Attached files
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
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[X]
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ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the fiscal year ended December 31, 2016
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or
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file No. 001-37853
AZURRX BIOPHARMA, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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46-4993860
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(State or other jurisdiction of incorporation
or organization)
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(I.R.S. employer identification
number)
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760 Parkside Avenue
Downstate Biotechnology Incubator, Suite 304
Brooklyn, New York 11226
(Address of principal executive offices)
(646) 699-7855
(Issuer’s telephone number)
Securities registered pursuant
to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common stock, par value $0.0001 per share
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NASDAQ
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Securities registered under Section 12(g) of the Exchange Act:
None
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes [ ]
No [X]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes [
] No [X]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes [X] No
[ ]
Indicate by check mark whether the registrant (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 if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer [ ]
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Accelerated filer [ ]
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Non-accelerated filer [ ]
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Smaller reporting company [X]
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Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No
[X]
The aggregate market value of common stock held by non-affiliates
of the registrant, based on the closing price of a share of the
registrant’s common stock on October 11, 2016, as reported by
the NASDAQ Capital Market on such date, was approximately
$28,331,285. The registrant has elected to use October 11, 2016,
which was the initial trading date on the NASDAQ Capital Market, as
the calculation date because on June 30, 2016 (the last business
day of the registrant’s most recently completed second fiscal
quarter), the registrant was a privately held company.
There were 9,631,088 shares of the registrant’s common stock
outstanding as of March 31, 2017.
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DRAFT
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AZURRX BIOPHARMA, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2016
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K
(“Annual
Report”) contains
forward-looking statements that involve substantial risks and
uncertainties. All statements contained in this Annual Report other
than statements of historical facts, including statements regarding
our strategy, future operations, future financial position, future
revenue, projected costs, prospects, plans, objectives of
management and expected market growth, are forward-looking
statements. These statements involve known and unknown risks,
uncertainties and other important factors that may cause our actual
results, performance or achievements to be materially different
from any future results, performance or achievements expressed or
implied by the forward-looking statements.
The
words “anticipate,” “believe,”
“estimate,” “expect,” “intend,”
“may,” “plan,” “predict,”
“project,” “target,”
“potential,” “will,” “would,”
“could,” “should,” “continue,”
and similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain
these identifying words. These forward-looking statements include,
among other things, statements about:
●
the
availability of capital to satisfy our working capital
requirements;
●
the
accuracy of our estimates regarding expenses, future revenues and
capital requirements;
●
our
plans to develop and commercialize our principal product
candidates, consisting of MS1819 and AZX1101;
●
our
ability to initiate and complete our clinical trials and to advance
our principal product candidates into additional clinical trials,
including pivotal clinical trials, and successfully complete such
clinical trials;
●
regulatory
developments in the U.S. and foreign countries;
●
the
performance of our third-party contract manufacturer(s), contract
research organization(s) and other third-party non-clinical and
clinical development collaborators and regulatory service
providers;
●
our
ability to obtain and maintain intellectual property protection for
our core assets;
●
the
size of the potential markets for our product candidates and our
ability to serve those markets;
●
the
rate and degree of market acceptance of our product candidates for
any indication once approved;
●
the
success of competing products and product candidates in development
by others that are or become available for the indications that we
are pursuing;
●
the
loss of key scientific, clinical and nonclinical development,
and/or management personnel, internally or from one of our
third-party collaborators; and
●
other
risks and uncertainties, including those listed under Part I, Item
1A. Risk Factors of this Annual Report.
These forward-looking statements are only
predictions and we may not actually achieve the plans, intentions
or expectations disclosed in our forward-looking statements, so you
should not place undue reliance on our forward-looking statements.
Actual results or events could differ materially from the plans,
intentions and expectations disclosed in the forward-looking
statements we make. We have based these forward-looking statements
largely on our current expectations and projections about future
events and trends that we believe may affect our business,
financial condition and operating results. We have included
important factors in the cautionary statements included in this
Annual Report, particularly in Part I, Item 1A, titled
“Risk
Factors” that could cause
actual future results or events to differ materially from the
forward-looking statements that we make. Our forward-looking
statements do not reflect the potential impact of any future
acquisitions, mergers, dispositions, joint ventures or investments
we may make.
You
should read this Annual Report and the documents that we have filed
as exhibits to the Annual Report with the understanding that our
actual future results may be materially different from what we
expect. We do not assume any obligation to update any
forward-looking statements whether as a result of new information,
future events or otherwise, except as required by applicable
law.
PART I
ITEM 1. DESCRIPTION OF
BUSINESS
As
used in this Annual Report, unless otherwise stated or the context
otherwise requires, references to “AzurRx,”
“Company,” “we,” “us,”
“our,” or similar references mean AzurRx BioPharma,
Inc. and its subsidiaries on a consolidated basis. References to
“AzurRx BioPharma” refer to AzurRx BioPharma, Inc. on
an unconsolidated basis. References to “AzurRx SAS”
refer to AzurRx BioPharma SAS, AzurRx BioPharma’s
wholly-owned subsidiary through which we conduct our European
operations.
Overview
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 without reaching the systemic circulation, i.e. the
intestinal lumen, skin or mucosa. Our current product pipeline
consists of two therapeutic proteins under
development:
●
MS1819
- an autologous yeast recombinant lipase for exocrine pancreatic
insufficiency (EPI) associated with chronic pancreatitis (CP) and
cystic fibrosis (CF); and
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AZX1101-
a recombinant b-lactamase combination of bacterial origin for the
prevention of hospital-acquired infections by resistant bacterial
strains induced by parenteral administration of b-lactam
antibiotics, as well as prevention of antibiotic-associated
diarrhea (AAD).
Our
initial product, MS1819, is intended to treat patients suffering
from EPI who are currently treated with porcine pancreatic
extracts, or PPEs, which have been on the market since 1938. The
PPE market is well established and growing with estimated sales of
$880 million in the U.S. in 2015 (based on a 20% discount to IMS
Health’s 2015 prescription data) and has been growing for the
past five years at a compound annual growth rate of 22% according
to IMS Health 2009-2014 data. In spite of their long-term use,
however, PPEs suffer from poor stability, formulation problems,
possible transmission of conventional and non-conventional
infectious agents due to their animal origins, possible adverse
events at high doses in patients with CF and limited effectiveness.
We believe that MS1819, if successfully developed and approved for
commercialization, can address these shortcomings associated with
PPEs.
Phase 1 testing of MS1819 was completed in March
2011 and we initiated a Phase II clinical trial during the
fourth quarter of 2016. See “Product Programs-MS1819-Clinical
Program” below. Our second non-systemic biologic product
under preclinical development, AZX1101, is designed to protect the
gut microbiome (gastrointestinal (GI) microflora) from the effects
of certain commonly used intravenous (IV) antibiotics for the
prevention of C.
difficile infection (CDI)
and antibiotic-associated diarrhea (AAD). CDIs are a leading type
of hospital acquired infection (HAI) and are frequently associated
with IV antibiotic treatment. Designed to be given orally and
co-administered with a broad range of IV beta-lactam antibiotics
(e.g., penicillins, cephalosporins and aminogycosides), AZX1101 is
intended to protect the gut while the IV antibiotics fight the
primary infection. AZX1101 is believed to have the potential to
protect the gut from a broad spectrum of IV beta-lactam
antibiotics. Beta-lactam antibiotics are a mainstay in hospital
infection management and include the commonly used penicillin and
cephalosporin classes of antibiotics. AZX1101’s target market
is significant and represented by annual U.S. hospitals purchases
of approximately 118.0 million doses of IV beta-lactam antibiotics
which are administered to approximately 14.0 million patients.
Currently there are no approved treatments designed to protect the
gut microbiome from the damaging effects of IV antibiotics. This
worldwide market could represent a multi-billion-dollar opportunity
for us. Our current objective, utilizing the proceeds from our
initial public offering completed on October 11, 2016, is to
continue the additional preclinical studies needed to file an
Investigational New Drug Application, or IND, with the
FDA.
Recent Developments
In
the fourth quarter of 2016, we initiated our Phase II clinical
trial for our MS1819 lipase compound after receiving all regulatory
approvals in Australia and New Zealand. In December 2016, we
announced that we initiated enrollment of patients in our Phase II
chronic pancreatitis trial in Australia and New Zealand and we are
still currently enrolling patients in four sites.
In
October 2016, we completed our initial public offering which
allowed us to list our shares of common stock on the NASDAQ Capital
Market, raise the required funds to advance our clinical pipeline
and simplify our ownership structure by converting all outstanding
principal and accrued interest under certain of our convertible
notes into shares of our common stock.
Corporate History
On May 21, 2014, we entered into a stock purchase
agreement (the “SPA”) with Protea Biosciences Group, Inc.
(“Protea
Group”) and its
wholly-owned subsidiary, Protea Biosciences, Inc.
(“Protea Sub” and, together with Protea Group,
“Protea”), to acquire 100% of the outstanding
capital stock of AzurRx BioPharma SAS (formerly ProteaBio Europe SAS), a
wholly-owned subsidiary of Protea Sub. On June 13, 2014, we
completed the acquisition in exchange for the payment of $300,000
and the issuance of shares of our Series A Convertible Preferred
Stock convertible into 33% of our outstanding common stock. Under
the SPA, we are obligated to make certain milestone and royalty
payments to Protea. See “Agreements and Collaborations”
below.
Initial Public Offering
On October 11, 2016, we completed an initial
public offering (“IPO”) of 960,000 shares of common stock at a
price of $5.50 per share and received gross proceeds of $5,280,000.
We incurred total expenses of approximately $1,774,000 in
connection with the IPO, resulting in net offering proceeds of
$3,506,000. Concurrent with the IPO, (i) we issued 2,642,160 shares
of common stock upon the mandatory conversion of the convertible
debt, a beneficial conversion feature charge resulting in interest
expense of approximately $1,108,000 and the elimination of the
convertible debt and warrant liability; (ii) we issued 717,540
warrants with a five-year term to certain Original Issue Discount
(“OID”)
noteholders in exchange for their agreement not to sell their
shares for six months following the IPO with an exercise price
equal to the IPO price with an estimated value of approximately
$2,741,000 that was charged to interest expense; and (iii) the
grant of 48,000 warrants with a five-year term to the underwriters
at 120% of the IPO price with an estimated value of approximately
$197,000 that has no effect on expenses or stockholders’
equity.
Product Programs
We
are currently engaged in research and development of two potential
product candidates, MS1819 and AZX1101.
MS1819
MS1819 is the active pharmaceutical ingredient, or
API, derived from Yarrowia
lipolytica, an aerobic yeast
naturally found in various foods such as cheese and olive oil that
is widely used as a biocatalyst in several industrial processes.
MS1819 is an acid-resistant secreted lipase naturally produced
by Yarrowia
lipolytica, known as LIP2,
that we are developing through recombinant DNA technology for the
treatment of exocrine pancreatic insufficiency, or EPI, associated
with chronic pancreatitis (CP) and cystic fibrosis (CF). We
obtained the exclusive right to commercialize MS1819 in the U.S.
and Canada, South America (excluding Brazil), Asia (excluding China
and Japan), Australia, New Zealand and Israel pursuant to a
sublicense from Laboratoires Mayoly Spindler SAS, or Mayoly, under
a Joint Research and Development Agreement that also grants us
joint commercialization rights for Brazil, Italy, China and Japan.
See “Agreements and
Collaborations.”
Background
The
pancreas is both an endocrine gland that produces several important
hormones, including insulin, glucagon, and pancreatic polypeptide,
as well as a digestive organ that secretes pancreatic juice
containing digestive enzymes that assist the absorption of
nutrients and digestion in the small intestine.
The
targeted indication of MS1819 is the compensation of EPI, which is
observed when the exocrine functions of the pancreas are below 10%
of normal. The symptomatology of EPI is essentially due to
pancreatic lipase deficiency, an enzyme that hydrolyses
triglycerides into monoglycerides and free fatty acids. The
pancreatic lipase enzymatic activity is hardly compensated by
extrapancreatic mechanisms, because gastric lipase has nearly no
lipolytic activity in the pH range of the intestine. On the other
hand, when they are impaired, the pancreatic amylase and proteases
(enzymes that break up starches and protein,
respectively) activities can be, at least in part, compensated
by the salivary amylase, the intestinal glycosidase, the gastric
pepsin, and the intestinal peptidases, all of which are components
of the gastric juice secreted by the stomach walls. In summary,
lipid maldigestion due to lipase deficiency is responsible for
weight loss, steatorrhea featured by greasy diarrhea, and
fat-soluble vitamin deficiencies (i.e. A, D, E and K vitamins). In
addition, EPI caused by chronic pancreatic disorders is also
frequently associated with endocrine pancreatic insufficiency,
resulting in diabetes mellitus sometimes called type
IIIc.
CP,
the most common cause of EPI, is a long-standing inflammation of
the pancreas that alters its normal structure and functions. In the
United States, its prevalence rate is of 42 cases per 100,000
inhabitants, resulting in approximately 132,000 cases.
Approximately 60% of patients affected with CP display EPI,
resulting in approximately 80,000 patients requiring substitution
therapy in the U.S. In Western societies, CP is caused by chronic
alcoholic consumption in approximately 55-80% of cases. Other
relatively frequent etiologies include the genetic form of the
disease that is inherited as an autosomal dominant condition with
variable penetrance, pancreatic trauma and idiopathic causes. CP is
frequently associated with episodes of acute inflammation in a
previously injured pancreas, or as chronic damage with persistent
pain, diabetes mellitus due to endocrine pancreatic insufficiency,
or malabsorption caused by EPI. In addition to EPI symptoms, weight
loss due to malabsorption and/or reduction in food intake due to
pain related to food intake, are frequent.
CF,
another frequent etiology of EPI, is a severe genetic disease
associated with chronic morbidity and life-span decrease of most
affected individuals. In most Caucasian populations, CF prevalence
is of 7-8 cases per 100,000 inhabitants, but less common in other
populations, resulting in approximately 30,000 affected individuals
in the U.S. CF is inherited as monogenic autosomal recessive
disease due to the defect at a single gene locus that encodes the
Cystic Fibrosis Transmembrane Regulator protein (CFTR), a regulated
chloride channel. Mutation of both alleles of this chloride channel
gene results in the production of thick mucus, which causes a
multisystem disease of the upper and lower respiratory tracts,
digestive system, and the reproductive tract. The progressive
destruction of the pancreas results in EPI that is responsible for
malnutrition and contributes to significant morbidity and
mortality. About 80-90% of patients with CF develop EPI, resulting
in approximately 25,000-27,000 patients in the U.S. that require
substitution therapy.
EPI
can be also observed following pancreatic and gastric surgeries due
to insufficient enzyme production or asynchronism between the entry
of food into the small intestine and pancreatic juice with bile
secretion, respectively. Other uncommon etiologies of EPI include
intestinal disorders (e.g. severe celiac disease, small bowel
resection, enteral artificial nutrition), pancreatic diseases (e.g.
pancreatic trauma, severe acute pancreatitis with pancreatic
necrosis, and pancreatic cancer), and other uncommon etiologies
(e.g. Zollinger-Ellison syndrome, Shwachman-Diamond syndrome).
Idiopathic EPI has been also reported in the elderly.
Current
treatments for EPI stemming from CP and CF rely on porcine
pancreatic extracts, or PPEs, which have been on the market since
1938. The PPE market is well established and growing with estimated
sales in the U.S. of $880 million in 2015 and has been growing for
the past five years at a compound annual growth rate of 22%. In
spite of their long-term use, however, PPEs suffer from poor
stability, formulation problems, possible transmission of
conventional and non-conventional infectious agents due to their
animal origins, possible adverse events at high doses in patients
with CF and limited effectiveness.
We
believe that MS1819 recombinant lipase is currently the only
non-animal source product known to be in development for the
treatment of CP and has the potential to address the shortcomings
of PPEs.
History of the Program
In 1998, Mayoly, a European pharmaceutical company
focusing primarily on gastroenterology disorders, launched a
program for the discovery and characterization of novel lipases of
non-animal origin that could be used in replacement therapy for
EPI. The program was conducted in collaboration with INRA
TRANSFERT, a subsidiary of the French academic laboratory, National
Institute for Agricultural Research, or INRA. In 2000, Mayoly and
INRA discovered that the yeast Yarrowia
lipolytica secreted a
lipase which was named LIP2. During the ensuing years, Mayoly
investigated the in vitro enzymatic activities of LIP2 in
collaboration with the Laboratory of Enzymology at Interfaces and
Physiology of Lipolysis, or EIPL, a French public-funded research
laboratory at the French National Scientific Research Centre
laboratory, or CNR, which focuses on the physiology and molecular
aspects of lipid digestion.
Pre-clinical Program
The
efficacy of MS1819 has been investigated in normal minipigs, which
are generally considered as a relevant model for digestive drug
development when considering their physiological similarities with
humans and their omnivore diet. Experimental pancreatitis was
induced by pancreatic duct ligation, resulting in severe EPI with
baseline coefficient of fat absorption, or CFA, around 60%
post-ligature. CFA is a measurement obtained by quantifying
the amount of fat ingested orally over a defined time period and
subtracting the amount eliminated in the stool to ascertain the
amount of fat absorbed by the body. Pigs were treated with
either MS1819 or enteric-coated PPE, both administered as a
single-daily dose.
At doses ranging from 10.5 to 211mg, MS1819
increases the CFA by +25 to +29% in comparison to baseline
(p<0.05 at all doses), whereas the 2.5 mg dose had milder
activity. Similar efficacy was observed in pigs receiving 100,000 U
lipase of enteric-coated porcine pancreatic extract. These findings
demonstrate the in vivo activity of MS1819 in a
relevant in vivo model at a level similar to the PPEs at
dosage of 10.5mg or greater. The results of a clinical trial are
statistically significant if they are unlikely to have occurred by
chance. Statistical significance of the trial results are typically
based on widely used, conventional statistical methods that
establishes the p-value of the results. A p-value of 0.05 or less
is required to demonstrate statistical significance. As such, these
CFA levels are considered to be statistically
significant.
To
date, two non-clinical toxicology studies have been conducted. Both
show that MS1819 lipase is clinically well tolerated at levels up
to 1000mg/kg in rats and 250 mg/kg in minipigs up to 13 weeks.
MS1819 is therefore considered non-toxic in both rodent and
non-rodent species up to a maximum feasible dose (MFD) of 1000
mg/kg/day in the rats over six months of
administration.
Clinical Program
We
believe that there are two principal therapeutic indications for
EPI compensation by MS1819: (i) adult patients with CP or
post-pancreatectomy, and (ii) children or young adults affected by
cystic fibrosis. Because of their radically different
pathophysiology, we intend to separately investigate each of these
indications and have determined, based on market size and expected
dose requirements, to pursue the indication for adults
first.
During
2010 and 2011, a phase I/IIa clinical trial of MS1819 was conducted
in conjunction with Mayoly in a single center in France. The study
was an exploratory study mainly designed to investigate the safety
of MS1819-FD (freeze-dried) and was a randomized, double blind,
placebo controlled, parallel clinical trial in 12 patients affected
with CP or pancreatectomy and severe EPI. This study was not
designed, nor did it aim, to demonstrate statistically significant
changes of CFA or steatorrhea under MS1819-FD. The primary endpoint
of the study was defined as the relative change in steatorrhea (an
established surrogate biomarker of EPI correction) in comparison to
baseline. The study found that MS1819 was well tolerated with no
serious adverse events. Only two adverse events were observed:
constipation (two patients out of eight with MS1819) and
hypoglycemia (two patients out of eight with MS1819, and one
patient out of four with placebo). A non-statistically significant
difference of the primary endpoint, possibly due to the small group
size, was found between the two groups both in intention-to-treat,
a group that included three patients who received the in-patient
facility study diet but did not fulfill the protocol’s
inclusion criteria, and per-protocol analysis.
We
received regulatory approval in Australia and New Zealand in 2016
to conduct a phase II multi-center dose escalation study in CP and
pancreatectomy. This clinical trial is being designed to ascertain
the active dose of MS1819 and to compare its efficacy with or in
combination with PPEs and is expected to enroll approximately 15
patients. A substantial portion of the proceeds from our IPO are
dedicated to sponsor and conduct the trial. We expect to file an
IND for the study as a result of interactions with the FDA.
Following the results of the dose escalation trial we expect to
submit a U.S. IND by the fourth quarter of 2017. The U.S. trial is
expected to be a placebo-crossover study in 30-60 patients with
chronic pancreatitis. In parallel with the IND preparation, we
expect to mitigate the dose escalation work in Australia and New
Zealand.
AZX1101
AZX1101
is a recombinant-lactamase combination of bacterial origin under
development for the prevention of hospital-acquired infections by
resistant bacterial strains induced by parenteral administration of
b-lactam antibiotics (known as nosocomial infections), as well as
the prevention of antibiotic-associated diarrhea, or AAD.
Nosocomial infections are a major health concern contributing to
increased morbidity, mortality and cost. The Centers for Disease
Control, or CDC has estimated that roughly 1.7 million
hospital-associated infections (i.e. ~5% of the number of
hospitalized patients), cause or contribute to 99,000 deaths each
year in the U.S., with the annual cost ranging from $4.5 - $11.0
billion.
Our
AZX1101 product candidate is at an early stage of preclinical
development and will consist of a combination of two b-lactamases
having complementary activity spectrum. We have selected two
proteins from the screening of 22 candidate enzymes that show
biochemical characteristics fitting with the application. The
production processes of these two candidate proteins have been
optimized and will be administrated to minipigs in order to
evaluate efficacy. A portion of the proceeds from our IPO are
dedicated to conducting the first animal study and primary
toxicology assessment of AZX1101 during the middle of 2017. The
proceeds from our IPO will not be sufficient to fund this program
past these initial steps and, accordingly, even if the findings
warrant further study, we will need to seek additional financing in
order to pursue the AZX1101 program, which may not be available on
acceptable terms, if at all.
