise Price
 $2.55 - $3.99 
  881,372 
  3.85 
 
 $4.00 - $4.99 
  196,632 
  3.26 
 
 $5.00 - $5.99 
  1,815,041 
  3.21 
 
 $6.00 - $6.99 
  187,750 
  3.01 
 
 $7.00 - $7.37 
  31,920 
  2.21 
 
 
Total
 
  3,112,715 
  3.37 
$4.83
 
 
 
-15-
DRAFT
 
 
Notes to Unaudited Consolidated Financial Statements
 
During the three months ended September 30, 2018, no warrants were issued to investment bankers. During the nine months ended September 30, 2018, 244,400 warrants were issued to investment bankers in association with the May 2018 Public Offering with a value of $416,426 that had no effect on expenses or stockholders’ equity.
 
During the three and nine months ended September 30, 2018, no warrants were issued to consultants.
 
During the three months ended September 30, 2017, no warrants were issued to consultants. 24,599 warrants issued to consultants were earned and expensed in the three months ended September 30, 2017 with a value of $64,962. During the nine months ended September 30, 2017, 250,000 warrants were issued to consultants. 239,037 warrants issued to consultants were earned and expensed in the nine months ended September 30, 2017 with a value of $550,012. The earned and expensed amounts were included in G&A expenses.
 
During the three months ended September 30, 2017, 114,283 warrants were issued in association with the June 2017 Private Placement of the Company’s common stock with a value of $185,452, which had no effect on expenses or stockholders’ equity. During the nine months ended September 30, 2017, 1,542,858 warrants were issued in association with the June 2017 Private Placement of the Company’s common stock with a value of $2,503,673, which had no effect on expenses or stockholders’ equity.
 
During the three and nine months ended September 30, 2017, 83,710 warrants were issued to investment bankers in association with the June 2017 Private Placement of the Company’s common stock that vested immediately with a value of $154,529, which had no effect on expenses or stockholders’ equity.
 
The weighted average fair value of warrants granted to non-employees during the three months ended September 30, 2017 was $2.13. The weighted average fair value of warrants granted to non-employees during the nine months ended September 30, 2018 and 2017 was $1.70 and $2.40, respectively. The fair value was estimated on the grant dates using the Black-Scholes option-pricing model with the following weighted-average assumptions:
 
 
 
September 30,
 
 
September 30,
 
 
 
2018
 
 
2017
 
Expected life (in years)
  5 
  5 
Volatility
  84%
  87
Risk-free interest rate
  2.70
  1.82% - 1.92%
Dividend yield
  -
  -
 
The expected term of the warrants is based on the actual term of the warrants. Volatility is based on the historical volatility of several public entities that are similar to the Company. The Company bases volatility this way because it does not have sufficient historical transactions in its own shares on which to solely base expected volatility. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected term at the grant date. The Company has not historically declared any dividends and does not expect to in the future.
 
 
 
-16-
DRAFT
 
 
Notes to Unaudited Consolidated Financial Statements
 
Note 13 - Stock-Based Compensation Plan
 
Under the 2014 Plan, the fair value of options granted is estimated on the grant date using the Black-Scholes option valuation model. This valuation model for stock-based compensation expense requires the Company to make assumptions and judgments about the variables used in the calculation, including the expected term (weighted-average period of time that the options granted are expected to be outstanding), the volatility of the common stock price and the assumed risk-free interest rate. The Company recognizes stock-based compensation expense for only those shares expected to vest over the requisite service period of the award. No compensation cost is recorded for options that do not vest and the compensation cost from vested options, whether forfeited or not, is not reversed.
 
During the three months ended September 30, 2018, no stock options were granted. 7,500 options vested in the three months ended September 30, 2018 having a fair value of $29,018. 90,000 stock options were canceled with exercise prices ranging from of $3.04 to $3.60.
 
During the nine months ended September 30, 2018, 539,000 stock options were granted with an exercise price of $3.04 and a term of five years. 111,250 options vested in the nine months ended September 30, 2018 having a fair value of $306,966. 90,000 stock options were canceled with exercise prices ranging from of $3.04 to $3.60. The weighted average fair value of stock options granted to employees during the nine months ended September 30, 2018 was $2.07.
 
During the three months ended September 30, 2017, 355,000 stock options were granted with exercise prices ranging from $3.60 to $4.39 and terms ranging from five to ten years. 7,500 options vested in the three months ended September 30, 2017 having a fair value of $29,018. The weighted average fair value of stock options granted to employees during the three months ended September 30, 2017 was $2.48.
 
