10-Q 1 azrx10q_mar312020.htm ANNUAL REPORT azrx10q_mar312020
 
 
 

 
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 March 31, 2020
 
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 May 14, 2020, there were 28,202,850 shares of the registrant’s common stock, $0.0001 par value, (“common stock”) issued and outstanding.
  
 

 
 
 
 
TAB LE OF CONTENTS
 
 

 
-i-
 
 
 
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, 2019 included in our Annual Report filed on Form 10-K, filed with the SEC on March 30, 2020.
 
The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the fiscal year ended December 31, 2020.
 
  
 
 
-1-
 
 
 
AZURRX BIOPHARMA, INC.
Consolidated Balance Sheets (unaudited)
 
 
 
March
31,
 
 
December
31,
 
 
 
2020
 
 
2019
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
Cash
 $1,630,007 
 $175,796 
Other receivables
  760,232 
  2,637,303 
Prepaid expenses
  507,197 
  595,187 
Total Current Assets
  2,897,436 
  3,408,286 
 
    
    
Property, equipment, and leasehold improvements, net
  73,547 
  77,391 
 
    
    
Other Assets:
    
    
 Patents
  3,275,197 
  3,407,084 
 Goodwill
  1,844,006 
  1,886,686 
 Operating lease right-of-use assets
  53,399 
  82,386 
 Deposits
  40,727 
  41,047 
Total Other Assets
  5,213,329 
  5,417,203 
Total Assets
 $8,184,312 
 $8,902,880 
 
    
    
LIABILITIES AND STOCKHOLDERS' EQUITY
    
    
 
    
    
Current Liabilities:
    
    
Accounts payable and accrued expenses
 $1,039,219 
 $1,754,682 
Accounts payable and accrued expenses - related party
  396,853 
  533,428 
Note payable
  279,616 
  444,364 
Convertible debt
  2,986,328 
  1,076,938 
Other current liabilities
  441,173 
  476,224 
Total Current Liabilities
  5,143,189 
  4,285,636 
 
    
    
Stockholders' Equity:
    
    
Convertible preferred stock - Par value $0.0001 per share; 10,000,000 shares authorized and 0 shares issued and outstanding at March 31, 2019 and December 31, 2018; liquidation preference approximates par value
  - 
  - 
Common stock - Par value $0.0001 per share; 100,000,000 shares authorized; 27,157,651 and 26,800,519 shares issued and outstanding, respectively, at March 31, 2020 and December 31, 2019
  2,716 
  2,680 
Additional paid-in capital
  72,103,490 
  68,575,851 
Accumulated deficit
  (67,956,022)
  (62,694,732)
Accumulated other comprehensive loss
  (1,109,061)
  (1,266,555)
Total Stockholders' Equity
  3,041,123 
  4,617,244 
Total Liabilities and Stockholders' Equity
 $8,184,312 
 $8,902,880 
 
See accompanying notes to consolidated financial statements
 
 
-2-
 
 
 
AZURRX BIOPHARMA, INC.
Consolidated Statements of Operations and Comprehensive Loss (unaudited)
 
 
 
Three Months
 
 
Three Months
 
 
 
Ended
 
 
Ended
 
 
 
03/31/20
 
 
03/31/19
 
 
 
 
 
 
 
 
Research and development expenses
 $1,553,360 
 $3,009,676 
General and administrative expenses
  1,375,091 
  1,593,968 
 
    
    
Loss from operations
  (2,928,451)
  (4,603,644)
 
    
    
Other:
    
    
   Interest expense
  (2,332,839)
  (57,111)
Total other
  (2,332,839)
  (57,111)
 
    
    
Loss before income taxes
  (5,261,290)
  (4,660,755)
 
    
    
Income taxes
  - 
  - 
 
    
    
Net loss
  (5,261,290)
  (4,660,755)
 
    
    
Other comprehensive loss:
    
    
  Foreign currency translation adjustment
  157,494 
  (95,281)
Total comprehensive loss
 $(5,103,796)
 $(4,756,036)
 
    
    
Basic and diluted weighted average shares outstanding
  26,941,803 
  17,719,902 
 
    
    
Loss per share - basic and diluted
 $(0.20)
 $(0.26)
 
See accompanying notes to consolidated financial statements
 
 
-3-
 
 
 
AZURRX BIOPHARMA, INC.
Consolidated Statements of Changes in Stockholders' Equity (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
Convertible  
 
 
 
 
 
 
 
 
Additional
 
 
 
 
 
Other
 
 
 
 
 
 
 Preferred Stock
 
 
 Common Stock
 
 
Paid In
 
 
Accumulated
 
 
Comprehensive
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Deficit
 
 
Loss
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2019
  - 
 $- 
  17,704,925 
 $1,771 
 $53,139,259 
 $(47,517,046)
 $(1,150,112)
 $4,473,872 
 
    
    
    
    
    
    
    
    
Common stock issued to consultants
    
    
  27,102 
  2 
  59,998 
    
    
  60,000 
Common stock issued to Mayoly for patents
    
    
  775,931 
  77 
  1,740,882 
    
    
  1,740,959 
Stock-based compensation
    
    
    
    
  511,335 
    
    
  511,335 
Restricted stock granted to employees/directors
    
    
  30,000 
  3 
  296,282 
    
    
  296,285 
Warrant modification
    
    
    
    
  325,320 
    
    
  325,320 
Received from stockholder in relation to warrant modification
    
    
    
    
  61,590 
    
    
  61,590 
Foreign currency translation adjustment
    
    
    
    
    
    
  (95,281)
  (95,281)
Net loss
    
    
    
    
    
  (4,660,755)
    
  (4,660,755)
Balance, March 31, 2019
  - 
 $- 
  18,537,958 
 $1,853 
 $56,134,666 
 $(52,177,801)
 $(1,245,393)
 $2,713,325 
 
    
    
    
    
    
    
    
    
Balance, January 1, 2020
  - 
 $- 
  26,800,519 
 $2,680 
 $68,575,851 
 $(62,694,732)
 $(1,266,555)
 $4,617,244 
 
    
    
    
    
    
    
    
    
Common stock issued to settle related payable accounts payable
    
    
  105,937 
  11 
  131,126 
    
    
  131,137 
Common stock issued to consultants
    
    
  101,195 
  10 
  87,095 
    
    
  87,105 
Common stock issued to Lincoln Park for Equity Purchase agreement
    
    
  150,000 
  15 
  143,985 
    
    
  144,000 
Warrants issued in association with convertible debt issuances
    
    
    
    
  1,252,558 
    
    
  1,252,558 
Beneficial conversion feature on convertible debt issuances
    
    
    
    
  1,838,422 
    
    
  1,838,422 
Stock-based compensation
    
    
    
    
  74,453 
    
    
  74,453 
Foreign currency translation adjustment
    
    
    
    
    
    
  157,494 
  157,494 
Net loss
    
    
    
    
    
  (5,261,290)
    
  (5,261,290)
Balance, March 31, 2020
  - 
 $- 
  27,157,651 
 $2,716 
 $72,103,490 
 $(67,956,022)
 $(1,109,061)
 $3,041,123 
 
See accompanying notes to consolidated financial statements
 
 
-4-
 
 
AZURRX BIOPHARMA, INC.
Consolidated Statements of Cash Flows (unaudited)
 
 
 
Three Months
 
 
Three Months
 
 
 
Ended
 
 
Ended
 
 
 
03/31/20
 
 
03/31/19
 
Cash flows from operating activities:
 
 
 
 
 
 
   Net loss
 $(5,261,290)
 $(4,660,755)
   Adjustments to reconcile net loss to net cash used in
    
    
   operating activities:
    
    
         Depreciation
  9,661 
  17,114 
         Amortization
  131,149 
  561,289 
         Non-cash lease expense
  (6,065)
  (1,030)
         Stock-based compensation
  54,950 
  511,335 
         Common stock issued to settle related party accounts payable
  131,137 
  - 
         Restricted stock granted to employees/directors
  19,503 
  296,285 
         Restricted stock granted to consultants
  87,105 
  60,000 
         Accrued interest on convertible debt
  164,281 
  24,658 
         Accretion of debt discount
  2,059,086 
  29,104 
     Net changes in assets and liabilities:
    
    
         Other receivables
  2,064,252 
  (149,508)
         Prepaid expenses
  87,906 
  172,886 
         Deposits
  - 
  (4,125)
         Accounts payable and accrued expenses
  (832,955)
  514,950 
Net cash used in operating activities
  (1,291,280)
  (2,627,797)
 
    
    
Cash flows from investing activities:
    
    
     Purchase of property and equipment
  (4,340)
  (13,352)
Net cash used in investing activities
  (4,340)
  (13,352)
 
    
    
Cash flows from financing activities:
    
    
     Proceeds from issuance of common stock, net
  144,000 
  - 
     Proceeds from issuance of convertible debt, net
  3,227,002 
  2,000,000 
     Received from stockholder in relation to warrant modification
  - 
  61,590 
     Repayments of convertible debt
  (450,000)
  - 
     Repayments of note payable
  (164,748)
  (94,448)
Net cash provided by financing activities
  2,756,254 
  1,967,142 
 
    
    
Increase (decrease) in cash
  1,460,634 
  (674,007)
 
    
    
Effect of exchange rate changes on cash
  (6,423)
  (26,478)
 
    
    
Cash, beginning balance
  175,796 
  1,114,343 
 
    
    
Cash, ending balance
 $1,630,007 
 $413,858 
 
    
    
Supplemental disclosures of cash flow information:
    
    
 
    
    
     Cash paid for interest
 $104,153 
 $3,933 
 
    
    
     Cash paid for income taxes
 $- 
 $- 
 
    
    
Non-cash investing and financing activities:
    
    
 
    
    
    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
 
 
-5-
Notes to Unaudited Condensed 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 is currently focused on developing its lead drug product candidate, MS1819, a yeast derived recombinant lipase for the treatment of exocrine pancreatic insufficiency (“EPI”) associated with cystic fibrosis (“CF”) and chronic pancreatitis (“CP”).
 
Ongoing and Planned Clinical Studies
 
MS1819 – Phase 2b OPTION 2 Cystic Fibrosis Monotherapy Study
 
On October 17, 2019, the Company announced that the Cystic Fibrosis Foundation Data Safety Monitoring Board (the “CFF DSMB”) completed its review of the Company’s final results of the OPTION Cross-Over Study and has found no safety concerns for MS1819, and that the CFF DSMB supports the Company’s plan to proceed to a higher 4.4 gram dose of MS1819 with enteric capsules in its next planned multi-center dose escalation Phase 2b OPTION clinical trial (the “OPTION 2 Trial”). In December 2019, the Company submitted the clinical trial protocol to the existing IND at the FDA. The clinical trial protocol has been reviewed by the FDA with no comments. In April 2020, the Company received approval to conduct the OPTION 2 Trial in Therapeutics Development Network (TDN) clinical sites in the U.S. as well as Institutional Review Board (IRB) approval to commence the OPTION 2 Trial.
 
The OPTION 2 Trial is designed to investigate the safety, tolerability and efficacy of MS1819 (2.2 gram and 4.4 gram doses in enteric capsules) in a head-to-head manner versus the current standard of care, porcine pancreatic enzyme replacement therapy (PERT) pills. The OPTION 2 Trial will be an open-label, crossover study, conducted in 15 sites in the U.S. and Europe. A total of 30 CF patients 18 years or older will be enrolled.  MS1819 will be administered in enteric capsules to provide gastric protection and allow optimal delivery of enzyme to the duodenum.  Patients will first be randomized into two cohorts: to either the MS1819 arm, where they receive a 2.2 gram daily oral dose of MS1819 for three weeks; or to the PERT arm, where they receive their pre-study dose of PERT pills for three weeks. After three weeks, stools will be collected for analysis of coefficient of fat absorption (CFA). Patients will then be crossed over for another three weeks of the alternative treatment. After three weeks of cross-over therapy, stools will again be collected for analysis of CFA. A parallel group of patients will be randomized and studied in the same fashion, using a 4.4 gram daily dose of MS1819. All patients will be followed for an additional two weeks after completing both crossover treatments for post study safety observation. Patients will be assessed using descriptive methods for efficacy, comparing CFA between MS1819 and PERT arms, and for safety.
 
