10-Q 1 azrx10q_sep302019.htm QUARTERLY REPORT Blueprint
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, 2019
 
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 every Interactive Data File required to be submitted 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 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
[X] 
Smaller reporting company
[X]
 
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]
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.0001 per share
AZRX
Nasdaq Capital Market
 
As of November 14, 2019, there were 26,155,111 shares of the registrant’s common stock, $0.0001 par value, (“common stock”) issued and outstanding.
 
 
 

 
 
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
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, 2018 included in our Annual Report filed on Form 10-K, filed with the SEC on April 1, 2019.
 
The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the fiscal year ended December 31, 2019.
 
 
 
 
 

 
 
AZURRX BIOPHARMA, INC.
 
 
 
 
 
 
Consolidated Balance Sheets (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
 
 
December 31,
 
 
 
2019
 
 
2018
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
Cash
 $1,549,825 
 $1,114,343 
Other receivables
  2,090,233 
  3,172,676 
Prepaid expenses
  89,756 
  512,982 
Total Current Assets
  3,729,814 
  4,800,001 
 
    
    
Property, equipment, and leasehold improvements, net
  95,367 
  128,854 
 
    
    
Other Assets:
    
    
 In process research and development, net
  - 
  258,929 
 License agreements, net
  - 
  311,548 
 Patents, net
  3,538,971 
  - 
 Goodwill
  1,832,915 
  1,924,830 
 Operating lease right-of-use assets
  189,987 
  - 
 Deposits
  48,669 
  45,233 
Total Other Assets
  5,610,542 
  2,540,540 
Total Assets
 $9,435,723 
 $7,469,395 
 
    
    
LIABILITIES AND STOCKHOLDERS' EQUITY
    
    
 
    
    
Current Liabilities:
    
    
Accounts payable and accrued expenses
 $2,754,217 
 $2,070,396 
Accounts payable and accrued expenses - related party
  525,520 
  670,095 
Note payable
  - 
  255,032 
Convertible debt
  1,947,073 
  - 
Other current liabilities
  592,676 
  - 
Total Current Liabilities
  5,819,486 
  2,995,523 
 
    
    
Other liabilities
  414,463 
  - 
Total Liabilities
  6,233,949 
  2,995,523 
 
    
    
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, 2019 and December 31, 2018; liquidation preference approximates par value
  - 
  - 
Common stock - Par value $0.0001 per share; 100,000,000 shares authorized; 26,155,111 and 17,704,925 shares issued and outstanding, respectively, at September 30, 2019 and December 31, 2018
  2,615 
  1,771 
Additional paid-in capital
  65,969,414 
  53,139,259 
Accumulated deficit
  (61,413,109)
  (47,517,046)
Accumulated other comprehensive loss
  (1,357,146)
  (1,150,112)
Total Stockholders' Equity
  3,201,774 
  4,473,872 
Total Liabilities and Stockholders' Equity
 $9,435,723 
 $7,469,395 
 
 
See accompanying notes to consolidated financial statements
 
 
 
AZURRX BIOPHARMA, INC.
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Operations and Comprehensive Loss (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months
 
 
Three Months
 
 
Nine Months
 
 
Nine Months
 
 
 
Ended
 
 
Ended
 
 
Ended
 
 
Ended
 
 
 
09/30/19
 
 
09/30/18
 
 
09/30/19
 
 
09/30/18
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development expenses
 $2,210,091 
 $1,168,874 
 $7,067,392 
 $3,772,679 
General and administrative expenses
  1,871,983 
  1,317,132 
  6,550,516 
  5,400,712 
Fair value adjustment, contingent consideration
  - 
  80,000 
  - 
  240,000 
 
    
    
    
    
Loss from operations
  (4,082,074)
  (2,566,006)
  (13,617,908)
  (9,413,391)
 
    
    
    
    
Other:
    
    
    
    
   Interest expense
  (110,398)
  (5,629)
  (278,155)
  (100,418)
Total other
  (110,398)
  (5,629)
  (278,155)
  (100,418)
 
    
    
    
    
Loss before income taxes
  (4,192,472)
  (2,571,635)
  (13,896,063)
  (9,513,809)
 
    
    
    
    
Income taxes
  - 
  - 
  - 
  - 
 
    
    
    
    
Net loss
  (4,192,472)
  (2,571,635)
  (13,896,063)
  (9,513,809)
 
    
    
    
    
Other comprehensive loss:
    
    
    
    
  Foreign currency translation adjustment
  (138,241)
  (36,215)
  (207,034)
  (140,108)
Total comprehensive loss
 $(4,330,713)
 $(2,607,850)
 $(14,103,097)
 $(9,653,917)
 
    
    
    
    
Basic and diluted weighted average shares outstanding
  24,962,691 
  16,889,519 
  21,080,701 
  14,895,323 
 
    
    
    
    
Loss per share - basic and diluted
 $(0.17)
 $(0.15)
 $(0.66)
 $(0.64)
 
 
See accompanying notes to consolidated financial statements
 
 
 
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, 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 
 
    
    
    
    
    
    
    
    
    
 
    
    
    
    
    
    
    
    
    
Balance, January 1, 2019
  - 
 $- 
  17,704,925 
 $1,771 
 $53,139,259 
 $- 
 $(47,517,046)
 $(1,150,112)
 $4,473,872 
 
    
    
    
    
    
    
    
    
    
Common stock issued from public offerings
    
    
  7,522,097 
  752 
  9,491,265 
    
    
    
  9,492,017 
Common stock issued to consultants
    
    
  62,158 
  6 
  112,494 
    
    
    
  112,500 
Common stock issued to Mayoly for patents
    
    
  775,931 
  77 
  1,740,882 
    
    
    
  1,740,959 
Stock-based compensation
    
    
    
    
  541,725 
    
    
    
  541,725 
Restricted stock granted to employees/directors
    
    
  90,000 
  9 
  556,879 
    
    
    
  556,888 
Warrant modification
    
    
    
    
  325,320 
    
    
    
  325,320 
 
Received from stockholder in relation to warrant modification
 
    
    
    
  61,590 
    
    
    
  61,590 
Foreign currency translation adjustment
    
    
    
    
    
    
    
  (207,034)
  (207,034)
Net loss
    
    
    
    
    
    
  (13,896,063)
    
  (13,896,063)
Balance, September 30, 2019
  - 
 $- 
  26,155,111 
 $2,615 
 $65,969,414 
 $- 
 $(61,413,109)
 $(1,357,146)
 $3,201,774 
 
 
See accompanying notes to consolidated financial statements
 
 
 
AZURRX BIOPHARMA, INC.
 
 
 
 
 
 
Consolidated Statements of Cash Flows (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months
 
 
Nine Months
 
 
 
Ended
 
 
Ended
 
 
 
09/30/19
 
 
09/30/18
 
Cash flows from operating activities:
 
 
 
 
 
 
   Net loss
 $(13,896,063)
 $(9,513,809)
   Adjustments to reconcile net loss to net cash used in
    
    
   operating activities:
    
    
         Depreciation
  51,261 
  46,073 
         Amortization
  825,063 
  558,716 
         Fair value adjustment, contingent consideration
  - 
  240,000 
         Stock-based compensation
  541,725 
  306,966 
         Restricted stock granted to employees/directors
  556,888 
  457,686 
         Restricted stock granted to consultants
  112,500 
  360,771 
         Accreted interest on convertible debt
  124,932 
  - 
         Accreted interest on debt discount - warrants
  147,461 
  97,837 
         Warrant modification
  - 
  428,748 
     Changes in assets and liabilities:
    
    
         Other receivables
  (261,981)
  (134,052)
         Prepaid expenses
  420,218 
  216,236 
         Right of use assets
  (192,257)
  - 
         Deposits
  (4,125)
  (15,000)
         Accounts payable and accrued expenses
  601,096 
  (571,616)
         Interest payable
  - 
  (7,192)
         Other liabilities
  165,765 
  - 
Net cash used in operating activities
  (10,807,517)
  (7,528,636)
 
    
    
Cash flows from investing activities:
    
    
     Purchase of property and equipment
  (17,243)
  (48,359)
Net cash used in investing activities
  (17,243)
  (48,359)
 
    
    
Cash flows from financing activities:
    
    
     Issuances of common stock
  9,492,016 
  11,902,805 
     Issuances of convertible debt
  2,000,000 
  - 
     Repayments of convertible debt
    