During the nine months ended September 30, 2017, 545,000 stock options were granted with exercise prices ranging from $3.60 to $4.48 and terms ranging from five to ten years. 150,000 options vested in the nine months ended September 30, 2017 having a fair value of $580,351. The weighted average fair value of stock options granted to employees during the nine months ended September 30, 2017 was $2.96.
 
The fair values were estimated on the grant dates using the Black-Scholes option-pricing model with the following weighted-average assumptions:
 
 
 
September 30,
 
 
September 30,
 
 
 
2018
 
 
2017
 
Expected life (in years)
  5 
  5 - 10 
Volatility
  85%
  71% - 90%
Risk-free interest rate
  2.82%
  1.78 - 2.48%
Dividend yield
  -%
  -%
 
The expected term of the options is based on expected future employee exercise behavior. Volatility is based on the historical volatility of several public entities that are similar to the Company. The Company bases volatility this way because it does not have sufficient historical transactions in its own shares on which to solely base expected volatility. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected term at the grant date. The Company has not historically declared any dividends and does not expect to in the future.
 
The Company realized no income tax benefit from stock option exercises in each of the periods presented due to recurring losses and valuation allowances.
 
 
 
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Notes to Unaudited Consolidated Financial Statements
 
Stock option activity under the 2014 Plan for the periods January 1 through September 30, 2017 and 2018 is as follows:
 
 
 
 
 
 
 Weighted
 
 
Weighted Average
 
 
Aggregate
 
 
 
Number
 
 
Average
 
 
Remaining Contract
 
 
Intrinsic
 
 
 
of Shares
 
 
Exercise Price
 
 
Life in Years
 
 
Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock options outstanding at January 1, 2017
  - 
  - 
 
 
 
 
 
 
 
    
    
 
 
 
 
 
 
Granted during the period
  545,000 
 $4.05 
  7.38 
 $- 
Expired during the period
  - 
  - 
    
    
Exercised during the period
  - 
  - 
    
    
Stock options outstanding at September 30, 2017
  545,000 
 $4.05 
  7.38 
 $- 
 
    
    
    
    
Exercisable at September 30, 2017
  150,000 
 $4.48 
  7.38 
 $- 
 
    
    
    
    
Non-vested stock options outstanding at January 1, 2017
  - 
  - 
    
    
 
    
    
    
    
Granted during the period
  395,000 
 $3.89 
  6.64 
 $- 
Expired during the period
  - 
  - 
    
    
Exercised during the period
  - 
  - 
    
    
Non-vested stock options outstanding at September 30, 2017
  395,000 
 $3.89 
  6.64 
 $- 
 
    
    
    
    
 
    
    
    
    
Stock options outstanding at January 1, 2018
  545,000 
 $4.05 
  7.13 
 $- 
 
    
    
    
    
Granted during the period
  539,000 
 $3.04 
  5.00 
 $- 
Expired during the period
  - 
  - 
    
    
Canceled during the period
  (90,000)
 $3.26 
  4.41 
 $- 
Exercised during the period
  - 
  - 
    
    
Stock options outstanding at September 30, 2018
  994,000 
 $3.58 
  5.67 
 $- 
 
    
    
    
    
Exercisable at September 30, 2018
  260,000 
 $4.29 
  7.47 
 $- 
 
    
    
    
    
Non-vested stock options outstanding at January 1, 2018
  387,500 
 $3.89 
  6.39 
 $- 
 
    
    
    
    
Granted during the period
  539,000 
 $3.04 
  5.00 
 $- 
Vested during the period
  (111,250)
 $3.67 
  5.64 
 $- 
Expired during the period
  - 
  - 
    
    
Canceled during the period
  (81,250)
 $3.26 
  4.41 
 $- 
Exercised during the period
  - 
  - 
    
    
Non-vested stock options outstanding at September 30, 2018
  734,000 
 $3.32 
  5.04 
 $- 
 
 
 
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Notes to Unaudited Consolidated Financial Statements
 
390,318 shares were available for future issuance under the 2014 Plan as of September 30, 2018.
 
As of September 30, 2018, the Company had unrecognized stock-based compensation expense of $1,645,847. $38,690 of this unrecognized expense will be recognized over the average remaining vesting term of the options of 0.35 years. $1,105,491 of this unrecognized expense will vest in the 4th quarter of 2018 as the FDA has accepted the MS1819 IND application in the United States. $501,666 of this unrecognized expense vests upon the first dosing of a cystic fibrosis patient with MS1819-SD anywhere in the world. As of September 30, 2018, the probability of these milestones being reached could not be determined.
 