The Company expects to initiate the OPTION 2 Trial by the end of the second quarter of 2020, with target enrollment completion in the fourth quarter of 2020 and study completion anticipated in the first quarter of 2021, however, these timelines may be delayed due to the novel coronavirus ("COVID-19") pandemic.
 
MS1819 – Phase 2 Combination Therapy Study
 
In addition to the monotherapy studies, the Company launched a Phase 2 multi-center clinical trial (the “Combination Trial”) in Europe to investigate MS1819 in combination with PERT, for CF patients who suffer from severe EPI, but continue to experience clinical symptoms of fat malabsorption despite taking the maximum daily dose of PERTs. The Combination Trial is designed to investigate the safety, tolerability and efficacy of escalating doses of MS1819 (700 mg, 1120 mg and 2240 mg per day, respectively), in conjunction with a stable dose of PERTs, in order to increase CFA and relieve abdominal symptoms in uncontrolled CF patients. A combination therapy of PERT and MS1819 has the potential to: (i) correct macronutrient and micronutrient maldigestion; (ii) eliminate abdominal symptoms attributable to maldigestion; and (iii) sustain optimal nutritional status on a normal diet in CF patients with severe EPI.
 
On October 15, 2019, the Company announced that it dosed the first patients in its Combination Trial in Hungary. Planned enrollment is expected to include approximately 24 CF patients with severe EPI, at clinical trial sites in Hungary and additional countries in Europe including Spain and possibly Turkey. Study completion was originally anticipated by the end of 2020; however, this timeline has been delayed due to the COVID-19 pandemic and topline results are now expected in the first quarter of 2021.
 
Basis of Presentation and Principles of Consolidation
 
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In our opinion, the accompanying unaudited interim consolidated financial statements include all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly our financial position, results of operations, and cash flows. The consolidated balance sheet at December 31, 2019, has been derived from audited financial statements of that date. The unaudited interim consolidated results of operations are not necessarily indicative of the results that may occur for the full fiscal year. Certain information and footnote disclosure normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to instructions, rules, and regulations prescribed by the Securities and Exchange Commission (“SEC”). The Company believes that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited interim consolidated financial statements are read in conjunction with the audited financial statements and notes previously distributed in our Annual Report Form 10-K for the year ended December 31, 2019, filed with the SEC on March 30, 2020.
 
The unaudited interim consolidated financial statements include the accounts of AzurRx and its wholly-owned subsidiary, AzurRx SAS. Intercompany transactions and balances have been eliminated upon consolidation.
 
Going Concern Uncertainty
 
The accompanying unaudited interim consolidated financial statements have been prepared as if the Company will continue as a going concern. The Company has incurred significant operating losses and negative cash flows from operations since inception, had negative working capital at March 31, 2020 of approximately $2.2 million, and had an accumulated deficit of approximately $67.9 million at March 31, 2020. The Company is dependent on obtaining, and continues to pursue, additional working capital funding from the sale of securities and debt in order to continue to execute its development plan and continue operations. Without adequate working capital, the Company may not be able to meet its obligations and continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
We will need to raise additional capital through additional equity and/or debt financings, including utilization of our LPC Equity Line of Credit (see Note 11), in order to fund our ongoing operations and to satisfy our obligations under our convertible debt (see Note 9), and the impact of the COVID-19 pandemic which is evolving rapidly could negatively impact our ability to raise additional capital and our ability to repay, extend or restructure our convertible debt.
 
 
-6-
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
Note 2 - Significant Accounting Policies and Recent Accounting Pronouncements
 
Use of Estimates
 
The accompanying unaudited consolidated financial statements are prepared in conformity with U.S. GAAP and include certain estimates and assumptions which affect the reported amounts of assets and liabilities at the date of the financial statements (including goodwill, intangible assets and contingent consideration), and the reported amounts of revenues and expenses during the reporting period, including contingencies. Accordingly, actual results may differ from those estimates.
 
Cash and Cash Equivalents
 
The Company considers all highly liquid investments with maturities of three months or less from date of purchase to be cash equivalents. All cash balances were highly liquid at March 31, 2020 and December 31, 2019, respectively.
 
Concentrations of Credit Risk
 
Financial instruments that potentially expose the Company to concentrations of credit risk consist of cash. The Company primarily maintains its cash balances with financial institutions in federally insured accounts in the U.S. The Company may from time to time have cash in banks in excess of FDIC insurance limits. At March 31, 2020 and December 31, 2019, the Company had $236,568 and $0, respectively, in one account in the U.S. in excess of these limits. The Company has not experienced any losses to date resulting from this practice. The Company mitigates its risk by maintaining the majority of its cash and cash equivalents with high quality financial institutions.
 
The Company also has exposure to foreign currency risk as its subsidiary in France has a functional currency in Euros.
 
Debt Instruments
 
Detachable warrants issued in conjunction with debt are measured at their relative fair value, if they are determined to be equity instrument, or their fair value, if they are determined to be liability instruments, and recorded as a debt discount.  Conversion features that are in the money at the commitment date constitute a beneficial conversion feature that is measured at its intrinsic value and recognized as debt discount. Debt discount is amortized as interest expense over the maturity period of the debt using the effective interest method. Contingent beneficial conversion features are recognized when the contingency has been resolved.
 
Debt Issuance Costs
 
Debt issuance costs are recorded as a direct reduction of the carrying amount of the related debt. Debt issuance costs are amortized over the maturity period of the related debt instrument using the effective interest method.
 
Equity-Based Payments to Non-Employees
 
Equity-based payments to non-employees are measured at fair value on the grant date per ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting.
 
Fair Value Measurements
 
The Company follows Accounting Standards Codification (“ASC”) Topic 820-10, Fair Value Measurements and Disclosures (“ASC 820”), which among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.
 
 
 
-7-
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
As a basis for considering such assumptions, a three-tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:
 
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities;
 
Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
 
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions, which reflect those that a market participant would use.
 
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the overall fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.
 
The Company recognizes transfers between levels as if the transfers occurred on the last day of the reporting period.
 
Foreign Currency Translation
 
For foreign subsidiaries with operations denominated in a foreign currency, assets and liabilities are translated to U.S. dollars, which is the functional currency, at period end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the periods presented. Gains and losses from translation adjustments are accumulated in a separate component of stockholders’ equity.
 
Goodwill and Intangible Assets
 
Goodwill represents the excess of the purchase price of the acquired business over the fair value of amounts assigned to assets acquired and liabilities assumed. Goodwill and other intangible assets with indefinite useful lives are reviewed for impairment annually or more frequently if events or circumstances indicate impairment may be present. Any excess in carrying value over the estimated fair value is charged to results of operations. The Company has not recognized any impairment charges through March 31, 2020.
 
Intangible assets subject to amortization consist of in process research and development, license agreements, and patents reported at the fair value at date of the acquisition less accumulated amortization. Amortization expense is provided using the straight-line method over the estimated useful lives of the assets as follows:
 
Patents                                                          7.2 years
In Process Research & Development            12 years
License Agreements                                        5 years
 
Impairment of Long-Lived Assets
 
The Company periodically evaluates its long-lived assets for potential impairment in accordance with ASC Topic 360, Property, Plant and Equipment (“ASC 360”). Potential impairment is assessed when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. Recoverability of these assets is assessed based on undiscounted expected future cash flows from the assets, considering a number of factors, including past operating results, budgets and economic projections, market trends and product development cycles. If impairments are identified, assets are written down to their estimated fair value. The Company has not recognized any impairment charges through March 31, 2020.
 
Income Taxes
Income taxes are recorded in accordance with ASC 740, Accounting for Income Taxes (“ASC 740”), which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. The Company determines its deferred tax assets and liabilities based on differences between financial reporting and tax bases of assets and liabilities, which are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
 
 
 
-8-
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. At March 31, 2020 and December 31, 2019, the Company does not have any significant uncertain tax positions. All tax years are still open for audit.
 
Leases
 
Effective January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, “Leases.” This ASU requires substantially all leases be recorded on the balance sheet as right of use assets and lease obligations. The Company adopted the ASU using a modified retrospective adoption method at January 1, 2019, as outlined in ASU No. 2018-11, “Leases - Targeted Improvements.” Under this method of adoption, there is no impact to the comparative condensed consolidated statements of operations and condensed consolidated balance sheets. The Company determined that there was no cumulative-effect adjustment to beginning retained earnings on the consolidated balance sheet. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed carryforward of historical lease classifications. Adoption of this standard did not materially impact the Company’s results of operations and had no impact on the consolidated statements of cash flows.
 
Research and Development
 
Research and development (“R&D”) costs are charged to operations when incurred and are included in operating expense. R&D costs consist principally of compensation of employees and consultants that perform the Company’s research activities, the fees paid to maintain the Company’s licenses, and the payments to third parties for manufacturing drug supply and clinical trials, and amortization of intangible assets.
 
Stock-Based Compensation
 
The Company’s board of directors (the “Board”) and stockholders have adopted and approved the Amended and Restated 2014 Omnibus Equity Incentive Plan which took effect on May 12, 2014. The Company accounts for its stock-based compensation awards to employees and Board members in accordance with ASC Topic 718, Compensation—Stock Compensation (“ASC 718”). ASC 718 requires all stock-based payments to employees and Board members, including grants of employee stock options, to be recognized in the statements of operations by measuring the fair value of the award on the date of grant and recognizing this fair value as stock-based compensation using a straight-line method over the requisite service period, generally the vesting period.
 
For awards with performance conditions that affect their vesting, such as the occurrence of certain transactions or the achievement of certain operating or financial milestones, recognition of fair value of the award occurs when vesting becomes probable.
 
The Company estimates the grant date fair value of stock option awards using the Black-Scholes option-pricing model. The use of the Black-Scholes option-pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the Common Stock consistent with the expected life of the option, risk-free interest rates and expected dividend yields of the Common Stock.
 
Sublicense Agreement
 
As more fully discussed in Note 14, the Company entered into a sublicense agreement with TransChem, Inc. (“TransChem”), pursuant to which TransChem granted the Company an exclusive license to certain patents and patent applications. Any payments made to TransChem in connection with this sublicense agreement are recorded as R&D expense.
 
 
 
-9-
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
Subsequent Events
 
The Company considered events or transactions occurring after the balance sheet date but prior to the date the consolidated financial statements are available to be issued for potential recognition or disclosure in its consolidated financial statements.
 
Recent Accounting Pronouncements
 
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other, Simplifying the Accounting for Goodwill Impairment. ASU 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. This new guidance will be applied prospectively and is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. This ASU, which the Company adopted as of January 1, 2020, did not have a material effect on the Company’s consolidated financial statements.
 
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 March 31, 2020:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 $1,630,007 
 $- 
 $1,630,007 
 $- 
 $1,630,007 
Other receivables
 $760,232 
 $- 
 $- 
 $760,232 
 $760,232 
Note payable
 $279,616 
 $- 
 $- 
 $279,616 
 $279,616 
Convertible debt
 $2,986,328 
 $- 
 $- 
 $2,986,328 
 $2,986,328 
 
    
    
    
    
 
 
 
At December 31, 2019:
    
    
    
    
 
 
 
Cash
 $175,796 
 $- 
 $175,796 
 $- 
 $175,796 
Other receivables
 $2,637,303 
 $- 
 $- 
 $2,637,303 
 $2,637,303 
Note payable
 $444,364 
 $- 
 $- 
 $444,364 
 $444,364 
Convertible debt
 $1,076,938 
 $- 
 $- 
 $1,076,938 
 $1,076,938 
 
At March 31, 2020, the fair value of other receivables approximates carrying value as these consist primarily of French R&D tax credits that are normally received the following year.
 
At December 31, 2019, the fair value of other receivables approximates carrying value as these consist primarily of French R&D tax credits that are normally received the following year.
 
The fair value of the note payable in connection with the financing of directors and officer’s liability insurance approximates carrying value due to the terms of such instruments and applicable interest rates.
 