Agreements and Collaborations
Stock Purchase Agreement
On May 21, 2014, we entered into the SPA with
Protea to acquire 100% of the outstanding capital stock of
ProteaBio Europe (the “Acquisition”). On June 13, 2014, we completed the
Acquisition in exchange for the payment to Protea of $600,000 and
the issuance of shares of our Series A Convertible Preferred Stock
convertible into 33% of our outstanding common stock. Pursuant to
the SPA, Protea Sub assigned (i) to Protea Europe all of its
rights, assets, know-how and intellectual property rights in
connection with program PR1101 and those granted under that certain
Joint Research and Development Agreement, by and among Protea Sub,
Protea Europe and Mayoly, dated March 22, 2010; and (ii) to us all
amounts, together with any right of reimbursement, due to Protea
Sub in connection with outstanding shareholder
loans.
Pursuant
to the SPA, we are obligated to pay certain other contingent
consideration upon the satisfaction of certain events, including
(a) a one-time milestone payment of $2.0 million due within ten
days of receipt of the first approval by the FDA of an NDA or BLA
for a Business Product (as such term is defined in the SPA); (b)
royalty payments equal to 2.5% of net sales of Business Product up
to $100.0 million and 1.5% of net sales of Business Product in
excess of $100.0 million; and (c) 10% of the Transaction Value (as
defined in the SPA) received in connection with a sale or transfer
of the pharmaceutical development business of Protea
Europe.
Mayoly Agreement
Effective March 22, 2010, Protea and AzurRx SAS
entered into a Joint Research and Development Agreement with Mayoly
pursuant to which Mayoly sublicensed certain of its exclusive
rights to a genetically engineered yeast strain cell line on which
our MS1819 is based that derive from a Usage and Cross-Licensing
Agreement dated February 2, 2006 (the “INRA
Agreement”) between
Mayoly and INRA, in charge of patent management acting for and on
behalf of the National Centre of Scientific Research
(“CNRS”) and INRA.
Effective January 1,
2014, Protea entered into an amended and restated Joint
Research and Development Agreement with Mayoly (the
“Mayoly
Agreement”) pursuant to
which Protea acquired the exclusive right to Mayoly patents
and technology, with the right to sublicense, to develop,
manufacture and commercialize human pharmaceuticals based on the
MS1819 lipase within the following territories: U.S. and Canada,
South America (excluding Brazil), Asia (excluding China and Japan),
Australia, New Zealand and Israel. The Mayoly Agreement further
provides Mayoly the exclusive right to Protea's patents and
technology, with the right to sublicense, to develop, manufacture
and commercialize human pharmaceuticals based on the MS1819 lipase
within the following territories: Mexico, Europe (excluding Italy,
Portugal and Spain) and any other country not granted to us alone,
or jointly with Mayoly. Rights to the following territories are
held jointly with Mayoly: Brazil, Italy, Portugal, Spain, China and
Japan. In addition, the Mayoly Agreement requires Protea to
pay 70% of all development costs and requires each of the parties
to use reasonable efforts to:
●
devote
sufficient personnel and facilities required for the performance of
its assigned tasks;
●
make
available appropriately qualified personnel to supervise, analyze
and report on the results obtained in the furtherance of the
development program; and
●
deploy
such scientific, technical, financial and other resources as is
necessary to conduct the development program.
Pursuant
to the Mayoly Agreement, if Protea obtains marketing authorization
in the U.S. during the development program, Protea is obligated to
make a one-time milestone payment and pay Mayoly royalties on net
product sales in the low single digits. If Protea does not obtain
marketing authorization in the U.S. during the development program,
but obtains such authorization thereafter, then Mayoly has the
option to either request a license from Protea and pay 30% of our
development costs, less the shared costs incurred by Mayoly and a
royalty on net sales in the mid-teens, or Protea will pay Mayoly
royalties on net product sales in the low single digits. If Mayoly
receives EU marketing authorization after the development program
concludes, then Protea may license the product from Mayoly for 70%
of Mayoly’s development costs, less the shared costs incurred
by Protea and a royalty on net sales in the mid-teens. The
agreement further provides that no royalties are payable by either
party until all expenses incurred in connection with the
development program since 2009 have been recovered. The Mayoly
Agreement further grants Protea the right to cure any breach by
Mayoly of its obligations under the INRA Agreement. See “INRA
Agreement” below. Unless earlier terminated in accordance
with its terms, the Mayoly Agreement will expire, on a country by
country basis, on the latest of (i) the expiration of any patent
covered by the license, (ii) the duration of the legal protection
of any intellectual property licensed under the agreement, or (iii)
the expiration of any applicable data exclusivity period. The
latest expiration date of the current series of issued patents
covered by the Mayoly Agreement is September 2028. See
“Intellectual Property.” Either party may terminate the
agreement upon a material breach by the other party that remains
uncured after 90 days’ notice without prejudicing the rights
of the terminating party. If the development program or license is
terminated due to a material breach that is not cured, then the
non-breaching party is free to develop, manufacture and
commercialize the product, or grant a license to a third party to
carry out such activities in the breaching parties territories or
the joint territories. Further, the non-breaching party’s net
product sales will be subject to low single digit royalties.
Finally, either party may terminate due to insolvency of the other
party. In connection with the Acquisition, Protea, with the consent
of INRA and CNRS, assigned all of its rights, title and
interest in and to the Mayoly Agreement to AzurRx SAS.
INRA Agreement
In
February 2006, INRA, acting on behalf of CNRS and Institut National
de la Recherche Agronomique, entered into a Usage and
Cross-licensing Agreement with Mayoly to specify their respective
rights to the use of (i) French patent application no. FR9810900
(INRA CNRS patent application), (ii) international patent
application no. WO2000FR0001148 (Mayoly patent application), and
(iii) the technology and know-how associated with both patent
applications.
The
agreement covers extensions of both patent applications.
Specifically, the INRA CNRS patent application encompasses
application no. FR9810900 as well as PCT/FR99/02079 with national
phase entry in the U.S. (no. 09/786,048, now US patent 6,582,951),
Canada (no. 2,341,776) and Europe (no. 99.940.267.0, now EP 1 108
043 B1). The Mayoly patent application encompasses WO2000FR0001148
with the national phase entered in Europe (now EP 1 276 874
B1).
The
agreement provides Mayoly with the world-wide use in human therapy,
nutraceuticals, and cosmetology and provides INRA with world-wide
(i) use of lipase as an enzymatic catalyst throughout this field,
including the production of pharmaceuticals, and (ii) treatment of
the environment, food production processes, cleaning processes and
other fields, excluding human therapies, neutraceuticals and
cosmetology. The agreement provides for shared use in the
production of lipase in the veterinary field (livestock and pets).
As consideration for the agreement, Mayoly will pay INRA an annual
lump sum of €5,000 until marketing. Upon marketing, Mayoly
will pay INRA a lump sum of €100,000 and royalties on net
sales of the product. Unless earlier terminated in accordance with
its terms, the agreement with INRA expires upon the expiration of
the patents in each country in which the license has been granted.
The parties may terminate the agreement in the event the other
party breaches its obligations therein, which termination shall
become effective three months following written notice thereof to
the breaching party. The breaching party shall have the right to
cure such breach or default during such three-month
period.
Intellectual Property
Our
goal is to obtain, maintain and enforce patent protection for our
product candidates, formulations, processes, methods and any other
proprietary technologies, preserve our trade secrets, and operate
without infringing on the proprietary rights of other parties, both
in the United States and in other countries. Our policy is to
actively seek to obtain, where appropriate, the broadest
intellectual property protection possible for our current product
candidates and any future product candidates, proprietary
information and proprietary technology through a combination of
contractual arrangements and patents, both in the United States and
abroad. However, patent protection may not afford us with complete
protection against competitors who seek to circumvent our
patents.
We
also depend upon the skills, knowledge, experience and know-how of
our management and research and development personnel, as well as
that of our advisors, consultants and other contractors. To help
protect our proprietary know-how, which is not patentable, and for
inventions for which patents may be difficult to enforce, we
currently rely and will in the future rely on trade secret
protection and confidentiality agreements to protect our interests.
To this end, we require all of our employees, consultants, advisors
and other contractors to enter into confidentiality agreements that
prohibit the disclosure of confidential information and, where
applicable, require disclosure and assignment to us of the ideas,
developments, discoveries and inventions important to our
business.
MS1819
The MS1819 program is protected by the following
series of issued patents that we have licensed under the Mayoly
Agreement covering the method for transformation
of Yarrowia
lipolytica, the sequence of the LIP2 enzyme and its production
process:
●
PCT/FR99/02079 patent family (including the
patents EP1108043 B1, and US6582951) “Method for
non-homologous transformation of Yarrowia lipolytica”,
concerns the integration of a gene of interest into the genome of
aYarrowia strain devoid of zeta sequences, by transforming said
strain using a vector bearing zeta sequences. This modified strain
is used for the current production process. This patent has been
issued in the U.S., Canada, and validated in several European
countries, including Austria, Belgium, Switzerland, Cyprus,
Germany, Denmark, Spain, Finland, Great Britain, Greece, Ireland,
France, Italy, Lithuania, Luxembourg, Netherlands, Portugal and
Sweden. This patent expires September 1, 2019; PCT/FR2000/001148
patent family (including the patent EP1276874 B1) “Cloning
and expressing an acid-resistant extracellular lipase
of Yarrowia
lipolytica” describes the
coding sequences of acid-resistant extracellular lipases, in
particular Candida ernobii or Yarrowia lipolytica yeasts and the
production of said lipases in their recombinant form. This patent
has been validated in several European countries, including
Italy, France and Great Britain. This patent expires April 28,
2020;
●
PCT/FR2000/001148
patent family (including the patent EP1276874 B1) "Cloning and
expressing an acid-resistant extracellular lipase of Yarrowia
lipolytica" describes the coding sequences of acid-resistant
extracellular lipases, in particular Candida ernobii or Yarrowia
lipolytica yeasts and the production of said lipases in their
recombinant form. This patent has been validated in several
European countries, including Italy, France and Great Britain. This
patent expires April 28, 2020; and
●
PCT/FR2006/001352 patent family (including the
patent EP2035556 and patent US8,334,130 and US8,834,867)
“Method for producing lipase,
transformed Yarrowia
lipolytica cell capable of
producing said lipase and their uses” describes a method for
producing Yarrowia
lipolytica acid-resistant
recombinant lipase utilizing a culture medium without any products
of animal origin or non-characterized mixtures such as tryptone,
peptone or lactoserum, in addition to its uses. The European
patents expire June 15, 2026, U.S. patent 8,334,130 expires
September 11, 2028, and U.S. patent 8,834,867 expires September 15,
2026.
AZX1101
To
date, we own one patent application covering different compositions
which has been filed in France. This application was filed
internationally (PCT) on October 13, 2015 as PCT/FR2015/052756
claiming priority to French patent application 1459935 dated
October 16, 2014. This application was published as WO/2016/059341
titled “Hybrid Proteinaceous Molecule Capable Of Inhibiting
At Least One Antibiotic And Pharmaceutical Composition Containing
It.” At present all PCT contracting states are
designated. The term of patent protection available is typically 20
years from the filing date of the earliest international (PCT)
application. Patents are territorial rights, meaning that the
rights conferred are only applicable in the country or region in
which a patent has been filed and granted, in accordance with the
law of that country or region. Patent enforcement is only possible
after a patent is granted and before the expiration of the patent
term. Any patent issuing from PCT/FR2015/052756 will expire on
October 13, 2035, unless the patent term is extended pursuant to
specific laws of the granting country. We expect to file additional
patent applications covering the production process and formulation
of AZX1101.
Manufacturing
MS1819 API is obtained by fermentation in
bioreactors using the engineered Yarrowia
lipolytica strain. MS1819
is currently manufactured at a contract facility located in Capua
Italy owned by DSM. The proprietary yeast cell line from which the
API is derived is kept at a storage facility maintained by Charles
River. Because the manufacturing process is fairly straightforward,
we believe there are multiple alternative contract manufacturers
capable of producing the product we need for clinical
trials.
AZX1101
API production is still under development in-house. To date, the
manufacturing process appears fairly straightforward with multiple
options leading us to believe that there are multiple alternative
contract manufacturers capable of producing the products we will
need for clinical trials.
Competition
The
pharmaceutical and biotechnology industries are characterized by
rapidly evolving technology and intense competition. Many companies
of all sizes, including major pharmaceutical companies and
specialized biotechnology companies, are engaged in the development
and commercialization of therapeutic agents designed for the
treatment of the same diseases and disorders that we target. Many
of our competitors have substantially greater financial and other
resources, larger research and development staff and more
experience in the regulatory approval process. Moreover, potential
competitors have or may have patents or other rights that conflict
with patents covering our technologies.
With
respect to MS1819, we will compete with PPEs, a well-established
market that is currently dominated by a few large pharmaceutical
companies, including AbbVie, Johnson & Johnson and Allergan.
There are currently six PPE products that have been approved by the
FDA for sale in the U.S. There is another synthetic lipase under
development from Anthera which may be competitive to our efforts to
enter the market with a non-animal based lipase which has recently
had some clinical setbacks. We believe our ability to compete in
this market, if we are successful in developing and obtaining
regulatory approval to market MS1819, will depend on our ability
(or that of a corporate partner) to convince patients, their
physicians, healthcare payors and the medical community of the
benefits of using a non-animal based product to treat EPI, as well
as by addressing other shortcomings associated with
PPEs.
With respect to AZX1101, we are aware of only one
beta-lactamase under active development by a U.S. specialty
pharmaceutical company for the treatment
of c.
difficile although the
compounds being developed appear to have very limited efficacy to
only specific classes of antibiotics rather than the large
classes of antibiotics expected to be covered by our
compound.
Government Regulation and Product Approval
Government
authorities in the United States, at the federal, state and local
level, and other countries extensively regulate, among other
things, the research, development, testing, manufacture, quality
control, approval, labeling, packaging, storage, record-keeping,
promotion, advertising, distribution, post-approval monitoring and
reporting, marketing and export and import of products such as
those we are developing. To date, our research and development
efforts have been conducted in France. We expect to continue to
perform substantially all of our basic research activities in
France in order to leverage our human capital expertise as well as
to avail ourselves of tax credits awarded by the French government
to research companies. We expect to conduct early stage development
work in both France and the U.S. and late stage development work,
including the MS1819 Phase II study and subsequent Phase III
trial in the U.S. as North America is our principal target market
for any products that we may successfully
develop.
FDA Approval Process
In the United States, pharmaceutical products are
subject to extensive regulation by the FDA. The Federal Food, Drug,
and Cosmetic Act, or the FDC Act, the Public Health
Services Act or the PHS Act, and other federal and state statutes and
regulations, govern, among other things, the research, development,
testing, manufacture, storage, recordkeeping, approval, labeling,
promotion and marketing, distribution, post-approval monitoring and
reporting, sampling, and import and export of pharmaceutical
products. Failure to comply with applicable U.S. requirements may
subject a company to a variety of administrative or judicial
sanctions, such as FDA refusal to approve pending new drug
applications, or NDAs, refusal to approve
pending biologic license applications, or BLAs, warning letters, product recalls, product
seizures, total or partial suspension of production or
distribution, injunctions, fines, civil penalties, and criminal
prosecution.
Pharmaceutical
product development in the U.S. typically involves preclinical
laboratory and animal tests, the submission to the FDA of either a
notice of claimed investigational exemption or an investigational
new drug application, or IND, which must become effective before
clinical testing may commence, and adequate and well-controlled
clinical trials to establish the safety and effectiveness of the
drug for each indication for which FDA approval is sought.
Satisfaction of FDA pre-market approval requirements typically
takes many years and the actual time required may vary
substantially based upon the type, complexity, and novelty of the
product or disease.
Preclinical tests include laboratory
evaluation of product chemistry, formulation, and toxicity, as well
as animal trials to assess the characteristics and potential safety
and efficacy of the product. The conduct of the preclinical tests
must comply with federal regulations and requirements, including
good laboratory practices. The results of preclinical testing are
submitted to the FDA as part of an IND along with other
information, including information about product chemistry,
manufacturing and controls, and a proposed clinical trial protocol.
Long term preclinical tests, such as animal tests of reproductive
toxicity and carcinogenicity, may continue after the IND is
submitted.
Clinical
trials involve the administration of the investigational new drug
to healthy volunteers or patients under the supervision of a
qualified investigator. Clinical trials must be conducted: (i) in
compliance with federal regulations; (ii) in compliance with good
clinical practice, or GCP, an international standard meant to
protect the rights and health of patients and to define the roles
of clinical trial sponsors, administrators, and monitors; as well
as (iii) under protocols detailing the objectives of the trial, the
parameters to be used in monitoring safety, and the effectiveness
criteria to be evaluated. Each protocol involving testing on U.S.
patients and subsequent protocol amendments must be submitted to
the FDA as part of the IND.
The
FDA may order the temporary, or permanent, discontinuation of a
clinical trial at any time, or impose other sanctions if it
believes that the clinical trial either is not being conducted in
accordance with FDA requirements or presents an unacceptable risk
to the clinical trial patients. The study protocol and informed
consent information for patients in clinical trials must also be
submitted to an institutional review board, or IRB, for approval.
An IRB may also require the clinical trial at the site to be
halted, either temporarily or permanently, for failure to comply
with the IRB’s requirements, or may impose other
conditions.
Clinical
trials to support NDAs or BLAs for marketing approval are
typically conducted in three sequential phases, but the phases may
overlap. In Phase 1, the initial introduction of the drug into
healthy human subjects or patients, the drug is tested to assess
metabolism, pharmacokinetics, pharmacological actions, side effects
associated with increasing doses, and, if possible, early evidence
on effectiveness. Phase II usually involves trials in a limited
patient population to determine the effectiveness of the drug for a
particular indication, dosage tolerance, and optimum dosage, and to
identify common adverse effects and safety risks. If a compound
demonstrates evidence of effectiveness and an acceptable safety
profile in Phase II evaluations, Phase III trials are undertaken to
obtain the additional information about clinical efficacy and
safety in a larger number of patients, typically at geographically
dispersed clinical trial sites, to permit FDA to evaluate the
overall benefit-risk relationship of the drug and to provide
adequate information for the labeling of the drug.
After completion of the required clinical testing,
an NDA is prepared and submitted to the
FDA for
small molecule drugs, or a BLA is prepared and submitted for
biologics. Section 351 of the PHS Act defines a biological product
as a “virus, therapeutic serum, toxin, antitoxin, vaccine,
blood, blood component or derivative, allergenic product, or
analogous product… applicable to the prevention, treatment,
or cure of a disease or condition of human beings.” FDA
regulations and policies have established that biological products
include blood-derived products, vaccines, in vivo diagnostic
allergenic products, immunoglobulin products, products containing
cells or microorganisms, and most protein products (including
cytokines and enzymes). Biological products subject to the PHS Act
also meet the definition of drugs under FDC Act and therefore are
regulated under provisions of both statutes. FDA approval of the NDA or BLA is required
before marketing of the product may begin in the U.S. The NDA or
BLA must include the results of all preclinical, clinical, and
other testing and a compilation of data relating to the
product’s pharmacology, chemistry, manufacture, and controls.
The cost of preparing and submitting an NDA or a BLA is
substantial.
Once the submission is accepted for filing, the
FDA begins an in-depth review. Priority review can be applied to
drugs that the FDA determines offer major advances in treatment, or
provide a treatment where no adequate therapy exists. The FDA may
refer applications for novel drug products, or drug products which
present difficult questions of safety or efficacy, to an advisory
committee — typically a panel that includes
clinicians and other experts — for review,
evaluation, and a recommendation as to whether the application
should be approved. The FDA is not bound by the recommendation of
an advisory committee, but it generally follows such
recommendations. Before approving an NDA or BLA, the FDA will
typically inspect one, or more, clinical sites to assure compliance
with GCP. Additionally, the FDA will inspect the facility or the
facilities at which the drug is manufactured. FDA will not approve
the product unless compliance with current good manufacturing
practices, or GMP — a quality system regulating
manufacturing — is satisfactory and the NDA or
BLA contains data that provide substantial evidence that the
drug is safe and effective in the indication
studied. The issuance of a
biologics license is a determination that the product, the
manufacturing process, and the manufacturing facilities meet
applicable requirements to ensure the continued safety, purity and
potency of the biologic product.
After the FDA evaluates the NDA or BLA and
the manufacturing facilities, it issues either an approval
letter (with the U.S. license
number, in the case of a biologic license) or a complete response letter. A complete
response letter generally outlines the deficiencies in the
submission and may require substantial additional testing, or
information, in order for the FDA to reconsider the application.
If, or when, those deficiencies have been addressed to the
FDA’s satisfaction in a resubmission of the NDA or BLA, the
FDA will issue an approval letter. An approval letter authorizes
commercial marketing of the drug with specific prescribing
information for specific indications. As a condition of NDA or
BLA approval, the FDA may require a risk evaluation and
mitigation strategy, or REMS, to help ensure that the benefits of
the drug outweigh the potential risks. REMS can include medication
guides, communication plans for healthcare professionals, and
elements to assure safe use, or ETASU. ETASU can include, but are
not limited to, special training or certification for prescribing
or dispensing, dispensing only under certain circumstances, special
monitoring, and the use of patient registries. The requirement for
a REMS can materially affect the potential market and profitability
of the drug. Moreover, product approval may require substantial
post-approval testing and surveillance to monitor the drug’s
safety or efficacy. Once granted, product approvals may be
withdrawn if compliance with regulatory standards is not maintained
or problems are identified following initial
marketing.
The Hatch-Waxman Act
In
seeking approval for a drug through an NDA, applicants are required
to list with the FDA each patent whose claims cover the
applicant’s product. Upon approval of a drug, each of the
patents listed in the application for the drug is then published in
the FDA’s Approved Drug Products with Therapeutic Equivalence
Evaluations, commonly known as the Orange Book. Drugs listed in the
Orange Book can, in turn, be cited by potential competitors in
support of approval of an abbreviated new drug application, or
ANDA. An ANDA provides for marketing of a drug product that has the
same active ingredients in the same strengths and dosage form as
the listed drug and has been shown through bioequivalence testing
to be therapeutically equivalent to the listed drug. Other than the
requirement for bioequivalence testing, ANDA applicants are not
required to conduct, or submit results of, pre-clinical or clinical
tests to prove the safety or effectiveness of their drug product.