Note 14 - Interest Expense
 
During the three months ended September 30, 2018 and 2017, the Company incurred $5,629 and $408,106, respectively, of interest expense. During the three months ended September 30, 2018 and 2017, $5,505 and $408,048, respectively, of this amount was in connection with the convertible notes issued by the Company in the form of amortization of debt discount and beneficial conversion feature related to the warrants. During the three months ended September 30, 2018 and 2017, the Company also incurred $124 and $58, respectively, of miscellaneous interest expense.
 
During the nine months ended September 30, 2018 and 2017, the Company incurred $100,418 and $696,327, respectively, of interest expense. During the nine months ended September 30, 2018 and 2017, $97,837 and $695,103, respectively, of this amount was in connection with the convertible notes issued by the Company in the form of amortization of debt discount and beneficial conversion feature related to the warrants. During the nine months ended September 30, 2018 and 2017, the Company also incurred $2,581 and $1,224, respectively, of miscellaneous interest expense.
 
Note 15 - Agreements
 
TransChem Sublicense Agreement
 
On August 7, 2017, the Company entered into a Sublicense Agreement with TransChem, Inc. (“TransChem”), pursuant to which TransChem granted the Company an exclusive license to patents and patent applications relating to Helicobacter pylori 5’methylthioadenosine nucleosidase inhibitors (the “Licensed Patents”) currently held by TransChem (the “Sublicense Agreement”). The Company may terminate the Sublicense Agreement and the licenses granted therein for any reason and without further liability on 60 days’ notice. Unless terminated earlier, the Sublicense Agreement will expire upon the expiration of the last Licensed Patents. Upon execution, the Company paid an upfront fee to TransChem and agreed to reimburse TransChem for certain expenses previously incurred in connection with the preparation, filing, and maintenance of the Licensed Patents. The Company also agreed to pay TransChem certain future periodic sublicense maintenance fees, which fees may be credited against future royalties. The Company may also be required to pay TransChem additional payments and royalties in the event certain performance-based milestones and commercial sales involving the Licensed Patents are achieved. The Licensed Patents will allow the Company to develop compounds for treating gastrointestinal, lung and other infections which are specific to individual bacterial species. H.pylori bacterial infections are a major cause of chronic gastritis, peptic ulcer disease, gastric cancer and other diseases. Amounts paid under this Sublicense Agreement during the three and nine months ended September 30, 2018 and 2017 are $136,880 and $226,880, respectively, and are included in R & D expense.
 
Mayoly Agreement
 
During the three months ended September 30, 2018 and 2017, the Company was reimbursed $96,119 and $220,607, respectively, from Mayoly under the Mayoly Agreement. During the nine months ended September 30, 2018 and 2017, the Company was reimbursed $621,724 and $581,325, respectively, from Mayoly under the Mayoly Agreement.
 
The Mayoly Agreement includes a €1,000,000 payment due to Mayoly upon the U.S. FDA approval of MS1819-SD. At this time, based on management’s assessment of ASC Topic 450, Contingencies, the Company has not recorded any contingent liability related to this payment.
 
 
 
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Notes to Unaudited Consolidated Financial Statements
 
Employment Agreements
 
Johan (Thijs) Spoor
 
On January 3, 2016, the Company entered into an employment agreement with its President and Chief Executive Officer, Johan (Thijs) Spoor. The employment agreement provides for a term expiring January 2, 2019.
 
Mr. Spoor was originally entitled to 380,000 10-year stock options pursuant to the 2014 Plan. In the first quarter of 2017, 100,000 options having a value of $386,900 were granted and expensed. On September 29, 2017, Mr. Spoor was granted 100,000 shares of restricted common stock subject to vesting conditions as follows: (i) 75% upon FDA acceptance of a U.S. IND application for MS1819-SD, and (ii) 25% upon the Company completing a Phase IIa clinical trial for MS1819-SD, in satisfaction of the Company’s obligation to issue the additional 280,000 options to Mr. Spoor described above, with an estimated fair value at the grant date of $425,000 to be expensed when the probability of these milestones can be determined.
 
On September 29, 2017, the Board approved a 2016 annual incentive bonus equal to 40% of Mr. Spoor’s current base salary pursuant to his employment agreement in the amount of $170,000.
 