  (286,529)
     Received from stockholder in relation to warrant modification
  61,590 
  - 
     Repayments of note payable
  (255,032)
  (159,180)
Net cash provided by financing activities
  11,298,574 
  11,457,096 
 
    
    
Increase in cash
  473,814 
  3,880,101 
 
    
    
Effect of exchange rate changes on cash
  (38,332)
  (25,932)
 
    
    
Cash, beginning balance
  1,114,343 
  573,471 
 
    
    
Cash, ending balance
 $1,549,825 
 $4,427,640 
 
    
    
Supplemental disclosures of cash flow information:
    
    
     Cash paid for interest
 $5,762 
 $2,581 
 
    
    
     Cash paid for income taxes
 $- 
 $- 
 
    
    
Non-cash investing and financing activities:
    
    
 
    
    
   Conversion of convertible debt into common stock
 $- 
 $68,673 
 
    
    
   Common stock issued for patents purchased from Mayoly
 $1,740,959 
 $- 
 
    
    
   Warrant modification related to convertible debt issuance
 $325,320 
 $- 
 
 
See accompanying notes to consolidated financial statements
 
 
 
 
Note 1 - The Company and Basis of Presentation
 
The Company
 
AzurRx BioPharma, Inc. (“AzurRx” or “Parent”) was incorporated on January 30, 2014 in the State of Delaware. In June 2014, the Company acquired 100% of the issued and outstanding capital stock of AzurRx SAS (formerly “ProteaBio Europe SAS”), a company incorporated in October 2008 under the laws of France. AzurRx and its wholly-owned subsidiary, AzurRx SAS (“ABS”), are collectively referred to as the “Company.”
 
The Company is engaged in the research and development of non-systemic biologics for the treatment of patients with gastrointestinal disorders. Non-systemic biologics are non-absorbable drugs that act locally, i.e. the intestinal lumen, skin or mucosa, without reaching an individual’s systemic circulation. The Company’s current product pipeline consists of two therapeutic proteins under development:
 
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. In June 2018, the Company completed an open-label, dose escalation Phase 2a 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 showed 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. Additionally, maximal absolute CFA response to treatment was up to 57%, with an inverse relationship to baseline CFA.
 
In October 2018, 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. In connection with the FDA’s clearance of the IND, the Company initiated a multi-center Phase 2 OPTION study in the fourth quarter of 2018 in the United States and Europe (the “OPTION Study”). The Company targeted enrollment of 30 to 35 patients for the OPTION Study and dosed the first patients in February 2019. In June 2019, the Company reached its enrollment target for the study.
 
On September 25, 2019, the Company announced positive results from the OPTION Study. Results showed that the primary efficacy endpoint of CFA was comparable to the CFA in a prior phase two study in patients with CP, while using the same dosage of MS1819-SD. The dosage used in both studies was 2.2 grams per day, which was determined in agreement with the FDA as a bridging dose. Although the study was not powered for statistical significance, the data demonstrated meaningful efficacy results, with approximately 50% of the patients showing CFAs high enough to reach non-inferiority with standard porcine enzyme replacement therapy (“PERT”). Additionally, coefficient of nitrogen absorption (“CNA”) was comparable between the MS1819-SD and PERT arms, 93% vs. 97%, respectively, in the Option Study. This important finding confirms that protease supplementation is not likely to be required with MS1819-SD treatment. A total of 32 patients, ages 18 or older, completed the OPTION Study. The Company now plans to meet with the FDA before year-end based on prior communications, to discuss a Phase 2b or Phase 3 trial design exploring the use of higher doses and/or enteric-coated capsules to ensure higher levels of MS1819-SD in the duodenum.
 
In addition to the OPTION Study, in July 2019 the Company launched a Phase 2 multi-center clinical trial (the “Combination Trial”) in Hungary to investigate MS1819-SD in combination with PERT, for CF patients who suffer from severe EPI, but continue to experience clinical symptoms of fat malabsorption despite taking the maximum daily dose of PERTs. The Combination 2 study is designed to investigate the safety, tolerability and efficacy of escalating doses of MS1819-SD, in conjunction with a stable dose of PERTs, in order to increase CFA and relieve abdominal symptoms.
 
 
 
-6-
 
On October 15, 2019, the Company announced that it dosed the first patients in its Combination Trial. This study is designed to investigate the safety, tolerability and efficacy of escalating doses of MS1819-SD (700 mg, 1120 mg and 2240 mg per day, respectively), in conjunction with a stable dose of porcine PERTs, in order to increase the CFA and relieve abdominal symptoms. A combination therapy of PERT and MS1819-SD has the potential to: (i) correct macronutrient and micronutrient maldigestion; (ii) eliminate abdominal symptoms attributable to maldigestion; and (iii) sustain optimal nutritional status on a normal diet in CF patients with severe EPI. Planned enrollment is expected to include approximately 24 CF patients with severe EPI, with study completion anticipated in 2020.
 
On October 17, 2019, the Company announced that the Cystic Fibrosis Foundation Data Safety Monitoring Board has completed its review of the Company’s final results of the OPTION Study and has found no safety concerns for MS1819-SD, and that the group supports the Company’s plan to proceed to a higher four-gram dose of MS1819-SD in its next planned Phase 2 clinical trial.
 
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 in addition to assessing plans for continuation of the development of AZX1101.
 
Recent Developments
 
Asset Purchase Agreement with Mayoly
 
On March 27, 2019, the Company entered into an Asset Purchase Agreement with Mayoly (the “Mayoly APA”), pursuant to which the Company purchased all rights, title and interest in and to MS1819-SD. Upon execution of the Mayoly APA, the Joint Development and License Agreement (the “JDLA”) previously executed by AzurRx SAS and Mayoly was terminated. In addition, the Company granted to Mayoly an exclusive, royalty-bearing right to revenue received from commercialization of MS1819-SD within certain territories.
 
In accordance with the Mayoly APA, the Company provided to Mayoly the following consideration for the purchase of MS1819-SD:
 
(i)
the Company assumed certain of Mayoly’s liabilities with respect to MS1819-SD;
 
(ii)
the Company forgave all amounts currently owed to AzurRx SAS by Mayoly under the JDLA;
 
(iii)
the Company agreed to pay, within 30 days after the execution of the Mayoly APA, all amounts incurred by Mayoly for the maintenance of patents related to MS1819-SD from January 1, 2019 through the date of the Mayoly APA;
 
(iv)
the Company made an initial payment to Mayoly of €800,000, which amount was paid by the issuance of 400,481 shares of the Company’s common stock at a price of $2.29 per share (the “Closing Payment Shares”) and the Company recognized $917,101 as part of stockholders’ equity; and
 
(v)
the Company agreed to pay to Mayoly an additional €1,500,000, payable in a mix of cash and shares of the Company’s common stock as follows (the “Milestone Payments”): (y) on December 31, 2019, a cash payment of €400,000 and 200,240 shares of common stock (the “2019 Escrow Shares”) and (z) on December 31, 2020, a cash payment of €350,000 and 175,210 shares of common stock (the “2020 Escrow Shares” and, together with the 2019 Escrow Shares, the “Escrow Shares”) and the Company recognized $823,858 as part of stockholders’ equity.
 
 
 
-7-
 
The Closing Payment Shares and the Escrow Shares were all issued upon execution of the Mayoly APA; provided, however, per the terms of the Mayoly APA, the Escrow Shares will be held in escrow until the applicable Milestone Payment date, at which time the respective Escrow Shares will be released to Mayoly. See Note 6.
 
April 2019 Registered Direct Public Offering
        
In April 2019, the Company completed a public offering of 1,294,930 shares of its common stock at a public offering price of $2.13 per share, resulting in net proceeds of approximately $2,500,000, after deducting the selling agent fee paid to Alexander Capital, L.P. and other offering expenses payable by the Company (the “April 2019 Public Offering”). The April 2019 Public Offering was completed pursuant to the Company’s effective shelf registration statement on Form S-3 (File No. 333-226065) and the prospectus supplement filed on April 2, 2019.
 