Drugs approved in this way are commonly referred to as
“generic equivalents” to the listed drug, and can often
be substituted by pharmacists under prescriptions written for the
original listed drug.
The
ANDA applicant is required to certify to the FDA concerning any
patents listed for the approved product in the FDA’s Orange
Book. Specifically, the applicant must certify that: (i) the
required patent information has not been filed; (ii) the listed
patent has expired; (iii) the listed patent has not expired, but
will expire on a particular date and approval is sought after
patent expiration; or (iv) the listed patent is invalid or will not
be infringed by the new product. A certification that the new
product will not infringe the already approved product’s
listed patents, or that such patents are invalid, is called a
Paragraph IV certification. If the applicant does not challenge the
listed patents, the ANDA application will not be approved until all
the listed patents claiming the referenced product have expired.
The ANDA application also will not be approved until any non-patent
exclusivity listed in the Orange Book for the referenced product
has expired. Federal law provides a period of five years following
approval of a drug containing no previously approved active
ingredients during which ANDAs for generic versions of those drugs
cannot be submitted, unless the submission contains a Paragraph IV
challenge to a listed patent — in which case the submission
may be made four years following the original product approval.
Federal law provides for a period of three years of exclusivity
during which the FDA cannot grant effective approval of an ANDA
based on the approval of a listed drug that contains previously
approved active ingredients but is approved in a new dosage form,
route of administration or combination, or for a new use; the
approval of which was required to be supported by new clinical
trials conducted by, or for, the applicant.
The BPCIA
The Biologics Price Competition and Innovation Act
(“BPCIA”) was enacted as part of the Affordable
Care Act on March 23, 2010. The BPCIA creates an abbreviated
licensure pathway for biological products shown to be biosimilar
to, or interchangeable with, an FDA-licensed biological reference
product. The objectives of the BPCIA are conceptually similar to
those of the Hatch-Waxman Act, which established abbreviated
pathways for the approval of small molecule drug products under the
FDC Act. The implementation of an abbreviated licensure pathway for
biological products can present challenges given the scientific and
technical complexities that may be associated with the larger and
typically more complex structure of biological products, as well as
the processes by which such products are manufactured. Most
biological products are produced in a living system such as a
microorganism, or plant or animal cells, whereas small molecule
drugs are typically manufactured through chemical
synthesis.
A
“biosimilar” product is a follow-on version of another
biological product for which marketing approval is sought or has
been obtained based on a demonstration that it is
“biosimilar” to the original reference product. Section
351(k) of the PHS Act, added by the BPCIA, sets forth the
requirements for an application for a proposed biosimilar product
and an application or a supplement for a proposed interchangeable
product. Section 351(i) defines biosimilarity to mean “that
the biological product is highly similar to the reference product
notwithstanding minor differences in clinically inactive
components” and that “there are no clinically
meaningful differences between the biological product and the
reference product in terms of the safety, purity, and potency of
the product”. A 351(k) application must contain, among other
things, information demonstrating that the biological product is
biosimilar to a reference product based upon data derived from
analytical studies, animal studies, and a clinical study or
studies, unless the FDA determines, in its discretion, that certain
studies are unnecessary. To meet the additional standard of
“interchangeability,” an applicant must provide
sufficient information to demonstrate biosimilarity, and also to
demonstrate that the biological product can be expected to produce
the same clinical result as the reference product in any given
patient and, if the biological product is administered more than
once to an individual, the risk in terms of safety or diminished
efficacy of alternating or switching between the use of the
biological product and thereference product is not greater than the
risk of using the reference product without such alternation or
switch. Biosimilar drugs are not generic drugs, which are shown to
be the same as the reference product. However, biosimilar products
that are also determined to be interchangeable may be substituted
for the reference product without the intervention of the
prescribing healthcare provider.
In
many cases, biosimilars may be brought to market without conducting
the full suite of clinical trials typically required of
originators. The law establishes a period of 12 years of data
exclusivity for reference products in order to preserve incentives
for future innovation and outlines statutory criteria for
science-based biosimilar approval standards that take into account
patient safety considerations. Under this framework, data
exclusivity protects the data in the innovator's regulatory
application by prohibiting others, for a period of 12 years, from
gaining FDA approval based in part on reliance on or reference to
the innovator's data in their application to the FDA. Moreover, a
biosimilar applicant cannot file their application until 4 years
after the reference biological product was first licensed. The law
does not change the duration of patents granted on biologic
products, but does provide procedures for resolving patent disputes
based on a biosimilar application.
The FDA maintains lists biological products,
including any biosimilar and interchangeable biological products
licensed by the FDA under the PHS Act in a book titled “Lists
of Licensed Biological Products with Reference Product Exclusivity
and Biosimilarity or Interchangeability Evaluations” (the
“Purple Book”). The Purple Book includes the date a
biological product was licensed under 351(a) of the PHS Act and
whether the FDA evaluated the biological product for reference
product exclusivity. If the FDA has determined that a biological
product is protected by a period of reference product exclusivity,
the list will identify the date of first licensure and the date
that reference product exclusivity (including any attached
pediatric exclusivity) will expire. The list will not identify
periods of orphan exclusivity and their expiration dates for
biological products as those dates are available at the searchable
database for Orphan Designated and/or Approved Products. The Purple
Book also identifies whether a biological product licensed under
section 351(k) of the PHS Act has been determined by the FDA to be
biosimilar to or interchangeable with a reference biological
product. Biosimilar and interchangeable biological products
licensed under section 351(k) of the PHS Act are listed under the
reference product to which biosimilarity or interchangeability was
demonstrated.
Advertising and Promotion
Once
an NDA or BLA is approved, a product will be subject to certain
post-approval requirements. For instance, the FDA closely regulates
the post-approval marketing and promotion of drugs, including
standards and regulations for direct-to-consumer advertising,
off-label promotion, industry-sponsored scientific and educational
activities and promotional activities involving the
internet.
Drugs
may be marketed only for the approved indications and in accordance
with the provisions of the approved labeling. Changes to some of
the conditions established in an approved application, including
changes in indications, labeling, or manufacturing processes or
facilities, require submission and FDA approval of a new NDA
or BLA or supplement to same, before the change can
be implemented. An NDA or BLA supplement for a new indication
typically requires clinical data similar to that in the original
application, and the FDA uses the same procedures and actions in
reviewing NDA and BLA supplements as it does in reviewing NDAs
and BLAs.
Adverse Event Reporting and GMP Compliance
Adverse
event reporting and submission of periodic reports is required
following FDA approval of an NDA or BLA. The FDA also may require
post-marketing testing, known as Phase IV testing, risk
minimization action plans, and surveillance to monitor the effects
of an approved product, or the FDA may place conditions on an
approval that could restrict the distribution or use of the
product. In addition, quality-control, drug manufacture, packaging,
and labeling procedures must continue to conform to current good
manufacturing practices, or cGMPs, after approval. Drug
manufacturers and certain of their subcontractors are required to
register their establishments with FDA and certain state agencies.
Registration with the FDA subjects entities to periodic unannounced
inspections by the FDA, during which the agency inspects
manufacturing facilities to assess compliance with cGMPs.
Accordingly, manufacturers must continue to expend time, money, and
effort in the areas of production and quality-control to maintain
compliance with cGMPs. Regulatory authorities may withdraw product
approvals or request product recalls if a company fails to comply
with regulatory standards, if it encounters problems following
initial marketing, or if previously unrecognized problems are
subsequently discovered.
Pediatric Information
Under
the Pediatric Research Equity Act, or PREA, NDAs, BLAs or
supplements to same must contain data to assess the safety and
effectiveness of the drug for the claimed indications in all
relevant pediatric subpopulations and to support dosing and
administration for each pediatric subpopulation for which the drug
is safe and effective. The FDA may grant full or partial waivers,
or deferrals, for submission of data. Unless otherwise required by
regulation, PREA does not apply to any drug for an indication for
which orphan designation has been granted.
The
Best Pharmaceuticals for Children Act, or BPCA, provides NDA and
BLA holders a six-month extension of any
exclusivity — patent or
non-patent — for a drug if certain conditions are
met. Conditions for exclusivity include the FDA’s
determination that information relating to the use of a new drug in
the pediatric population may produce health benefits in that
population, the FDA making a written request for pediatric studies,
and the applicant agreeing to perform, and reporting on, the
requested studies within the statutory timeframe. Applications
under the BPCA are treated as priority applications, with all of
the benefits that designation confers.
Physician Drug Samples
As
part of the sales and marketing process, pharmaceutical companies
frequently provide samples of approved drugs to physicians. The
Prescription Drug Marketing Act, or the PDMA, imposes requirements
and limitations upon the provision of drug samples to physicians,
as well as prohibits states from licensing distributors of
prescription drugs unless the state licensing program meets certain
federal guidelines that include minimum standards for storage,
handling, and record keeping. In addition, the PDMA sets forth
civil and criminal penalties for violations.
Anti-Kickback, False Claims Laws & The Prescription Drug
Marketing Act
In
addition to FDA restrictions on marketing of pharmaceutical
products, several other types of state and federal laws have been
applied to restrict certain marketing practices in the
pharmaceutical industry in recent years. These laws include
anti-kickback statutes and false claims statutes. The federal
healthcare program anti-kickback statute prohibits, among other
things, knowingly and willfully offering, paying, soliciting or
receiving remuneration to induce; or in return for; purchasing,
leasing, ordering or arranging for the purchase, lease or order of
any healthcare item or service reimbursable under Medicare,
Medicaid, or other federally financed healthcare programs. This
statute has been interpreted to apply to arrangements between
pharmaceutical manufacturers on the one hand and prescribers,
purchasers, and formulary managers on the other. Violations of the
anti-kickback statute are punishable by imprisonment, criminal
fines, civil monetary penalties, and exclusion from participation
in federal healthcare programs. Although there are a number of
statutory exemptions and regulatory safe harbors protecting certain
common activities from prosecution or other regulatory sanctions,
the exemptions and safe harbors are drawn narrowly, and practices
that involve remuneration intended to induce prescribing,
purchases, or recommendations may be subject to scrutiny if they do
not qualify for an exemption or safe harbor.
Federal
false claims laws prohibit any person from knowingly presenting, or
causing to be presented, a false claim for payment to the federal
government, or knowingly making, or causing to be made, a false
statement to have a false claim paid. Recently, several
pharmaceutical and other healthcare companies have been prosecuted
under these laws for allegedly inflating drug prices they report to
pricing services, which in turn were used by the government to set
Medicare and Medicaid reimbursement rates, and for allegedly
providing free product to customers with the expectation that the
customers would bill federal programs for the product. In addition,
certain marketing practices, including off-label promotion, may
also violate false claims laws. The majority of states also have
statutes or regulations similar to the federal anti-kickback law
and false claims laws, which apply to items and services reimbursed
under Medicaid and other state programs, or, in several states,
apply regardless of the payor.
Foreign Regulatory Issues
Sales
of pharmaceutical products outside the United States are subject to
foreign regulatory requirements that vary widely from country to
country. Whether or not FDA approval has been obtained, approval of
a product by a comparable regulatory authority of a foreign country
must generally be obtained prior to the commencement of marketing
in that country. Although the time required to obtain such approval
may be longer or shorter than that required for FDA approval, the
requirements for FDA approval are among the most detailed in the
world and FDA approval generally takes longer than foreign
regulatory approvals.
Employees
As
of December 31, 2016, we had eleven full-time employees, of
whom eight were employed by AzurRx SAS and located in France and
three were employed by us and located in our office in Brooklyn,
New York.
Available Information
As a public company, we are required to file our
annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, proxy statements on Schedule 14A and
other information (including any amendments) with the Securities
and Exchange Commission (the “SEC”). You may read and copy such material at
the SEC’s Public Reference Room located at 100 F Street,
N.E., Washington, D.C. 20549, on official business days during the
hours of 10:00 a.m. to 3:00 p.m. You may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. You can also find our SEC filings at the
SEC’s website at http://www.sec.gov.
Our Internet address is www.azurrx.com.
Information contained on our website is not part of this Annual
Report. Our SEC filings (including any amendments) will be made
available free of charge on www.azurrx.com,
as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC.
ITEM 1A. RISK FACTORS
We
are subject to various risks that could have a negative effect on
us and our financial condition. These risks could cause actual
operating results to differ from those expressed in certain
“forward looking statements’ contained in this Annual
Report as well as in other communications.
Risks Related to Our Business and Industry
We are a development stage company and have a limited operating
history upon which to base an investment decision.
We
are a clinical development stage biopharmaceutical company. Since
inception, we have engaged primarily in research and development
activities, have not generated any revenues from product sales and
have incurred significant net losses. We have not demonstrated our
ability to perform the functions necessary for the successful
commercialization of any products. The successful commercialization
of any of our products will require us to perform a variety of
functions, including:
●
continuing
to undertake pre-clinical development and clinical
trials;
●
participating
in regulatory approval processes;
●
formulating
and manufacturing products; and
●
conducting
sales and marketing activities.
Our
operations to date have been limited to organizing and staffing,
acquiring, developing and securing the proprietary rights for, and
undertaking pre-clinical development and clinical trials of our
product candidates. These operations provide a limited basis for
our stockholders and prospective investors to assess our ability to
complete development of or commercialize any products and the
advisability of investing in our securities.
We have
incurred significant operating losses and negative cash flows from
operations since inception, had working capital at December 31,
2016 of approximately $623,000 and had an accumulated deficit at
December 31, 2016 of approximately $22,887,000. We believe that our
cash on hand will sustain operations until July 2017. 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 through
March 2018.
Our product candidates are at an early stage of development and may
not be successfully developed or commercialized.
Our
two product candidates, MS1819 and AZX1101, are in the early stages
of development and will require substantial further capital
expenditures, development, testing, and regulatory clearances prior
to commercialization. The development and regulatory approval
process takes several years and it is not likely that either of
such products, even if successfully developed and approved by the
FDA or any comparable foreign regulatory authority, would be
commercially available for at least four to five years or more. Of
the large number of drugs in development, only a small percentage
successfully completes the regulatory approval process and is
commercialized. Accordingly, even if we are able to obtain the
requisite financing to fund our development programs, we cannot
assure you that our product candidates will be successfully
developed or commercialized. Our failure to develop, manufacture or
receive regulatory approval for or successfully commercialize any
of our product candidates, could result in the failure of our
business and a loss of all of your investment in our
company.
Any product candidates we advance into clinical development are
subject to extensive regulation, which can be costly and time
consuming, cause unanticipated delays or prevent the receipt of the
required approvals to commercialize our product
candidates.
The
clinical development, manufacturing, labeling, storage,
record-keeping, advertising, promotion, import, export, marketing
and distribution of our product candidates are subject to extensive
regulation by the FDA in the United States and by comparable health
authorities in foreign markets, including Health Canada’s
Therapeutic Products Directorate, or the TPD, the European
Medicines Agency, or the EMA. In the United States, we are not
permitted to market our product candidates until we receive
approval of a New Drug Application, or NDA, or Biologics License
Application, or BLA, from the FDA. The process of obtaining such
approval is expensive, often takes many years and can vary
substantially based upon the type, complexity and novelty of the
products involved. In addition to the significant clinical testing
requirements, our ability to obtain marketing approval for these
products depends on obtaining the final results of required
non-clinical testing, including characterization of the
manufactured components of our product candidates and validation of
our manufacturing processes. The FDA may determine that our product
manufacturing processes, testing procedures or facilities are
insufficient to justify approval. Approval policies or regulations
may change and the FDA has substantial discretion in the
pharmaceutical approval process, including the ability to delay,
limit or deny approval of a product candidate for many reasons.
Despite the time and expense invested in clinical development of
product candidates, regulatory approval is never
guaranteed.
The
FDA, the TPD and/or the EMA can delay, limit or deny approval of a
product candidate for many reasons, including, but not limited
to:
●
disagreement
with the design or implementation of our clinical
trials;
●
failure
to demonstrate to their satisfaction that a product candidate is
safe and effective for any indication;
●
failure
to accept clinical data from trials which are conducted outside
their jurisdiction;
●
the
results of clinical trials may not meet the level of statistical
significance required for approval;
●
we
may be unable to demonstrate that a product candidate’s
clinical and other benefits outweigh its safety
risks;
●
such
agencies may disagree with our interpretation of data from
preclinical studies or clinical trials;
●
failure
to approve the manufacturing processes or facilities of third-party
manufacturers with which we or our collaborators contract for
clinical and commercial supplies; or
●
changes
in the approval policies or regulations of such agencies may
significantly change in a manner rendering our clinical data
insufficient for approval.
Any
delay in obtaining, or inability to obtain, applicable regulatory
approvals would prevent us from commercializing our product
candidates.
If we encounter difficulties enrolling patients in our clinical
trials, our clinical development activities could be delayed or
otherwise adversely affected.
We
may experience difficulties in patient enrollment in our clinical
trials for a variety of reasons. The timely completion
of clinical trials in accordance with their protocols depends,
among other things, on our ability to enroll a sufficient number of
patients who remain in the trial until its
conclusion. The enrollment of patients depends on many
factors, including:
●
the
number of clinical trials for other product candidates in the same
therapeutic area that are currently in clinical development, and
our ability to compete with such trials for patients and clinical
trial sites;
●
the
patient eligibility criteria defined in the
protocol;
●
the
size of the patient population;
●
the
proximity and availability of clinical trial sites for prospective
patients;
●
the
design of the trial;
●
our
ability to recruit clinical trial investigators with the
appropriate competencies and experience;
●
our
ability to obtain and maintain patient consents;
and
●
the
risk that patients enrolled in clinical trials will drop out of the
trials before completion.
Our
clinical trials will compete with other clinical trials for product
candidates that are in the same therapeutic areas as our product
candidates. This competition will reduce the number and
types of patients and qualified clinical investigators available to
us, because some patients who might have opted to enroll in our
trials may instead opt to enroll in a trial being conducted by one
of our competitors or clinical trial sites may not allow us to
conduct our clinical trial at such site if competing trials are
already being conducted there. Since the number of
qualified clinical investigators is limited, we expect to conduct
some of our clinical trials at the same clinical trial sites that
some of our competitors use, which will reduce the number of
patients who are available for our clinical trials in such clinical
trial site. We may also encounter difficulties finding a
clinical trial site at which to conduct our trials.
Delays
in patient enrollment may result in increased costs or may affect
the timing or outcome of our planned clinical trials, which could
prevent completion of these clinical trials and adversely affect
our ability to advance the development of our product
candidates.
Because the results of preclinical studies and early clinical
trials are not necessarily predictive of future results, any
product candidate we advance into clinical trials may not have
favorable results in later clinical trials, if any, or receive
regulatory approval.
Pharmaceutical
development has inherent risk. We will be required to demonstrate
through well-controlled clinical trials that our product candidates
are effective with a favorable benefit-risk profile for use in
their target indications before we can seek regulatory approvals
for their commercial sale. Our principal product candidate, MS1819
has only completed a phase I/IIa clinical trial, while our second
product, AZX1101 has only been tested in a pre-clinical
setting. Success in pre-clinical studies or early
clinical trials does not mean that later clinical trials will be
successful as product candidates in later-stage clinical trials may
fail to demonstrate sufficient safety or efficacy despite having
progressed through initial clinical testing. We also may need to
conduct additional clinical trials that are not currently
anticipated. Companies frequently suffer significant setbacks in
advanced clinical trials, even after earlier clinical trials have
shown promising results.
Any product candidate we advance into clinical trials may cause
unacceptable adverse events or have other properties that may delay
or prevent their regulatory approval or commercialization or limit
their commercial potential.
Unacceptable
adverse events caused by any of our product candidates in clinical
trials could cause us or regulatory authorities to interrupt, delay
or halt clinical trials and could result in the denial of
regulatory approval by the FDA or other regulatory authorities for
any or all targeted indications and markets. This, in turn, could
prevent us from commercializing the affected product candidate and
generating revenues from its sale. We have not yet
completed testing of any of our product candidates for the
treatment of the indications for which we intend to seek product
approval in humans, and we currently do not know the extent of
adverse events, if any, that will be observed in patients who
receive any of our product candidates. If any of our
product candidates cause unacceptable adverse events in clinical
trials, we may not be able to obtain regulatory approval or
commercialize such product or, if such product candidate is
approved for marketing, future adverse events could cause us to
withdraw such product from the market.
Delays in the commencement or completion of our clinical trials
could result in increased costs and delay our ability to pursue
regulatory approval.
Although
we commenced a Phase II clinical trial for MS1819 in the second
half of 2016, and currently anticipate competing the preclinical
work necessary to file an IND for AZX1101 by the end of 2017, the
commencement of clinical trials can be delayed for a variety of
reasons, including delays in:
●
obtaining
regulatory clearance to commence a clinical
trial;
●
identifying,
recruiting and training suitable clinical
investigators;
●
reaching
agreement on acceptable terms with prospective CROs and trial
sites, the terms of which can be subject to extensive negotiation,
may be subject to modification from time to time and may vary
significantly among different CROs and trial
sites;
●
obtaining
sufficient quantities of a product candidate for use in clinical
trials;
●
obtaining
Investigator Review Board, or IRB, or ethics committee approval to
conduct a clinical trial at a prospective site;
●
identifying,
recruiting and enrolling patients to participate in a clinical
trial;
●
retaining
patients who have initiated a clinical trial but may withdraw due
to adverse events from the therapy, insufficient efficacy, fatigue
with the clinical trial process or personal issues;
and
●
availability
of cash.
Any delays in the commencement of our clinical
trials will delay our ability to pursue regulatory approval for our
product candidates. In addition, many of the factors that cause, or
lead to, a delay in the commencement of clinical trials may also
ultimately lead to the denial of regulatory approval of a product
candidate.