On June 28, 2018, the Board approved a 2017 annual incentive bonus pursuant to his employment agreement in the amount of $212,500.
 
Maged Shenouda
 
On September 26, 2017, the Company entered into an employment agreement with Maged Shenouda, a member of the Company’s Board of Directors, pursuant to which Mr. Shenouda serves as the Company’s Chief Financial Officer. Mr. Shenouda’s employment agreement provides for the issuance of stock options to purchase 100,000 shares of the Company’s common stock, issuable pursuant to the 2014 Plan. These options will vest as follows so long as Mr. Shenouda is serving as either Executive Vice-President of Corporate Development or as Chief Financial Officer (i) 75% upon FDA acceptance of a U.S. IND application for MS1819-SD, and (ii) 25% upon the Company completing a Phase IIa clinical trial for MS1819-SD. The option is exercisable for $4.39 per share and will expire on September 25, 2027.
 
On June 28, 2018, the Board approved a 2017 annual incentive bonus pursuant to his employment agreement in the amount of $82,500.
 
Dr. James E. Pennington
 
On May 28, 2018, the Company entered into an employment agreement with Dr. Pennington to serve as the Company’s 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 employment agreement is terminable by either party at any time. 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, Dr. Pennington will receive six months’ severance payable over such period.
 
 
 
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Notes to Unaudited Consolidated Financial Statements
 
Note 16 - Leases
 
The Company leases its office and research facilities under operating leases which are subject to various rent provisions and escalation clauses expiring at various dates through 2020. The escalation clauses are indeterminable and considered not material and have been excluded from minimum future annual rental payments. Rental expense, which is calculated on a straight-line basis, amounted to $40,224 and $28,294, respectively, in the three months ended September 30, 2018 and 2017. Rental expense, which is calculated on a straight-line basis, amounted to $108,217 and $93,858, respectively, in the nine months ended September 30, 2018 and 2017.
 
Minimum future annual rental payments are as follows:
 
 
2018 (balance of the year)
 $37,680 
2019
 $117,912 
2020
 $87,831 
 
Note 17 - Income Taxes
 
The Company is subject to taxation at the federal level in both the United States and France and at the state level in the United States. At September 30, 2018 and December 31, 2017, the Company had no tax provision for either jurisdictions.
 
The Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”), which was signed into law on December 22, 2017, has resulted in significant changes to the U.S. corporate income tax system. These changes include a federal statutory rate reduction from 35% to 21% and the elimination or reduction in the deductibility of certain credits and limitations, such as net operating losses, interest expense, and executive compensation. The federal statutory rate reduction took effect on January 1, 2018. On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. In accordance with SAB 118, the Company continues to evaluate the impact of the 2017 Tax Act, which may impact its current conclusions.
 
At September 30, 2018 and December 31, 2017, the Company had gross deferred tax assets of approximately $12,026,000 and $9,918,000, 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 $12,026,000 and $9,918,000, respectively, has been established at June 30, 2018 and December 31, 2017.
 
At September 30, 2018, the Company has gross net operating loss (“NOL”) carryforwards for U.S. federal and state income tax purposes of approximately $19,105,000 and $19,180,000, 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, 2018 and December 31, 2017, the Company had approximately $15,461,000 and $12,374,000, respectively, in net operating losses which it can carryforward indefinitely to offset against future French income.
 
At September 30, 2018 and December 31, 2017, the Company had taken no uncertain tax positions that would require disclosure under ASC 740, Accounting for Income Taxes.
 
 
 
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DRAFT
 
 
Notes to Unaudited Consolidated Financial Statements
 
Note 18 - Net Loss per Common Share
 
Basic net loss per share is computed by dividing net loss available to common shareholders 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, 2018, diluted net loss per share did not include the effect of 3,112,715 shares of common stock issuable upon the exercise of outstanding warrants and 994,000 shares of common stock issuable upon the exercise of outstanding options as their effect would be antidilutive during the periods prior to conversion.
 
At September 30, 2017, diluted net loss per share did not include the effect of 3,899,164 shares of common stock issuable upon the exercise of outstanding warrants, 545,000 shares of common stock issuable upon the exercise of outstanding options, or 100,000 shares of common stock issuable upon the conversion of convertible debt as their effect would be antidilutive during the periods prior to conversion.
 