The convertible debt is based on its fair value less unamortized debt discount plus accrued interest through the date of reporting (see Note 9).
 
 
 
-10-
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
Note 4 - Other Receivables
 
Other receivables consisted of the following:
 
 
March 31,
 
 
December 31,
 
 
 
2020
 
 
2019
 
R&D tax credits
 $695,511 
 $2,566,281 
Other
  64,721 
  71,022 
Total other receivables
 $760,232 
 $2,637,303 
 
At March 31, 2020, the R&D tax credits were comprised of the 2019 refundable tax credits for research conducted in France.
 
At December 31, 2019, the R&D tax credits were comprised of the 2017, 2018, and 2019 refundable tax credits for research conducted in France. In the quarter ended March 31, 2020, the Company received both the 2017 and 2018 refundable tax credits totaling approximately $1,770,000.
 
At December 31, 2019, Other consisted of amounts due from U.S. R&D tax credits.
 
Note 5 - Property, Equipment and Leasehold Improvements
 
Property, equipment and leasehold improvements consisted of the following:
 
 
 
March 31,
 
 
December 31,
 
 
 
2020
 
 
2019
 
Laboratory equipment
 $193,661 
 $193,661 
Computer equipment
  74,836 
  74,836 
Office equipment
  36,703 
  36,703 
Leasehold improvements
  35,711 
  35,711 
Total property, plant and equipment
  340,911 
  340,911 
Less accumulated depreciation
  (267,364)
  (263,520)
Property, plant and equipment, net
 $73,547 
 $77,391 
 
Depreciation expense for the three months ended March 31, 2020 and 2019 was $9,661 and $17,114, respectively.
 
For the three months ended March 31, 2020, $4,771 of depreciation is included in R&D expense and $4,890 of depreciation is included in G&A expense.
 
For the three months ended March 31, 2019, $12,095 of depreciation has been reclassified to R&D expense and $5,019 of depreciation remains in G&A expense.
 
Note 6 - Intangible Assets and Goodwill
 
Patents
 
Pursuant to the Mayoly APA entered into on March 27, 2019, in which the Company purchased all rights, title and interest in and to MS1819 (see Note 14), the Company recorded Patents in the amount of $3,802,745 as follows:
 
Common stock issued at signing to Mayoly
 $1,740,959 
Due to Mayoly at 12/31/19 - €400,000
  449,280 
Due to Mayoly at 12/31/20 - €350,000
  393,120 
Assumed Mayoly liabilities and forgiveness of Mayoly debt
  1,219,386 
 
    
 
 $3,802,745 
 
 
 
-11-
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
Intangible assets are as follows:
 
 
 
March 31,
 
 
December 31,
 
 
 
2020
 
 
2019
 
Patents
 $3,802,745 
 $3,802,745 
Less accumulated amortization
  (527,548)
  (395,661)
Patents, net
 $3,275,197 
 $3,407,084 
 
Amortization expense for the three months ended March 31, 2020 and 2019 was $131,149 and $561,289, respectively. Amortization expense for the three months ended March 31, 2019 included $384,234 from In process research and development and License agreements written off as a result of the Mayoly APA.
 
As of March 31, 2020, amortization expense related to patents is expected to be as follows for the next five years (2020 through 2024):
 
2020 (balance of year)
 $395,661 
2021
  527,548 
2022
  527,548 
2023
  527,548 
2024
  527,548 
 
Goodwill is as follows:
 
 
 
Goodwill
 
Balance at January 1, 2019
 $1,924,830 
Foreign currency translation
  (38,144)
Balance at December 31, 2019
  1,886,686 
Foreign currency translation
  (42,680)
Balance at March 31, 2020
 $1,844,006 
 
Note 7 - Accounts Payable and Accrued Expenses
 
Accounts payable and accrued expenses consisted of the following:
 
 
 
March 31,
 
 
December 31,
 
 
 
2020
 
 
2019
 
Trade payables
 $925,284 
 $1,683,505 
Accrued expenses
  113,935 
  71,177 
Total accounts payable and accrued expenses
 $1,039,219 
 $1,754,682 
 
Note 8 - Note Payable
 
On December 5, 2019, the Company entered into a 9-month financing agreement for its directors and officer’s liability insurance in the amount of $498,783 that bears interest at an annual rate of 5.461%. Monthly payments, including principal and interest, are $56,689 per month. The balance due under this financing agreement at March 31, 2020 was $279,616.
 
 
 
-12-
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
Note 9 – Convertible Notes
 
ADEC Notes
 
On February 14, 2019, the Company entered into a Note Purchase Agreement (the “ADEC NPA”) with ADEC Private Equity Investments, LLC (“ADEC”), pursuant to which the Company issued to ADEC two Senior Convertible Notes (“Note A” and “Note B,” respectively, each an “ADEC Note,” and together, the “ADEC Notes”), in the principal amount of $1,000,000 per ADEC Note, resulting in gross proceeds to the Company of $2,000,000 (the “ADEC Note Offering”). ADEC is controlled by a significant stockholder of the Company.
 
The ADEC Notes accrue interest at a rate of 10% per annum; provided, however, that in the event the Company elects to repay the full balance due under the terms of both ADEC Notes prior to December 31, 2019, then the interest rate will be reduced to 6% per annum. Interest is payable at the time all outstanding principal amounts owed under each ADEC Note is repaid. The ADEC Notes mature on the earlier to occur of (i) the tenth business day following the receipt by ABS of certain tax credits that the Company expects to receive prior to July 2019 in the case of Note A (the “2019 Tax Credit”) and July 2020 in the case of Note B (the “2020 Tax Credit”), respectively, or (ii) December 31, 2019 in the case of Note A and December 31, 2020 in the Case of Note B (the “Maturity Dates”). As a condition to entering into the ADEC NPA, ABS and ADEC also entered into a Pledge Agreement, pursuant to which ABS agreed to pledge an interest in each of the 2019 Tax Credit and 2020 Tax Credit to ADEC in order to guarantee payment of all amounts due under the terms of the ADEC Notes.
 
Each of the ADEC Notes is convertible, at ADEC’s option, into shares of Common Stock, at a conversion price equal to $2.50 per share;provided, however, that pursuant to the term of the ADEC Notes, ADEC may not convert all or a portion of the ADEC Notes if such conversion would result in the significant stockholder and/or entities affiliated with him beneficially owning in excess of 19.99% of the shares of Common Stock issued and outstanding immediately after giving effect to the issuance of the shares issuable upon conversion of the ADEC Notes (the “ADEC Note Conversion Shares”).
 
As additional consideration for entering into the ADEC NPA, the Company entered into a warrant amendment agreement, whereby the Company agreed to reduce the exercise price of 1,009,565 outstanding warrants previously issued by the Company to ADEC and its affiliates (the “ADEC Warrants”) to $1.50 per share (the “ADEC Warrant Amendment”). The ADEC Warrant Amendment does not alter any other terms of the ADEC Warrants. The ADEC Warrant Amendment resulted in a debt discount of $325,320 that is accreted to additional interest expense over the lives of the ADEC Notes.
 
In December 2019, the Company repaid $1,550,000 principal amount of the ADEC Notes and on January 2, 2020 repaid the remaining principal balance of $450,000 plus outstanding accrued interest of $104,153.
 
Senior Convertible Promissory Note Offering
 
On December 20, 2019, the Company began an offering of (i) Senior Convertible Promissory Notes (each a “Promissory Note,” and together, the “Promissory Notes”) in the principal amount of up to $8.0 million to certain accredited investors (the “Note Investors”), and (ii) warrants (“Note Warrants”) to purchase shares of Common Stock, each pursuant to Note Purchase Agreements entered into by and between the Company and each of the Investors (the “Promissory NPAs”) (the “Promissory Note Offering”).
 
In December 2019, the Company issued Promissory Notes to the Note Investors in the aggregate principal amount of $3,386,300. The Promissory Notes mature on September 20, 2020, accrue interest at a rate of 9% per annum, and are convertible, at the sole option of the holder, into shares of Common Stock (the “Promissory Note Conversion Shares”) at a price of $0.97 per share (the “Conversion Option”). The Promissory Notes may be prepaid by the Company at any time prior to the maturity date in cash without penalty or premium (the “Prepayment Option”).
 
On January 2, 2020, January 3, 2020, and January 9, 2020, the Company issued Promissory Notes to the Note Investors in the aggregate principal amount of $3,517,700.
 
 
-13-
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
As additional consideration for the execution of the Promissory NPA, each Note Investor also received Note Warrants to purchase that number of shares of Common Stock equal to one-half (50%) of the Promissory Note Conversion Shares issuable upon conversion of the Promissory Notes (the “Warrant Shares”). The Note Warrants have an exercise price of $1.07 per share and expire five years from the date of issuance. The Company and each Note Investor executed a Registration Rights Agreement (the “RRA”), pursuant to which the Company agreed to file a registration statement. The Company filed a registration statement with the SEC on February 7, 2020 covering the Promissory Note Conversion Shares and Warrant Shares.
 
In connection with the four closings in December 2019 of the Promissory Note Offering, the Company paid aggregate placement agent fees of $338,630, which fees were based on (i) 9% of the aggregate principal amount of the Promissory Notes issued to the Note Investors introduced by the placement agent, and (ii) a non-accountable expense allowance of 1% of the gross proceeds from the Promissory Note Offering. In addition, the placement agent was issued warrants, containing substantially the same terms and conditions as the Note Warrants, to purchase an aggregate of 244,372 shares of Common Stock (the “Placement Agent Warrants”), representing 7% of the Promissory Note Conversion Shares issuable upon conversion of the Promissory Notes issued to the Note Investors. The Placement Agent Warrants expire five years from the date of issuance. The Placement Agent Warrants in connection with the December 2019 closings have an exercise price of $1.21 per share.
 
In connection with the three closings in January 2020 of the Promissory Note Offering, the Company paid aggregate placement agent fees of $276,770, which fees were based on (i) 9% of the aggregate principal amount of the Promissory Notes issued to the Note Investors introduced by the placement agent, and (ii) a non-accountable expense allowance of 1% of the gross proceeds from the Promissory Note Offering. In addition, the placement agent was issued Placement Agent Warrants, to purchase an aggregate of 199,732 shares of Common Stock. 41,495 of these Placement Agent Warrants have an exercise price of $1.21 per share and 158,237 of these Placement Agent Warrants have an exercise price of $1.42 per share.
 
The Company determined the Prepayment Option feature represents a contingent call option. The Company evaluated the Prepayment Option in accordance with ASC 815-15-25. The Company determined that the Prepayment Option feature is clearly and closely related to the debt host instrument and is not an embedded derivative requiring bifurcation. Additionally, the Company determined the Conversion Option represents an embedded call option. The Company evaluated the Conversion Option in accordance with ASC 815-15-25. The Company determined that the Conversion Option feature meets the scope exception from ASC 815 and is not an embedded derivative requiring bifurcation.
 
The Company evaluated the Promissory Notes for a beneficial conversion feature in accordance with ASC 470-20. The Company determined that at each commitment date the effective conversion price was below the closing stock price (market value), and the Convertible Notes contained a beneficial conversion feature.
 
Pursuant to the December 2019 closings of the Promissory Note Offering, the principal amount of $3,386,300 was first allocated based on the relative fair value of the Promissory Notes and the Note Warrants. The fair value of the Note Warrants amounted to $912,648. Then the beneficial conversion feature was calculated, which amounted to $1,359,284. The Company incurred debt issuance costs of $588,017 related to the offering. The initial carrying value of the Promissory Notes issued amounted to $526,351.
 
Pursuant to the January 2020 closings of the Promissory Note Offering, the principal amount of $3,517,700 was first allocated based on the relative fair value of the Promissory Notes and the Note Warrants. The fair value of the Note Warrants amounted to $2,439,272. Then the beneficial conversion feature was calculated, which amounted to $1,838,422. The Company incurred debt issuance costs of $472,326 related to the offering. The initial carrying value of the Promissory Notes issued amounted to $128,524.
 