Once
a clinical trial has begun, patient recruitment and enrollment may
be slower than we anticipate. Clinical trials may also be delayed
as a result of ambiguous or negative interim results or
difficulties in obtaining sufficient quantities of product
manufactured in accordance with regulatory
requirements.
We may be required to suspend, repeat or terminate our clinical
trials if they are not conducted in accordance with regulatory
requirements, the results are negative or inconclusive or the
trials are not well designed.
Regulatory
agencies, IRBs or data safety monitoring boards may at any time
recommend the temporary or permanent discontinuation of our
clinical trials or request that we cease using investigators in the
clinical trials if they believe that the clinical trials are not
being conducted in accordance with applicable regulatory
requirements, or that they present an unacceptable safety risk to
participants. Clinical trials must be conducted in
accordance with current Good Clinical Practices, or cGCPs, or other
applicable foreign government guidelines governing the design,
safety monitoring, quality assurance and ethical considerations
associated with clinical studies. Clinical trials are
subject to oversight by the FDA, other foreign governmental
agencies and IRBs at the study sites where the clinical trials are
conducted. In addition, clinical trials must be
conducted with product candidates produced in accordance with
applicable Current Good Manufacturing Practices, or cGMPs, which
are the FDA's regulations governing the design, monitoring and
control of manufacturing processes and
facilities. Clinical trials may be suspended by the FDA,
other foreign governmental agencies, or us for various reasons,
including:
●
deficiencies
in the conduct of the clinical trials, including failure to conduct
the clinical trial in accordance with regulatory requirements or
clinical protocols;
●
deficiencies
in the clinical trial operations or trial sites;
●
the
product candidate may have unforeseen adverse side
effects;
●
deficiencies
in the trial design necessary to demonstrate
efficacy;
●
fatalities
or other adverse events arising during a clinical trial due to
medical problems that may not be related to clinical trial
treatments;
●
the
product candidate may not appear to be more effective than current
therapies; or
●
the
quality or stability of the product candidate may fall below
acceptable standards.
If
we elect or are forced to suspend or terminate a clinical trial of
any other of our product candidates, the commercial prospects for
that product will be harmed and our ability to generate product
revenue from that product may be delayed or
eliminated. Furthermore, any of these events could
prevent us or our partners from achieving or maintaining market
acceptance of the affected product and could substantially increase
the costs of commercializing our product candidates and impair our
ability to generate revenue from the commercialization of these
products either by us or by our collaboration
partners.
Because we licensed our product candidates from third parties, any
dispute with our licensors or non-performance by us or by our
licensors may adversely affect our ability to develop and
commercialize the applicable product candidates.
Some
of our product candidates, including related intellectual property
rights, were licensed from third parties. Under the terms of our
license agreements, the licensors generally have the right to
terminate such agreements in the event of a material breach by us.
Our licenses require us to make annual, milestone or other payments
prior to commercialization of any product and our ability to make
these payments depends on our ability to generate cash in the
future. These agreements generally require us to use diligent and
reasonable efforts to develop and commercialize the product
candidate. In the case of MS1819, Laboratoires Mayoly Spindler SAS,
or Mayoly, licenses MS1819 from a third party and, accordingly, our
rights to MS1819 are also subject to Mayoly’s performance of
its obligations to its licensor, any breach of which we may be
required to remedy in order to preserve our rights.
If
there is any conflict, dispute, disagreement or issue of
non-performance between us and our licensing partner regarding our
rights or obligations under the license agreement, including any
conflict, dispute or disagreement arising from our failure to
satisfy payment obligations under such agreement, our ability to
develop and commercialize the affected product candidate may be
adversely affected. Similarly, any such dispute or issue of
non-performance between Mayoly and its licensor that we are unable
to cure could adversely affect our ability to develop and
commercialize MS1819. Any loss of our rights under our license
agreements could delay or completely terminate our product
development efforts for the affected product
candidate.
We may form or seek strategic alliances or enter into additional
licensing arrangements in the future, and we may not realize the
benefits of such alliances or licensing arrangements.
From
time to time, we may form or seek strategic alliances, create joint
ventures or collaborations or enter into additional licensing
arrangements with third parties that we believe will complement or
augment our development and commercialization efforts with respect
to our product candidates and any future product candidates that we
may develop. Any of these relationships may require us
to incur non-recurring and other charges, increase our near and
long-term expenditures, issue securities that dilute our existing
stockholders or disrupt our management and
business. These relationships also may result in a delay
in the development of our product candidates if we become dependent
upon the other party and such other party does not prioritize the
development of our product candidates relative to its other
development activities. In addition, we face significant
competition in seeking appropriate strategic partners and the
negotiation process is time-consuming and
complex. Moreover, we may not be successful in our
efforts to establish a strategic partnership or other alternative
arrangements for our product candidates because they may be deemed
to be at too early of a stage of development for collaborative
effort and third parties may not view our product candidates as
having the requisite potential to demonstrate safety and
efficacy. If we license products or businesses, we may
not be able to realize the benefit of such transactions if we are
unable to successfully integrate them with our existing operations
and company culture. We cannot be certain that,
following a strategic transaction or license, we will achieve the
revenue or specific net income that justifies such transaction. We
rely completely on third parties to manufacture our preclinical and
clinical pharmaceutical supplies and expect to continue to rely on
third parties to produce commercial supplies of any approved
product candidate, and our dependence on third party suppliers
could adversely impact our business.
We rely completely on third parties to manufacture our preclinical
and clinical pharmaceutical supplies and expect to continue to rely
on third parties to produce commercial supplies of any approved
product candidate, and our dependence on third party suppliers
could adversely impact our business.
The
proprietary yeast strain used to manufacture MS1819 API is located
in a storage facility maintained by Charles River Laboratories in
Malvern, PA and such manufacturing is conducted by DSM Capua SPA in
Italy. We are completely dependent on these third
parties for product supply and our MS1819 development programs
would be adversely affected by a significant interruption in our
ability to receive such materials. Furthermore, our
third-party suppliers will be required to maintain compliance with
cGMPs and will be subject to inspections by the FDA or comparable
regulatory authorities in other jurisdictions to confirm such
compliance. In the event that the FDA or such other authorities
determine that our third-party suppliers have not complied with
cGMP, our clinical trials could be terminated or subjected to a
clinical hold until such time as we are able to obtain appropriate
replacement material. Any delay, interruption or other
issues that arise in the manufacture, packaging, or storage of our
products as a result of a failure of the facilities or operations
of our third party suppliers to pass any regulatory agency
inspection could significantly impair our ability to develop and
commercialize our products.
We
do not expect to have the resources or capacity to commercially
manufacture any of our proposed products, if approved, and will
likely continue to be dependent upon third party manufacturers. Our
dependence on third parties to manufacture and supply us with
clinical trial materials and any approved products may adversely
affect our ability to develop and commercialize our products on a
timely basis or at all.
We rely on third parties to conduct our clinical trials. If these
third parties do not meet our deadlines or otherwise conduct the
trials as required, our clinical development programs could be
delayed or unsuccessful and we may not be able to obtain regulatory
approval for or commercialize our product candidates when expected
or at all.
We
do not have the ability to conduct all aspects of our preclinical
testing or clinical trials ourselves. We intend to use CROs to
conduct our planned clinical trials and will rely upon such CROs,
as well as medical institutions, clinical investigators and
consultants, to conduct our trials in accordance with our clinical
protocols. Our future CROs, investigators and other third parties
will play a significant role in the conduct of these trials and the
subsequent collection and analysis of data from the clinical
trials.
There
is no guarantee that any CROs, investigators and other third
parties upon which we rely for administration and conduct of our
clinical trials will devote adequate time and resources to such
trials or perform as contractually required. If any of these third
parties fail to meet expected deadlines, fail to adhere to our
clinical protocols or otherwise perform in a substandard manner,
our clinical trials may be extended, delayed or terminated. If any
of our clinical trial sites terminate for any reason, we may
experience the loss of follow-up information on patients enrolled
in our ongoing clinical trials unless we are able to transfer the
care of those patients to another qualified clinical trial site. In
addition, principal investigators for our clinical trials may serve
as scientific advisors or consultants to us from time to time and
receive cash or equity compensation in connection with such
services. If these relationships and any related compensation
result in perceived or actual conflicts of interest, the integrity
of the data generated at the applicable clinical trial site may be
jeopardized.
We will face intense competition and may not be able to compete
successfully.
We
operate in highly competitive segments of the biotechnology and
biopharmaceutical markets. We face competition from many different
sources, including commercial pharmaceutical and biotechnology
enterprises, academic institutions, government agencies, and
private and public research institutions. Our product candidates,
if successfully developed and approved, will compete with
established therapies, as well as new treatments that may be
introduced by our competitors. Many of our competitors have
significantly greater financial, product development, manufacturing
and marketing resources than us. Large pharmaceutical companies
have extensive experience in clinical testing and obtaining
regulatory approval for drugs. In addition, many universities and
private and public research institutes are active in cancer
research, some in direct competition with us. We also may compete
with these organizations to recruit management, scientists and
clinical development personnel. Smaller or early-stage companies
may also prove to be significant competitors, particularly through
collaborative arrangements with large and established companies.
New developments, including the development of other biological and
pharmaceutical technologies and methods of treating disease, occur
in the pharmaceutical and life sciences industries at a rapid pace.
Developments by competitors may render our product candidates
obsolete or noncompetitive. We will also face competition from
these third parties in recruiting and retaining qualified
personnel, establishing clinical trial sites and patient
registration for clinical trials and in identifying and
in-licensing new product candidates.
Our success will depend upon intellectual property, proprietary
technologies and regulatory market exclusivity periods, and we may
be unable to protect our intellectual property.
Our
success will depend, in large part, on obtaining and maintaining
patent protection and trade secret protection for our product
candidates and their formulations and uses, as well as successfully
defending these patents against third-party challenges. Under our
license agreement with Mayoly, enforcement of patents relating to
MS1819 is the responsibility of Mayoly. If we or our licensors fail
to appropriately prosecute and maintain patent protection for our
product candidates, our ability to develop and commercialize these
product candidates may be adversely affected and we may not be able
to prevent competitors from making, using and selling competing
products. This failure to properly protect the intellectual
property rights relating to these product candidates could have a
material adverse effect on our financial condition and results of
operations.
The patent application process is subject to numerous risks and
uncertainties, and there can be no assurance that we or our
partners will be successful in protecting our product candidates by
obtaining and defending patents. These risks and uncertainties
include the following:
●
patent
applications may not result in any patents being
issued;
●
patents
that may be issued or in-licensed may be challenged, invalidated,
modified, revoked, circumvented, found to be unenforceable, or
otherwise may not provide any competitive
advantage;
●
our
competitors, many of which have substantially greater resources
than we or our partners and many of which have made significant
investments in competing technologies, may seek, or may already
have obtained, patents that will limit, interfere with, or
eliminate our ability to make, use, and sell our potential
products;
●
there
may be significant pressure on the United States government and
other international governmental bodies to limit the scope of
patent protection both inside and outside the United States for
disease treatments that prove successful as a matter of public
policy regarding worldwide health concerns;
●
countries
other than the United States may have patent laws less favorable to
patentees than those upheld by United States courts, allowing
foreign competitors a better opportunity to create, develop, and
market competing products; and
●
we
may be involved in lawsuits to protect or enforce our patents or
the patents of our licensors, which could be expensive, time
consuming and unsuccessful.
In
addition to patents, we and our partners also rely on trade secrets
and proprietary know-how. Although we have taken steps to protect
our trade secrets and unpatented know-how, including entering into
confidentiality agreements with third parties, and confidential
information and inventions agreements with employees, consultants
and advisors, third parties may still obtain this information or
come upon this same or similar information independently. We may
become subject to claims that we or consultants, advisors or
independent contractors that we may engage to assist us in
developing our product candidates have wrongfully or inadvertently
disclosed to us or used trade secrets or other proprietary
information of their former employers or their other
clients.
We intend to rely on market exclusivity periods that may not be or
remain available to us.
We
intend to rely on our ability to obtain and maintain a regulatory
period of market exclusivity for any of our biologic product
candidates that are successfully developed and approved for
commercialization. Although this period in the United States is
currently 12 years from the date of marketing approval, reductions
to this period have been proposed. This exclusivity period in
Europe is currently 10 years from the date of marketing
approval by the EMA. Once any regulatory period of exclusivity
expires, depending on the status of our patent coverage and the
nature of the product, we may not be able to prevent others from
marketing products that are biosimilar to or interchangeable with
our products, which would materially adversely affect
us.
In
addition, United States patent laws may change which could prevent
or limit us from filing patent applications or patent claims to
protect our products and/or technologies or limit the exclusivity
periods that are available to patent holders. For example, on
September 16, 2011, the Leahy-Smith America Invents Act, or the
Leahy-Smith Act, was signed into law, and includes a number of
significant changes to United States patent law. These include
changes to transition from a “first-to-invent” system
to a “first-to-file” system and to the way issued
patents are challenged. These changes may favor larger and more
established companies that have more resources to devote to patent
application filing and prosecution. The United States Patent and
Trademark Office is currently developing regulations and procedures
to administer the Leahy-Smith Act, and many of the substantive
changes to patent law associated with the Leahy-Smith Act will not
become effective until one year or 18 months after its enactment.
Accordingly, it is not clear what, if any, impact the Leahy-Smith
Act will ultimately have on the cost of prosecuting our patent
applications, our ability to obtain patents based on our
discoveries and our ability to enforce or defend our issued
patents.
If we are unable to establish sales and marketing capabilities or
fail to enter into agreements with third parties to market,
distribute and sell any products we may successfully develop, we
may not be able to effectively market and sell any such products
and generate product revenue.
We
do not currently have the infrastructure for the sales, marketing
and distribution of any of our product candidates, and must build
this infrastructure or make arrangements with third parties to
perform these functions in order to commercialize any products that
we may successfully develop. The establishment and development of a
sales force, either by us or jointly with a partner, or the
establishment of a contract sales force to market any products we
may develop will be expensive and time-consuming and could delay
any product launch. If we, or our partners, are unable to establish
sales and marketing capability or any other non-technical
capabilities necessary to commercialize any products we may
successfully develop, we will need to contract with third parties
to market and sell such products. We may not be able to establish
arrangements with third-parties on acceptable terms, if at
all.
If any product candidate that we successfully develop does not
achieve broad market acceptance among physicians, patients,
healthcare payors and the medical community, the revenues that it
generates from their sales will be limited.
Even
if our product candidates receive regulatory approval, they may not
gain market acceptance among physicians, patients, healthcare
payors and the medical community. Coverage and reimbursement of our
product candidates by third-party payors, including government
payors, generally is also necessary for commercial success. The
degree of market acceptance of any approved products will depend on
a number of factors, including:
●
the
efficacy and safety as demonstrated in clinical
trials;
●
the
clinical indications for which the product is
approved;
●
acceptance
by physicians, major operators of hospitals and clinics and
patients of the product as a safe and effective
treatment;
●
acceptance
of the product by the target population;
●
the
potential and perceived advantages of product candidates over
alternative treatments;
●
the
safety of product candidates seen in a broader patient group,
including its use outside the approved indications;
●
the
cost of treatment in relation to alternative
treatments;
●
the
availability of adequate reimbursement and pricing by third parties
and government authorities;
●
relative
convenience and ease of administration;
●
the
prevalence and severity of adverse events;
●
the
effectiveness of our sales and marketing efforts; and
●
unfavorable
publicity relating to the product.
If
any product candidate is approved but does not achieve an adequate
level of acceptance by physicians, hospitals, healthcare payors and
patients, we may not generate sufficient revenue from these
products and may not become or remain profitable.
We may incur substantial product liability or indemnification
claims relating to the clinical testing of our product
candidates.
We
face an inherent risk of product liability exposure related to the
testing of our product candidates in human clinical trials, and
claims could be brought against us if use or misuse of one of our
product candidates causes, or merely appears to have caused,
personal injury or death. While we have and intend to maintain
product liability insurance relating to our clinical trials, our
coverage may not be sufficient to cover claims that may be made
against us and we may be unable to maintain such insurance. Any
claims against us, regardless of their merit, could severely harm
our financial condition, strain our management and other resources
or destroy the prospects for commercialization of the product which
is the subject of any such claim. We are unable to predict if we
will be able to obtain or maintain product liability insurance for
any products that may be approved for marketing. Additionally, we
have entered into various agreements where we indemnify third
parties for certain claims relating to the testing and use of our
product candidates. These indemnification obligations may require
us to pay significant sums of money for claims that are covered by
these indemnifications.
If we fail to attract and retain key management and clinical
development personnel, we may be unable to successfully develop or
commercialize our product candidates.
We
are dependent on our management team and clinical development
personnel and our success will depend on their continued service,
as well as our ability to attract and retain highly qualified
personnel. In particular, the continued service of our senior
management team, including Johan M. (Thijs) Spoor, our President
and Chief Executive Officer, and Daniel Dupret, our Chief
Scientific Officer, is critical to our success. The market for the
services of qualified personnel in the pharmaceutical industry is
highly competitive. The loss of service of any member of our senior
management team or key personnel could prevent, impair or delay the
implementation of our business plan, the successful conduct and
completion of our planned clinical trials and the commercialization
of any product candidates that we may successfully develop. We do
not carry key man insurance for any member of our senior management
team.
We use biological materials and may use hazardous materials, and
any claims relating to improper handling, storage or disposal of
these materials could be time consuming or costly.
We
may use hazardous materials, including chemicals and biological
agents and compounds, that could be dangerous to human health and
safety or the environment. Our operations also produce hazardous
waste products. Federal, state and local laws and regulations
govern the use, generation, manufacture, storage, handling and
disposal of these materials and wastes. Compliance with applicable
environmental laws and regulations may be expensive, and current or
future environmental laws and regulations may impair our product
development efforts. In addition, we cannot entirely eliminate the
risk of accidental injury or contamination from these materials or
wastes. We do not carry specific biological or hazardous waste
insurance coverage and our property and casualty and general
liability insurance policies specifically exclude coverage for
damages and fines arising from biological or hazardous waste
exposure or contamination. Accordingly, in the event of
contamination or injury, we could be held liable for damages or
penalized with fines in an amount exceeding our resources, and our
clinical trials or regulatory approvals could be
suspended.
Although
we maintain workers’ compensation insurance to cover us for
costs and expenses we may incur due to injuries to our employees
resulting from the use of hazardous materials, this insurance may
not provide adequate coverage against potential liabilities. We do
not maintain insurance for environmental liability or toxic tort
claims that may be asserted against us in connection with our
storage or disposal of biological or hazardous
materials.
In
addition, we may incur substantial costs in order to comply with
current or future environmental, health and safety laws and
regulations. These current or future laws and regulations may
impair our research, development or production efforts. Failure to
comply with these laws and regulations also may result in
substantial fines, penalties or other sanctions.
If we or our partners are sued for infringing intellectual property
rights of third parties, it will be costly and time consuming, and
an unfavorable outcome in that litigation would have a material
adverse effect on our business.
Our
success also depends upon our ability and the ability of any of our
future collaborators to develop, manufacture, market and sell our
product candidates without infringing the proprietary rights of
third parties. Numerous United States and foreign issued patents
and pending patent applications, which are owned by third parties,
exist in the fields in which we are developing products, some of
which may be directed at claims that overlap with the subject
matter of our intellectual property. Because patent applications
can take many years to issue, there may be currently pending
applications, unknown to us, which may later result in issued
patents that our product candidates or proprietary technologies may
infringe. Similarly, there may be issued patents relevant to our
product candidates of which we are not aware.
There is a substantial amount of litigation involving patent and
other intellectual property rights in the biotechnology and
biopharmaceutical industries generally. If a third party claims
that we or any of our licensors, suppliers or collaborators
infringe the third party’s intellectual property rights, we
may have to:
●
obtain
licenses, which may not be available on commercially reasonable
terms, if at all;
●
abandon
an infringing product candidate or redesign our products or
processes to avoid infringement;
●
pay
substantial damages, including the possibility of treble damages
and attorneys’ fees, if a court decides that the product or
proprietary technology at issue infringes on or violates the third
party’s rights;
●
pay
substantial royalties, fees and/or grant cross licenses to our
technology; and/or
●
defend
litigation or administrative proceedings which may be costly
whether we win or lose, and which could result in a substantial
diversion of our financial and management resources.
Healthcare reform and restrictions on reimbursements may limit our
financial returns.
Our
ability or the ability of our collaborators to commercialize any of
our product candidates that we successfully develop may depend, in
part, on the extent to which government health administration
authorities, private health insurers and other organizations will
reimburse consumers for the cost of these products. These third
parties are increasingly challenging both the need for and the
price of new drug products. Significant uncertainty exists as to
the reimbursement status of newly approved therapeutics. Adequate
third-party reimbursement may not be available for our product
candidates to enable us or our collaborators to maintain price
levels sufficient to realize an appropriate return on their and our
investments in research and product development.
Changes in healthcare law and implementing regulations, including
government restrictions on pricing and reimbursement, as well as
healthcare policy and other healthcare payor cost-containment
initiatives, may negatively impact our ability to generate
revenues.
The potential pricing and reimbursement environment for our drug
product candidates and any future products may change in the future
and become more challenging due to, among other reasons, policies
advanced by the current or any new presidential administration,
federal agencies, new healthcare legislation passed by Congress or
fiscal challenges faced by all levels of government health
administration authorities.
If we or any of our independent contractors, consultants,
collaborators, manufacturers, vendors or service providers fail to
comply with healthcare laws and regulations, we or they could be
subject to enforcement actions, which could result in penalties and
affect our ability to develop, market and sell our product
candidates and may harm our reputation.