Note 19 - Related Party Transactions
 
During the year ended December 31, 2015, the Company employed the services of JIST Consulting (“JIST”), a company controlled by Johan (Thijs) Spoor, the Company’s current Chief Executive Officer and President, as a consultant for business strategy, financial modeling, and fundraising. Included in accounts payable at both September 30, 2018 and December 31, 2017 is $478,400 for JIST relating to Mr. Spoor’s services. Mr. Spoor received no other compensation from the Company other than as specified in his employment agreement.
 
During the year ended December 31, 2015, the Company's then President, Christine Rigby-Hutton, was employed through Rigby-Hutton Management Services (“RHMS”). Ms. Rigby-Hutton resigned from the Company effective April 20, 2015. Included in accounts payable at both September 30, 2018 and December 31, 2017 is $38,453 for RHMS for Ms. Rigby-Hutton’s services.
 
From October 1, 2015 through December 31, 2015, the Company used the services of Edward Borkowski, a member of our Board of Directors and the Company’s Audit Committee Chair, as a financial consultant. Included in accounts payable at December 31, 2017 is $90,000 for Mr. Borkowski’s services. This amount was paid to Mr. Borkowski during the nine months ended September 30, 2018.
 
Starting on October 1, 2016 until his appointment as the Company’s Chief Financial Officer on September 25, 2017, the Company used the services of Maged Shenouda as a financial consultant. Expense recorded in G&A expense in the accompanying statements of operations related to Mr. Shenouda for the three months ended September 30, 2018 and 2017 was $0 and $30,000, respectively. Expense recorded in G&A expense in the accompanying statements of operations related to Mr. Shenouda for the nine months ended September 30, 2018 and 2017 was $0 and $80,000, respectively. Included in accounts payable at September 30, 2018 and December 31, 2017 is $50,000 and $70,000, respectively, for Mr. Shenouda’s services.
 
 
-22-
 
 
ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
References in this report to “AzurRx,” “Company,” “we,” “us,” “our,” or similar references mean AzurRx BioPharma, Inc. and its subsidiaries on a consolidated basis. References to “AzurRx BioPharma” refer to AzurRx BioPharma, Inc. on an unconsolidated basis. References to “AzurRx SAS” refer to AzurRx BioPharma SAS, AzurRx BioPharma’s wholly-owned subsidiary through which we conduct our European operations. References to the “SEC” refer to the U.S. Securities and Exchange Commission.
 
Forward-Looking Statements
 
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this interim report. Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words “expect,” “anticipate,” “intend,” “believe,” or similar language. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our business and financial performance are subject to substantial risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, you should carefully consider the information set forth under the heading “Risk Factors” included in our Annual Report filed on Form 10-K for the year ended December 31, 2017, filed with the SEC on March 16, 2018. Readers are cautioned not to place undue reliance on these forward-looking statements.
 
Overview
 
AzurRx BioPharma, Inc. was incorporated on January 30, 2014 in the State of Delaware. In June 2014, the Company acquired 100% of the issued and outstanding capital stock of AzurRx BioPharma SAS (formerly “ProteaBio Europe SAS”), a company incorporated in October 2008 under the laws of France that had been a wholly-owned subsidiary of Protea Biosciences, Inc., or Protea Sub, in turn a wholly-owned subsidiary of Protea Biosciences Group, Inc., a publicly-traded company (“ABS”).
 
AzurRx, through its ABS subsidiary, is engaged in the research and development of non-systemic biologics for the treatment of patients with gastrointestinal disorders. Non-systemic biologics are non-absorbable drugs that act locally, i.e. the intestinal lumen, skin or mucosa, without reaching an individual’s systemic circulation. Our current product pipeline consists of two therapeutic programs under development, each of which are described below:
 
MS1819-SD
 
MS1819-SD is a yeast derived recombinant lipase for exocrine pancreatic insufficiency (“EPI”) associated with chronic pancreatitis (“CP”) and cystic fibrosis (“CF”). A lipase is an enzyme that breaks up fat molecules. MS1819-SD is considered recombinant because it was created from new combinations of genetic material in yeast called Yarrowia lipolytica. We recently completed an open-label, dose escalation Phase IIa trial of MS1819-SD in France, Australia, and New Zealand to investigate both the safety of escalating doses of MS1819-SD, and the efficacy of MS1819-SD through the analysis of each patient’s coefficient of fat absorption (“CFA”) and its change from baseline. A total of 11 CP patients with EPI were enrolled in the study and final data shows a strong safety and efficacy profile. Although the study was not powered for efficacy, in a pre-planned analysis, the highest dose cohort of MS1819-SD showed statistically significant and clinically meaningful increases in CFA compared to baseline with a mean increase of 21.8% and a p value of p=0.002 on a per protocol basis. Favorable trends were also observed on other evaluated endpoints, including the Bristol stool scale, number of daily evacuations and stool weight, which were consistent with the CFA results. Additionally, maximal absolute CFA response to treatment was up to 57%, with an inverse relationship to baseline CFA. Favorable trends were also observed on other evaluated endpoints, including Bristol stool scale, number of daily evacuations and weight of stool, and these were consistent with the CFA results.
 