During the three months ended March 31, 2020, the Company recognized $2,209,163 of interest expense related to these Promissory Notes, including amortization of debt discount related to the value of the Note Warrants of $658,126, amortization of the beneficial conversion feature of $1,053,366, amortization of debt discount related to debt issuance costs of $347,594, and accrued interest expense of $150,077.
 
 
 
-14-
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
Convertible Debt consisted of:
 
 
 
Total
 
 
Promissory Notes
 
 
ADEC Notes
 
 
Total
 
 
 
March 31,
 
 
March 31,
 
 
March 31,
 
 
December 31,
 
 
 
2020
 
 
2020
 
 
2020
 
 
2019
 
Convertible debt
 $6,904,000 
 $6,904,000 
 $- 
 $3,836,300 
Unamortized debt discount - revalued warrants
  - 
  - 
  - 
  (118,356)
Unamortized debt discount - warrants
  (1,299,280)
  (1,299,280)
  - 
  (878,979)
Unamortized debt discount - BCF
  (2,092,811)
  (2,092,811)
  - 
  (1,307,755)
Unamortized debt discount - debt issuance costs
  (684,048)
  (684,048)
  - 
  (566,815)
Accrued interest
  158,467 
  158,467 
  - 
  112,543 
Total convertible debt
 $2,986,328 
 $2,986,328 
 $- 
 $1,076,938 
 
Note 10 – Other Liabilities
 
Other liabilities consisted of the following:
 
 
 
March 31,
 
 
December 31,
 
Current
 
2020
 
 
2019
 
Due to Mayoly
 $386,925 
 $392,989 
Lease liabilities
  54,248 
  83,235 
 
 $441,173 
 $476,224 
 
    
    
Note 11 – Equity
 
On December 19, 2019, the Company held its Annual Meeting of Stockholders (the “Annual Meeting”), whereby, the shareholders approved, among others, the following proposals: (i) amending the Company’s Certificate of Incorporation to increase the authorized shares of its Common Stock to 150,000,000 shares from 100,000,000 shares, and (ii) amending the Company’s Charter to authorize the Board to effect a reverse stock split of both the issued and outstanding and authorized shares of Common Stock, at a specific ratio, ranging from one-for-two (1:2) to one-for-five (1:5), any time prior to the one-year anniversary date of the Annual Meeting, with the exact ratio to be determined by the Board (the “Reverse Split”). As of March 31, 2020, the Board had not elected to effect a Reverse Split.
 
Common Stock
 
The Company had 27,157,651 and 26,800,519 shares of its Common Stock issued and outstanding at March 31, 2020 and December 31, 2019, respectively.
 
The holders of our Common Stock are entitled to one vote per share. In addition, the holders of our Common Stock will be entitled to receive ratably such dividends, if any, as may be declared by our Board out of legally available funds;however, the current policy of our Board is to retain earnings, if any, for operations and growth. Upon liquidation, dissolution or winding-up, the holders of our Common Stock will be entitled to share ratably in all assets that are legally available for distribution.
 
Voting
 
Each holder of common stock has one vote for each share held.
 
 
 
-15-
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
2014 Equity Incentive Plan
 
The Company’s Board and stockholders adopted and approved the Amended and Restated 2014 Omnibus Equity Incentive Plan (the “2014 Plan”), which took effect on May 12, 2014. The 2014 Plan allows for the issuance of securities, including stock options to employees, Board members and consultants. The number of shares of Common Stock reserved for issuance under the 2014 Plan shall not exceed ten percent (10%) of the issued and outstanding shares of Common Stock on an as converted basis (the “As Converted Shares”) on a rolling basis. For calculation purposes, the As Converted Shares shall include all shares of Common Stock and all shares of Common Stock issuable upon the conversion of outstanding preferred stock and other convertible securities but shall not include any shares of Common Stock issuable upon the exercise of options, or other convertible securities issued pursuant to the 2014 Plan. The number of authorized shares of Common Stock reserved for issuance under the 2014 Plan shall automatically be increased concurrently with the Company’s issuance of fully paid and non- assessable shares of As Converted Shares. Shares shall be deemed to have been issued under the 2014 Plan solely to the extent actually issued and delivered pursuant to an award.
 
The Company issued an aggregate of 335,006 and 0 stock options, during the three months ended March 31, 2020 and 2019, respectively, under the 2014 Plan (see Note 13). As of March 31, 2020, there were an aggregate of 4,245,905 total shares available under the 2014 Plan, of which 1,997,506 are issued and outstanding, 632,667 shares are reserved subject to issuance of restricted stock and RSUs and 1,615,732 shares are available for potential issuances. The Company may issue securities outside of the 2014 Plan.
 
Series A Convertible Preferred Stock
 
At March 31, 2020 and December 31, 2019, there were no shares of Series A Convertible Preferred Stock (“Series A Preferred”) outstanding. However, all terms of the Series A Preferred are still in effect.
 
LPC Equity Line of Credit
 
On November 13, 2019, the Company entered into a purchase agreement (the “LPC Purchase Agreement”), together with a registration rights agreement (the “LPC Registration Rights Agreement”), with LPC. Under the terms of the LPC Purchase Agreement, LPC has committed to purchase up to $15,000,000 of our Common Stock (the “LPC Equity Line of Credit”). Upon execution of the LPC Purchase Agreement, the Company issued LPC 487,168 shares of Common Stock (the “Commitment Shares”) as a fee for its commitment to purchase shares of our Common Stock under the LPC Purchase Agreement. The remaining shares of our Common Stock that may be issued under the LPC Purchase Agreement may be sold by the Company to LPC at our discretion from time-to-time over a 30-month period commencing after the satisfaction of certain conditions set forth in the Purchase Agreement, subject to the continued effectiveness of a registration statement covering such shares of Common Stock sold to LPC by the Company. The registration statement was filed with the SEC on December 31, 2019 and was declared effective on January 14, 2020.
 
Under the LPC Purchase Agreement, on any business day over the term of the LPC Purchase Agreement, the Company has the right, in its sole discretion, to present LPC with a purchase notice (each, a “Purchase Notice”) directing LPC to purchase up to 150,000 shares of Common Stock per business day (the “Regular Purchase”). In each case, LPC’s maximum commitment in any single Regular Purchase may not exceed $1,000,000. The LPC Purchase Agreement provides for a purchase price per Purchase Share (the “Purchase Price”) equal to the lesser of:
 
 the lowest sale price of Common Stock on the purchase date; and;
 
 
 the average of the three lowest closing sale prices for the Common Stock during the ten consecutive business days ending on the business day immediately preceding the purchase date of such shares;
 
In addition, on any date on which the Company submits a Purchase Notice to LPC, the Company also has the right, in its sole discretion, to present LPC with an accelerated purchase notice (each, an “Accelerated Purchase Notice”) directing LPC to purchase an amount of stock (the “Accelerated Purchase”) equal to up to the lesser of (i) three times the number of shares purchased pursuant to such Regular Purchase; and (ii) 30% of the aggregate shares of Common Stock traded during all or, if certain trading volume or market price thresholds specified in the LPC Purchase Agreement are crossed on the applicable Accelerated Purchase date, the portion of the normal trading hours on the applicable Accelerated Purchase date prior to such time that any one of such thresholds is crossed (such period of time on the applicable Accelerated Purchase Date, the “Accelerated Purchase Measurement Period”), provided that LPC will not be required to buy shares pursuant to an Accelerated Purchase Notice that was received by LPC on any business day on which the last closing trade price of Common Stock on the Nasdaq Capital Market (or alternative national exchange) is below $0.25 per share. The purchase price per share for each such Accelerated Purchase will be equal to the lesser of:
 
 97% of the volume weighted average price of the Company’s common stock during the applicable Accelerated Purchase Measurement Period on the applicable Accelerated Purchase date; and
 
 
 the closing sale price of Common Stock on the applicable Accelerated Purchase Date.
 
 
 
-16-
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
The Company may also direct LPC on any business day on which an Accelerated Purchase has been completed and all of the shares to be purchased thereunder have been properly delivered to LPC in accordance with the LPC Purchase Agreement, to purchase an amount of stock (the “Additional Accelerated Purchase”) equal to up to the lesser of (i) three times the number of shares purchased pursuant to such Regular Purchase; and (ii) 30% of the aggregate number of shares of Common Stock traded during a certain portion of the normal trading hours on the applicable Additional Accelerated Purchase date as determined in accordance with the Purchase Agreement (such period of time on the applicable Additional Accelerated Purchase date, the “Additional Accelerated Purchase Measurement Period”), provided that the closing price of the Company’s common stock on the business day immediately preceding such business day is not below $0.25 per share. Additional Accelerated Purchases will be equal to the lower of:
 
 97% of the volume weighted average price of the Company’s common stock during the applicable Additional Accelerated Purchase Measurement Period on the applicable Additional Accelerated Purchase date; and
 
 
 the closing sale price of Common Stock on the applicable Additional Accelerated Purchase.
 
During the three months ended March 31, 2020, the Company issued 150,000 shares of Common Stock in connection with the LPC Purchase Agreement, resulting in gross proceeds to the Company of $144,000.
 
Common Stock Issuances
 
During the three months ended March 31, 2020, the Company issued an aggregate of 101,195 shares of its Common Stock to consultants with a grant date fair value of $87,105 for services provided, that was recorded as part of G&A expense.
 
During the three months ended March 31, 2020, the Company issued its outside Board members an aggregate of 105,937 shares of Common Stock for the settlement of accounts payable in the aggregate amount of $131,137. The aggregate effective settlement price was $1.24 per share, and each individual stock issuance was based on the closing stock price of the Common Stock on the initial date the payable was accrued.
 
During the three months ended March 31, 2019, the Company issued 27,102 shares of its common stock to a consultant as payment of $60,000 of accounts payable.
 
During the three months ended March 31, 2019, the Company issued an aggregate of 30,000 shares of its Common Stock to outside members of its Board as payment of Board fees with an aggregate grant date fair value of $296,285, that was recorded as part of G&A expense.
 
Restricted Stock and Restricted Stock Units
 
During the three months ended March 31, 2020, an aggregate of 5,417 unvested restricted shares of Common Stock subject to time-based vesting, vested with a total grant date fair value of $19,500.
 
During the three months ended March 31, 2019, an aggregate of 72,583 unvested restricted shares of Common Stock subject to milestone-based vesting, vested with a total grant date fair value of $223,685. 58,833 of these 72,583 shares with a total grant date fair value of $178,852 vested during the three months ended March 31, 2019 due to the Company achieving certain clinical milestones. 13,750 of these 72,583 shares with a total grant date fair value of $44,833 vested during the three months ended March 31, 2019 due to the terms of such grants.
 
As of March 31, 2020, the Company had unrecognized restricted common stock expense of $424,439. $31,189 of this unrecognized expense will be recognized over the average remaining vesting term of 0.4 years. $196,625 of this unrecognized expense vests upon the first commercial sale in the United States of MS1819 and $196,625 of this unrecognized expense vests upon the total market capitalization of the Company exceeding $1.0 billion for 20 consecutive trading days. These milestones were not considered probable at March 31, 2020.
 
As of March 31, 2019, the Company had unrecognized restricted common stock expense of $438,528. $337,193 of this unrecognized expense will be recognized over the average remaining vesting term of the restricted common stock of 2.04 years. $101,335 of this unrecognized expense vests upon the enrollment of the first 30 patients in a CF trial. This milestone was not considered probable at March 31, 2019.
 
 
 
-17-
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
Note 12 - Warrants
 
For the three months ended March 31, 2020, in connection with the January 2020 closings of the Promissory Note Offering, the Company issued Note Warrants to investors to purchase an aggregate of 1,813,257 shares of Common Stock with the issuance of the Promissory Notes as referenced in Note 9. These Note Warrants were issued between January 2, 2020 and January 9, 2020, are exercisable commencing six (6) months following the issuance date at $1.07 per share and expire five years from issuance. The total grant date fair value of these warrants was determined to be approximately $1,574,886, as calculated using the Black-Scholes model, and were recorded as a debt discount based on their relative fair value.
 