We
are subject to federal, state, and foreign healthcare laws and
regulations pertaining to fraud and abuse and patients’
rights. These laws and regulations include:
●
the
U.S. federal healthcare program anti-kickback law, which prohibits,
among other things, persons and entities from soliciting, receiving
or providing remuneration, directly or indirectly, to induce either
the referral of an individual for a healthcare item or service, or
the purchasing or ordering of an item or service, for which payment
may be made under a federal healthcare program such as Medicare or
Medicaid;
●
the
U.S. federal false claims and civil monetary penalties laws, which
prohibit, among other things, individuals or entities from
knowingly presenting or causing to be presented, claims for payment
by government funded programs such as Medicare or Medicaid that are
false or fraudulent, and which may apply to us by virtue of
statements and representations made to customers or third
parties;
●
the
U.S. federal Health Insurance Portability and Accountability Act,
or HIPAA, which prohibits, among other things, executing a scheme
to defraud healthcare programs;
●
HIPAA,
as amended by the Health Information Technology for Economic and
Clinical Health Act, or HITECH, imposes requirements relating to
the privacy, security, and transmission of individually
identifiable health information, and requires notification to
affected individuals and regulatory authorities of certain breaches
of security of individually identifiable health
information;
●
the
federal Physician Payment Sunshine Act, which requires certain
manufacturers of drugs, devices, biologics and medical supplies to
report annually to the Centers for Medicare & Medicaid
Services, or CMS, information related to payments and other
transfers of value to physicians, other healthcare providers and
teaching hospitals, and ownership and investment interests held by
physicians and other healthcare providers and their immediate
family members, which is published in a searchable form on an
annual basis; and
●
state
laws comparable to each of the above federal laws, such as, for
example, anti-kickback and false claims laws that may be broader in
scope and also apply to commercial insurers and other non-federal
payors, requirements for mandatory corporate regulatory compliance
programs, and laws relating to patient data privacy and
security.
If
our operations are found to be in violation of any such health care
laws and regulations, we may be subject to penalties, including
administrative, civil and criminal penalties, monetary damages,
disgorgement, imprisonment, the curtailment or restructuring of our
operations, loss of eligibility to obtain approvals from the FDA,
or exclusion from participation in government contracting,
healthcare reimbursement or other government programs, including
Medicare and Medicaid, any of which could adversely affect our
financial results. Although effective compliance
programs can mitigate the risk of investigation and prosecution for
violations of these laws, these risks cannot be entirely
eliminated. Any action against us for an alleged or
suspected violation could cause us to incur significant legal
expenses and could divert our management’s attention from the
operation of our business, even if our defense is
successful. In addition, achieving and sustaining
compliance with applicable laws and regulations may be costly to us
in terms of money, time and resources.
We will need to grow the size of our organization, and we may
experience difficulties in managing this growth.
As
of December 31, 2016, we had eleven employees. As our
development and commercialization plans and strategies develop, and
as we continue to transition into operating as a public company, we
expect to need additional managerial, operational, sales,
marketing, financial and other personnel. Future growth
would impose significant added responsibilities on members of
management, including:
●
identifying,
recruiting, integrating, maintaining and motivating additional
employees;
●
managing
our internal development efforts effectively, including the
clinical, FDA and international regulatory review process for our
product candidates, while complying with our contractual
obligations to contractors and other third parties;
and
●
improving
our operational, financial and management controls, reporting
systems and procedures.
Our
future financial performance and our ability to commercialize our
product candidates will depend, in part, on our ability to
effectively manage any future growth, and our management may also
have to divert a disproportionate amount of its attention away from
day-to-day activities in order to devote a substantial amount of
time to managing these growth activities.
We
currently rely, and for the foreseeable future will continue to
rely, in substantial part on certain independent organizations,
advisors and consultants to provide certain services, including
substantially all aspects of regulatory approval, clinical
management and manufacturing. There can be no assurance
that the services of independent organizations, advisors and
consultants will continue to be available to us on a timely basis
when needed, or that we can find qualified
replacements. In addition, if we are unable to
effectively manage our outsourced activities or if the quality or
accuracy of the services provided by consultants is compromised for
any reason, our clinical trials may be extended, delayed or
terminated, and we may not be able to obtain regulatory approval of
our product candidates or otherwise advance our
business. There can be no assurance that we will be able
to manage our existing consultants or find other competent outside
contractors and consultants on economically reasonable terms, or at
all.
If
we are not able to effectively expand our organization by hiring
new employees and expanding our groups of consultants and
contractors, we may not be able to successfully implement the tasks
necessary to further develop and commercialize our product
candidates and, accordingly, may not achieve our research,
development and commercialization goals.
Risks Relating to our Finances, Capital Requirements and Other
Financial Matters
We are a development stage company with a history of operating
losses that are expected to continue and we are unable to predict
the extent of future losses, whether we will generate significant
revenues or whether we will achieve or sustain
profitability.
We
are a company in the development stage and our prospects must be
considered in light of the uncertainties, risks, expenses and
difficulties frequently encountered by companies in their early
stages of operations. We have generated operating losses since our
inception, including losses of approximately $14,592,000 and
$5,930,000 for the years ended December 31, 2016 and 2015,
respectively. We expect to make substantial expenditures and incur
increasing operating costs in the future and our accumulated
deficit will increase significantly as we expand development and
clinical trial activities for our product candidates. Our losses
have had, and are expected to continue to have, an adverse impact
on our working capital, total assets and stockholders’
equity. Because of the risks and uncertainties associated with
product development, we are unable to predict the extent of any
future losses, whether we will ever generate significant revenues
or if we will ever achieve or sustain profitability.
We have
incurred significant operating losses and negative cash flows from
operations since inception, had working capital at December 31,
2016 of approximately $623,000 and had an accumulated deficit at
December 31, 2016 of approximately $22,887,000. We believe that our
cash on hand will sustain operations until July 2017. 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 through
March 2018.
We will need substantial additional funding and may be unable to
raise capital when needed, which would force us to delay, curtail
or eliminate one or more of our research and development programs
or commercialization efforts.
Our
operations have consumed substantial amounts of cash since
inception. During the years ended December 31, 2016 and 2015, we
incurred research and development expenses of approximately
$2,496,000 and $1,398,000, respectively. We expect to continue to
spend substantial amounts on product development, including
conducting clinical trials for our product candidates and
purchasing clinical trial materials from our suppliers. We believe
that our cash on hand will sustain our operations until July 2017
and that we will require substantial additional funds to support
our continued research and development activities, as well as the
anticipated costs of preclinical studies and clinical trials,
regulatory approvals and potential commercialization. We have based
this estimate, however, on assumptions that may prove to be wrong,
and we could spend our available financial resources much faster
than we currently expect.
Until
such time, if ever, as we can generate a sufficient amount of
product revenue and achieve profitability, we expect to seek to
finance future cash needs through equity or debt financings or
corporate collaboration and licensing arrangements. We currently
have no other commitments or agreements relating to any of these
types of transactions and we cannot be certain that additional
funding will be available on acceptable terms, or at all. If we are
unable to raise additional capital, we will have to delay, curtail
or eliminate one or more of our research and development
programs.
Raising additional funds by issuing securities or through licensing
or lending arrangements may cause dilution to our existing
stockholders, restrict our operations or require us to relinquish
proprietary rights.
To
the extent that we raise additional capital by issuing equity
securities, the share ownership of existing stockholders will be
diluted. Any future debt financing may involve covenants that
restrict our operations, including limitations on our ability to
incur liens or additional debt, pay dividends, redeem our stock,
make certain investments and engage in certain merger,
consolidation or asset sale transactions, among other restrictions.
In addition, if we raise additional funds through licensing
arrangements, it may be necessary to relinquish potentially
valuable rights to our product candidates, or grant licenses on
terms that are not favorable to us.
Risks Associated with our Capital Stock
The limited public market for our securities may adversely affect
an investor’s ability to liquidate an investment in
us.
Although
our common stock is currently listed on the NASDAQ Capital Market,
there is limited trading activity. We can give no
assurance that an active market will develop, or if developed, that
it will be sustained. If an investor acquires shares of
our common stock, the investor may not be able to liquidate our
shares should there be a need or desire to do so.
The market price of our common stock may be volatile and may
fluctuate in a way that is disproportionate to our operating
performance.
Our stock price may experience substantial
volatility as a result of a number of factors,
including
●
sales
or potential sales of substantial amounts of our common
stock;
●
delay
or failure in initiating or completing pre-clinical or clinical
trials or unsatisfactory results of these
trials;
●
announcements
about us or about our competitors, including clinical trial
results, regulatory approvals or new product
introductions;
●
developments
concerning our licensors or product manufacturers;
●
litigation
and other developments relating to our patents or other proprietary
rights or those of our competitors;
●
conditions
in the pharmaceutical or biotechnology
industries;
●
governmental
regulation and legislation;
●
variations
in our anticipated or actual operating results;
●
change
in securities analysts’ estimates of our performance, or our
failure to meet analysts’ expectations; foreign currency
values and fluctuations; and
●
overall
economic conditions.
Many
of these factors are beyond our control. The stock markets in
general, and the market for pharmaceutical and biotechnological
companies in particular, have historically experienced extreme
price and volume fluctuations. These fluctuations often have been
unrelated or disproportionate to the operating performance of these
companies. These broad market and industry factors could reduce the
market price of our common stock, regardless of our actual
operating performance.
Future sales of shares of our common stock by existing stockholders
could depress the market price of our common stock.
We
have an aggregate of 9,631,088 issued and outstanding shares of
common stock. 8,529,841 shares, or approximately
89% of our outstanding shares of common stock, are currently
restricted as a result of lock-up agreements. These shares will be
available for sale into the public market beginning in April 2017,
subject to certain exceptions and also to potential extensions
under certain circumstances, and may be subject to volume and other
sale restrictions. The representative of the underwriters of our
IPO may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to lock-up
agreements.
In
the future, we may issue additional securities in connection with
investments and acquisitions. The amount of our common stock issued
in connection with an investment or acquisition could constitute a
material portion of our then outstanding stock. Due to these
factors, sales of a substantial number of shares of our common
stock in the public market could occur at any time. These sales, or
the perception in the market that the holders of a large number of
shares intend to sell shares, could reduce the market price of our
common stock.
Holders
of approximately 5,331,108 shares, or 55%, of our common stock have
registration rights, subject to some conditions, to require us to
file registration statements covering the sale of their shares or
to include their shares in registration statements that we may file
for ourselves or other stockholders in the future. Once we register
the shares for the holders of registration rights, they can be
freely sold in the public market upon issuance, subject to the
restrictions contained in the lock-up agreements. If a large number
of these shares are sold in the public market, the sales could
reduce the trading price of our common stock.
We have never paid and do not intend to pay cash
dividends. As a result, capital appreciation, if any,
will be your sole source of gain.
We
have never paid cash dividends on any of our capital stock and we
currently intend to retain future earnings, if any, to fund the
development and growth of our business. In addition, the
terms of existing and future debt agreements may preclude us from
paying dividends. As a result, capital appreciation, if
any, of our common stock will be your sole source of gain for the
foreseeable future.
Provisions in our restated certificate of incorporation, our
restated by-laws and Delaware law might discourage, delay or
prevent a change in control of our company or changes in our
management and, therefore, depress the trading price of our common
stock.
Provisions
of our restated certificate of incorporation, our restated by-laws
and Delaware law may have the effect of deterring unsolicited
takeovers or delaying or preventing a change in control of our
company or changes in our management, including transactions in
which our stockholders might otherwise receive a premium for their
shares over then current market prices. In addition, these
provisions may limit the ability of stockholders to approve
transactions that they may deem to be in their best interests.
These provisions include:
●
the
inability of stockholders to call special meetings;
and
●
the
ability of our board of directors to designate the terms of and
issue new series of preferred stock without stockholder approval,
which could include the right to approve an acquisition or other
change in our control or could be used to institute a rights plan,
also known as a poison pill, that would work to dilute the stock
ownership of a potential hostile acquirer, likely preventing
acquisitions that have not been approved by our board of
directors.
In
addition, Section 203 of the Delaware General Corporation Law
prohibits a publicly-held Delaware corporation from engaging in a
business combination with an interested stockholder, generally a
person which together with its affiliates owns, or within the last
three years, has owned 15% of our voting stock, for a period of
three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination
is approved in a prescribed manner.
The
existence of the foregoing provisions and anti-takeover measures
could limit the price that investors might be willing to pay in the
future for shares of our common stock. They could also deter
potential acquirers of our company, thereby reducing the likelihood
that you could receive a premium for your common stock in an
acquisition.
We are eligible to be treated as an “emerging growth
company,” as defined in the JOBS Act, and we cannot be
certain if the reduced disclosure requirements applicable to
emerging growth companies will make our common stock less
attractive to investors.
We are an “emerging growth company,”
as defined in the Jumpstart Our Business Startups Act of 2012 (the
“JOBS
Act”). For as long as we
continue to be an emerging growth company, we may take advantage of
exemptions from various reporting requirements that are applicable
to other public companies that are not emerging growth companies,
including (i) not being required to comply with the auditor
attestation requirements of Section 404 of the Sarbanes-Oxley Act,
(ii) reduced disclosure obligations regarding executive
compensation in our periodic reports and proxy statements, and
(iii) exemptions from the requirements of holding a nonbinding
advisory vote on executive compensation and stockholder approval of
any golden parachute payments not previously approved. We could be
an emerging growth company for up to five years, although
circumstances could cause us to lose that status earlier, including
if the market value of our common stock held by non-affiliates
exceeds $700.0 million as of any June 30 before that time
or if we have total annual gross revenue of $1.0 billion or more
during any fiscal year before that time, after which, in each case,
we would no longer be an emerging growth company as of the
following December 31 or, if we issue more than $1.0 billion in
non-convertible debt during any three-year period before that time,
we would cease to be an emerging growth company
immediately.
Under
the JOBS Act, emerging growth companies can also delay adopting new
or revised accounting standards until such time as those standards
apply to private companies. We have irrevocably elected not to
avail ourselves of this exemption from new or revised accounting
standards and, therefore, will be subject to the same new or
revised accounting standards as other public companies that are not
emerging growth companies.
If securities or industry analysts do not publish research or
reports about our business, if they adversely change their
recommendations regarding our shares or if our results of
operations do not meet their expectations, our share price and
trading volume could decline.
The
trading market for our shares is influenced by the research and
reports that industry or securities analysts publish about us or
our business. We do not have any control over these analysts. If
one or more of these analysts cease coverage of our company or fail
to publish reports on us regularly, we could lose visibility in the
financial markets, which in turn could cause our share price or
trading volume to decline. Moreover, if one or more of the analysts
who cover us downgrade our stock, or if our results of operations
do not meet their expectations, our share price could
decline.
ITEM 1B. UNRESOLVED STAFF
COMMENTS
None.
ITEM 2. PROPERTIES
Facilities
Our
executive offices are located in approximately 687 square feet of
office space at 760 Parkside Avenue, Downstate Biotechnology
Incubator, Suite 304, Brooklyn, NY 11226 that we occupy under a
lease expiring on December 31, 2017 with the option for
multiple year renewals. The operations of AzurRx SAS are
conducted at approximately 4,520 square feet of office space
located at 290 chemin de Saint Dionisy, Jardin des Entreprises,
30980 Langlade, France, that we occupy under a nine-year lease
expiring in December 24, 2020.
ITEM 3. LEGAL
PROCEEDINGS
As
of the date hereof, we know of no material, existing or pending
legal proceedings against us, nor are we the plaintiff in any
material proceedings or pending litigation. There are no
proceedings in which any of our directors, executive officers or
affiliates, or any registered or beneficial shareholder, is an
adverse party or has a material interest adverse to our
interest. From time to time, we may be subject to
various claims, legal actions and regulatory proceedings arising in
the ordinary course of business.
ITEM 4. MINE SAFETY
DISCLOSURES
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Our
common stock is listed on the NASDAQ Capital Market, or NASDAQ,
under the symbol “AZRX.”
The
following table sets forth high and low sales prices for our common
stock for the calendar quarter indicated as reported by NASDAQ.
These prices represent quotations between dealers without
adjustment for retail markup, markdown, or commission and may not
represent actual transactions. Our common stock began trading on
NASDAQ on October 11, 2016, and the following table reflects the
high and low sales prices for our common stock subsequent to that
date:
|
|
High
|
Low
|
|
2016
|
|
|
|
Fourth
Quarter
|
$5.48
|
$3.96
|
Holders
At
March 31, 2017, there were 9,631,088 shares of our common
stock outstanding and approximately 148 shareholders of
record.
Dividends
We
did not declare any dividends on common stock for the years ended
December 31, 2016 and 2015. Our board of directors does not intend
to distribute dividends in the near future. Instead, we
plan to retain any earnings to finance the development and
expansion of our business. The declaration, payment and amount
of any future dividends will be made at the discretion of the board
of directors, and will depend upon, among other things, the results
of our operations, cash flows and financial condition, operating
and capital requirements, and other factors as the board of
directors considers relevant. There is no assurance that future
dividends will be paid, and if dividends are paid, there is no
assurance with respect to the amount of any such
dividend.
Our
board of directors is empowered, without stockholder approval, to
issue shares of preferred stock with dividend, liquidation,
redemption, voting or other rights which could adversely affect the
voting power or other rights of the holders of common stock. In
addition, the preferred stock could be utilized as a method of
discouraging, delaying or preventing a change in control of us.
Although we do not currently intend to issue any shares of
preferred stock, we cannot assure you that we will not do so in the
future.
Transfer Agent
The
transfer agent for our common stock is Transhare Corporation, 4626
South Broadway, Englewood, Colorado 80113, Tel: (303)
662-1112.
ITEM 6. SELECTED FINANCIAL
DATA
As
a “smaller reporting company” as defined by the rules
and regulations of the SEC, we are not required to provide this
information.
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion and analysis in
conjunction with our financial statements, including the notes
thereto contained in this Annual Report. This discussion contains
forward-looking statements that involve risks, uncertainties and
assumptions. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of a
variety of certain factors, including those set forth under
“Risk Factors Associated with Our Business” and
elsewhere in this Annual Report.
Critical Accounting Polices and Estimates
This Management's Discussion and Analysis of
Financial Condition and Results of Operations is based on our
financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America (“U.S. GAAP”). The preparation of financial
statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements
and the reported amount of revenues and expenses during the
reporting period. In our consolidated financial statements,
estimates are used for, but not limited to, valuation of financial
instruments and intangible assets, fair value of long-lived assets
and contingent consideration, deferred taxes and valuation
allowance, and the depreciable lives of long-lived
assets.
On
an ongoing basis, we evaluate these estimates and assumptions,
including those described below. We base our estimates on
historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. These estimates
and assumptions form the basis for making judgments about the
carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results could differ from
those estimates. Due to the estimation processes involved, the
following summarized accounting policies and their application are
considered to be critical to understanding our business operations,
financial condition and operating results.
Intangible Assets
Our
definite-lived intangible assets have a carrying value of
approximately $1,836,000 and $2,584,000, December 31, 2016 and
2015, respectively. These assets include in-process research and
development and license agreements. These intangible assets were
recorded at historical cost and are stated net of
accumulated amortization.
The
in-process research and development and licenses are amortized over
their remaining estimated useful lives, ranging from 5 to
12 years, based on the straight-line method. The estimated
useful lives directly impact the amount of amortization expense
recorded for these assets on a quarterly and annual
basis.
In
addition, we test for impairment of definite-lived intangible
assets when events or circumstances indicate that the carrying
value of the assets may not be recoverable. Judgment is used in
determining when these events and circumstances arise. If we
determine that the carrying value of the assets may not be
recoverable, judgment and estimates are used to assess the fair
value of the assets and to determine the amount of any impairment
loss. No events or circumstances arose in the years ended
December 31, 2016 and 2015 that would indicate that the carrying
value of any of our definite-lived intangible assets may not be
recoverable.
Goodwill
Goodwill
relates to the acquisition of ProteaBio Europe during 2014 and
represents the excess of the total purchase consideration over the
fair value of acquired assets and assumed liabilities, using the
purchase method of accounting. Goodwill is not amortized, but is
subject to periodic review for impairment. As a result, the amount
of goodwill is directly impacted by the estimates of the fair
values of the assets acquired and liabilities assumed.
In
addition, goodwill will be reviewed annually, and whenever events
or changes in circumstances indicate that the carrying amount of
the goodwill might not be recoverable. Judgment is used in
determining when these events and circumstances arise. We perform
our review of goodwill on our one reporting unit. If we determine
that the carrying value of the assets may not be recoverable,
judgment and estimates are used to assess the fair value of the
assets and to determine the amount of any impairment
loss.
The
carrying value of goodwill at December 31, 2016 and 2015 was
approximately $1,768,000 and $1,833,000, respectively. If
actual results are not consistent with our estimates or
assumptions, we may be exposed to an impairment charge that could
be material.
Income Taxes
We
use the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax
rates and laws that are expected to be in effect when the
differences are expected to reverse. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
the period that such tax rate changes are enacted. The measurement
of a deferred tax asset is reduced, if necessary, by a valuation
allowance if it is more likely than not that some portion or all of
the deferred tax asset will not be realized.
We
use a recognition threshold and a measurement attribute for
the financial statement recognition and measurement of tax
positions taken or expected to be taken in a tax return. For those
benefits to be recognized, a tax position must be
more-likely-than-not to be sustained upon examination by taxing
authorities. We have not identified any uncertain income tax
positions that could have a material impact to the consolidated
financial statements. We are subject to taxation in various U.S.
and foreign jurisdictions and remain subject to examination by
taxing jurisdictions for the calendar year 2013 and all subsequent
periods due to the availability of net operating loss
carryforwards. To the extent we prevail in matters for which a
liability has been established, or are required to pay amounts in
excess of our established liability, our effective income tax rate
in a given financial statement period could be materially affected.
An unfavorable tax settlement generally would require use of our
cash and may result in an increase in our effective income tax rate
in the period of resolution. A favorable tax settlement may reduce
our effective income tax rate and would be recognized in the period
of resolution.
Our
effective income tax rate may be affected by changes in tax
law, our level of earnings, and the results of tax
audits.
Although
we believe that the judgments and estimates discussed herein are
reasonable, actual results could differ, and we may be exposed to
losses or gains that could be material.