 
 
-23-
 
B-Lactamase Program
 
Our b-lactamase program focuses on products with an enzymatic combination of bacterial origin for the prevention of hospital-acquired infections and antibiotic-associated diarrhea (“AAD”) by resistant bacterial strains induced by parenteral administration of several antibiotic classes. Currently, we have two compounds in pre-clinical development in this program, AZX1101 and AZX1103. Both AZX1101 and AZX1103 are composed of several distinct enzymes that break up individual classes of antibiotic molecules. AZX1103 is a b-lactamase enzyme combination that has shown positive pre-clinical activity, with degradation of amoxicillin in the presence of clavulanic acid in the upper gastrointestinal tract in the Gottingen minipig model. Currently, we are focused on advancing pre-clinical development of AZX1103 and expect to file an Investigational New Drug application (an “IND”) for AZX1103 with the U.S. Food and Drug Administration (“FDA”) in 2019. At this time, the Company is currently assessing its plans for the continuation of the development of AZX1101.
 
Recent Developments
 
Update and Completion of the Phase IIa Trial of MS1819-SD
 
On June 29, 2018, we announced the successful completion of our Phase IIa trial of MS1819-SD, and on September 24, 2018, we announced, in partnership with Mayoli Spindler, a European pharmaceutical company, that we achieved, in a pre-planned analysis, the highest dose cohort of MS1819-SD showed statistically significant and clinically meaningful increases in CFA compared to baseline with a mean increase of 21.8% and a p value of p=0.002 on a per protocol basis. A total of 11 CP patients with EPI were enrolled in the study and final data showed a strong safety and efficacy profile. Additionally, maximal absolute CFA response to treatment was up to 57%, with an inverse relationship to baseline CFA. Favorable trends were also observed on other evaluated endpoints, including Bristol stool scale, number of daily evacuations and weight of stool, and these were consistent with the CFA results. We expect to begin a planned Phase IIb study focused on enrolling patients with CF in the second half of 2018.
 
On October 16, 2018, we announced that the FDA cleared our IND application for MS1819-SD in patients with EPI due to CF. We also announced that we plan to initiate the multi-center Phase II study that was the subject of the IND in the U.S. and Europe in the fourth quarter of 2018 and expect it to conclude in 2019.
 
Sanction of Cystic Fibrosis Therapeutics Development Network f or the Study of MS1819-SD in CF Patients
 
On November 1, 2018, the Company announced that the Company's Phase II study protocol to investigate MS1819-SD in CF patients with EPI has received sanction from the Therapeutics Development Network, a collaborative network of CF clinical trial specialists supported by the Cystic Fibrosis Foundation.
 
Liquidity and Capital Resources
 
We have experienced net losses and negative cash flows from operations since our inception. As of September 30, 2018, we had cash of approximately $4,428,000 and had an accumulated deficit of approximately $43,497,000. We believe that our cash on hand will sustain operations until June 2019. We are dependent on obtaining, and are continuing to pursue, funding necessary to continue our operations from outside sources, including obtaining additional funding from the sale of securities. Without adequate funding, we may not be able to meet our obligations. We believe these conditions raise substantial doubt about our ability to continue as a going concern.
 
We have funded our operations to date primarily through the completion of our initial public offering in October 2016 (“IPO”), the issuance of debt and convertible debt securities, as well as the issuance of common stock in various private placement transactions and our public offering in May 2018. We expect to incur substantial expenditures in the foreseeable future for the development of our product candidates. We will require additional financing to develop, prepare regulatory filings and obtain regulatory approvals, fund operating losses, and, if deemed appropriate, establish manufacturing, sales and marketing capabilities.
 
 
 
-24-
 
We are focused on expanding our product pipeline through collaborations, and also through potential acquisitions. We are continually evaluating potential asset acquisitions and business combinations. To finance such potential acquisitions, we might raise additional equity capital, incur additional debt, or both, which capital may not be available on a timely basis or on acceptable terms.
 