In connection with the April 2019 Public Offering, the Company entered into a Selling Agent Agreement with Alexander Capital, L.P., pursuant to which we paid to Alexander Capital, L.P. (i) a cash fee equal to 7% of the aggregate gross proceeds of the April 2019 Public Offering, and (ii) issued to Alexander Capital, L.P. warrants to purchase 38,848 shares of the Company’s common stock (the “April 2019 Selling Agent Warrants”), an amount equal to 3% of the aggregate number of shares of common stock sold in the April 2019 Public Offering. The April 2019 Selling Agent Warrants will become exercisable one year from the date of issuance, expire on April 2, 2024 and have an exercise price of $2.55 per share. Also see Note 12. The Company also reimbursed Alexander Capital, L.P. for its expenses on a non-accountable basis in an amount equal to 1% of the gross proceeds of the April 2019 Public Offering and $50,000 for other accountable expenses.
 
May 2019 Registered Direct Public Offering
 
On May 9, 2019, the Company completed a second public offering with Alexander Capital of 1,227,167 shares of the Company’s common stock at a public offering price of $2.35 per share, resulting in net proceeds of approximately $2,550,000, after deducting the selling agent fee paid to Alexander Capital and other offering expenses payable by the Company (the “May 2019 Public Offering”). The May 2019 Public Offering was completed pursuant to the Company’s effective shelf registration statement on Form S-3 (File No. 333-226065) and the prospectus supplement filed on May 9, 2019.
 
In connection with the May 2019 Public Offering, the Company entered into a Selling Agent Agreement with Alexander Capital, pursuant to which the Company (i) paid Alexander Capital a cash fee equal to 7.0% of the aggregate gross proceeds of the May 2019 Public Offering, and (ii) issued Alexander Capital warrants to purchase up to 36,815 shares of common stock, an amount equal to 3.0% of the aggregate number of shares of common stock sold in the Offering. The May 2019 Selling Agent Warrants will become exercisable one year from the date of issuance, expire on May 9, 2024 and have an exercise price of $2.82 per share. Also see Note 12. The Company also agreed to reimburse Alexander Capital for its expenses in connection with the Offering on a non-accountable basis in an amount equal to 1.0% of the gross proceeds of the Offering and up to $50,000 for other accountable expenses.
 
July 2019 Underwritten Public Offering
 
On July 17, 2019, we entered into an underwriting agreement (the “Underwriting Agreement”) with H.C. Wainwright & Co., LLC. (“Wainwright”) as representatives of the several underwriters named therein (the “Underwriters”), relating to the issuance and sale of 5 million shares of our common stock. Each share of common stock was sold at a public offering price of $1.00 per share, resulting in gross proceeds to us of $5,000,000, or net proceeds of approximately $4,500,000, after deducting the underwriting discount, estimated legal fees and other offering expenses payable by the Company (the “July 2019 Public Offering”). In addition, pursuant to the terms of the Underwriting Agreement, the Company granted to the Underwriters a 30-day option to purchase up to an additional 750,000 shares of common stock at the same public offering price per share.
 
 
 
-8-
 
The July 2019 Public Offering was conducted pursuant to our effective shelf registration statement on Form S-3 (File No. 333-231954), filed with the Securities and Exchange Commission (the “SEC”) on June 5, 2019, and declared effective on June 25, 2019, including the base prospectus dated June 4, 2019 included therein and the related prospectus supplement filed on July 19, 2019.
 
In addition to the underwriting discount received by the Underwriters, we also issued unregistered common stock purchase warrants to Wainwright to purchase up to 200,000 shares of common stock (the “Wainwright Warrants”). The Wainwright Warrants are exercisable immediately upon issuance, expire on July 17, 2024 and have an exercise price of $1.25 per share.
 
Cyber-Related Fraud
 
On August 8, 2019, management was advised that it was a victim of a cyber-related fraud whereby a hacker impersonated one of the Company’s key vendors to redirect payments, totaling $418,765. The Company, including the Audit Committee, completed its investigation and is reviewing all available avenues of recovery, including from the Company’s financial institution to recover the payments. As of September 30, 2019, the Company had recovered $50,858 from its financial institution but management is unable to determine the probability of recovering anything further from the cyber-related fraud. Therefore, as of September 30, 2019, the Company recorded a loss of $367,908 which is included in General and Administrative (“G&A”) expenses. As a result of the cyber-related fraud, the Company has instituted additional controls and procedures and all employees have now undergone cybersecurity training.
 
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, 2018, has been derived from audited financial statements of that date. The unaudited interim consolidated results of operations are not necessarily indicative of the results that may occur for the full fiscal year. Certain information and footnote disclosure normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to instructions, rules, and regulations prescribed by the Securities and Exchange Commission (“SEC”). The Company believes that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited interim consolidated financial statements are read in conjunction with the audited financial statements and notes previously distributed in our Annual Report Form 10-K for the year ended December 31, 2018, filed with the SEC on April 1, 2019.
 
The unaudited interim consolidated financial statements include the accounts of AzurRx and its wholly-owned subsidiary, AzurRx SAS. Intercompany transactions and balances have been eliminated upon consolidation.
 
Going Concern Uncertainty
 
The accompanying unaudited interim consolidated financial statements have been prepared as if the Company will continue as a going concern. The Company has incurred significant operating losses and negative cash flows from operations since inception, had negative working capital at September 30, 2019 of approximately $2,090,000, and had an accumulated deficit of approximately $61,413,000 at September 30, 2019. The Company is dependent on obtaining, and continues to pursue, additional working capital funding from the sale of securities and debt in order to continue to execute its development plan and continue operations. Without adequate working capital, the Company may not be able to meet its obligations and continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 
 
-9-
 
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, 2019 and December 31, 2018, the Company had $1,172,862 and $754,261, respectively, in one account in the U.S. in excess of these limits. The Company has not experienced any losses to date resulting from this practice.
 
The Company also has exposure to foreign currency risk as its subsidiary in France has a functional currency in Euros.
 
Leases
 
Effective January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, "Leases." This ASU requires substantially all leases be recorded on the balance sheet as right of use assets and lease obligations. The Company adopted the ASU using a modified retrospective adoption method at January 1, 2019, as outlined in ASU No. 2018-11, "Leases - Targeted Improvements." Under this method of adoption, there is no impact to the comparative condensed consolidated statement of operations and condensed consolidated balance sheet. The Company determined that there was no cumulative-effect adjustment to beginning retained earnings on the consolidated balance sheet. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed carryforward of historical lease classifications. Adoption of this standard did not materially impact the Company’s results of operations and had no impact on the consolidated statement of cash flows.
 
Equity-Based Payments to Non-Employees
 
Equity-based payments to non-employees are measured at fair value on the grant date per ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting.
 
Research and Development
 
Research and development costs are charged to operations when incurred and are included in operating expenses. Research and development 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 stockholders’ equity.
 
 
 
-10-
 
Recent Accounting Pronouncements
 
In January 2017, the FASB issued guidance to simplify the subsequent measurement of goodwill impairment. The new guidance eliminates the two-step process that required identification of potential impairment and a separate measure of the actual impairment. Goodwill impairment charges, if any, would be determined by reducing the goodwill balance by the difference between the carrying value and the reporting unit’s fair value (impairment loss is limited to the carrying value). This standard is effective for annual or any interim goodwill impairment tests beginning after December 15, 2019.
 
Note 3 - Fair Value Disclosures
 
Fair value is the price that would be received from the sale of an asset or paid to transfer a liability assuming an orderly transaction in the most advantageous market at the measurement date. U.S. GAAP establishes a hierarchical disclosure framework that prioritizes and ranks the level of observability of inputs used in measuring fair value.
 
The fair value of the Company's financial instruments are as follows:
 
 
 
 
 
 
Fair Value Measured at Reporting Date Using
 
 
 
 
 
 
Carrying Amount
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Fair Value
 
At September 30, 2019:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 $1,549,825 
 $- 
 $1,549,825 
 $- 
 $1,549,825 
Other receivables
 $2,090,233 
 $- 
 $- 
 $2,090,233 
 $2,090,233 
Convertible debt
 $1,947,073 
 $- 
 $- 
 $1,947,073 
 $1,947,073 
 
    
    
    
    
    
At December 31, 2018:
    
    
    
    
    
Cash
 $1,114,343 
 $- 
 $1,114,343 
 $- 
 $1,114,343 
Other receivables
 $3,172,676 
 $- 
 $- 
 $3,172,676 
 $3,172,676 
Note payable
 $255,032 
 $- 
 $- 
 $255,032 
 $255,032 
 
The fair value of other receivables approximates carrying value as these consist primarily of French R&D tax credits that are normally received the following year and amounts due from our collaboration partner Mayoly, see Note 14.
 