Jumpstart Our Business Startups Act of 2012
On
April 5, 2012, the JOBS Act was enacted. The JOBS Act provides
that an “emerging growth company” can take advantage of
the extended transition period provided in Section 7(a)(2)(B)
of the Securities Act for complying with new or revised accounting
standards.
General
To date, we have not generated any revenues from
operations and at December 31, 2016, we had an accumulated deficit
of approximately $22,887,000, primarily as a result of research and
development (“R&D”) expenses and general and administrative
(“G&A”) expenses. While we may in the future
generate revenue from a variety of sources, including license fees,
research and development payments in connection with strategic
partnerships and/or government grants, our product candidates are
at an early stage of development and may never be successfully
developed or commercialized. Accordingly, we expect to continue to
incur substantial losses from operations for the foreseeable future
and there can be no assurance that we will ever generate
significant revenues or net income.
R&D Expense
Conducting R&D
is central to our business. R&D expense consists primarily
of:
●
employee-related
expense, which include salaries and benefits, and rent
expense;
●
license fees and
annual payments related to in-licensed products and intellectual
property;
●
expenses incurred
under agreements with clinical research organizations,
investigative sites and consultants that conduct or provide other
services relating to our clinical trials and a substantial portion
of our preclinical activities;
●
the
cost of acquiring clinical trial materials from third party
manufacturers; and
●
costs
associated with non-clinical activities, patent filings and
regulatory filings.
We
expect to continue to incur substantial expense related to our
R&D activities for the foreseeable future as we continue
product development. Since product candidates in later stages of
clinical development generally have higher development costs than
those in earlier stages of clinical development, primarily due to
the increased size and duration of later stage clinical trials, we
expect that our R&D expense will increase in the future. In
addition, if our product development efforts are successful, we
expect to incur substantial costs to prepare for potential
commercialization of any late-stage product candidates and, in the
event one or more of these product candidates receive regulatory
approval, to fund the launch of the product.
G&A Expense
G&A
expense consists principally of personnel-related costs,
professional fees for legal, consulting and audit services, rent
and other general operating expenses not otherwise included in
R&D. We anticipate G&A expense will increase in future
periods, reflecting continued and increasing costs associated
with:
●
support of our
expanded R&D activities;
●
an
expanding infrastructure and increased professional fees and other
costs associated with the compliance with the Exchange Act, the
Sarbanes-Oxley Act and stock exchange regulatory requirements and
compliance; and
●
business
development and financing activities.
Liquidity and Capital Resources
We have experienced net losses and negative cash
flows from operations since our inception. As of December 31, 2016,
we had cash of approximately $1,774,000, working capital of
approximately $623,000, and had sustained cumulative losses attributable to common
stockholders of approximately $22,887,000. We believe that
our cash on hand will sustain operations until July 2017. 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 through
March 2018.
We have funded our operations to date primarily
through the completion of the IPO and the issuance of debt and
convertible debt securities. The debt was issued through short-term
8% convertible promissory notes and original issue discounted
convertible notes (the “OID Notes”).
Through
December 31, 2016, we had received aggregate gross proceeds of
$896,000 from the issuance of convertible promissory notes,
$761,000 of which had been repaid, and $135,000 that was converted
into OID Notes on July 22, 2016. Payment of $33,790 of accrued
interest on the $761,000 principal amount of convertible promissory
notes repaid was made through the issuance of an aggregate of 5,242
shares of common stock. In addition, through December 31, 2016, we
have received aggregate gross proceeds of $9,297,529 from the
issuance of $10,128,836 principal amount of OID Notes.
On
October 11, 2016, we completed the IPO, resulting in the issuance
of 960,000 shares of common stock at an initial public offering
price of $5.50 per share and received gross proceeds of $5,280,000.
We incurred total expenses of approximately $1,774,000 in
connection with the IPO, resulting in net offering proceeds of
$3,506,000.
We
expect to incur substantial expenditures in the foreseeable future
for the development of our product candidates. We will require
additional financing to develop, prepare regulatory filings and
obtain regulatory approvals, fund operating losses, and, if deemed
appropriate, establish manufacturing, sales and marketing
capabilities. 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 or debt financings,
collaborative or other arrangements with corporate sources, or
through other sources of financing. Adequate additional funding may
not be available to us on acceptable terms or at all. If adequate
funds are not available to us, we will be required to delay,
curtail or eliminate one or more of our research and development
programs.
We
are 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.
Cash Flows for the Years Ended December 31, 2016 and
2015
Net
cash used in operating activities for the year ended December 31,
2016 was $4,534,859, which primarily reflected our net loss of
$14,591,662 plus adjustments to reconcile net loss to net cash used
in operating activities of depreciation and amortization expense of
$734,500, fair value adjustment of the warrants liability of
$2,329,019, fair value adjustment of the contingent consideration
of ($300,000), restricted stock granted to employees and directors
of $603,750, warrant expense to placement agents of $55,097,
warrant expense for lockup provisions of $2,741,003, accreted
interest on OID convertible debt of $1,160,267, a beneficial
conversion feature of OID convertible debt of $1,108,194, and
accreted interest on debt discount - warrants of $883,429. Changes
in assets and liabilities are due to a decrease in other
receivables of $132,038 due primarily to the settling of amounts
owed from an investor in the OID Notes and an increase in accounts
payable and accrued expenses of $805,766 due to our cash position,
offset by an increase in prepaid expenses of $229,411 due to the
addition of prepaid Directors and Officers (“D&O”)
liability insurance. Net cash used in operating activities for the
year ended December 31, 2015 was $4,170,254, which primarily
reflected our net loss of $5,930,236 plus adjustments to reconcile
net loss to net cash used in operating activities of depreciation
and amortization expense of $733,599, fair value gain on warrant
liability of $386,103, accreted interest expense on OID convertible
debt of $749,262, accreted interest expense on debt discount -
warrants of $812,415, and warrant expense to placement agents of
$218,337. Changes in assets and liabilities are due to an increase
of accounts payable and accrued expenses of $251,608 due to our
limited cash position offset by an increase in other receivables of
$638,092 due to a higher French R&D tax credit in 2015 versus
2014.
Net
cash used in investing activities for the year ended December 31,
2016 was $12,355 which consisted of the purchase of property and
equipment. Net cash used in investing activities for the year ended
December 31, 2015 was $24,380 consisting of purchases of property
and equipment.
Net
cash provided by financing activities for the year ended December
31, 2016 was $5,746,294, which consisted of $5,280,000 in gross
proceeds from the sale of stock from our IPO, less $1,420,107 of
offering costs paid in association with our IPO, $232,000 in
proceeds from the issuance of notes payable from a financing
agreement for our D&O insurance premiums less $76,813 in
repayment of these notes, and $2,094,000 in gross proceeds from the
issuance of OID Notes offset by $362,786 in repayment of OID Notes.
Net cash provided by financing activities for the year ended
December 31, 2015 was $4,680,829 consisting of $340,524 of offering
costs paid in association with our IPO, gross proceeds of
$5,395,000 in connection with the issuance of OID convertible debt,
repayments of OID convertible debt of $117,947, gross proceeds from
the issuance of promissory notes of $445,000, and the repayments of
promissory notes of $701,000.
Consolidated Results of Operations for the Years Ended December 31,
2016 and 2015
We
have not yet achieved revenue-generating status from any of our
product candidates or technologies. Since inception, we have
devoted substantially all of our time and efforts to developing our
principal product candidates, consisting of AZX1101 and
MS1819. As a result, we did not have incur any revenue during
the years ended December 31, 2016 or 2015.
R&D
expense was $2,496,105 for the year ended December 31, 2016, as
compared to $1,398,056 for the year ended December 31, 2015, an
increase of $1,098,049. The increase in R&D is primarily due to
costs associated with manufacturing additional batches of MS1819.
We expect R&D expense to increase in future periods as our
product candidates continue through clinical trials and we seek
strategic collaborations.
G&A
expense was $4,129,053 for the year ended December 31, 2016, as
compared to $3,330,752 for the year ended December 31, 2015, an
increase of $798,301. The increase was due primarily to non-cash
restricted stock granted to employees and directors of $603,750 and
increased expenses such as auditing, D&O insurance, and
directors fees due to being a public company. We expect G&A
expense to increase going forward as we proceed to advance our
product candidates through the development and regulatory
process.
Fair
value adjustment of our contingent consideration decreased $300,000
for the year ended December 31, 2016 due primarily to revised net
sales projections, slight adjustments to the risk of realizing
those projections, and the time value of money. No such fair value
adjustment of our consideration was recorded in the year ended
December 31, 2015.
Interest
expense for the year ended December 31, 2016 was $5,937,486 as
compared to $1,587,533 for the year ended December 31, 2015. The
increase is due to the higher level of outstanding OID Notes as
well as a beneficial conversion feature of the OID Notes at the
date of the IPO recorded as an interest expense of the OID Notes
and the issuance of additional warrants issued for 6-month lockup
provisions on the common stock received from the conversion of OID
Debt at the date of the IPO recorded as interest expense. Fair
value adjustment of our warrants was $2,329,018 and ($386,103),
respectively, for the years ended December 31, 2016 and 2015, an
increase of $2,715,121. The increase was due to the warrants having
a greater value at the date of the IPO compared to December 31,
2015.
Net
loss was $14,591,662 and $5,930,236, respectively, for the years
ended December 31, 2016 and 2015, an increase of $8,661,426. The
higher net loss for the year ended December 31, 2016 compared to
the same period in 2015 is due to the higher expenses noted
above.
Off-Balance Sheet Items
The
following table summarizes our contractual obligations over the
periods indicated, as well as our total contractual
obligations:
|
Contractual
Obligation
|
Total
|
2017
|
2018
|
2019
|
2020
|
2021
|
|
Operating
Leases
|
$320,854
|
$106,450
|
$71,468
|
$71,468
|
$71,468
|
$-
|
ITEM 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A
smaller reporting company is not required to provide the
information required by this item.
ITEM 8. FINANCIAL
STATEMENTS
The
audited consolidated financial statements of AzurRx BioPharma,
Inc., including the notes thereto, together with the report thereon
of Mazars USA LLP (formerly “WeiserMazars”),
independent registered public accounting firm, are included in this
Annual Report as a separate section beginning on page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND
PROCEDURES
|
(a)
|
Evaluation of disclosure controls and procedures.
|
We
maintain disclosure controls and procedures (as defined in Rule
13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of
1934, as amended, which we refer to as the Exchange Act) that are
designed to ensure that information required to be disclosed in our
periodic reports filed under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in the rules and forms of the SEC, and that this
information is accumulated and communicated to our management,
including our principal executive and financial officers, to allow
timely decisions regarding required disclosure.
Management has identified
deficiencies in our internal control over financial reporting which
we concluded are, in the aggregate, a material weakness in our
ability to report certain types of transactions in accordance with
U.S. GAAP.
Our management intends to
design and implement processes and procedures that will provide
reasonable assurance regarding the reliability of our financial
reporting and preparation of financial statements for external
purposes, including, but not limited to, an assessment of our
current resources ability to identify, evaluate and appropriately
conclude on the accounting and reporting treatment.
|
(b)
|
Management's Annual Report on Internal Control over Financial
Reporting.
|
This
Annual Report does not include a report of management's assessment
regarding internal control over financial reporting or an
attestation report of our independent registered public accounting
firm due to a transition period established by the rules of the SEC
for newly public companies.
|
(c)
|
Changes in internal controls 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 Annual Report on Form 10-K that materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
ITEM 9B. OTHER
INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE
OFFICERS
Directors and Executive Officers
The
following sets forth certain information regarding each of our
directors and executive officers:
|
Name
|
Age
|
Position
|
|
Johan
M. (Thijs) Spoor
|
45
|
President,
Chief Executive Officer and Director
|
|
Daniel
Dupret
|
60
|
Chief
Scientific Officer
|
|
Edward
J. Borkowski (1)
|
58
|
Chairman
of the Board of Directors
|
|
Alastair
Riddell (1)
|
67
|
Director
|
|
Maged
Shenouda (1)
|
52
|
Director
|
|
Charles
Casamento
|
71
|
Director
|
_____________
(1)
Member
of the Audit Committee, Compensation Committee and Nominating and
Corporate Governance Committee.
The
following is a summary of our executive officers’ and
directors’ business experience.
Johan M.
(Thijs) Spoor has been our
Chief Executive Officer since January 2016, President since April
2015, and Chairman from June 2014 to September 2015. From September
2010 until December 2015, he was the chief executive officer of
FluoroPharma Medical, Inc. (OTCQB: FPMI). He has served as chairman
of the board of such company from June 2012 until December 2015.
From December 2008 until February 2010, he worked at Oliver Wyman
as a consultant to pharmaceutical and medical device companies. Mr.
Spoor was an equity research analyst at J.P. Morgan from July 2007
through October 2008 and at Credit Suisse from November 2005
through July 2007, covering the biotechnology and medical device
industries. He holds a Pharmacy degree from the University of
Toronto as well as an M.B.A. from Columbia University. We believe
that Mr. Spoor’s background in pharmacy, finance and
accounting and as a healthcare research analyst, as well as his
experience at both large and small healthcare companies, provides
him with a broad familiarity of the range of issues confronting our
company, which makes him a qualified member of our
board.
Daniel
Dupret has served as
President of AzurRx SAS since its formation in 2007 and as our
Chief Scientific Officer since the Acquisition. Previously, Dr.
Dupret founded Proteus SA in 1998 and served as its President and
CEO from 1998 to 2007. He founded Appligene SA in 1985 and served
as its CSO, then President and CEO until 1998. From 1982 to 1985,
he served as Project leader at Transgene SA. In parallel to his
biotechnology career, Daniel Dupret served as an advisor for the
French government and the European commission in connection with
grant commission and funding of early-stage biotechnology
companies. From 2003 to 2007, he served as President of the Board
of the University of Nîmes.
Edward
Borkowski joined our board
of directors in May 2015 and was appointed Chairman of the Board in
September 2015. Since August 2016, Mr. Borkowski has served as the
Executive Vice President and CFO of Concordia International. Mr.
Borkowski is a healthcare executive who previously was the acting
CFO of Amerigen Pharmaceuticals, a generic pharmaceutical company
with a focus on oral controlled release products, from 2013 to
2016. In addition, Mr. Borkowski previously held the position of
CFO with Convatec, a global medical device company focused on wound
care and ostomy, from 2012 to 2013, and Carefusion, a global
medical device company for which he helped lead its spin-out from
Cardinal Health into an independent public company. Mr. Borkowski
was also previously CFO and Executive Vice President of Mylan N.V.
Mr. Borkowski also held senior financial positions at Pharmacia and
American Home Products (Wyeth). He started his career with Arthur
Andersen & Co. after graduating from Rutgers University with an
MBA in accounting. Mr. Borkowski also graduated from Allegheny
College with a degree in Economics and Political Science. He is a
Trustee and an Executive Committee member of Allegheny
College. We believe that Mr. Borkowski’s industry
specific extensive management experience provides him with a broad
and deep understanding of our business and our competitors’
efforts, which makes him a qualified member of our
board.
Dr.
Alastair Riddell joined
our board of directors in September 2015. He is also currently
Chairman of a private UK biotech, Nemesis Biosciences Ltd, Chairman
of a UK AIM listed medical imaging company Feedback plc and
Chairman of the South West Academic Health Science Network, which
fosters links between the NHS, industry and universities. He is
also on the board of directors of another US private company,
Skyline Vet Pharma. Dr. Riddell has over 30 years of
experience in the pharmaceutical, life science and biotech
industries, 18 years as main board director. After 10 years
directing phases 1-4 clinical trials of antibiotics, oncology and
intensive care products for companies including Lederle (now
Pfizer) and Centocor (now J&J), he spent 5 years managing sales
and marketing for oncology and imaging products for Amersham
International (now GE Healthcare). This led to 12 years as CEO for
3 UK biotech companies, Pharmagene, Paradigm Therapeutics and Stem
Cell Sciences; in these roles he was the principal involved in
significant fund raising including an IPO on UK’s main list
and trade sales to Takeda in Japan and Stem Cells Inc. in the USA.
He has since had several roles in UK government initiatives related
to promoting cooperation between pharmaceutical companies and the
NHS and assessing projects for funding with Innovate UK. He began
his career as a medical doctor in a variety of hospital specialties
and in general practice. He was recently awarded a Doctorate of
Science, Honoris Causa by Aston University. We believe
that Dr. Riddell’s background as a medical doctor with
experience in a variety of hospital specialties coupled with
his experience in the life sciences industry, directing all phases
of clinical trials, before moving to sales, marketing
and general management, makes him a qualified member of our
board.
Maged
Shenouda joined our board
of directors in October 2015. Mr. Shenouda, a financial
professional in the biotechnology industry, was the Head of
Business Development at Retrophin, Inc. from January 2014
until November 2014. From January 2012 until September 2013, he
served as Head of East Coast Operations for the Blueprint Life
Science Group. Prior thereto, Mr. Shenouda was a financial analyst,
first at UBS from January 2004 until March 2010 and Stifel Nicolaus
from June 2010 until November 2011. He currently serves on the
boards of directors of Relmada Therapeutics, Inc. (OTCQB: RLMD) and
Protea Biosciences Group, Inc. (OTCQB: PRGB). Mr. Shenouda received
an MBA from Rutgers Graduate School of Management and BS
in Pharmacy from St. John's College of Pharmacy. He is a
Registered Pharmacist in New Jersey and California. We
believe that Mr. Shenouda’s extensive knowledge of our
industry, his role in the governance of publicly held companies and
his directorships in other life science companies qualify him to
serve as our director.
Charles
Casamento joined our board of
directors in March 2017. Since 2007, he has been executive director
and principal of The Sage Group, a health care advisory group. He
was president and CEO of Osteologix from October 2004 until April
2007. He was the founder of Questcor Pharmaceuticals where he was
president, CEO and chairman. At Questcor he acquired Acthar, a
product whose sales eventually exceeded $1.0 billion. At RiboGene
Inc. he was president, CEO and chairman and he was also co-founder,
president and CEO of Indevus (formerly Interneuron
Pharmaceuticals). He has held senior management positions at
Genzyme Corporation, where he was Senior Vice President, American
Hospital Supply, where he was Vice President of Business
Development for the Critical Care division, Johnson & Johnson,
Hoffmann-LaRoche and Sandoz. He holds a bachelor's degree in
Pharmacy from Fordham University and an M.B.A. from Iona College.
He currently sits on the boards of directors of International Stem
Cell Corporation and Relmada Therapeutics.We believe that Mr.
Casemento’s expertise and knowledge of the financial
community combined with his experience in the healthcare sector
qualify him to serve as our director.
Board of Directors
Director Independence
The
board of directors has reviewed the independence of our directors
based on the listing standards of the NASDAQ. Based on this review,
the board of directors determined that each of Messrs. Borkowski,
Shenouda, Riddell, and Casamento are independent within the meaning
of the NASDAQ rules. In making this determination, our board of
directors considered the relationships that each of these
non-employee directors has with us and all other facts and
circumstances our board of directors deemed relevant in determining
their independence. As required under applicable NASDAQ rules, we
anticipate that our independent directors will meet in regularly
scheduled executive sessions at which only independent directors
are present.
Board Committees
Our
board of directors has established the following three standing
committees: audit committee; compensation committee; and nominating
and corporate governance committee. Our board of directors has
adopted written charters for each of these committees. Copies of
the charters are available on our website. Our board of directors
may establish other committees as it deems necessary or appropriate
from time to time.
Audit Committee
The
audit committee is responsible for, among other
matters:
●
appointing,
compensating, retaining, evaluating, terminating, and overseeing
our independent registered public accounting
firm;
●
discussing
with our independent registered public accounting firm the
independence of its members from its management;
●
reviewing
with our independent registered public accounting firm the scope
and results of their audit;
●
approving
all audit and permissible non-audit services to be performed by our
independent registered public accounting firm;
●
overseeing
the financial reporting process and discussing with management and
our independent registered public accounting firm the interim and
annual financial statements that we file with the
SEC;
●
reviewing
and monitoring our accounting principles, accounting policies,
financial and accounting controls, and compliance with legal and
regulatory requirements;
●
coordinating
the oversight by our board of directors of our code of business
conduct and our disclosure controls and procedures;
●
establishing
procedures for the confidential and/or anonymous submission of
concerns regarding accounting, internal controls or auditing
matters; and
●
reviewing
and approving related-person transactions.
Our
audit committee consists of Messrs. Borkowski, Shenouda and
Riddell, with Mr. Borkowski serving as the chairman. The NASDAQ
rules require us to have a majority of independent directors. Our
board of directors has affirmatively determined that Messrs.
Borkowski, Shenouda, and Riddell meet the definition of
“independent director” for purposes of serving on an
audit committee under Rule 10A-3 and NASDAQ rules. Our board
of directors has determined that Mr. Borkowski qualifies as an
“audit committee financial expert,” as such term is
defined in Item 407(d)(5) of Regulation S-K.
Compensation Committee
The
compensation committee is responsible for, among other
matters:
●
reviewing
key employee compensation goals, policies, plans and
programs;
●
reviewing
and approving the compensation of our directors and executive
officers;
●
reviewing
and approving employment agreements and other similar arrangements
between us and our executive officers; and
●
appointing
and overseeing any compensation consultants or
advisors.
Our
compensation committee consists of Messrs. Borkowski,
Shenouda and Riddell, with Dr. Riddell serving as the
chairman.
Nominating and Corporate Governance Committee
The
purpose of the nominating and corporate governance committee is to
assist the board in identifying qualified individuals to become
board members, in determining the composition of the board and in
monitoring the process to assess board effectiveness. In
addition, the nominating and corporate governance committee will be
responsible for developing and recommending to our board corporate
governance guidelines applicable to our company and advising our
board on corporate governance matters. Our nominating and corporate
governance committee consists of Messrs. Borkowski,
Shenouda and Riddell, with Mr. Borkowski serving as the
chairman.
Board Leadership Structure
Currently,
our principal executive officer is Johan M. (Thijs) Spoor and our
chairman of the board is Edward J. Borkowski.