For the three months ended March 31, 2020, in connection with the January 2020 closings of the Promissory Note Offering, the Company issued placement agent warrants to purchase an aggregate of 199,732 shares of Common Stock. These placement agent warrants were issued between January 2, 2020 and January 9, 2020, vested immediately, and expire five years from issuance. 41,495 of these Placement Agent Warrants are exercisable at $1.21 per share and 158,237 are exercisable at $1.42 per share. The total grant date fair value of these placement agent warrants was determined to be approximately $174,130, as calculated using the Black-Scholes model, and was charged to debt discount that will be amortized over the life of the debt.
 
Warrant transactions for the three months ended March 31, 2020 and 2019 were as follows:
 
 
 
 
 
 
Exercise
 
 
 Weighted
 
 
 
 
 
 
Price Per
 
 
Average
 
 
 
Warrants
 
 
Share
 
 
Exercise Price
 
 
 
 
 
 
 
 
 
 
 
Warrants outstanding and exercisable at January 1, 2019
  3,112,715 
 $2.55 - 7.37 
 $4.83 
 
    
    
    
Granted during the period
  - 
  - 
  - 
Expired during the period
  - 
  - 
  - 
Exercised during the period
  - 
  - 
  - 
Warrants outstanding and exercisable at March 31, 2019
  3,112,715 
 $2.55 - 7.37 
 $3.53 
 
    
    
    
 
    
    
    
Warrants outstanding and exercisable at January 1, 2020
  5,378,288 
 $1.07 - 7.37 
 $2.53 
 
    
    
    
Granted during the period
  2,012,989 
 $1.07 - 1.42 
 $1.10 
Expired during the period
  - 
  - 
  - 
Exercised during the period
  - 
  - 
  - 
Warrants outstanding and exercisable at March 31, 2020
  7,391,277 
 $1.07 - 7.37 
 $2.14 
 
 
 
 
 
Number of
Weighted Average
Weighted
 
Shares Under
Remaining Contract
Average
Exercise Price
Warrants
Life in Years
Exercise Price
$1.07 - $1.99
         5,212,464
4.12
 
$2.00 - $2.99
          320,063
3.32
 
$3.00 - $3.99
            636,972
2.06
 
$4.00 - $4.99
            196,632
1.76
 
$5.00 - $5.99
            805,476
1.88
 
$6.00 - $6.99
            187,750
1.51
 
$7.00 - $7.37
              31,920
0.71
 
Total
         7,391,277
3.52
$2.14
 
 
 
-18-
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
The weighted average fair value of warrants granted during the three months ended March 31, 2020 was $0.87 per share. The fair value was estimated on the grant dates using the Black-Scholes option-pricing model with the following weighted average assumptions:
 
 
 
March 31,
 
 
 
2020
 
Expected life (in years)
  5 
Volatility
  81.9%
Risk-free interest rate
  1.64%
Dividend yield
  -%
 
Note 13 - Stock Options
 
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 March 31, 2020, the Company issued stock options to purchase an aggregate of 335,006 shares of Common Stock with a strike price of $1.03 per share and a term of ten years to its chief financial officer that vest quarterly over three years. These options had a total fair value of approximately $281,405, as calculated using the Black-Scholes model. During the three months ended March 31, 2020, stock options to purchase an aggregate of 15,000 shares of Common Stock were cancelled with strike prices ranging between $1.75 and $3.60 per share.
 
During the three months ended March 31, 2020, stock options to purchase an aggregate of 57,917 shares of Common Stock, subject to time-based vesting, vested with a total grant date fair value of $54,950 and were recorded as G&A stock-based compensation.
 
During the three months ended March 31, 2019, the Company did not issue any stock options.
 
During the three months ended March 31, 2019, stock options to purchase an aggregate of 244,500 shares of Common Stock with a total grant date fair value of $511,335 vested. 242,000 of these options with a total grant date fair value of $501,666 vested due to the Company achieving certain clinical milestones for MS1819.
 
 
The fair values were estimated on the grant dates using the Black-Scholes option-pricing model with the following weighted-average assumptions:
 
 
 
March 31,
 
 
 
2020
 
Expected life (in years)
  10 
Volatility
  80.5%
Risk-free interest rate
  1.88%
Dividend yield
  -%
 
The expected term of the options is based on expected future employee exercise behavior. Volatility is based on the historical volatility of the Company’s Common Stock if available or of several public entities that are similar to the Company. The Company bases volatility this way because it may not have sufficient historical transactions in its own shares on which to solely base expected volatility. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected term at the grant date. The Company has not historically declared any dividends and does not expect to in the future.
 
 
 
-19-
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
During the three months ended March 31, 2020 and 2019, stock option activity under the 2014 Plan was as follows:
 
 
 
 
Number
 
 
Average
 
 
Remaining Contract
 
 
Intrinsic
 
 
 
of Shares
 
 
Exercise Price
 
 
Life in Years
 
 
Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock options outstanding at January 1, 2019
  994,000 
 $3.58 
  5.42 
 $- 
 
    
    
    
    
Granted during the period
  - 
  - 
    
    
Expired during the period
  - 
  - 
    
    
Canceled during the period
  - 
  - 
    
    
Exercised during the period
  - 
  - 
    
    
Stock options outstanding at March 31, 2019
  994,000 
 $3.58 
  5.17 
 $- 
 
    
    
    
    
Exercisable at March 31, 2019
  749,500 
 $3.74 
  5.71 
 $- 
 
    
    
    
    
Non-vested stock options outstanding at January 1, 2019
  244,500 
 $3.05 
  4.53 
 $- 
 
    
    
    
    
Granted during the period
  - 
  - 
    
    
Vested during the period
  (244,500)
 $3.05 
  4.53 
    
Expired during the period
  - 
  - 
    
    
Canceled during the period
  - 
  - 
    
    
Exercised during the period
  - 
  - 
    
    
Non-vested stock options outstanding at March 31, 2019
  - 
 $- 
  - 
 $- 
Stock options outstanding at January 1, 2020
  1,677,5000 
 $2.17 
  5.37 
 $- 
 
    
    
    
    
Granted during the period
  335,006 
 $1.03 
  10.00 
 $- 
Expired during the period
  - 
  - 
    
    
Canceled during the period
  (15,000)
 $2.80 
  3.28 
 $- 
Exercised during the period
  - 
  - 
    
    
Stock options outstanding at March 31, 2020
  1,997,506 
 $2.08 
  5.91 
 $- 
 
    
    
    
    
Exercisable at March 31, 2020
  841,917 
 $3.23 
  4.33 
 $- 
 
Non-vested stock options outstanding at January 1, 2020
  883,500 
 $1.33 
  6.26 
 $- 
 
    
    
    
    
Granted during the period
  335,006 
 $1.03 
  10.00 
 $- 
Vested during the period
  (57,917)
 $1.40 
  6.88 
 $- 
Expired during the period
  - 
  - 
  - 
    
Canceled during the period
  (5,000)
 $3.32 
  2.82 
 $- 
Exercised during the period
  - 
  - 
  - 
    
Non-vested stock options outstanding at March 31, 2020
  1,155,589 
 $1.24 
  7.06 
 $- 
 
As of March 31, 2020, the Company had unrecognized stock-based compensation expense of $965,280. $289,455 of this unrecognized expense will be recognized over the average remaining vesting term of the options of 9.27 years. $522,513 of this unrecognized expense will vest upon enrollment completion next MS1819 clinical trial in the U.S. for CF (the OPTION 2 Trial). $72,713 of this unrecognized expense will vest upon enrollment completion of the ongoing Combination Trial in Europe. $40,300 of this unrecognized expense vests upon the Company initiating a Phase III clinical trial in the U.S. for MS1819. $40,300 of this unrecognized expense vests upon initiating a U.S. Phase I clinical trial for any product other than MS1819. The Company will recognize the expense related to these milestones when the milestones become probable.
 
 
 
-20-
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
Note 14 - Agreements
 
Mayoly Agreement
 
On March 27, 2019, the Company and Laboratories Mayoly Spinder (“Mayoly”) entered into an Asset Purchase Agreement (the “Mayoly APA”), pursuant to which the Company purchased all rights, title and interest in and to MS1819. Upon execution of the Mayoly APA, the Joint Development and License Agreement (the “JDLA”) previously executed by AzurRx SAS and Mayoly was terminated. In addition, the Company granted to Mayoly an exclusive, royalty-bearing right to revenue received from commercialization of MS1819 within certain territories.
 
During the three months ended March 31, 2019, the Company charged $403,020 to Mayoly under the JDLA that was in effect during both periods.
 
TransChem Sublicense
 
On August 7, 2017, the Company and TransChem entered into the TransChem Sublicense Agreement pursuant to which TransChem granted to us an exclusive license to certain patents (the “TransChem Licensed Patents”) relating to H. pylori 5’methylthioadenosine nucleosidase inhibitors. We may terminate the Sublicense Agreement and the licenses granted therein for any reason and without further liability on 60 days’ notice. Unless terminated earlier, the Sublicense Agreement will expire upon the expiration of the last Licensed Patents. Upon execution, we paid an upfront fee to TransChem and agreed to reimburse TransChem for certain expenses previously incurred in connection with the preparation, filing, and maintenance of the Licensed Patents. We also agreed to pay TransChem certain future periodic sublicense maintenance fees, which fees may be credited against future royalties. We may also be required to pay TransChem additional payments and royalties in the event certain performance-based milestones and commercial sales involving the Licensed Patents are achieved. The TransChem Licensed Patents will allow us to develop compounds for treating gastrointestinal, lung and other infections that are specific to individual bacterial species. H. pylori bacterial infections are a major cause of chronic gastritis, peptic ulcer disease, gastric cancer and other diseases.
 
On March 11, 2020, the Company provided TransChem with sixty (60) days prior written notice of its intent to terminate the TransChem Sublicense Agreement.
 
Amounts paid under this Sublicense Agreement during the three months ended March 30, 2020 and 2019 were $0 and $50,000, respectively, and are included in R&D expense.
 
Employment Agreements
 
Current Named Executive Officers
 
James Sapirstein
 
Effective October 8, 2019, the Company entered into an employment agreement with Mr. Sapirstein to serve as its President and Chief Executive Officer for a term of three years, subject to further renewal upon agreement of the parties. The employment agreement with Mr. Sapirstein provides for a base salary of $450,000 per year. In addition to the base salary, Mr. Sapirstein is eligible to receive (i) a cash bonus of up to 40% of his base salary on an annual basis, based on certain milestones that are yet to be determined; (ii) 1% of net fees received by the Company upon entering into license agreements with any third-party with respect to any product current in development or upon the sale of all or substantially all assets of the Company; (iii) a grant of 200,000 restricted stock units (“RSUs”) which are scheduled to vest as follows (a) 100,000 shares upon the first commercial sale of MS1819 in the U.S. and (b) 100,000 shares upon the total market capitalization of the Company exceeding $1.0 billion for 20 consecutive trading days; (iv) a grant of 300,000 10-year stock options to purchase shares of common stock with an exercise price equal to $0.56 per share, which are scheduled to vest as follows (a) 50,000 shares upon the Company initiating its next Phase II clinical trial in the U.S. for MS1819, (b) 50,000 shares upon the Company completing its next or subsequent Phase II clinical trial in the U.S. for MS1819, (c) 100,000 shares upon the Company initiating a Phase III clinical trial in the U.S. for MS1819, and (d) 100,000 shares upon the Company initiating a Phase I clinical trial in the U.S. for any product other than MS1819. Mr. Sapirstein is entitled to receive 20 days of paid vacation, participate in full employee health benefits and receive reimbursement for all reasonable expenses incurred in connection with his services to the Company.
 
 
 
-21-
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
In the event that Mr. Sapirstein’s employment is terminated by the Company for Cause, as defined in his employment agreement, or by Mr. Sapirstein voluntarily, then he will not be entitled to receive any payments beyond amounts already earned, and any unvested equity awards will terminate. In the event that Mr. Sapirstein’s employment is terminated as a result of an Involuntary Termination Other than for Cause, as defined in his employment agreement, Mr. Sapirstein will be entitled to receive the following compensation: (i) severance in the form of continuation of his salary (at the base salary rate in effect at the time of termination, but prior to any reduction triggering Good Reason (as such term is defined in Mr. Sapirstein’s employment agreement) for a period of twelve months following the termination date; (ii) payment of Mr. Sapirstein’s premiums to cover COBRA for a period of twelve months following the termination date; and (iii) a prorated annual bonus.
 