Off-Balance Sheet Arrangements
 
The following table summarizes our contractual obligations over the periods indicated, as well as our total contractual obligations:  
 
Contractual Obligation
 
Total
 
 
2018 (Balance of Year)
 
 
2019
 
 
2020
 
 
2021
 
 
2022
 
Operating Leases
 $243,423 
 $37,680 
 $117,912 
 $87,831 
 $- 
 $- 
 
 
Cash Flows for the Nine Months Ended September 30, 2018 and 2017
 
Net cash used in operating activities for the nine months ended September 30, 2018 was $7,528,636, which primarily reflected our net loss of $9,513,809 plus adjustments to reconcile net loss to net cash used in operating activities of depreciation and amortization expense of $604,789, non-cash fair value adjustment of the contingent consideration of $240,000, non-cash stock-based compensation of $306,966, non-cash restricted stock granted to employees/directors of $457,686, non-cash restricted stock granted/accrued to consultants of $360,771, non-cash debt discount - warrants on a 12% Senior Secured Original Issue Discount Convertible Debenture issued to Lincoln Park Capital (“LPC”) in April 2017 (the “LPC Debenture”) of $97,837, and a non-cash warrant modification expense of $428,748. Changes in assets and liabilities are due to an increase in other receivables of $134,052 due primarily to the billings to our research partner Laboratoires Mayoly Spindler SAS (“Mayoly”), an increase in deposits of $15,000 due to a new office space lease for the startup of U.S. R&D, a decrease in accounts payable and accrued expenses of $571,616 due primarily to paying off balances, a decrease in interest payable of $7,192, offset by a decrease in prepaid expense of $216,236 due primarily to the expensing of prepaid insurance.
 
Net cash used in operating activities for the nine months ended September 30, 2017 was $4,715,504, which primarily reflected our net loss of $8,615,371 plus adjustments to reconcile net loss to net cash used in operating activities of depreciation and amortization expense of $556,585, non-cash fair value adjustment of the contingent consideration of $110,000, non-cash stock-based compensation of $588,151, non-cash restricted stock granted to consultants of $225,179, non-cash warrant expense of $576,902, non-cash accreted interest on OID Notes and debt discount - warrants of $695,103, a decrease in other receivables of $861,507 due primarily to the collection of the French R&D tax credit, a decrease in prepaid expenses of $165,213 due primarily to the expensing of prepaid insurance, and an increase in accounts payable and accrued expenses of $115,602.
 
Net cash used in investing activities for the nine months ended September 30, 2018 and 2017 was $48,359 and $31,953, respectively, which consisted of the purchase of property and equipment.
 
Net cash provided by financing activities for the nine months ended September 30, 2018 was $11,457,098, which consisted of $2,324,742 from the issuance of Common Stock in connection with the exercise of certain repriced warrants in May 2018, $9,578,065 from the sale of Common Stock offered in our public offering in May 2018, offset by repayments of convertible debt of $286,529 and a note payable of $159,180. Net cash provided by financing activities for the nine months ended September 30, 2017 was $5,854,038, which consisted of the gross proceeds resulting from the issuance of the Debentures to LPC of $1,000,000 and the net proceeds resulting from the Unit Financing of $5,009,225, offset by repayment of note payable of $155,187.
 
 
 
-25-
 
Consolidated Results of Operations for the Three and Nine Months Ended September 30, 2018 and 2017
 
Research and development (“R&D”) expense was $1,168,874 and $966,685, respectively, for the three months ended September 30, 2018 and 2017, an increase of $202,189 due primarily to the startup of an R&D function in the U.S. R&D expense was $3,772,679 and $2,244,244, respectively, for the nine months ended September 30, 2018 and 2017, which is an increase of $1,528,435. The increase in R&D expense for the nine months ended September 30, 2018 as compared to the same period in 2017 are primarily due to patient enrollment thresholds having been met, thus triggering milestone-based payments for the ongoing Phase II study of MS1819-SD in chronic pancreatitis, the production of new batches of material for both the MS1819-SD program and the b-lactamase program, and the startup of an R&D function in the U.S. We expect R&D expense to increase in future periods as our product candidates continue through clinical trials and we seek strategic collaborations.
 
General and administrative (“G&A”) expense was $1,317,132 and $2,009,432, respectively, for the three months ended September 30, 2018 and 2017, a decrease of $692,300. The decrease for the three months ended September 30, 2018 as compared to the same period in 2017 was due primarily to a decrease in legal, accounting, and other professional fees of $101,129 due to less usage of these services, a decrease in compensation of $121,606 due to timing differences in recording bonus, and a decrease in non-cash restricted stock, stock-based compensation, and warrants granted accumulating to $481,570 due to less restricted stock/stock options vesting and less warrants issued to consultants.
 