Risk Oversight
Our
board of directors will oversee a company-wide approach to risk
management. Our board of directors will determine the appropriate
risk level for us generally, assess the specific risks faced by us
and review the steps taken by management to manage those risks.
While our board of directors will have ultimate oversight
responsibility for the risk management process, its committees will
oversee risk in certain specified areas.
Specifically,
our compensation committee will be responsible for overseeing the
management of risks relating to our executive compensation plans
and arrangements, and the incentives created by the compensation
awards it administers. Our audit committee will oversee management
of enterprise risks and financial risks, as well as potential
conflicts of interests. Our board of directors will be responsible
for overseeing the management of risks associated with the
independence of our board of directors.
Code of Business Conduct and Ethics
Our
board of directors adopted a code of business conduct and ethics
that applies to our directors, officers and employees. A copy of
this code is available on our website. We intend to disclose on our
website any amendments to the Code of Business Conduct and Ethics
and any waivers of the Code of Business Conduct and Ethics that
apply to our principal executive officer, principal financial
officer, principal accounting officer, controller, or persons
performing similar functions.
Section 16(a) Beneficial Ownership Reporting
Compliances
Section 16(a) of the Securities Exchange Act of
1934, as amended (the “Exchange
Act”) requires our
officers, directors, and persons who beneficially own more than 10%
of our common stock to file reports of ownership and changes in
ownership with the SEC. Officers, directors, and
greater-than-ten-percent shareholders are also required by the SEC
to furnish us with copies of all Section 16(a) forms that they
file.
Based
solely upon a review of these forms that were furnished to us, we
believe that all reports required to be filed by these individuals
and persons under Section 16(a) were filed during the year ended
December 31, 2016 and that such filings were timely.
ITEM 11. EXECUTIVE
COMPENSATION
Summary Compensation Table
The
following table provides information regarding the compensation
paid during the years ended December 31, 2016 and 2015 to our
principal executive officer, principal financial officer and
certain of our other executive officers, who are collectively
referred to as “named executive officers” elsewhere in
this Annual Report.
|
Name
and Principal Position
|
Year
|
Salary
|
Bonus
|
Equity
Awards
|
All
Other
Compensation
|
Total
|
|
Johan M. (Thijs)
Spoor, President and Chief Executive Officer
|
2016
|
$336,458
|
-0-
|
$210,000
|
-0-
|
$546,458
|
|
|
2015
|
$478,400
|
-0-
|
-0-
|
-0-
|
$478,400
|
|
|
|
|
|
|
|
|
|
Daniel Dupret,
Chief Scientific Officer
|
2016
|
$204,215
|
-0-
|
-0-
|
-0-
|
$204,215
|
|
|
2015
|
$204,675
|
-0-
|
-0-
|
-0-
|
$204,675
|
Potential Payments Upon Termination or Change in
Control
If
we terminate Mr. Spoor’s employment other than for cause, we
will pay him twelve months of his base salary as severance. In
the event of termination by us without cause or by Mr. Spoor for
good reason in connection with a change of control, we will pay him
eighteen months of his base salary as severance.
If
we terminate Dr. Dupret’s employment other than for cause, we
will pay him twelve months of his base salary as
severance.
Overview of Our Fiscal 2016 and 2015 Executive
Compensation
Elements of Compensation
Our
executive compensation program consisted of the following
components of compensation in 2016 and 2015:
Base Salary. Each named executive officer receives a base
salary for the expertise, skills, knowledge and experience he
offers to our management team. Base salaries are periodically
adjusted to reflect:
●
The
nature, responsibilities, and duties of the officer’s
position;
●
The
officer’s expertise, demonstrated leadership ability, and
prior performance;
●
The
officer’s salary history and total compensation, including
annual cash incentive awards and annual equity incentive awards;
and
●
The
competitiveness of the officer’s base salary.
Each
named executive officer’s base salary for fiscal 2016 and
2015 is listed in the Summary Compensation Table.
Employment Agreement
Effective
as of January 1, 2016, we entered into an employment agreement with
Mr. Spoor to serve as our president and chief executive officer for
a term of three years. The employment agreement with Mr. Spoor
provides for a base annual salary of $350,000, which annual salary
was increased to $425,000 upon completion of our IPO and listing of
our common stock on The NASDAQ Stock Market. Mr. Spoor’s
annual salary is subject an annual milestone bonus, at the sole
discretion of the board of directors based on his attainment of
certain financial, clinical development, and/or business milestones
to be established annually by our board of directors or
compensation committee. The employment agreement is
terminable by either party at any time. In the event of termination
by us without cause or by Mr. Spoor for good reason not in
connection with a change of control, as those terms are defined in
the agreement, he is entitled to twelve months’ severance
payable over such period. In the event of termination by us without
cause or by Mr. Spoor for good reason in connection with a change
of control, as those terms are defined in the agreement, he will
receive his eighteen months’ severance.
Subject
to any required consents from third parties, on or as promptly as
practicable following the effective date, Mr. Spoor shall be
granted 100,000 shares of restricted stock that are to be issued as
follows: (i) 50,000 upon the first commercial sale in the United
States of MS1819, and (ii) 50,000 upon our total market
capitalization exceeding $1.0 billion dollars for 20 consecutive
trading days, in each case subject to the earlier determination of
a majority of the board.
In
addition, subject to any required consents from third parties, Mr.
Spoor is entitled to ten-year options to be governed by the terms
of the 2014 Incentive Plan to purchase 380,000 shares of common
stock, which options vested or will vest as follows: (i) 100,000
upon consummation of the IPO, (ii) 50,000 upon initiation of a
Phase II clinical trial in the United States for MS1819, (iii)
50,000 completion of a Phase II clinical trial in the United States
for MS1819, (iv) 100,000 upon initiation of a Phase III clinical
trial in the United States for MS1819, (v) 50,000 upon initiation
of a Phase I clinical trial in the United States for any product
other than MS1819, and (vi) 30,000 upon the determination of a
majority of our board. The employment agreement contains standard
confidential and proprietary information, and one-year
non-competition and non-solicitation provisions.
On
June 8, 2016, the board clarified Mr. Spoor’s agreement as
follows: the 380,000 options described have neither been granted
nor priced, the options will be granted at a future date to be
determined by the board, and the options will be priced at that
future date when they are granted.
In
February 2017, we issued 100,000 options with a ten-year term at an
exercise price of $4.48 to Mr. Spoor that vest immediately pursuant
to his employment agreement.
Outstanding Equity Incentive Awards At Fiscal Year-End
There
were no outstanding equity awards held by our named executive
officers as of December 31, 2016 and 2015.
Warrant Exercises and Stock Vested
No
officers or directors exercised warrants and no stock vested during
the years ended December 31, 2016 and 2015.
Non-Executive Director Compensation
All
directors were granted a one-time IPO-related compensation of
$30,000, which was accrued at December 31, 2016 and payable after
our next financing. As of October 11, 2016, all directors will be
compensated at a rate of $30,000 compensation per year to be
accrued quarterly and payable at some time following our next
financing.
The
following table sets forth certain information relating to the
compensation for each of our directors who is not an executive
officer of our company named in the Summary Compensation Table for
the past fiscal year:
|
Name
|
Fees Earned or Paid in Cash
|
Stock Awards
|
Option Awards
|
All Other Compensation
|
Total
|
|
Ed
Borkowski
|
$36,250
|
$168,750
|
$0
|
$0
|
$205,000
|
|
Maged Shenouda(1)
|
$106,250
|
$112,500
|
$0
|
$0
|
$218,750
|
|
Alastair
Riddell
|
$36,250
|
$112,500
|
$0
|
$0
|
$148,750
|
(1)
Maged Shenouda also earned $70,000 in
2016 as a financial consultant and this amount is included
in Accounts Payable at
December 31, 2016.
In
July 2016, we issued 45,000 shares of restricted stock to Mr.
Borkowski and 30,000 shares of restricted stock to each of Messrs.
Shenouda and Riddell. The shares of restricted stock vest as
follows: (i) 50% upon the first commercial sale in the United
States of MS1819, and (ii) 50% upon our total market capitalization
exceeding $1.0 billion for 20 consecutive trading days, in each
case subject to the earlier determination of a majority of the
board.
In
February 2017, we issued 30,000 options with a ten-year term at an
exercise price of $4.48 to each of directors Borkowski, Shenouda,
and Riddell that vest 10,000 immediately and the balance monthly
over 24 months.
Compensation Committee Interlocks and Insider
Participation
None
of our officers currently serves, or has served during the last
completed fiscal year, on the compensation committee or board of
directors of any other entity that has one or more officers serving
as a member of our board of directors.
Amended and Restated 2014 Omnibus Equity Incentive
Plan
Our board of directors and stockholders have
adopted and approved the Amended and Restated 2014 Omnibus Equity
Incentive Plan (the “2014 Plan”). The 2014 Plan is a comprehensive
incentive compensation plan under which we can grant equity-based
and other incentive awards to our officers, employees, directors,
consultants and advisers. The purpose of the 2014 Plan is to help
us attract, motivate and retain such persons with awards under the
2014 Plan and thereby enhance shareholder
value.
Administration.
The 2014 Plan is administered by the compensation committee of the
board, which consists of three members of the board, each of whom
is a “non-employee director” within the meaning of Rule
16b-3 promulgated under the Exchange Act and an “outside
director” within the meaning of Code Section 162(m). Among
other things, the compensation committee has complete discretion,
subject to the express limits of the 2014 Plan, to determine the
directors, employees and nonemployee consultants to be granted an
award, the type of award to be granted the terms and conditions of
the award, the form of payment to be made and/or the number of
shares of common stock subject to each award, the exercise price of
each option and base price of each stock appreciation right
(“SAR”), the term of each award, the vesting
schedule for an award, whether to accelerate vesting, the value of
the common stock underlying the award, and the required
withholding, if any. The compensation committee may amend, modify
or terminate any outstanding award, provided that the
participant’s consent to such action is required if the
action would impair the participant’s rights or entitlements
with respect to that award. The compensation committee is also
authorized to construe the award agreements, and may prescribe
rules relating to the 2014 Plan. Notwithstanding the foregoing, the
compensation committee does not have any authority to grant or
modify an award under the 2014 Plan with terms or conditions that
would cause the grant, vesting or exercise thereof to be considered
nonqualified “deferred compensation” subject to Code
Section 409A.
Grant of Awards; Shares
Available for Awards. The 2014
Plan provides for the grant of stock options, SARs, performance
share awards, performance unit awards, distribution equivalent
right awards, restricted stock awards, restricted stock unit awards
and unrestricted stock awards to non-employee directors, officers,
employees and nonemployee consultants of AzurRx or its affiliates.
The aggregate number of shares of common stock that may be issued
under the 2014 Plan shall not exceed 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, warrants and
other convertible securities issued pursuant to the 2014 Plan. The
number of authorized shares of common stock reserved for issuance
under the Plan shall automatically be increased concurrently with
our 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. If any award expires, is cancelled,
or terminates unexercised or is forfeited, the number of shares
subject thereto is again available for grant under the 2014
Plan.
The
number of shares of common stock for which awards may be granted
under the 2014 Plan to a participant who is an employee in any
calendar year is limited to 300,000 shares. Future new hires and
additional non-employee directors and/or consultants would be
eligible to participate in the 2014 Plan as well. The number of
stock options and/or shares of restricted stock to be granted to
executives and directors cannot be determined at this time as the
grant of stock options and/or shares of restricted stock is
dependent upon various factors such as hiring requirements and job
performance.
Stock
Options. The 2014 Plan provides
for either “incentive stock options”
(“ISOs”), which are intended to meet the
requirements for special federal income tax treatment under the
Code, or “nonqualified stock options”
(“NQSOs”). Stock options may be granted on such
terms and conditions as the compensation committee may determine;
provided, however, that the per share exercise price under a stock
option may not be less than the fair market value of a share of
common stock on the date of grant and the term of the stock option
may not exceed 10 years (110% of such value and five years in the
case of an ISO granted to an employee who owns (or is deemed to
own) more than 10% of the total combined voting power of all
classes of capital stock of our company or a parent or subsidiary
of our company). ISOs may only be granted to employees. In
addition, the aggregate fair market value of common stock covered
by one or more ISOs (determined at the time of grant), which are
exercisable for the first time by an employee during any calendar
year may not exceed $100,000. Any excess is treated as a
NQSO.
Stock Appreciation
Rights. A SAR entitles the
participant, upon exercise, to receive an amount, in cash or stock
or a combination thereof, equal to the increase in the fair market
value of the underlying common stock between the date of grant and
the date of exercise. SARs may be granted in tandem with, or
independently of, stock options granted under the 2014 Plan. A SAR
granted in tandem with a stock option (i) is exercisable only at
such times, and to the extent, that the related stock option is
exercisable in accordance with the procedure for exercise of the
related stock option; (ii) terminates upon termination or exercise
of the related stock option (likewise, the common stock option
granted in tandem with a SAR terminates upon exercise of the SAR);
(iii) is transferable only with the related stock option; and (iv)
if the related stock option is an ISO, may be exercised only when
the value of the stock subject to the stock option exceeds the
exercise price of the stock option. A SAR that is not granted in
tandem with a stock option is exercisable at such times as the
compensation committee may specify.
Performance Shares and
Performance Unit Awards.
Performance share and performance unit awards entitle the
participant to receive cash or shares of common stock upon the
attainment of specified performance goals. In the case of
performance units, the right to acquire the units is denominated in
cash values.
Distribution Equivalent Right
Awards. A distribution
equivalent right award entitles the participant to receive
bookkeeping credits, cash payments and/or common stock
distributions equal in amount to the distributions that would have
been made to the participant had the participant held a specified
number of shares of common stock during the period the participant
held the distribution equivalent right. A distribution equivalent
right may be awarded as a component of another award under the 2014
Plan, where, if so awarded, such distribution equivalent right will
expire or be forfeited by the participant under the same conditions
as under such other award.
Restricted Stock Awards and
Restricted Stock Unit Awards. A
restricted stock award is a grant or sale of common stock to the
participant, subject to our right to repurchase all or part of the
shares at their purchase price (or to require forfeiture of such
shares if issued to the participant at no cost) in the event that
conditions specified by the compensation committee in the award are
not satisfied prior to the end of the time period during which the
shares subject to the award may be repurchased by or forfeited to
us. Our restricted stock unit entitles the participant to receive a
cash payment equal to the fair market value of a share of common
stock for each restricted stock unit subject to such restricted
stock unit award, if the participant satisfies the applicable
vesting requirement.
Unrestricted Stock
Awards. An unrestricted stock
award is a grant or sale of shares of our common stock to the
participant that is not subject to transfer, forfeiture or other
restrictions, in consideration for past services rendered to AzurRx
or an affiliate or for other valid
consideration.
Change-in-Control
Provisions. In connection with
the grant of an award, the compensation committee may provide that,
in the event of a change in control, such award will become fully
vested and immediately exercisable.
Amendment and
Termination. The compensation
committee may adopt, amend and rescind rules relating to the
administration of the 2014 Plan, and amend, suspend or terminate
the 2014 Plan, but no such amendment or termination will be made
that materially and adversely impairs the rights of any participant
with respect to any award received thereby under the 2014 Plan
without the participant’s consent, other than amendments that
are necessary to permit the granting of awards in compliance with
applicable laws. We have attempted to structure the 2014 Plan so
that remuneration attributable to stock options and other awards
will not be subject to the deduction limitation contained in Code
Section 162(m).
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS
MATTERS
As
of March 31, 2017, we had one class of voting stock outstanding:
common stock. The following tables set forth information regarding
shares of common stock beneficially owned as of March 31, 2017
by:
|
|
(i)
|
Each
of our officers and directors;
|
|
|
(ii)
|
All
officer and directors as a group; and
|
|
|
(iii)
|
Each person known by us to beneficially own five
percent or more of the outstanding shares of our common stock.
Percent ownership is calculated based on 9,631,088 shares of
common stock outstanding at March 31, 2017.
|
Beneficial Ownership of Common Stock
|
Name and Address of Beneficial
Owner (1)
|
|
Number
of Shares (2)
|
|
Percent Ownership of Class (3)
|
|
Daniel Dupret, Chief Scientific Officer
|
|
0
|
|
*
|
| Johan M. (Thijs) Spoor, President and Chief Executive Officer (4) |
|
539,885
|
|
6%
|
|
Alastair Riddell, Director (5)
|
|
50,000
|
|
*
|
|
Edward J. Borkowski, Director (6)
|
|
335,486
|
|
4%
|
|
Maged Shenouda, Director (7)
|
|
60,000
|
|
*
|
|
Charles Casamento, Director
|
|
0
|
|
*
|
|
Pelican Partners LLC (8)
|
|
1,787,796
|
|
19%
|
|
Richard Melnick (9)
|
|
871,962
|
|
9%
|
|
Jason Adelman (10)
|
|
545,243
|
|
6%
|
|
Burke Ross (11)
|
|
1,804,866
|
|
18%
|
|
ADEC Private Equity Investment, LLC (12)
|
|
1,304,866
|
|
13%
|
|
EBR Ventures, LLC (13)
|
|
500,000
|
|
5%
|
| All directors and executive officers as a group (6 persons) |
|
985,371
|
|
10%
|
* Less
than 1%.
(1)
Unless
otherwise indicated, the address of such individual is c/o AzurRx
BioPharma, Inc., 760 Parkside Avenue, Downstate Biotechnology
Incubator, Suite 217, Brooklyn, NY 11226.
(2)
Beneficial
ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to
securities. All entries exclude beneficial ownership of shares
issuable pursuant to warrants, options or other derivative
securities that have not vested or that are not otherwise
exercisable as of the date hereof or which will not become vested
or exercisable within 60 days of March 31, 2017.
(3)
Percentages are
rounded to nearest percent. Percentages are based on 9,631,088
shares of common stock outstanding. Warrants, options or other
derivative securities that are presently exercisable or exercisable
within 60 days are deemed to be beneficially owned by the person
holding the options for the purpose of computing the percentage
ownership of that person, but are not treated as outstanding for
the purpose of computing the percentage of any other
person.
(4)
Includes 100,000
non-issued restricted shares; 100,000 shares issuable pursuant to
options granted by the Company; 300,000 shares that may be
purchased pursuant to options granted by third parties at an
exercise price of $1.00 per share; and 39,851 shares held in a
trust for the benefit of Mr. Spoor’s spouse and minor
children. Mr. Spoor disclaims beneficial ownership with
respect to such shares held in trust.
(5)
Includes 30,000
non-issued restricted shares and 10,000 shares issuable upon the
exercise of stock options.
(6)
Includes 45,000
non-issued restricted shares; 10,000 shares issuable upon the
exercise of stock options; and 27,360 shares issuable upon the
exercise of warrants.
(7)
Includes 30,000
non-issued restricted shares and 10,000 shares issuable upon the
exercise of stock options.
(8)
The
address of such entity is P.O. Box 2422, Westport, CT
06880.
(9)
The
address of such individual is 28 Gothic Ave., Crested Butte, CO
81224.
(10)
The
address of such individual is 30 E. 72nd St., 5th Floor, New York,
NY 10021. Includes 13,680 shares issuable upon the exercise of
warrants.
(11)
Includes 273,598
shares issuable upon the exercise of warrants held by ADEC Private
Equity Investment, LLC and 500,000 shares of common stock held
by EBR Ventures, LLC.
(12)
Includes 273,598
shares issuable upon the exercise of warrants. Burke Ross has
voting and dispositive power over the shares held by such entity.
The address of such entity is c/o SCS Financial, 919 Third Ave.,
30th Floor, New York, NY 10022.
(13)
Burke
Ross has voting and dispositive power over the shares held by such
entity. The address of such entity is 172 South Ocean Blvd.,
Palm Beach, FL 33480.
ITEM 13. CERTAIN RELATIONSHIPS,
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
During
the year ended December 31, 2015, we employed the services of JIST
Consulting (“JIST”), a company
controlled by Johan M. Spoor, our current chief executive officer
and president, as a consultant for business strategy, financial
modeling, and fundraising. Expense recorded in general and
administrative expense in the accompanying statements of operations
related to JIST for the years ended December 31, 2016 and 2015 was
$0 and $478,400, respectively. Included in accounts payable at both
December 31, 2016 and 2015 is $508,300 for JIST relating to Mr.
Spoor’s services. Mr. Spoor received no other compensation
from us other than as specified in his employment
agreement.
During
the year ended December 31, 2015, our former president, Christine
Rigby-Hutton, was employed through Rigby-Hutton Management Services
(“RHMS”).
Expense recorded in general and administrative expense in the
accompanying statements of operations related to RHMS for the years
ended December 31, 2016 and 2015 was $0 and $27,750, respectively.
Included in accounts payable at both December 31, 2016 and 2015 is
$38,453 for RHMS for Ms. Rigby-Hutton’s services. Ms.
Rigby-Hutton resigned from the Company effective April 20,
2015.
On
August 31, 2014, January 31, 2015, February 28, 2015 and May 31,
2015, we issued promissory notes to Matthew Balk and his affiliates
in the aggregate principal amount of $236,000. These notes have
been repaid in full as to $50,000 on November 11, 2014, $111,000 on
April 3, 2015, and $75,000 on August 7, 2015. Mr. Balk holds voting
and dispositive power over the shares held by Pelican Partners LLC,
which owns approximately 9% and 47%, respectively, of the
outstanding common stock as of December 31, 2016 and
2015.
In
August 2015, we issued $3,000,000 of original issue discounted
convertible notes and warrants to purchase 273,598 shares of common
stock to ADEC Private Equity Investment, LLC, an entity controlled
by Burke Ross. The notes shall automatically convert into that
number of shares of common stock equal to the aggregate principal
amount of the notes plus any accrued but unpaid interest,
multiplied by 1.25, divided by the lesser of $4.65 or the price per
share of the IPO. In addition, in September 2016, we
agreed to issue warrants to purchase an aggregate of 371,142 shares
of common stock to ADEC Private Equity Investment, LLC in
connection with its execution of an amendment to the securities
purchase agreement that includes, among other things, a 180-day
lock-up agreement.