The fair value of the 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,
 
 
 
2019
 
 
2018
 
R&D tax credits
 $2,019,211 
 $2,162,373 
Other
  71,022 
  1,010,303 
Total other receivables
 $2,090,233 
 $3,172,676 
 
The research and development (“R&D”) tax credits are the 2017 and 2018 refundable tax credits for research conducted in France. The tax credits for the years 2016 through 2018 are currently being examined by the French tax authorities which is in the normal course of business. At December 31, 2018, Other consists primarily of amounts due from collaboration partner Mayoly.
 
 
 
-11-
 
Note 5 - Property, Equipment and Leasehold Improvements
 
Property, equipment and leasehold improvements consisted of the following:
 
 
 
September 30,
 
 
December 31,
 
 
 
2019
 
 
2018
 
Laboratory equipment
 $193,661 
 $190,406 
Computer equipment
  78,986 
  75,417 
Office equipment
  41,188 
  37,262 
Leasehold improvements
  35,711 
  29,163 
Total property, plant and equipment
  349,546 
  332,248 
Less accumulated depreciation
  (254,179)
  (203,394)
Property, plant and equipment, net
 $95,367 
 $128,854 
 
Depreciation expense for the three months ended September 30, 2019 and 2018 was $17,220 and $15,653, respectively. Depreciation expense for the nine months ended September 30, 2019 and 2018 was $51,261 and $46,073, respectively. Depreciation expense is included in general and administrative (“G&A”) expenses.
 
Note 6 - Intangible Assets and Goodwill
 
Patents
 
Pursuant to the Mayoly APA entered into on March 27, 2019, in which the Company purchased all rights, title and interest in and to MS1819-SD (see Note 14), the Company recorded Patents in the amount of $3,802,745 as follows:
 
Common stock issued at signing to Mayoly
 $1,740,959 
Due to Mayoly at 12/31/19 - €400,000
  449,280 
Due to Mayoly at 12/31/20 - €350,000
  393,120 
Assumed Mayoly liabilities and forgiveness of Mayoly debt
  1,219,386 
 
    
 
 $3,802,745 
 
Intangible assets are as follows:
 
 
 
September 30,
 
 
December 31,
 
 
 
2019
 
 
2018
 
In process research and development
 $- 
 $416,600 
Less accumulated amortization
  - 
  (157,671)
In process research and development, net
 $- 
 $258,929 
 
    
    
License agreements
 $- 
 $3,398,702 
Less accumulated amortization
  - 
  (3,087,154)
License agreements, net
 $- 
 $311,548 
 
    
    
Patents
 $3,802,745 
 $- 
Less accumulated amortization
  (263,774)
  - 
Patents, net
 $3,538,971 
 $- 
 
Amortization expense for the three months ended September 30, 2019 and 2018 was $131,887 and $181,217, respectively. Amortization expense for the nine months ended September 30, 2019 and 2018 was $825,063 and $558,716, respectively. Amortization expense for the nine months ended September 30, 2019 included $384,234 from In process research and development and License agreements written off as a result of the Mayoly APA.
 
 
 
-12-
 
As of September 30, 2019, amortization expense is expected to be as follows for the next five years:
 
2019 (balance of year)
 $131,887 
2020
  527,548 
2021
  527,548 
2022
  527,548 
2023
  527,548 
 
Goodwill is as follows:
 
 
 
Goodwill
 
Balance at January 1, 2018
 $2,016,240 
Foreign currency translation
  (91,410)
Balance at December 31, 2018
  1,924,830 
Foreign currency translation
  (91,915)
Balance at September 30, 2019
 $1,832,915 
 
Note 7 - Accounts Payable and Accrued Expenses
 
Accounts payable and accrued expenses consisted of the following:

 
 
September 30,
 
 
December 31,
 
 
 
2019
 
 
2018
 
Trade payables
 $2,184,841 
 $1,532,110 
Accrued expenses
  509,597 
  285,061 
Accrued payroll
  59,779 
  253,225 
Total accounts payable and accrued expenses
 $2,754,217 
 $2,070,396 
 
Note 8 - Note Payable
 
On December 14, 2018, the Company entered into a 9-month financing agreement for its directors and officer’s liability insurance in the amount of $286,203 that bears interest at an annual rate of 5.99%. Monthly payments, including principal and interest, are $32,599 per month. The balance due under this financing agreement at September 30, 2019 and December 31, 2018 was $0 and $255,032, respectively.
 
Note 9 – Convertible Notes and Original Issue Discounted Convertible Notes with Warrants
 
ADEC Notes
 
On February 14, 2019, the Company entered into a Note Purchase Agreement (the “NPA”) with ADEC Private Equity Investments, LLC (“ADEC”), pursuant to which the Company issued to ADEC two Senior Convertible Notes (“Note A” and “Note B,” respectively, each a “Note,” and together, the “Notes”), in the principal amount of $1,000,000 per Note, resulting in gross proceeds to the Company of $2,000,000. ADEC is controlled by a significant stockholder of the Company.
 
The Notes accrue interest at a rate of 10% per annum (the “Interest Rate”); provided, however, that in the event the Company elects to repay the full balance due under the terms of both Notes prior to December 31, 2019, then the interest rate will be reduced to 6% per annum. Interest is payable at the time all outstanding Principal Amounts owed under each Note is repaid. The Notes will mature on the earlier to occur of (i) the tenth business day following the receipt by ABS of certain tax credits that the Company expects to receive prior to July 2019 in the case of Note A (the “2019 Tax Credit”) and July 2020 in the case of Note B (the “2020 Tax Credit”), respectively, or (ii) December 31, 2019 in the case of Note A and December 31, 2020 in the Case of Note B (the “Maturity Dates”). As a condition to entering into the NPA, ABS and ADEC also entered into a Pledge Agreement, pursuant to which ABS agreed to pledge an interest in the 2019 and 2020 Tax Credits to ADEC in order to guarantee payment of all amounts due under the terms of the Notes.
 
 
 
-13-
 
Prior to their respective Maturity Dates, each of the Notes is convertible, at ADEC’s option, into shares of the Company’s common stock, at a conversion price equal to the principal and accrued interest due under the terms of the Notes divided by $2.50 (“Conversion Shares”); provided, however, that pursuant to the term of the Notes, ADEC may not convert all or a portion of the Notes if such conversion would result in the significant stockholder and/or entities affiliated with him beneficially owning in excess of 19.99% of the Company’s shares of common stock issued and outstanding immediately after giving effect to the issuance of the Conversion Shares.
 
As additional consideration for entering into the NPA, pursuant to a Warrant Amendment Agreement, the Company agreed to reduce the exercise price of 1,009,565 outstanding warrants previously issued by the Company to ADEC and its affiliates (the “Warrants”) to $1.50 per share. The Warrant Amendment does not alter any other terms of the Warrants. This resulted in a debt discount of $325,320 that will be accreted to additional interest expense over the lives of the Notes.
 
In connection with the above transaction, the Company also entered into a registration rights agreement with ADEC, pursuant to which the Company agreed to file a registration statement with the Securities and Exchange Commission no later than 45 days after the closing date of February 14, 2019 in order to register, on behalf of ADEC, the Conversion Shares. ADEC subsequently agreed to extend the date to file a registration statement to April 30, 2019. The registration statement was filed on April 25, 2019.
 
During the three months ended September 30, 2019, the Company accrued $50,411 of interest expense in connection with these convertible notes. During the three months ended September 30, 2019, the Company recorded $59,502 of interest expense in the form of amortization of debt discount related to the repriced warrants. During the nine months ended September 30, 2019, the Company accrued $124,932 of interest expense in connection with these convertible notes. During the nine months ended September 30, 2019, the Company recorded $147,461 of interest expense in the form of amortization of debt discount related to the repriced warrants.
 
Convertible Debt consisted of:
 
 
 
September 30,
 
 
December 31,
 
 
 
2019
 
 
2018
 
Convertible debt
 $2,000,000 
 $- 
Unamortized debt discount - revalued warrants
  (177,859)
  - 
Accrued interest
  124,932 
  -
Total convertible debt
 $1,947,073 
 $- 
 
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.
 
On July 11, 2018, the Company paid off the remaining amount due under the terms of this Debenture in the amount of $286,529.
 