Daniel Schneiderman
 
Effective January 2, 2020, the Company entered into an employment agreement with Mr. Schneiderman to serve as the Company’s Chief Financial Officer for a term of three years, subject to further renewal upon agreement of the parties. The employment agreement with Mr. Schneiderman provides for a base salary of $285,000 per year. In addition to the base salary, Mr. Schneiderman is eligible to receive (a) an annual milestone cash bonus based on certain milestones that will be established by the Company’s Board or the Compensation Committee, and (b) a grant of stock options to purchase 335,006 shares of common stock with an exercise price of $1.03 per share, which shall vest in three equal portions on each anniversary date of the execution of Mr. Schneiderman’s employment agreement, commencing on January 2, 2021, the first anniversary date of the agreement. Mr. Schneiderman is entitled to receive 20 days of paid vacation, participate in full employee health benefits and receive reimbursement for all reasonable expenses incurred in connection with his service to the Company. The Company may terminate Mr. Schneiderman’s employment agreement at any time, with or without Cause, as such term is defined in his employment agreement.
 
In the event that Mr. Schneiderman’s employment is terminated by the Company for Cause, as defined in Mr. Schneiderman’s employment agreement, or by Mr. Schneiderman voluntarily, then he will not be entitled to receive any payments beyond amounts already earned, and any unvested equity awards will terminate. If the Company terminates his employment agreement without Cause, not in connection with a Change of Control, as such term is defined in Mr. Schneiderman’s employment agreement, he will be entitled to (i) all salary owed through the date of termination; (ii) any unpaid annual milestone bonus; (iii) severance in the form of continuation of his salary for the greater of a period of six months following the termination date or the remaining term of the employment agreement; (iv) payment of premiums to cover COBRA for a period of six months following the termination date; (v) a prorated annual bonus equal to the target annual milestone bonus, if any, for the year of termination multiplied by the formula set forth in the agreement. If the Company terminates Mr. Schneiderman’s employment agreement without Cause, in connection with a Change of Control, he will be entitled to the above and immediate accelerated vesting of any unvested options or other unvested awards.
 
Dr. James E. Pennington
 
Effective May 28, 2018, the Company entered into an employment agreement with Dr. Pennington to serve as its Chief Medical Officer. The employment agreement with Dr. Pennington provides for a base annual salary of $250,000. In addition to his salary, Dr. Pennington is eligible to receive an annual milestone bonus, awarded at the sole discretion of the Board based on his attainment of certain financial, clinical development, and/or business milestones established annually by the Board or Compensation Committee. The Company may terminate Dr. Pennington’s employment agreement at any time, with or without Cause, as such term is defined in Dr. Pennington’s employment agreement. In the event of termination by the Company other than for Cause, Dr. Pennington is entitled to three months’ severance payable over such period. In the event of termination by the Company other than for Cause in connection with a Change of Control as such term is defined in Dr. Pennington’s employment agreement, Dr. Pennington will receive six months’ severance payable over such period.
 
Former Named Executive Officers
 
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 expired, he remained employed as the Company’s President and Chief Executive Officer under the terms of his prior employment agreement through his resignation from all positions with the Company on October 8, 2019. In addition, Mr. Spoor resigned as a member of the Board on April 29, 2020.
 
 
 
-22-
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
The employment agreement with Mr. Spoor provided for a base salary of $425,000 per year. At the sole discretion of the Board or the Compensation Committee of the Board, following each calendar year of employment, Mr. Spoor was eligible to receive an additional cash bonus based on his attainment of certain financial, clinical development, and/or business milestones to be established annually by the Board or the Compensation Committee. Mr. Spoor’s employment agreement was terminable by either party at any time.
 
On June 29, 2019, the Company accrued an incentive bonus in the amount of $255,000. Subsequent to Mr. Spoor’s resignation, the Compensation Committee reviewed the accrued bonus and determined that such amount was not owed by the Company, which determination is being challenged by Mr. Spoor.
 
Mr. Spoor received no additional or severance compensation and all unvested stock options and unvested shares of restricted common stock granted to Mr. Spoor were cancelled as a result of Mr. Spoor’s resignation. As of March 31, 2020, there were 241,667 shares earned, but unissued shares of restricted common stock due to Mr. Spoor. However, Mr. Spoor declined the right to receive these shares on April 29, 2020.
 
Maged Shenouda
 
On September 26, 2017, the Company entered into an employment agreement with Mr. Shenouda to serve as its Executive Vice-President of Corporate Development and Chief Financial Officer for a term of three years, during which time he received a base salary of $275,000. In addition to the base salary, Mr. Shenouda was eligible to receive an annual milestone cash bonus based on the achievement of certain financial, clinical development, and/or business milestones, which milestones were established annually at the sole discretion of the Company’s Board or the Compensation Committee. Mr. Shenouda’s employment agreement provided for the issuance of stock options to purchase 100,000 shares of common stock, pursuant to the 2014 Plan, with an exercise price of $4.39 per share and a term of ten years. These stock options vested according to the following performance-based criteria, so long as Mr. Shenouda served as either Executive Vice-President of Corporate Development or as Chief Financial Officer of the Company: (i) 75% upon FDA acceptance of a U.S. IND application for MS1819, and (ii) 25% upon the Company completing a Phase IIa clinical trial for MS1819. These stock options vested during the year ended December 31, 2018.
 
Mr. Shenouda’s employment agreement provided that the Company may terminate Mr. Shenouda’s employment agreement at any time, with or without Cause, as such term is defined in the agreement. If the Company terminated the agreement without Cause, or if the agreement was terminated due to a Change of Control, as such term is defined in the agreement, Mr. Shenouda was entitled to (i) all salary owed through the date of termination; (ii) any unpaid annual milestone bonus; (iii) severance in the form of continuation of his salary for the greater of a period of 12 months following the termination date or the remaining term of his employment agreement; (iv) payment of premiums to cover COBRA for a period of 12 months following the termination date; (v) a prorated annual bonus equal to the target annual milestone bonus, if any, for the year of termination multiplied by the formula set forth in the agreement; and (vi) immediate accelerated vesting of any unvested options or other unvested awards.
 
On June 28, 2019, the Compensation Committee approved the accrual of an incentive bonus in the amount of $100,000. Subsequent to Mr. Shenouda’s resignation, the Compensation Committee reviewed the accrued bonus and determined that such amount was not owed, and the Company reversed the accrual in the quarter ended December 31, 2019.
 
 
 
-23-
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
Mr. Shenouda resigned from his position as the Company’s Chief Financial Officer effective November 30, 2019. Mr. Shenouda received no additional or severance compensation and all unvested stock options and shares of restricted common stock granted to Mr. Shenouda were cancelled as a result of Mr. Shenouda’s resignation. Mr. Shenouda has a period of twelve months following his resignation to exercise all vested stock options
 
Note 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 $35,098 and $50,655, respectively, in the three months ended March 31, 2020 and 2019.
 
The weighted-average remaining lease term and weighted-average discount rate under operating leases at March 31, 2020 are:
 
 
 
March 31,
 
 
 
2020
 
Lease term and discount rate
 
 
 
Weighted-average remaining lease term
 
 0.66 years
 
Weighted-average discount rate
  6.0%
 
Maturities of operating lease liabilities at March 31, 2020 are as follows:
 
2020
 $56,442 
Total lease payments
  56,442 
Less imputed interest
  (2,194)
Present value of lease liabilities
 $54,248 
 
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 March 31, 2020 and December 31, 2019, the Company had no tax provision for either jurisdiction.
 
At March 31, 2020 and December 31, 2019, the Company had gross deferred tax assets of approximately $16,020,000 and $16,372,000, respectively. As the Company cannot determine that it is more likely than not that the Company will realize the benefit of the deferred tax asset, a valuation allowance of approximately $16,020,000 and $16,372,000, respectively, has been established at March 31, 2020 and December 31, 2019. The change in the valuation allowance in the three months ended March 31, 2020 and 2019 was $(352,000) and $1,160,000, respectively.
 
At March 31, 2020, the Company has gross net operating loss (“NOL”) carryforwards for U.S. federal and state income tax purposes of approximately $30,682,000 and $22,178,000, 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 March 31, 2020 and December 31, 2019, the Company had approximately $19,782,000 and $19,475,000, respectively, in net operating losses which it can carryforward indefinitely to offset against future French income.
 
At March 31, 2020 and December 31, 2019, the Company had taken no uncertain tax positions that would require disclosure under ASC 740, Accounting for Income Taxes.
 
 
 
-24-
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
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 March 31, 2020, diluted net loss per share did not include the effect of 7,117,559 shares of Common Stock issuable upon the conversion of convertible debt, 7,391,277 shares of Common Stock issuable upon the exercise of outstanding warrants, 632,667 shares of Common Stock pursuant to unissued restricted stock and RSUs, and 1,997,506 shares of Common Stock issuable upon the exercise of outstanding options as their effect would be antidilutive during the periods prior to conversion.
 
At March 31, 2019, diluted net loss per share did not include the effect of 3,112,715 shares of common stock issuable upon the exercise of outstanding warrants, 416,000 shares of restricted stock not yet issued, and 994,000 shares of common stock issuable upon the exercise of outstanding options as their effect would be antidilutive during the periods prior to conversion.
 
Note 18 - Related Party Transactions
 
Johan (Thijs) Spoor
 
During the year ended December 31, 2015, the Company employed the services of JIST Consulting (“JIST”), a company controlled by Johan (Thijs) Spoor, the Company’s former Chief Executive Officer and President, as a consultant for business strategy, financial modeling, and fundraising. Included in accounts payable at December 31, 2019 and 2018, is $348,400 and $478,400, respectively, for JIST relating to Mr. Spoor’s services. Mr. Spoor received no other compensation from the Company other than as specified in his employment agreement. On October 8, 2019, Mr. Spoor resigned as Chief Executive Officer and President of the Company. In addition, Mr. Spoor resigned as a member of the Board on April 29, 2020.
 
On June 29, 2019, the Company accrued an incentive bonus in the amount of $255,000 payable to Mr. Spoor. Subsequent to Mr. Spoor’s resignation, the Compensation Committee reviewed the accrued bonus and determined that such amount was not owed by the Company, which determination is being challenged by Mr. Spoor. As a result of management’s determination, the Company reversed the accrual in the quarter ended December 31, 2019.
 
All unvested shares of restricted stock and stock options subject to time and other performance-based vesting conditions have been forfeited in connection with Mr. Spoor's resignation as the Company’s President and Chief Executive Officer.  Mr. Spoor also declined the right to receive 241,667 shares earned, but unissued shares of restricted stock on April 29, 2020.
 
Management is currently negotiating with Mr. Spoor regarding the amounts, if any, that should be paid to Mr. Spoor relating to payments due to JIST, any bonus payable, as well as the equity awards due to Mr. Spoor.
 
Maged Shenouda
 
From October 1, 2016 until his appointment as the Company’s Chief Financial Officer on September 25, 2017, the Company employed the services of Maged Shenouda as a financial consultant. Included in accounts payable at December 31, 2019 and 2018 is $10,000 and $50,000, respectively, for Mr. Shenouda’s services. On November 1, 2019, Mr. Shenouda submitted his resignation as Chief Financial Officer of the Company, effective November 30, 2019.
 
On June 29, 2019, the Company accrued an incentive bonus in the amount of $100,000 payable to Mr. Shenouda. Subsequent to Mr. Shenouda’s resignation, the Compensation Committee reviewed the accrued bonus and determined that such amount should not be paid, and the Company reversed the accrual in the quarter ended December 31, 2019.
 
 
-25-
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
Note 19 – Subsequent Events
 
LPC Equity Line of Credit
 
In April and May 2020, the Company issued an aggregate of 788,464 shares of Common Stock in connection with the LPC Purchase Agreement, resulting in gross proceeds to the Company of $456,698.
 