 G&A expense was $5,400,712 and $5,564,800, respectively, for the nine months ended September 30, 2018 and 2017, a decrease of $164,088. The decrease for the nine months ended September 30, 2018 as compared to the same period in 2017 was due primarily to a decrease in non-cash restricted stock, stock-based compensation, and warrants granted accumulating to $864,762 due to less grants made in 2018 than in the same period in 2017, and a decrease in legal and other professional fees of $171,902 due to less usage of these services offset by a warrant modification expense of $428,748, an increase in compensation of $375,394 due to the addition of a Chief Financial Officer well as increased bonuses, and an increase in investor relations of $59,775 due to efforts to increase the visibility of the Company. We expect G&A expense to increase going forward in anticipation of the commercialization of our product candidates.
 
Fair value adjustment of our contingent consideration was $80,000 and ($250,000), respectively, for the three months ended September 30, 2018 and 2017. Fair value adjustment of our contingent consideration was $240,000 and $110,000, respectively, for the nine months ended September 30, 2018 and 2017. The difference in fair value adjustments in the three-month and nine-month periods ended September 30, 2018 as compared to the same period in 2017 is due primarily to increased risk-free and corporate bond rates, a greater probability of achieving success due to the completion of the Phase IIa study of MS1819-SD, and getting closer to the time of expected royalty payments..
 
Interest expense was $5,629 and $408,106, respectively, for the three months ended September 30, 2018 and 2017, a decrease of $402,477. Interest expense was $100,418 and $696,327, respectively, for the nine months ended September 30, 2018 and 2017, a decrease of $595,909. The lower interest expense in the three and nine months ended September 30, 2018 as compared to the same periods in 2017 is due to the lower amounts of LPC Debenture outstanding.
 
Net loss was $2,571,635 and $3,134,223 respectively, for the three months ended September 30, 2018 and 2017. Net loss was $9,513,809 and $8,615,371, respectively, for the nine months ended September 30, 2018 and 2017. The changes in net loss for the three and nine months ended September 30, 2018 compared to the same period in 2017 are due to the changes in expenses as noted above.
 
 
 
-26-
 
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
 
Not applicable.
 
ITEM 4.  CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures
 
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”) conducted an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, our CEO and our CFO each concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act, (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) is accumulated and communicated to our management, including our CEO and our CFO, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Internal Control Over Financial Reporting
 
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
 
-27-
 
 
PART II
 
OTHER INFORMATION
 
ITEM  1.     LEGAL PROCEEDINGS
 
None.
 
ITEM  1A.  RISK FACTORS
 
Our results of operations and financial condition are subject to numerous risks and uncertainties described in our Annual Report on Form 10-K for our fiscal year ended December 31, 2017, filed on March 16, 2018. You should carefully consider these risk factors in conjunction with the other information contained in this Quarterly Report. Should any of these risks materialize, our business, financial condition and future prospects could be negatively impacted. As of November 9, 2018, there have been no material changes to the disclosures made in the above referenced Form 10-K. 
 
ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
None.
 
ITEM 3.     DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4.    MINE SAFETY DISCLOSURES
 
Not applicable.
 
ITEM 5.    OTHER INFORMATION
 
None. 
  
ITEM 6.    EXHIBITS
 
(b)
Exhibits
 
Exhibit No.
 
Description
 
 
 
 
Certification of the Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Certification of the Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Certification of the Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase
 
 
 
 
 
-28-
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
AZURRX BIOPHARMA, INC.
 
 
 
 
 
 
By
/s/ Johan M. (Thijs) Spoor
 
 
 
Johan M. (Thijs) Spoor
President and Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
 
 
 
By
/s/ Maged Shenouda
 
 
 
Maged Shenouda
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: November 9, 2018
 
 
 
 
 
 
-29-
EX-31.1 2 ex31-1.htm CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF THE SARBANES-OXLY ACT OF 2002 Exhibit 31.1
 
Exhibit 31.1
 
CERTIFICATION PURSUANT TO RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
 I, Johan M. (Thijs) Spoor, Chief Executive Officer of the Company, certify that:
 
 1.
I have reviewed this Quarterly Report on Form 10-Q of AzurRx BioPharma, Inc.;
 
 2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
 
 3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
 4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
 a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;