For the three months ended September 30, 2018, the Company recorded $5,505 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, the Company recorded $97,837 of interest expense related to the amortization of the debt discount and beneficial conversion feature related to the warrant features of the Debenture.
 
 
 
-14-
 
Note 10 – Other Liabilities
 
Other liabilities consisted of the following:
 
 
 
September 30,
 
 
December 31,
 
Current
 
2019
 
 
2018
 
Due to Mayoly
 $436,320 
 $- 
Lease liabilities
  156,356 
  - 
 
 $592,676 
 $- 
 
    
    
 
 
 
September 30,
 
 
December 31,
 
Long-term
 
2019
 
 
2018
 
Due to Mayoly
 $381,780 
 $- 
Lease liabilities
  32,683 
  - 
 
 $414,463 
 $- 
 
Note 11 - Equity
 
On July 13, 2016, the Company amended its Certificate of Incorporation to increase the authorized shares of its common stock, $0.0001 par value, to 100,000,000 shares from 9,000,000 shares and increase the authorized shares of its preferred stock, $0.0001 par value, to 10,000,000 shares from 1,000,000 shares.
 
Common Stock
 
At September 30, 2019 and December 31, 2018, the Company had 26,155,111 and 17,704,925, respectively, of shares of its common stock issued and outstanding.
 
Voting
 
Each holder of common stock has one vote for each share held.
 
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, 2019 and 2018, no stock options were granted under the 2014 Plan. During the nine months ended September 30, 2019 and 2018, the Company granted 893,500 and 539,000, respectively of stock options under the 2014 Plan.
 
Series A Convertible Preferred Stock
 
At September 30, 2019 and December 31, 2018, there were no Series A Convertible Preferred Stock (“Series A Preferred”) outstanding. However, all terms of the Series A Preferred are still in effect.
 
Restricted Stock
 
During the three months ended September 30, 2019, 43,750 restricted shares of common stock vested with a fair value of $63,434. 30,000 of these 43,750 shares having a fair value of $18,600 were issued during the three months ended September 30, 2019 to our directors as a part of Board compensation. 13,750 of these 43,750 shares having a fair value of $44,834 vested during the three months ended September 30, 2019 due to the terms of such grants.
 
During the nine months ended September 30, 2019, 223,417 restricted shares of common stock vested with a fair value of $556,888. 58,833 of these 223,417 shares having a fair value of $178,852 vested during the nine months ended September 30, 2019 due to the Company dosing the first patients in the Company's Phase II study to investigate MS1819-SD in CF patients. 33,334 of these 223,417 shares having a fair value of $101,335 vested during the nine months ended September 30, 2019 due to the Company reaching enrollment of 30 patients in the Company's Phase II study to investigate MS1819-SD in CF patients. 90,000 of these 223,417 shares having a fair value of $142,200 were issued during the nine months ended September 30, 2019 to our directors as a part of Board compensation. 41,250 of these 223,417 shares having a fair value of $134,501 vested during the nine months ended September 30, 2019 due to the terms of such grants.
 
 
 
-15-
 
During the three months ended September 30, 2019, the Company issued 21,677 shares of its common stock to a consultant as payment of $22,500 of accounts payable. During the nine months ended September 30, 2019, the Company issued 62,518 shares of its common stock to a consultant as payment of $112,500 of accounts payable.
 
As of September 30, 2019, the Company had unrecognized restricted common stock expense of $247,526 that will be recognized over the average remaining vesting term of 1.57 years.
 
During the three months ended September 30, 2018, 43,750 restricted shares of common stock vested with a fair value of $121,935. 30,000 of these 43,750 shares having a fair value of $77,100 were issued during the three months ended September 30, 2018 to our directors as a part of Board compensation. 13,750 of these 43,750 shares having a fair value of $44,835 vested during the three months ended September 30, 2018 due to the terms of such grants. 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, 139,584 restricted shares of common stock vested with a fair value of $457,685. 90,000 of these 139,584 shares having a fair value of $267,600 were issued during the nine months ended September 30, 2018 to our directors as a part of Board compensation. 49,584 of these 139,584 shares having a fair value of $190,085 vested during the nine months ended September 30, 2018 due to the terms of such grants. 5,000 shares of restricted common stock were canceled during the nine months ended September 30, 2018 with a total value of $15,200.
 
During the three months ended September 30, 2018, the Company issued 55,067 shares of its common stock to consultants as payment of $140,541 of accounts payable. During the nine months ended September 30, 2018, the Company issued 118,067 shares of its common stock to consultants as payment of $360,771 of accounts payable.
 
Note 12 - Warrants
 
In February 2019, as additional consideration for issuing convertible notes with ADEC and pursuant to a Warrant Amendment Agreement, the Company agreed to reduce the exercise price of certain outstanding warrants previously issued by the Company to ADEC and its affiliates, see Note 9.
 
Stock warrant transactions for the periods January 1 through September 30, 2019 and 2018 are as follows:
 
 
 
 
 
 
Exercise
 
 
 Weighted
 
 
 
 
 
 
Price Per
 
 
Average
 
 
 
Warrants
 
 
Share
 
 
Exercise Price
 
 
 
 
 
 
 
 
 
 
 
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 
 
    
    
    
 
    
    
    
Warrants outstanding and exercisable at January 1, 2019
  3,112,715 
 $2.55 - $7.37 
 $4.83 
 
    
    
    
Granted during the period
  275,663 
 $1.25 - $2.82 
 $1.64 
Expired during the period
  - 
  - 
  - 
Exercised during the period
  - 
  - 
  - 
Warrants outstanding and exercisable at September 30, 2019
  3,388,378 
 $1.25 - $7.37 
 $3.37 
 
 
 
-16-
 
 
Number of
Weighted Average
Weighted
 
Shares Under
Remaining Contract
Average
Exercise Price
Warrants
Life in Years
Exercise Price
$1.25 - $2.99
         1,529,628
2.80
 
$3.00 - $3.99
            636,972
2.56
 
$4.00 - $4.99
            196,632
2.26
 
$5.00 - $5.99
            805,476
2.38
 
$6.00 - $6.99
            187,750
2.01
 
$7.00 - $7.37
              31,920
1.21
 
Total
         3,388,378
2.57
$3.37
 
In January 2018, the Company offered certain warrant holders the opportunity to exercise their warrants at a reduced strike price of $2.50, and if so elected, would also have the opportunity to reprice other warrants that they continued to hold unexercised to $3.25. The offer, which was effective 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 had other warrants modified on approximately 197,000 shares, which resulted in a charge of approximately $429,000 in January 2018.
 
During the three months ended September 30, 2019, 200,000 warrants were issued to investment bankers in association with the July 2019 Public Offerings with a value of $116,600. During the nine months ended September 30, 2019, 275,663 warrants were issued to investment bankers in association with the April, May, and July 2019 Public Offerings with a value of $233,182.
 
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.
 
The weighted average fair value of warrants granted to non-employees during the three months ended September 30, 2019 was $0.58. The weighted average fair value of warrants granted to non-employees during the nine months ended September 30, 2019 and 2018 was $0.84 and $1.70, 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,
 
 
 
2019
 
 
2018
 
Expected life (in years)
  5 
  5 
Volatility
  71 - 73%
  84%
Risk-free interest rate
  1.83 - 2.37%
  2.70%
Dividend yield
  -%
  -%
 
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, 2019, no stock options were granted. During the three months ended September 30, 2019, 30,000 options vested having a fair value of $30,390 and an intrinsic value of $0.
 
During the nine months ended September 30, 2019 893,500 stock options were granted with an exercise price of $1.70 and a term of five years. During the nine months ended September 30, 2019, 274,500 options vested having a fair value of $541,725 and an intrinsic value of $0. 242,000 of these options valued at $501,666 vested due to the Company having its first CF patient dosed with MS1819-SD anywhere in the world, which was achieved by the dosing of the first patient in the OPTION Study.
 
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.
 
 
 
-17-
 
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 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,
 
 
 
2019
 
 
2018
 
Contractual term (in years)
  5 
  5 
Volatility
  71%
  85%
Risk-free interest rate
  2.19%
  2.82%
Dividend yield
  -%
  -%
 
The expected term of the options is based on expected future employee exercise behavior. Volatility is based on the historical volatility of the Company’s common stock if available or of several public entities that are similar to the Company. The Company bases volatility this way because it may not have sufficient historical transactions in its own shares on which to solely base expected volatility. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected term at the grant date. The Company has not historically declared any dividends and does not expect to in the future.
 