Change in Directors
 
Effective April 3, 2020, the Company appointed Gregory Oakes to the Board. Mr. Oakes, age 52, brings over 25 years of pharmaceutical industry and leadership experience and currently serves as Corporate Vice President, Global Integration Lead for Otezla at Amgen where he is responsible for the integration and continued success for sustained growth of the brand with $2 billion in assets. Prior to Amgen from 2017 to 2019, Mr. Oakes served as Corporate Vice President and U.S. General Manager at Celgene, a global biopharmaceutical company which develops and commercializes medicines for cancer and inflammatory disorders. Mr. Oakes also served as the Global Commercial Integration Lead at Celgene where he helped steer the $74 billion acquisition by Bristol-Myers Squibb and the $13.4 billion divestiture of Otezla. From 2010 to 2017, Mr. Oakes held several positions at Novartis, the most recent as Head of Sandoz Biopharmaceuticals, North America. He began his career at Schering-Plough (Merck) where he held executive roles in both the U.S. and Europe. Mr. Oakes holds a bachelor's degree in Marketing and Business Administration from Edinboro University and a M.B.A. from Clemson University. He currently sits on the Board of BioNJ and previously served on various Executive Committees at Celgene, Novartis, and Schering-Plough (Merck).
 
In connection with his service on the Board for 2020, Mr. Oakes received an initial grant of stock options to purchase 60,000 shares of Common Stock with an exercise price of $0.97 per share. 20,000 of these stock options vest in equal installments on each of June 30, 2020, September 30, 2020 and December 31, 2020, in accordance with the Company's director compensation plan.
 
On April 29, 2020, Mr. Spoor resigned as a member of the Board. Additionally, Mr. Spoor provided notice to the Company that he declined the right to receive 241,667 earned shares, but unissued shares of restricted stock.
 
French R&D (CIR) Tax Credit
 
In May 2020, the Company received payment for the 2019 refundable tax credits for research conducted in France of approximately $721,000.
 
CARES ACT PPP Loan
 
In April 2020, the Company applied for and received a CARES Act Paycheck Protection Program (PPP) loan of approximately $180,000 through the Small Business Administration (SBA). Subsequently, in May 2020, the Company returned the loan of approximately $180,000 after analysis of the updated guidance from the U.S. Department of Treasury and the SBA regarding the eligibility of such loans.
 
2020 Board Compensation
 
On April 6, 2020, the Company issued each of its five outside Board members stock options to purchase a total of 80,000 shares of Common Stock each with an exercise price of $0.97 per share. 20,000 of these stock options were vested immediately with the remainder vesting in equal installments on each of June 30, 2020, September 30, 2020 and December 31, 2020.

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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, 2019, filed with the SEC on March 30, 2020. Readers are cautioned not to place undue reliance on these forward-looking statements.
 
Overview
 
AzurRx BioPharma, Inc. (“AzurRx”) was incorporated on January 30, 2014 in the State of Delaware. In June 2014, the Company acquired 100% of the issued and outstanding capital stock of AzurRx 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”) (collectively referred to herein 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.
 
We are currently focused on developing our lead drug product candidate, MS1819, which is described below:
 
MS1819
 
MS1819 is a yeast derived recombinant lipase for the treatment of exocrine pancreatic insufficiency (“EPI”) associated with cystic fibrosis (“CF”) and chronic pancreatitis (“CP”). A lipase is an enzyme that breaks up fat molecules. MS1819 is considered recombinant because it was created from new combinations of genetic material in yeast called Yarrowia lipolytica.
 
Completed Clinical Studies
 
MS1819 – Phase 2a Chronic Pancreatitis Study
 
In June 2018, the Company completed an open-label, dose escalation Phase 2a trial of MS1819 in France, Australia, and New Zealand to investigate both the safety of escalating doses of MS1819, and the efficacy of MS1819 through the analysis of each patient’s coefficient of fat absorption (“CFA”) and its change from baseline. A total of 11 CP patients with EPI were enrolled in the study and final data indicated a strong safety and efficacy profile. Although the study was not powered for efficacy, in a pre-planned analysis, the highest dose (2.2 grams per day) cohort of MS1819 showed statistically significant and clinically meaningful increases in CFA compared to baseline with a mean increase of 21.8% and a p-value of p=0.002 on a per protocol basis. Maximal absolute CFA response to treatment was up to 62%.
 
 
 
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MS1819 – Phase 2 OPTION Cystic Fibrosis Monotherapy Study
 
In October 2018, the U.S. Food and Drug Administration (“FDA”) cleared the Company’s Investigational New Drug (“IND”) application for MS1819 in patients with EPI due to CF. In connection with the FDA’s clearance of the IND, the Company initiated a multi-center Phase 2 OPTION bridging dose safety study in the fourth quarter of 2018 in the United States and Europe (the “OPTION Cross-Over Study”). The Company targeted enrollment of 30 to 35 patients for the OPTION Cross-Over Study and dosed the first patients in February 2019. In June 2019, the Company reached its enrollment target for the study.
 
On September 25, 2019, the Company announced positive results from the OPTION Cross-Over Study. Results showed that the primary efficacy endpoint of CFA was comparable to the CFA in a prior phase two study in patients with CP, while using the same dosage of MS1819. The dosage used in the OPTION Cross-Over Study was 2.2 grams per day, which was determined in agreement with the FDA as a bridging dose from the highest safe dose used in the Phase 2a CP dose escalation study. Although the study was not powered for statistical significance, the data demonstrated meaningful efficacy results, with approximately 50% of the patients showing CFAs high enough to reach non-inferiority with standard porcine-derived pancreatic enzyme replacement therapy (“PERT”). Additionally, the coefficient of nitrogen absorption (“CNA”) was comparable between the MS1819 and PERT arms, 93% vs. 97%, respectively, in the OPTION Cross-Over Study. This important finding confirms that protease supplementation is not likely to be required with MS1819 treatment. A total of 32 patients, ages 18 or older, completed the OPTION Cross-Over Study.
 
Ongoing and Planned Clinical Studies
 
MS1819 – Phase 2b OPTION 2 Cystic Fibrosis Monotherapy Study
 
On October 17, 2019, the Company announced that the Cystic Fibrosis Foundation Data Safety Monitoring Board (the “CFF DSMB”) completed its review of the Company’s final results of the OPTION Cross-Over Study and has found no safety concerns for MS1819, and that the CFF DSMB supports the Company’s plan to proceed to a higher 4.4 gram dose of MS1819 with enteric capsules in its next planned multi-center dose escalation Phase 2b OPTION clinical trial (the “OPTION 2 Trial”). In December 2019, the Company submitted the clinical trial protocol to the existing IND at the FDA. The clinical trial protocol has been reviewed by the FDA with no comments. In April 2020, the Company received approval to conduct the OPTION 2 Trial in Therapeutics Development Network (TDN) clinical sites in the U.S. as well as Institutional Review Board (IRB) approval to commence the OPTION 2 Trial.
 
The OPTION 2 Trial is designed to investigate the safety, tolerability and efficacy of MS1819 (2.2 gram and 4.4 gram doses in enteric capsules) in a head-to-head manner versus the current standard of care, porcine pancreatic enzyme replacement therapy (PERT) pills. The OPTION 2 Trial will be an open-label, crossover study, conducted in 15 sites in the U.S. and Europe. A total of 30 CF patients 18 years or older will be enrolled.  MS1819 will be administered in enteric capsules to provide gastric protection and allow optimal delivery of enzyme to the duodenum.  Patients will first be randomized into two cohorts: to either the MS1819 arm, where they receive a 2.2 gram daily oral dose of MS1819 for three weeks; or to the PERT arm, where they receive their pre-study dose of PERT pills for three weeks. After three weeks, stools will be collected for analysis of coefficient of fat absorption (CFA). Patients will then be crossed over for another three weeks of the alternative treatment. After three weeks of cross-over therapy, stools will again be collected for analysis of CFA. A parallel group of patients will be randomized and studied in the same fashion, using a 4.4 gram daily dose of MS1819. All patients will be followed for an additional two weeks after completing both crossover treatments for post study safety observation. Patients will be assessed using descriptive methods for efficacy, comparing CFA between MS1819 and PERT arms, and for safety.
 
The Company expects to initiate the OPTION 2 Trial by the end of the second quarter of 2020, with target enrollment completion in the fourth quarter of 2020 and study completion anticipated in the first quarter of 2021, however, these timelines may be delayed due to the COVID-19 pandemic.
 
MS1819 – Phase 2 Combination Therapy Study
 
In addition to the monotherapy studies, the Company launched a Phase 2 multi-center clinical trial (the “Combination Trial”) in Europe to investigate MS1819 in combination with PERT, for CF patients who suffer from severe EPI, but continue to experience clinical symptoms of fat malabsorption despite taking the maximum daily dose of PERTs. The Combination Trial is designed to investigate the safety, tolerability and efficacy of escalating doses of MS1819 (700 mg, 1120 mg and 2240 mg per day, respectively), in conjunction with a stable dose of PERTs, in order to increase CFA and relieve abdominal symptoms in uncontrolled CF patients. A combination therapy of PERT and MS1819 has the potential to: (i) correct macronutrient and micronutrient maldigestion; (ii) eliminate abdominal symptoms attributable to maldigestion; and (iii) sustain optimal nutritional status on a normal diet in CF patients with severe EPI.
 
 
 
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On October 15, 2019, the Company announced that it dosed the first patients in its Combination Trial in Hungary. Planned enrollment is expected to include approximately 24 CF patients with severe EPI, at clinical trial sites in Hungary and additional countries in Europe including Spain and possibly Turkey. Study completion was originally anticipated by the end of 2020; however, this timeline has been delayed due to the COVID-19 pandemic and topline results are now expected in the first quarter of 2021.
 
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 March 31, 2020, we had cash of approximately $1,630,007 and had sustained cumulative losses attributable to common stockholders of approximately $67.9 million. Subsequent to March 31, 2020, we have raised aggregate net proceeds of approximately $456,698. We have not yet achieved profitability and anticipate that we will continue to incur net losses for the foreseeable future. We expect that our expenses will continue to grow and, as a result, we will need to generate significant product revenues to achieve profitability. We may never achieve profitability. As such, we are dependent on obtaining, and are continuing to pursue, the necessary funding from outside sources, including obtaining additional funding from the sale of securities in order to continue our operations. 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 will need to raise additional capital through additional equity and/or debt financings, including utilization of our LPC Equity Line of Credit (see Note 11), in order to fund our ongoing operations and to satisfy our obligations under our convertible debt (see Note 9), and the impact of the COVID-19 pandemic which is evolving rapidly could negatively impact our ability to raise additional capital and our ability to repay, extend or restructure our convertible debt.
 
We have funded our operations to date primarily through the completion of our initial public offering in October 2016 (“IPO”), the issuance of debt and convertible debt securities, as well as the issuance of Common Stock in various private placement transactions and public offerings. We expect to incur substantial expenditures in the foreseeable future for the development of MS1819 and any other 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.
 
In June and July of 2017, we issued a 12% senior secured original issue discount convertible debenture, resulting in gross proceeds of $1,000,000, and in net offering proceeds of $915,000. In addition, in June and July of 2017, we issued units of Common Stock and warrants resulting in net offering proceeds of approximately $4,645,000, and in January 2018 we received proceeds of $2,239,617 from the exercise of repriced warrants.
 
On May 3, 2018, we completed the May 2018 Public Offering, an underwritten public offering of 4,160,000 shares of Common Stock at a public offering price per share of $2.50, resulting in gross proceeds of $10.4 million with associated expenses of approximately $800,000. The May 2018 Public Offering was completed pursuant to the terms of an underwriting agreement executed by the Company and Oppenheimer on May 1, 2018. After deducting the underwriting discount paid to Oppenheimer, legal fees, and other offering expenses payable by the Company, the Company received net proceeds of approximately $9.6 million.
 
On February 14, 2019, we sold and issued two Senior Convertible Notes to ADEC, resulting in gross proceeds to the Company of $2.0 million.
 