The Company realized no income tax benefit from stock option exercises in each of the periods presented due to recurring losses and valuation allowances.
 
Stock option activity under the 2014 Plan is as follows:
 
 
 
Number
 
 
Average
 
 
Remaining Contract
 
 
Intrinsic
 
 
 
of Shares
 
 
Exercise Price
 
 
Life in Years
 
 
Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 
 $- 
 
 
 
-18-
 

Stock options outstanding at January 1, 2019
  994,000 
 $3.58 
  5.42 
 $- 
 
    
    
    
    
Granted during the period
  893,500 
 $1.70 
  4.96 
  -
Expired during the period
  - 
  - 
  -
  -
Canceled during the period
  - 
  - 
  -
  -
Exercised during the period
  - 
  - 
  -
  -
Stock options outstanding at September 30, 2019
  1,887,500 
 $2.58 
  4.69 
 $- 
 
    
    
    
    
Exercisable at September 30, 2019
  1,024,000 
 $3.52 
  4.54 
 $- 
 
    
    
    
    
Non-vested stock options outstanding at January 1, 2019
  244,500 
 $3.05 
  4.53 
 $- 
 
    
    
    
    
Granted during the period
  893,500 
 $1.70 
  4.96 
  -
Vested during the period
  (274,500)
 $2.91 
  3.88 
  -
Expired during the period
  - 
  - 
  -
  -
Canceled during the period
  - 
  - 
  -
  -
Exercised during the period
  - 
  - 
  -
  -
Non-vested stock options outstanding at September 30, 2019
  863,500 
 $1.70 
  4.77 
 $- 
 
530,849 shares of common stock were available for future issuance under the 2014 Plan as of September 30, 2019.
 
As of September 30, 2019, the Company had unrecognized stock-based compensation expense of $874,726. $91,170 of this unrecognized expense will be recognized over the average remaining vesting term of the options of 0.75 years. $713,405 of this unrecognized expense vests upon the completion of enrollment of the next trial of MS 1819-SD in the U.S. $70,151 of this unrecognized expense vests upon the completion of enrollment of the ongoing clinical trial assessing MS1819-SD in cystic fibrosis patients as a combination therapy with the standard of care. The expense related to these milestones will be recognized when the milestones become probable.
 
Note 14 - Agreements
 
Mayoly Agreement
 
During the three months ended September 30, 2019 and 2018, the Company charged $0 and $96,119, respectively, to Mayoly under the JDLA that was in effect during both periods. During the nine months ended September 30, 2019 and 2018, the Company charged $403,020 and $621,724, respectively, to Mayoly under the JDLA that was in effect during both periods.
 
On March 27, 2019, the Company entered into the Mayoly APA pursuant to which the Company purchased substantially all rights, title and interest in and to MS1819-SD, see Recent Developments above.
 
INRA Agreement
 
In February 2006, Mayoly and INRA TRANSFERT, on behalf of INRA and CNRS (French government research centers), entered into a Usage and Cross-Licensing Agreement granting Mayoly exclusive worldwide rights to exploit Yarrowia lipolytica and other lipase proteins based on their patents for use in humans. The INRA Agreement provides for the payment by Mayoly of royalties on net sales, subject to Mayoly’s right to terminate such obligation upon the payment of a lump sum specified in the agreement. Upon execution of the Mayoly APA, all rights, obligations and interests under the INRA Agreement were transferred to the Company.
 
 
 
-19-
 
TransChem Sublicense
 
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 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, 2019 and 2018 are $50,000 and $136,880, respectively, and are included in R&D expense.
 
Employment Agreements
 
James Sapirstein
 
Effective October 8, 2019, the Company entered into an employment agreement with Mr. Sapirstein to serve as its President and Chief Executive Officer for a term of three years, subject to further renewal upon agreement of the parties. The employment agreement with Mr. Sapirstein provides for a base salary of $450,000 per year. In addition to the base salary, Mr. Sapirstein is eligible to receive (i) a bonus of up to 40% of his base salary on an annual basis, based on certain milestones that are yet to be determined; (ii) 1% of net fees received by the Company upon entering into license agreements with any third-party with respect to any product current in development or upon the sale of all or substantially all assets of the Company; (iii) a grant of 200,000 restricted shares of the Company’s common stock which are subject to vest as follows (a) 100,000 upon the first commercial sale of MS1819 in the United States, and (b) 100,000 upon the total market capitalization of the Company exceeding $1.0 billion for 20 consecutive trading days; (iv) a grant of 300,000 10-year stock options to purchase shares of the Company’s common stock which are subject to vest as follows (a) 50,000 upon the Company initiating its next Phase II clinical trial in the United States for MS1819, (b) 50,000 upon the Company completing its next or subsequent Phase II clinical trial in the United States for MS1819, (c) 100,000 upon the Company initiating a Phase III clinical trial in the United States for MS1819, and (d) 100,000 upon the Company initiating a Phase I clinical trial in the United States for any product other than MS1819. Mr. Sapirstein is entitled to receive 20 days of paid vacation, participate in full employee health benefits and receive reimbursement for all reasonable expenses incurred in connection with his services to the Company.
 
In the event that Mr. Sapirstein’s employment is terminated by the Company for Cause, as defined in his employment agreement, or by Mr. Sapirstein voluntarily, then will not be entitled to receive any payments beyond amounts already earned, and any unvested equity awards will terminate. In the event that Mr. Sapirstein’s employment is terminated as a result of an Involuntary Termination Other than for Cause, as defined in the Agreement, Mr. Sapirstein will be entitled to receive the following compensation: (i) severance in the form of continuation of his salary (at the Base Salary rate in effect at the time of termination, but prior to any reduction triggering Good Reason) for a period of 12 months following the termination date; (ii) payment of Executive’s premiums to cover COBRA for a period of 12 months following the termination date; and (iii) a prorated annual bonus.
 
 
 
-20-
 
Johan (Thijs) Spoor
 
On January 3, 2016, the Company entered into an employment agreement with its former President and Chief Executive Officer, Johan Spoor. The employment agreement provided for a term expiring January 2, 2019. Although Mr. Spoor’s employment agreement has expired, he remained employed as the Company’s President and Chief Executive Officer under the terms of his prior employment agreement until his resignation on October 8, 2019. As previously reported on the Company’s Current Report on Form 8-K filed October 11, 2019, Mr. Spoor resigned from his position as the Company’s President and Chief Executive Officer effective October 8, 2019. Mr. Spoor continues to serve as a director on the Board of the Company.
 
Mr. Spoor was paid a base salary of $425,000 per year. At the sole discretion of the Board or the Compensation Committee of the Board, following each calendar year of employment, Mr. Spoor was eligible to receive an additional cash bonus based on his attainment of certain financial, clinical development, and/or business milestones to be established annually by the Board or the Compensation Committee.
 
Mr. Spoor was originally entitled to 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. All of these shares vested during 2018. $106,250 was expensed in the second quarter of 2018 and $318,750 was expensed in the fourth quarter of 2018 due to the Company completing both milestones.
 
On June 28, 2018, Mr. Spoor was granted 200,000 shares of restricted common stock subject to vesting conditions as follows: (i) 50% shall vest in three equal installments beginning one year from the date of issuance, and (ii) the remaining 50% shall vest as follows: one-third shall vest upon U.S. acceptance of IND for MS1819-SD, one-third upon the first dosing of a CF patient with MS1819-SD anywhere in the world, and the remaining one-third upon enrollment of the first 30 patients in a CF trial. These restricted shares had an estimated fair value at the grant date of $608,000 to be expensed when the above milestones are probable. 8,333 shares with a fair value of $25,332 vested and was expensed in the three months ended September 30, 2019 due to being earned over that time. 25,000 shares with a fair value of $76,000 vested and was expensed in the nine months ended September 30, 2019 due to being earned over that time. 33,333 shares with a fair value of $101,332 vested and was expensed in the nine months ended September 30, 2019 due to the first dosing of CF patients with MS1819-SD anywhere in the world.
 
On June 28, 2018, the Board approved a 2017 annual incentive bonus pursuant to his employment agreement in the amount of $212,500.
 
On June 13, 2019, Mr. Spoor was granted stock options to purchase 150,000 shares of the Company’s common stock, issuable pursuant to the 2014 Plan, that vest upon the completion of enrollment of the next trial of MS 1819-SD in the U.S. These options had an estimated fair value at the grant date of $151,950 to be expensed when the above milestone is probable.
 
On June 29, 2019, the Board approved a 2018 annual incentive bonus pursuant to his employment agreement in the amount of $255,000 that is included in accrued expenses at September 30, 2019.
 
Mr. Spoor received no additional or severance compensation and all unvested options and restricted shares of common stock were cancelled as a result of Mr. Spoor’s resignation.
 
 
 
-21-
 
Maged Shenouda
 
On September 26, 2017, the Company entered into an employment agreement with Maged Shenouda, pursuant to which Mr. Shenouda served as the Company’s Chief Financial Officer. Mr. Shenouda’s employment agreement provided for the issuance of stock options to purchase 100,000 shares of the Company’s common stock, issuable pursuant to the 2014 Plan. These options vested as follows so long as Mr. Shenouda served as either Executive Vice-President of Corporate Development or as Chief Financial Officer (i) 75% upon FDA acceptance of a U.S. IND application for MS1819-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. All of these shares vested in 2018. Due to the Company completing both milestones, $84,125 was expensed in the second quarter of 2018 and $252,375 was expensed in the fourth quarter of 2018.
 
On June 28, 2018, Mr. Shenouda was granted stock options to purchase 100,000 shares of the Company’s common stock, issuable pursuant to the 2014 Plan, subject to vesting conditions as follows: (i) 50% upon U.S. acceptance of an IND for MS1819-SD, and (ii) 50% upon the first CF patient doses with MS1819-SD anywhere in the world. These options had an estimated fair value at the grant date of $207,300 to be expensed when the above milestones are probable. 50,000 of these options having a fair value of $103,650 vested and was expensed in 2018 due to the FDA acceptance of the Company’s IND application for MS1819-SD. The remaining 50,000 options having a fair value of $103,650 vested and was expensed in the nine months ended September 30, 2019 due to the first dosing of CF patients with MS1819-SD anywhere in the world.
 
On June 28, 2018, the Board approved a 2017 annual incentive bonus pursuant to his employment agreement in the amount of $82,500.
 
On June 13, 2019, Mr. Shenouda was granted stock options to purchase 100,000 shares of the Company’s common stock, issuable pursuant to the 2014 Plan, that vest upon the completion of enrollment of the next trial of MS 1819-SD in the U.S. These options had an estimated fair value at the grant date of $101,300 to be expensed when the above milestone is probable.
 
On June 28, 2019, the Board approved a 2018 annual incentive bonus pursuant to his employment agreement in the amount of $100,000 that is included in accrued expenses at September 30, 2019.
 
As previously reported on the Company’s Current Report on Form 8-K filed November 1, 2019, Mr. Shenouda resigned from his position as the Company’s Chief Financial Officer effective November 30, 2019. Mr. Shenouda’s resignation was not due to any disagreements with respect to the Company’s operations, policies or plans and he received no additional or severance compensation in connection with his resignation. All options and restricted shares of common stock not otherwise exercised or vested will be cancelled effective upon the effective date of Mr. Shenouda’s resignation.
 
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.
 
 
 
-22-
 
On June 28, 2018, Mr. Pennington was granted stock options to purchase 75,000 shares of the Company’s common stock, issuable pursuant to the 2014 Plan, subject to vesting conditions as follows: (i) 50% upon U.S. acceptance of an IND for MS1819-SD, and (ii) 50% upon the first CF patient doses with MS1819-SD anywhere in the world. These options had an estimated fair value at the grant date of $155,475 to be expensed when the above milestones are probable. 37,500 of these options vested and $77,738 was expensed in 2018 due to the FDA acceptance of the Company’s IND application for MS1819-SD in 2018. 37,500 of these options having a fair value of $77,738 vested and was expensed in the nine months ended September 30, 2019 due to the first dosing of CF patients with MS1819-SD anywhere in the world.
 
On June 13, 2019, Mr. Pennington was granted stock options to purchase 110,000 shares of the Company’s common stock, issuable pursuant to the 2014 Plan, that vest upon the completion of enrollment of the next trial of MS 1819-SD in the U.S. These options had an estimated fair value at the grant date of $111,430 to be expensed when the above milestone is probable.
 
On June 13, 2019, the Board approved a 2018 annual incentive bonus pursuant to his employment agreement in the amount of $75,000 that was paid in the third quarter of 2019.
 
Note 15 - Leases
 
The Company adopted ASU 2016-02, Leases, as of January 1, 2019, using the modified retrospective approach. Prior year financial statements were not recast under the new standard.
 
The Company leases its office and research facilities under operating leases which are subject to various rent provisions and escalation clauses 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.
 
Lease expense amounted to $52,057 and $40,224, respectively, in the three months ended September 30, 2019 and 2018. Lease expense amounted to $153,723 and $108,217, respectively, in the nine months ended September 30, 2019 and 2018.
 
The weighted-average remaining lease term and weighted-average discount rate under operating leases at September 30, 2019 are:

 
 
September 30,
 
 
 
2019
 
Lease term and discount rate
 
 
 
Weighted-average remaining lease term
 
 1.00 years
 
Weighted-average discount rate
  6.0%
 
Maturities of operating lease liabilities at September 30, 2019 are as follows:

2019
 $49,983 
2020
  151,282 
Total lease payments
  201,265 
Less imputed interest
  (12,226)
Present value of lease liabilities
 $189,039 
 
Note 16 - Income Taxes
 
The Company is subject to taxation at the federal level in both the United States and France and at the state level in the United States. At September 30, 2019 and December 31, 2018, the Company had no tax provision for either jurisdiction.
 
At September 30, 2019 and December 31, 2018, the Company had gross deferred tax assets of approximately $16,156,000 and $12,490,000, respectively. As the Company cannot determine that it is more likely than not that the Company will realize the benefit of the deferred tax asset, a valuation allowance of approximately $16,156,000 and $12,490,000, respectively, has been established at September 30, 2019 and December 31, 2018. The change in the valuation allowance in the nine months ended September 30, 2019 and 2018 was $3,666,000 and $2,108,000, respectively.
 
 
 
-23-
 
At September 30, 2019, the Company has gross net operating loss (“NOL”) carryforwards for U.S. federal and state income tax purposes of approximately $30,229,000 and $28,673,000, respectively. The NOL’s expire between the years 2034 and 2039. The Company’s ability to use its NOL carryforwards may be limited if it experiences an “ownership change” as defined in Section 382 (“Section 382”) of the Internal Revenue Code of 1986, as amended. An ownership change generally occurs if certain stockholders increase their aggregate percentage ownership of a corporation’s stock by more than 50 percentage points over their lowest percentage ownership at any time during the testing period, which is generally the three-year period preceding any potential ownership change.
 
At September 30, 2019 and December 31, 2018, the Company had approximately $17,266,000 and $15,406,000, respectively, in net operating losses which it can carryforward indefinitely to offset against future French income.
 
At September 30, 2019 and December 31, 2018, the Company had taken no uncertain tax positions that would require disclosure under ASC 740, Accounting for Income Taxes.
 
Note 17 - Net Loss per Common Share
 
Basic net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the impact of common shares issuable upon exercise of stock options and warrants and conversion of convertible debt that are not deemed to be anti-dilutive. The dilutive effect of the outstanding stock options and warrants is computed using the treasury stock method.
 
At September 30, 2019, diluted net loss per share did not include the effect of 3,388,378 shares of common stock issuable upon the exercise of outstanding warrants, 416,000 shares of restricted stock not yet issued, and 1,887,500 shares of common stock issuable upon the exercise of outstanding options as their effect would be antidilutive during the periods prior to conversion.
 
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.
 
Note 18 - Related Party Transactions
 
During the year ended December 31, 2015, the Company employed the services of JIST Consulting (“JIST”), a company controlled by Johan (Thijs) Spoor, the Company’s former Chief Executive Officer and president, as a consultant for business strategy, financial modeling, and fundraising. Included in accounts payable at September 30, 2019 and December 31, 2018 is $348,400 and $478,400, respectively, for JIST relating to Mr. Spoor’s services. Mr. Spoor received no other compensation from the Company other than as specified in his employment agreement. On October 8, 2019, Mr. Spoor resigned as Chief Executive Officer and President of the Company.
 