In April 2019, we completed the April 2019 Public Offering, a public offering of 1,294,930 shares of Common Stock at a public offering price of $2.13 per share, resulting net proceeds of approximately $2.5 million, after deducting the selling agent fees and other offering expenses payable by the Company. The April 2019 Public Offering was completed pursuant to our effective shelf registration statement on Form S-3 (File No. 333-226065) and the prospectus supplement filed on April 2, 2019.
 
 
 
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On May 9, 2019, we completed the May 2019 Public Offering, a public offering of 1,227,167 shares of Common Stock at a public offering price of $2.35 per share, resulting net proceeds of approximately $2.55 million, after deducting the selling agent fees and other offering expenses payable by the Company. The May 2019 Public Offering was completed pursuant to our effective shelf registration statement on Form S-3 (File No. 333-226065) and the prospectus supplement filed on May 9, 2019.
 
On July 17, 2019, we completed the July 2019 Public Offering, a public offering of 5,000,000 shares of Common Stock at a public offering price of $1.00 per share, resulting in net proceeds of approximately $4.5 million, after deducting the underwriting discount, and other offering expenses payable by the Company. 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 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.
 
Between December 20, 2019 and January 9, 2020, we issued Senior Convertible Promissory Notes to certain investors in the aggregate principal amount of $6,904,000. Each Promissory Note matures on September 20, 2020, accrues interest at a rate of 9% per annum, and is convertible, at the option of the holder, into shares of Common Stock at a price of $0.97 per share (the “Promissory Note Conversion Shares”). As additional consideration for the purchase of the Promissory Notes, each Investor also received Common Stock purchase warrants (the “Note Warrants”) to purchase that number of shares of Common Stock equal to one-half of the Promissory Note Conversion Shares issuable upon conversion of the Promissory Notes. The Note Warrants have an exercise price of $1.07 per share and expire five years from the date of issuance.
 
In the quarter ended March 31, 2020, we issued an aggregate of 150,000 shares of Common Stock in connection with the LPC Purchase Agreement, resulting in gross proceeds to the Company of $144,000.
 
We expect to incur substantial expenditures in the foreseeable future for the development of MS1819 and our other product candidates. We will require additional financing to develop our product candidates, run clinical trials, prepare regulatory filings and obtain regulatory approvals, fund operating losses, and, if deemed appropriate, establish manufacturing, sales and marketing capabilities. Our current financial condition raises substantial doubt about our ability to continue as a going concern. Our failure to raise capital as and when needed would have a material adverse impact on our financial condition, our ability to meet our obligations, and our ability to pursue our business strategies. We will seek funds through additional equity and/or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing.
 
Although we are primarily focused on the development of MS1819, we are also opportunely focused on expanding our product pipeline through collaborations, and also through acquisitions of products and companies. We are continually evaluating potential asset acquisitions and business combinations. To finance such acquisitions, we might raise additional equity capital, incur additional debt, or both.
 
Continued Nasdaq Listing
 
On March 23, 2020, the Company received a letter from the Listing Qualifications Staff of The Nasdaq Stock Market, LLC ("Nasdaq") indicating that, based upon the closing bid price of the Company's Common Stock for the last 30 consecutive business days, the Company is not currently in compliance with the requirement to maintain a minimum bid price of $1.00 per share for continued listing on the Nasdaq Capital Market, as set forth in Nasdaq Listing Rule 5550(a)(2) (the "Notice").
 
The Notice has no immediate effect on the continued listing status of the Company's Common Stock on the Nasdaq Capital Market, and, therefore, the Company's listing remains fully effective.
 
The Company will continue to monitor the closing bid price of its Common Stock and seek to regain compliance with all applicable Nasdaq requirements within the allotted compliance periods. To regain compliance, the closing bid price of the Company's Common Stock must be at least $1.00 per share for 10 consecutive business days at some point during the period of 180 calendar days from the date of the Notice, or until September 21, 2020. If the Company does not regain compliance with the minimum bid price requirement by September 21, 2020, Nasdaq may grant the Company a second period of 180 calendar days to regain compliance. To qualify for this additional compliance period, the Company would be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, other than the minimum bid price requirement. In addition, the Company would also be required to notify Nasdaq of its intent to cure the minimum bid price deficiency. If the Company does not regain compliance within the allotted compliance periods, including any extensions that may be granted by Nasdaq, Nasdaq will provide notice that the Company's Common Stock will be subject to delisting. The Company would then be entitled to appeal that determination to a Nasdaq hearings panel. There can be no assurance that the Company will regain compliance with the minimum bid price requirement during the 180-day compliance period, secure a second period of 180 days to regain compliance, or maintain compliance with the other Nasdaq listing requirements.
 
 
 
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Cash Flows for the Three Months Ended March 31, 2020 and 2019
 
Net cash used in operating activities for the three months ended March 31, 2020 was $1,291,280, which primarily reflected our net loss of $5,261,290 plus adjustments to reconcile net loss to net cash used in operating activities of depreciation and amortization expense of $140,810, non-cash stock-based compensation of $54,950, non-cash restricted stock granted to employees and directors of $19,503, non-cash Common Stock granted to settle accounts payable of $131,137, non-cash Common Stock granted to consultants of $87,105, non-cash accretion of debt discount of $2,059,086, non-cash interest on convertible debt of $164,281, non-cash lease expense of 6,065. Changes in assets and liabilities are due to a decrease in other receivables of $2,064,252 due primarily to the payments of French R&D tax credits, offset by a decrease in prepaid expense of $87,906 due primarily to the expensing of prepaid insurance, a decrease in accounts payable and accrued expense of $832,955.
 
Net cash used in investing activities for the three months ended March 31, 2020 was $5,080, which consisted of the purchase of property and equipment. Net cash used in investing activities for the three months ended March 31, 2019 was $13,352, which consisted of the purchase of property and equipment.
 
Net cash provided by financing activities for the three months ended March 31, 2020 was $2,751,132, compared to $1,967,142 for the three months ended March 31, 2029, representing an increase of $783,990.
 
Net cash provided by financing activities for the three months ended March 31, 2020 consisted of $3,221,880 from the from the issuance of the convertible debt in the Promissory Note Offering, and $144,000 from the proceeds of the LPC Equity Line of Credit, offset by repayments of convertible debt of $450,000 plus accrued interest of $104,153 related to the ADEC Notes and repayment of a note payable of $164,748.
 
Consolidated Results of Operations for the Three Months Ended March 31, 2020 and 2019 
 
Revenues.  We have not yet achieved revenue-generating status from any of our product candidates. Since inception, we have devoted substantially all of our time and efforts to developing MS1819. As a result, we did not have any revenue during the three months ended March 31, 2020 and 2019, respectively.
 
Research and Development Expense. R&D expense was $1,553,360 for the three months ended March 31, 2020, as compared to $3,009,676 for the three months ended March 31, 2019. This represents a decrease of $1,456,316, or approximately 48% for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019. Stock-based compensation for stock options, stock expense for employees and consultants and depreciation and amortization was $9,000, $0, and $136,658, respectively, for the three months ended March 31, 2020, as compared to $361,739, $12,095, and $549,171, respectively for the three months ended March 31, 2019. Excluding non-cash stock-based compensation, stock expense and depreciation and amortization, cash R&D expenses decreased by $681,863, or approximately 33% to $1,407,701 for the three months ended March 31, 2020, from $2,086,671 for the three months ended March 31, 2019.
 
The decrease in R&D cash spending was primarily due to decreased direct clinical trial costs of $548,436 related to the recruitment delay in the Combination Study for the three months ended March 31, 2020 as compared to OPTION Cross-Over Study for the three months ended March 31, 2019, decreased consulting expenses of $63,445, decreased personnel costs of $41,973. We expect cash R&D expense to increase during the remainder of this fiscal year as we progress the Combination Study and CMC activities, and launch the Phase 2 OPTION2 Trial in connection with the continued development of MS1819.
 
General and Administrative Expense. G&A expense was $1,375,091 for the three months ended March 31, 2020, as, as compared to $1,593,968 for the for the three months ended March 31, 2019. This represents a decrease of $218,877, or approximately 14% for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019. Stock-based compensation for stock options, stock expense for employees and consultants, depreciation was $152,558, $4,890, and $0, respectively, for the three months ended March 31, 2020, as compared to $445,881, $17,110, and $0, respectively for the three months ended March 31, 2019. Excluding non-cash stock-based compensation, stock expense, depreciation and amortization, cash G&A expenses increased by $87,164, or approximately 8% to $1,218,142 for the three months ended March 31, 2020, from $1,130,978 for the three months ended March 31, 2019.
 
 
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The increase in G&A cash spending was primarily due to increased consulting expenses of $72,695, increased insurance of $66,276, increased personnel costs of $41,173, increased travel and entertainment expenses of $35,425, and increased information technology administration expenses of $24,128, offset by decreased legal expenses of $76,145, decreased directors fees of $35,000, decreased public company and corporate communications, including investor relations of $16,000, decreased rent of $14,750.
 
We expect cash G&A expense to remain relatively flat during the remainder of this fiscal year as management instituted cost cutting measures related to public company and corporate communications, including investor relations, the termination of the TransChem Sublicense Agreement and related intellectual property legal expenses and one-time and transaction-related costs are expected to be offset by increases to D&O and corporate insurance, outside consulting fees related to business development efforts and information technology security expenses.
 
Other Expense. Interest expense for the three months ended March 31, 2020 was $2,332,839 as compared to $57,111 for the three months ended March 31, 2019. The increased interest expense is due to amortization of debt discount and accrued interest related to the convertible debt issued in 2019 which was not present in the prior period.
 
Net Loss. As a result of the factors above, our net loss increased by $600,535 to $5,261,290 for the three months ended March 31, 2020 as compared to $4,660,755 for the three months ended March 31, 2019.
 
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS 
 
Not applicable.
 
ITEM 4.  CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures
 
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”) conducted an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, our CEO and our CFO each concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act, (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) is accumulated and communicated to our management, including our CEO and our CFO, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Internal Control Over Financial Reporting
 
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
 
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PART II
 
OTHER INFORMATION
 
ITEM  1.     LEGAL PROCEEDINGS
 
None.
 
ITEM  1A.  RISK FACTORS
 
Our results of operations and financial condition are subject to numerous risks and uncertainties described in our Annual Report on Form 10-K for our fiscal year ended December 31, 2019, filed on March 30, 2020. You should carefully consider these risk factors in conjunction with the other information contained in this Quarterly Report. Should any of these risks materialize, our business, financial condition and future prospects could be negatively impacted. As of May 15, 2020, there have been no material changes to the disclosures made in the above referenced Form 10-K.
 
ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
During the three months ended March 31, 2020, the Company issued an aggregate of 101,195 shares of its Common Stock to consultants with a grant date fair value of $87,105 for services provided, that was recorded as part of G&A expense.
 
During the three months ended March 31, 2020, the Company issued its outside Board members an aggregate of 105,937 shares of Common Stock for the settlement of accounts payable in the aggregate amount of $131,137. The aggregate effective settlement price was $1.24 per share, and each individual stock issuance was based on the closing stock price of the Common Stock on the initial date the payable was accrued.
 
During the three months ended March 31, 2019, the Company issued 27,102 shares of its common stock to a consultant as payment of $60,000 of accounts payable.
 
During the three months ended March 31, 2019, the Company issued an aggregate of 30,000 shares of its Common Stock to outside members of its Board as payment of Board fees with an aggregate grant date fair value of $296,285, that was recorded as part of G&A expense.
 
ITEM 3.     DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4.    MINE SAFETY DISCLOSURES
 
Not applicable.
 
ITEM 5.    OTHER INFORMATION
 
None. 
 
ITEM 6.    EXHIBITS
 
 
(b)
Exhibits
 
Exhibit No.
 
Description
 
Certification of the Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Certification of the Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Certification of the Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase
 
 
 
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
AZURRX BIOPHARMA, INC.
 
 
 
 
 
 
By
/s/ James Sapirstein
 
 
 
James Sapirstein
President, Chief Executive Officer and Director
(Principal Executive Officer)
 
 
 
 
 
 
 
By
/s/ Daniel Schneiderman
 Date: May 15, 2020
 
 
Daniel Schneiderman
Chief Financial Officer
(Principal Financial and Accounting Officer)
 
 
 
 
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