During the year ended December 31, 2015, the Company's President, Christine Rigby-Hutton, was employed through Rigby-Hutton Management Services (“RHMS”). Ms. Rigby-Hutton resigned from the Company effective April 20, 2015. Included in accounts payable at both September 30, 2019 and December 31, 2018 is $38,453 for RHMS for Ms. Rigby-Hutton’s services.
 
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. Included in accounts payable at September 30, 2019 and December 31, 2018 is $10,000 and $50,000, respectively, for Mr. Shenouda’s services. On November 1, 2019, Mr. Shenouda submitted his resignation as Chief Financial Officer of the Company, effective November 30, 2019.
  
Note 19 – Subsequent Events
 
       Continued Listing
 
On November 1, 2019, the Company received a letter from the Listing Qualifications Staff of The Nasdaq Stock Market, LLC ("Nasdaq") indicating that, based upon the closing bid price of the Company's common stock for the last 30 consecutive business days, the Company is not currently in compliance with the requirement to maintain a minimum bid price of $1.00 per share for continued listing on the Nasdaq Capital Market, as set forth in Nasdaq Listing Rule 5550(a)(2) (the "Notice").
 
The Notice has no immediate effect on the continued listing status of the Company's common stock on the Nasdaq Capital Market, and, therefore, the Company's listing remains fully effective.
 
The Company will continue to monitor the closing bid price of its common stock and seek to regain compliance with all applicable Nasdaq requirements within the allotted compliance periods. To regain compliance, the closing bid price of the Company's common stock must be at least $1.00 per share for 10 consecutive business days at some point during the period of 180 calendar days from the date of the Notice, or until April 29, 2020. If the Company does not regain compliance with the minimum bid price requirement by April 29, 2020, Nasdaq may grant the Company a second period of 180 calendar days to regain compliance. To qualify for this additional compliance period, the Company would be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, other than the minimum bid price requirement. In addition, the Company would also be required to notify Nasdaq of its intent to cure the minimum bid price deficiency. If the Company does not regain compliance within the allotted compliance periods, including any extensions that may be granted by Nasdaq, Nasdaq will provide notice that the Company's common stock will be subject to delisting. The Company would then be entitled to appeal that determination to a Nasdaq hearings panel. There can be no assurance that the Company will regain compliance with the minimum bid price requirement during the 180-day compliance period, secure a second period of 180 days to regain compliance, or maintain compliance with the other Nasdaq listing requirements.
 
       Equity Purchase Agreement
 
On November 13, 2019, the Company entered into a purchase agreement (the “Purchase Agreement”), and a registration rights agreement (the “Registration Rights Agreement”), with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which Lincoln Park has committed to purchase up to $15,000,000 of the Company’s common stock. Under the terms and subject to the conditions of the Purchase Agreement, the Company has the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park is obligated to purchase up to $15,000,000 of shares of common stock. Such sales of common stock by the Company, if any, will be subject to certain limitations, and may occur from time to time, at the Company’s sole discretion, over the 30-month period commencing on the date that a registration statement covering the resale of shares of common stock that have been and may be issued under the Purchase Agreement, which the Company agreed to file with the Securities and Exchange Commission (the “SEC”) pursuant to the Registration Rights Agreement, is declared effective by the SEC and a final prospectus in connection therewith is filed and the other conditions set forth in the Purchase Agreement are satisfied, all of which are outside the control of Lincoln Park. The Company has 60 business days to file the registration statement.
 
In consideration for Lincoln Park’s commitment to purchase up to $15,000,000 shares of common stock under, and subject to the terms of the Purchase Agreement, the Company is obligated to issue to Lincoln Park 487,168 shares of common stock. Additional terms and conditions of the Purchase Agreement and Registration Rights Agreement are set forth in the Current Report on Form 8-K filed on November 14, 2019.
 
 
 
-24-
 
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’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, 2018, filed with the SEC on April 1, 2019. 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 SAS (formerly “ProteaBio Europe SAS”), a company incorporated in October 2008 under the laws of France. AzurRx and its wholly-owned subsidiary, AzurRx SAS (“ABS”), are jointly referred to as the “Company.”
 
We are 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. In June 2018, we completed an open-label, dose escalation Phase 2a 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 showed 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. Additionally, maximal absolute CFA response to treatment was up to 57%, with an inverse relationship to baseline CFA.
 
In October 2018, the U.S. Food and Drug Administration (“FDA”) cleared our Investigational New Drug (“IND”) application for MS1819-SD in patients with EPI due to CF. In connection with the FDA’s clearance of the IND, we initiated the multi-center Phase 2 OPTION Study in the fourth quarter of 2018 in the United States and Europe (the “OPTION Study”). We targeted enrollment of 30 to 35 patients for the OPTION Study and dosed the first patients in February 2019. In June 2019, we reached our enrollment target for the study.
 
 
 
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On September 25, 2019, we announced positive results from the OPTION Study. Results showed that the primary efficacy endpoint of CFA was comparable to the CFA in a prior phase two study in patients with CP, while using the same dosage of MS1819-SD. The dosage used in both studies was 2.2 grams per day, which was determined in agreement with the FDA as a bridging dose. Although the study was not powered for statistical significance, the data demonstrated meaningful efficacy results, with approximately 50% of the patients showing CFAs high enough to reach non-inferiority with standard porcine enzyme replacement therapy (“PERT”). Additionally, coefficient of nitrogen absorption (“CNA”) was comparable between the MS1819-SD and PERT arms, 93% vs. 97%, respectively, in the Option Study. This important finding confirms that protease supplementation is not likely to be required with MS1819-SD treatment. A total of 32 patients, ages 18 or older, completed the OPTION Study. We now plan to meet with the FDA before year-end based on prior communications, to discuss a Phase 2b trial design exploring the use of higher doses and/or enteric-coated capsules to ensure higher levels of MS1819-SD in the duodenum.
 
On October 17, 2019, we announced that the Cystic Fibrosis Foundation Data Safety Monitoring Board has completed its review of our final results of the Phase 2 OPTION trial and has found no safety concerns for MS1819-SD, our lead product candidate for the treatment of exocrine pancreatic insufficiency in cystic fibrosis, and that the group supports our plan to proceed to a higher 4-gram dose of MS1819-SD in our next planned Phase 2 clinical trial. 
 
In addition to the OPTION Study, in July 2019 we launched a Phase 2 multi-center clinical trial (the “Combination Trial”) in Hungary to investigate MS1819-SD in combination with PERT, for CF patients who suffer from severe EPI, but continue to experience clinical symptoms of fat malabsorption despite taking the maximum daily dose of PERTs. The Phase 2 study is designed to investigate the safety, tolerability and efficacy of escalating doses of MS1819-SD, in conjunction with a stable dose of PERTs, in order to increase CFA and relieve abdominal symptoms.
 
On October 15, 2019, we announced that we dosed the first patients in the Combination Trial.  This study is designed to investigate the safety, tolerability and efficacy of escalating doses of MS1819-SD (700 mg, 1120 mg and 2240 mg per day, respectively), in conjunction with a stable dose of porcine PERTs, in order to increase the coefficient of fat absorption (CFA) and relieve abdominal symptoms. A combination therapy of PERT and MS1819-SD has the potential to: (i) correct macronutrient and micronutrient maldigestion; (ii) eliminate abdominal symptoms attributable to maldigestion; and (iii) sustain optimal nutritional status on a normal diet in CF patients with severe EPI. Planned enrollment is expected to include approximately 24 CF patients with severe EPI, with study completion anticipated in 2020.
 
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 in addition to assessing plans for continuation of the development of AZX1101.
 
We do not expect to generate revenue from drug candidates that we develop until we obtain approval for one or more of such drug candidates and commercialize our product or enter into a collaborative agreement with a third party. We do not have any products approved for sale at the present and have never generated revenue from product sale.
 
Liquidity and Capital Resources
 
We have experienced net losses and negative cash flows from operations since our inception. As of September 30, 2019, we had cash of approximately $1,550,000 and had an accumulated deficit of approximately $61,413,000. 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, the issuance of common stock in various private placement transactions, and our public offerings in May 2018, April 2019, May 2019, and July 2019. We do not believe our current cash, including net proceeds from the recent equity issuance in July 2019, will be sufficient to fund our working capital requirements beyond the next 12 months. 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.
 
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 may raise additional equity capital, incur additional debt, or both, which capital may not be available on a timely basis or on acceptable terms.
 
 
 
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