From
October 1, 2015 through December 31, 2015, we used the services of
Edward Borkowski, chairman of our board of directors, as a
financial consultant. Expense recorded in general and
administrative expense in the accompanying statements of operations
related to Mr. Borkowski for the year ended December 31, 2015 was
$90,000. As of June 30, 2016, we had $90,000 in accounts payable to
Mr. Borkowski. Mr. Borkowski received no other compensation from us
other than reimbursement of related travel expenses. On October 14,
2014 and March 12, 2015, we issued original issue discounted
convertible notes to Mr. Borkowski, in the aggregate principal
amount of $300,000, which notes automatically converted into
103,126 shares of our common stock upon the consummation of the
IPO. Mr. Borkowski had signed an exchange agreement related to
these notes as detailed in Note 10 to our financial
statements.
In July
2016, we issued 45,000 shares of restricted stock to Mr.
Borkowski and 30,000 shares of restricted stock to each of Messrs.
Shenouda and Riddell, each member of our board of directors. The
shares of restricted stock vest as follows: (i) 50% upon the first
commercial sale in the United States of MS1819, and (ii) 50% upon
our total market capitalization exceeding $1 billion dollars for 20
consecutive trading days, in each case subject to the earlier
determination of a majority of our board.
-46-
Table of Contents
|
DRAFT
|
ITEM 14. PRINCIPAL ACCOUNTANT FEES
AND SERVICES
Set
forth below are fees billed or expected to be billed to us by
our independent registered public accounting firm Mazars USA LLP
(formerly “WeiserMazars”) for the years ended December
31, 2016 and 2015 for the professional services performed for
us.
Audit Fees
The
following table presents fees for professional services billed by
Mazars USA LLP (formerly “WeiserMazars”) for the fiscal
years ended December 31, 2016 and 2015.
|
|
For the years ended
December 31,
|
|
|
|
2016
|
2015
|
|
Audit fees(1)
|
$284,779
|
$114,373
|
|
Audit-related fees(2)
|
181,437
|
33,000
|
|
Tax fees(3)
|
12,600
|
2,000
|
|
All other fees(4)
|
-
|
-
|
|
Total
|
$478,816
|
$149,373
|
(1)
Professional services rendered by the Mazars USA
LLP (formerly “WeiserMazars”) for the audit of our
annual financial statements and review of financial statements
included in our Form 10-Q’s.
(2)
The aggregate fees billed for assurance and
related services by Mazars USA LLP (formerly
“WeiserMazars”) that are reasonably related to the
performance of the audit or review of our financial statements and
are not reported under item 1 above.
(3)
The aggregate fees billed for professional
services rendered by Mazars USA LLP (formerly
“WeiserMazars”) for tax compliance, tax advice, and tax
planning.
(4)
The aggregate fees billed for products and
services provided by Mazars USA LLP (formerly
“WeiserMazars”) other than the services reported in
Items 1–3.
Audit Committee Pre-Approval Policies and Procedures
The Audit Committee has the sole authority for the appointment,
compensation and oversight of the work of our independent
accountants, who prepare or issue an audit report for
us.
PART IV
ITEM 15. EXHIBITS
|
Exhibit No.
|
|
Description
|
|
|
|
|
|
1.1
|
|
Form of
Underwriting Agreement (Incorporated
by reference from Exhibit 1.1 filed with Amendment No 1. to
Registration Statement on Form S-1, filed July 29,
2016).
|
|
3.1
|
|
Amended
and Restated Certificate of Incorporation of the Registrant
(Incorporated by reference from
Exhibit 3.1 filed with Registration Statement on Form S-1, filed
July 13, 2016).
|
|
3.2
|
|
Amended
and Restated Bylaws of the Registrant (Incorporated by reference from Exhibit 3.2 filed
with Registration Statement on Form S-1, filed July 13,
2016).
|
|
4.1
|
|
Form of
Common Stock Certificate (Incorporated
by reference from Exhibit 4.1 filed with Amendment No 1. to
Registration Statement on Form S-1, filed July 29,
2016).
|
|
4.2
|
|
Form of
Investor Warrant (Incorporated by
reference from Exhibit 4.2 filed with Registration Statement on
Form S-1, filed July 13, 2016).
|
|
4.3
|
|
Form of
Underwriter Warrant (Incorporated by
reference from Exhibit 4.3 filed with Amendment No 1. to
Registration Statement on Form S-1, filed July 29,
2016).
|
|
10.1
|
|
Stock
Purchase Agreement dated May 21, 2014 between the Registrant,
Protea Biosciences Group, Inc. and its wholly-owned subsidiary,
Protea Biosciences, Inc (Incorporated
by reference from Exhibit 10.1 filed with Registration Statement on
Form S-1, filed July 13, 2016).
|
|
10.2
|
|
Amended
and Restated Joint Research and Development Agreement dated January
1, 2014 between the Registrant and Mayoly (Incorporated by reference from Exhibit 10.2 filed
with Registration Statement on Form S-1, filed July 13, 2016).
+
|
|
10.3
|
|
Amended
and Restated AzurRx BioPharma, Inc. 2014 Omnibus Equity Incentive
Plan (Incorporated by reference from
Exhibit 10.3 filed with Registration Statement on Form S-1, filed
July 13, 2016).
|
|
10.4
|
|
Employment Agreement
between the Registrant and Mr. Spoor (Incorporated by reference from Exhibit 10.4 filed
with Registration Statement on Form S-1, filed July 13,
2016).
|
|
14.1
|
|
Code of
Ethics of AzurRx BioPharma, Inc. Applicable To Directors, Officers
And Employees (Incorporated by
reference from Exhibit 14.1 filed with Registration Statement on
Form S-1, filed July 13, 2016).
|
|
21.1
|
|
Subsidiaries
of the Registrant (Incorporated by
reference from Exhibit 21.1 filed with Registration Statement on
Form S-1, filed July 13, 2016).
|
|
31.1
|
|
Certification
of CEO as Required by Rule 13a-14(a)/15d-14, filed
herewith.
|
|
31.2
|
|
Certification
of CFO as Required by Rule 13a-14(a)/15d-14, filed
herewith.
|
|
32.1
|
|
Certification
of CEO as Required by Rule 13a-14(a) and Rule 15d-14(b) (17 CFR
240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the
United States Code, filed herewith.
|
|
32.2
|
|
Certification
of CFO as Required by Rule 13a-14(a) and Rule 15d-14(b) (17 CFR
240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the
United States Code, filed herewith.
|
|
|
|
|
|
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
|
+ Confidential treatment has been granted with respect to portions
of this exhibit.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, there unto duly
authorized.
|
|
AZURRX BIOPHARMA, INC.
|
|
March
31, 2017
|
By: /s/
Johan M. (Thijs) Spoor
Name: Johan M. (Thijs) Spoor
Title: President and Chief Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed by the following persons on
behalf of the registrant and in the capacities held on the dates
indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/ Johan M.
(Thijs) Spoor
|
|
President,
Chief Executive Officer and Director
|
|
March
31, 2017
|
|
Johan
M. (Thijs) Spoor
|
|
(principal
executive officer and principal financial and
accounting
officer)
|
|
|
|
|
|
|
|
|
|
/s/ Edward J.
Borkowski
|
|
Chairman
of the Board of Directors
|
|
March
31, 2017
|
|
Edward
J. Borkowski
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Alastair
Riddell
|
|
Director
|
|
March
31, 2017
|
|
Alastair
Riddell
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Maged
Shenouda
|
|
Director
|
|
March
31, 2017
|
|
Maged
Shenouda
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Charles
Casamento
|
|
Director
|
|
March
31, 2017
|
|
Charles
Casamento
|
|
|
|
|
AzurRx BioPharma, Inc.
Index to Consolidated Financial Statements
|
|
F-1
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
|
|
|
F-4
|
|
|
|
|
|
|
|
F-5
|
|
|
|
|
|
|
|
F-6
|
-50-
To the
Board of Directors and
Stockholders
of AzurRx BioPharma, Inc.
We have
audited the accompanying consolidated balance sheets of AzurRx
BioPharma, Inc. (the “Company”)
as of December 31, 2016 and 2015, and the related consolidated
statements of operations and comprehensive loss, changes in
stockholders’ equity (deficit), and cash flows for the years
then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements
based on our audits.
We
conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting.
Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express
no such opinion. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our
opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of the Company as of December 31, 2016 and 2015,
and the consolidated results of their operations and their
consolidated cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States
of America.
The
accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 1 to the consolidated financial statements, the
Company has incurred significant operating losses and negative cash
flows from operations since inception. The Company also had an
accumulated deficit of $22,887,046 at December 31, 2016. The
Company is dependent on obtaining necessary funding from outside
sources, including obtaining additional funding from the sale of
securities in order to continue their operations. These conditions
raise substantial doubt about its ability to continue as a going
concern. Management’s plans regarding those matters also are
described in Note 1. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
/s/
Mazars USA LLP
New
York, New York
March
31, 2017
|
AZURRX BIOPHARMA, INC.
|
|
|
|
Consolidated Balance
Sheets
|
|
|
|
|
|
|
|
|
12/31/16
|
12/31/15
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
Cash
|
$1,773,525
|
$581,668
|
|
Marketable
securities
|
-
|
56,850
|
|
Other
receivables
|
961,038
|
1,074,858
|
|
Prepaid
expenses
|
229,411
|
353,984
|
|
Total
Current Assets
|
2,963,974
|
2,067,360
|
|
|
|
|
|
Property,
equipment, and leasehold improvements, net
|
151,622
|
176,319
|
|
|
|
|
|
Other
Assets:
|
|
|
|
In
process research & development, net
|
301,531
|
345,678
|
|
License
agreements, net
|
1,534,487
|
2,238,105
|
|
Goodwill
|
1,767,550
|
1,832,579
|
|
Deposits
|
34,678
|
25,641
|
|
Total
Other Assets
|
3,638,246
|
4,442,003
|
|
Total
Assets
|
$6,753,842
|
$6,685,682
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
Accounts
payable and accrued expenses
|
$1,471,280
|
$781,985
|
|
Accounts
payable and accrued expenses - related party
|
707,181
|
636,753
|
|
Notes
payable
|
155,187
|
-
|
|
Convertible
promissory notes
|
-
|
135,000
|
|
Convertible
debt
|
-
|
6,442,372
|
|
Warrant
liability
|
-
|
818,216
|
|
Interest
payable
|
7,192
|
1,186
|
|
Total
Current Liabilities
|
2,340,840
|
8,815,512
|
|
|
|
|
|
Contingent
consideration
|
1,200,000
|
1,500,000
|
|
Total
Liabilities
|
3,540,840
|
10,315,512
|
|
|
|
|
|
Stockholders'
Equity (Deficit):
|
|
|
|
Convertible
preferred stock - Par value $0.0001 per share; 10,000,000 shares
authorized and 0 shares outstanding as of December 31, 2016 and
1,000,000 shares authorized and 71 shares outstanding as of
December 31, 2015; liquidation preference approximates par value at
December 31, 2016 and 2015
|
-
|
3,479,000
|
|
Common
stock - Par value $0.0001 per share; 100,000,000 shares authorized
and 9,631,088 shares outstanding as of December 31, 2016 and
9,000,000 shares authorized and 4,296,979 shares outstanding as of
December 31, 2015
|
963
|
430
|
|
Additional
paid in capital
|
27,560,960
|
2,532,188
|
|
Accumulated
deficit
|
(22,887,046)
|
(8,295,384)
|
|
Accumulated
other comprehensive loss
|
(1,461,875)
|
(1,346,064)
|
|
Total
Stockholders' Equity (Deficit)
|
3,213,002
|
(3,629,830)
|
|
Total
Liabilities and Stockholders' Equity (Deficit)
|
$6,753,842
|
$6,685,682
|
See
accompanying notes to consolidated financial
statements
|
AZURRX BIOPHARMA,
INC.
|
|
|
|
Consolidated Statements of Operations and Comprehensive
Loss
|
|
|
|
|
|
|
|
|
Year Ended 12/31/16
|
Year Ended 12/31/15
|
|
|
|
|
|
Research
and development expenses
|
$2,496,105
|
$1,398,056
|
|
General
& administrative expenses
|
4,129,053
|
3,330,752
|
|
Fair
value adjustment, contingent consideration
|
(300,000)
|
-
|
|
|
|
|
|
Loss
from operations
|
(6,325,158)
|
(4,728,808)
|
|
|
|
|
|
Other:
|
|
|
|
Interest
expense
|
(5,937,486)
|
(1,587,533)
|
|
Fair
value adjustment, warrants
|
(2,329,018)
|
386,103
|
|
Other
income
|
-
|
2
|
|
Total
other
|
(8,266,504)
|
(1,201,428)
|
|
|
|
|
|
Loss
before income taxes
|
(14,591,662)
|
(5,930,236)
|
|
|
|
|
|
Income
taxes
|
-
|
-
|
|
|
|
|
|
Net
loss
|
$(14,591,662)
|
$(5,930,236)
|
|
|
|
|
|
Other
comprehensive loss:
|
|
|
|
Foreign
currency translation adjustment
|
$(115,811)
|
$(596,619)
|
|
Total
comprehensive loss
|
$(14,707,473)
|
$(6,526,855)
|
|
|
|
|
|
Basic
and diluted weighted average shares outstanding
|
6,504,789
|
3,627,133
|
|
|
|
|
|
Loss
per share - basic and diluted
|
$(2.24)
|
$(1.63)
|
See
accompanying notes to consolidated financial
statements
AZURRX BIOPHARMA, INC.
Consolidated Statements of Changes in Stockholders' (Deficit)
Equity
|
|
Convertible Preferred Stock
|
Common Stock
|
Additional Paid In
|
Accumulated
|
Accumulated Other Comprehensive
|
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Loss
|
Total
|
|
Balance, January 1, 2015
|
100
|
$4,900,000
|
3,584,321
|
$358
|
$859,133
|
$(2,365,148)
|
$(749,445)
|
$2,644,898
|
|
Common
stock issued
|
|
|
5,242
|
1
|
33,789
|
|
|
33,790
|
|
Preferred
stock converted into common stock
|
(29)
|
(1,421,000)
|
707,416
|
71
|
1,420,929
|
|
|
-
|
|
Warrants
issued to investment bankers
|
|
|
|
|
218,337
|
|
|
218,337
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
(596,619)
|
(596,619)
|
|
Net
loss
|
|
|
|
|
|
(5,930,236)
|
|
(5,930,236)
|
|
Balance, December 31, 2015
|
71
|
$3,479,000
|
4,296,979
|
$430
|
$2,532,188
|
$(8,295,384)
|
$(1,346,064)
|
$(3,629,830)
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued
|
|
|
960,000
|
96
|
3,505,978
|
|
|
3,506,074
|
|
Preferred
stock converted into common stock
|
(71)
|
(3,479,000)
|
1,731,949
|
173
|
3,478,827
|
|
|
-
|
|
Convertible
debt converted into common stock
|
|
|
2,642,160
|
264
|
9,828,572
|
|
|
9,828,836
|
|
Restricted
stock granted to employees/directors
|
|
|
|
|
603,750
|
|
|
603,750
|
|
Warrants
issued to investment bankers
|
|
|
|
|
55,097
|
|
|
55,097
|
|
Warrants
issued to convertible debt holders for lockup
provisions
|
|
|
|
|
2,741,003
|
|
|
2,741,003
|
|
Warrant
liability reclassified into additional paid in capital at
IPO
|
|
|
|
|
3,670,680
|
|
|
3,670,680
|
|
Beneficial
conversion feature on convertible debt issuances
|
|
|
|
|
1,144,865
|
|
|
1,144,865
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
(115,811)
|
(115,811)
|
|
Net
loss
|
|
|
|
|
|
(14,591,662)
|
|
(14,591,662)
|
|
Balance, December 31, 2016
|
-
|
$-
|
9,631,088
|
$963
|
$27,560,960
|
$(22,887,046)
|
$(1,461,875)
|
$3,213,002
|
See
accompanying notes to consolidated financial
statements
AZURRX BIOPHARMA, INC.
Consolidated Statements of Cash Flows
|
|
Year Ended 12/31/16
|
Year Ended 12/31/15
|
|
Cash
flows from operating activities:
|
|
|
|
Net
loss
|
$(14,591,662)
|
$(5,930,236)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
Depreciation
|
44,305
|
41,784
|
|
Amortization
|
690,195
|
691,815
|
|
Fair
value adjustment, warrants
|
2,329,018
|
(386,103)
|
|
Fair
value adjustment, contingent consideration
|
(300,000)
|
-
|
|
Restricted
stock granted to employees/directors
|
603,750
|
-
|
|
Warrants
issued to placement agents
|
55,097
|
218,337
|
|
Warrants
issued for lockup provisions
|
2,741,003
|
-
|
|
Interest
expense settled with issuances of common stock
|
-
|
33,790
|
|
Accreted
interest on convertible debt
|
1,160,267
|
749,262
|
|
Convertible
debt beneficial conversion feature
|
1,144,865
|
-
|
|
Accreted
interest on debt discount - warrants
|
883,429
|
812,415
|
|
Changes in assets and liabilities:
|
|
|
|
Other
receivables
|
132,038
|
(638,092)
|
|
Prepaid
expenses
|
(229,411)
|
-
|
|
Deposits
|
(9,524)
|
(6,900)
|
|
Accounts
payable and accrued expenses
|
805,765
|
251,608
|
|
Interest
payable
|
6,006
|
(7,934)
|
|
Net
cash used in operating activities
|
(4,534,859)
|
(4,170,254)
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
Purchase
of property and equipment
|
(12,355)
|
(24,380)
|
|
Net
cash used in investing activities
|
(12,355)
|
(24,380)
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
Proceeds
from sale of stock - IPO
|
5,280,000
|
-
|
|
Payments
of offering costs - IPO
|
(1,420,107)
|
(340,524)
|
|
Proceeds
of notes payable
|
232,000
|
-
|
|
Repayments
of notes payable
|
(76,813)
|
-
|
|
Issuances
of convertible promissory notes
|
-
|
445,000
|
|
Repayments
of convertible promissory notes
|
-
|
(701,000)
|
|
Issuances
of convertible debt
|
2,094,000
|
5,395,000
|
|
Repayments
of convertible debt
|
(362,786)
|
(117,647)
|
|
Net
cash provided by financing activities
|
5,746,294
|
4,680,829
|
|
|
|
|
|
Increase
in cash
|
1,199,080
|
486,195
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
(7,223)
|
637
|
|
|
|
|
|
Cash,
beginning balance
|
581,668
|
94,836
|
|
|
|
|
|
Cash,
ending balance
|
$1,773,525
|
$581,668
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
Cash
paid for interest
|
$1,393
|
$-
|
|
Cash
paid for income taxes
|
$-
|
$-
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
Issuance
of 5,242 shares of common stock as payment of interest on
convertible promissory notes
|
$-
|
$33,790
|
|
Conversion
of preferred shares into common shares by Protea
|
$3,479,000
|
$1,421,000
|
|
Conversion
of convertible promissory notes into convertible debt
|
$135,000
|
$-
|
|
Conversion
of convertible debt into common stock
|
$9,828,836
|
$-
|
|
Warrant
liability reclassified into additional paid in capital at
IPO
|
$3,670,680
|
$-
|
See
accompanying notes to consolidated financial
statements
Notes to Consolidated Financial
Statements, AzurRx BioPharma Inc., December 31, 2016 and
2015
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 BioPharma SAS, formerly ProteaBio Europe
SAS (“Predecessor”), a company incorporated in October
2008 under the laws of France that had been a wholly-owned
subsidiary of Protea Biosciences, Inc., or Protea Sub, in turn a
wholly-owned subsidiary of Protea Biosciences Group, Inc., a
publicly-traded company. AzurRx and its wholly-owned subsidiary,
AzurRx Europe SAS, are collectively referred to as the
“Company.”
AzurRx,
through its AzurRx Europe SAS subsidiary, is engaged in the
research and development of non-systemic biologics for the
treatment of patients with gastrointestinal disorders. Non-systemic
biologics are non-absorbable drugs that act locally without
reaching the systemic circulation, i.e. the intestinal lumen, skin
or mucosa. The Company’s current product pipeline consists of
two therapeutic proteins under development:
●
MS1819
- a recombinant (synthetic) lipase, an enzyme derived from a
specialized yeast, which breaks apart fats. Lipases are required to
treat patients whose pancreases don’t work anymore in a
condition known as exocrine pancreatic insufficiency (EPI) which
usually arises from chronic pancreatitis (CP) or cystic fibrosis
(CF).
●
AZ1101- a
recombinant (synthetic) enzyme which is being developed to prevent
hospital-acquired infections which come from resistant bacterial
strains caused by parenteral (intra-venous) administration of
b-lactam antibiotics, as well as prevention of
antibiotic-associated diarrhea (AAD).
Initial
Public Offering
On
October 11, 2016 (the “IPO Date”), the Company
completed an Initial Public Offering (“IPO”) of 960,000
shares of common stock at a price of $5.50 per share and received
gross proceeds of $5,280,000. The Company incurred total expenses
of approximately $1,774,000 in connection with the IPO, resulting
in net offering proceeds of approximately $3,506,000. Concurrent
with the IPO, (i) the Company issued 2,642,160 shares of common
stock upon the mandatory conversion of the convertible debt that
results in a beneficial conversion feature resulting in interest
expense of approximately $1,108,000 and the elimination of the
convertible debt and warrant liability, (ii) the Company issued
717,540 warrants with a five-year term to certain Original Issued
Discounted (“OID”) noteholders in exchange for their
agreement not to sell their shares for 6 months following the IPO
with a strike price at the IPO price with an estimated value of
approximately $2,741,000 which was charged to interest expense, and
(iii) the grant of 48,000 warrants with a five-year term to the
underwriters at 120% of the IPO price with an estimated value of
approximately $197,000 that had no effect on expenses or
stockholders’ equity. On November 18, 2016, the Company
retired $362,786 of OID convertible debt and accreted interest not
mandatorily converted at the time of the IPO that decreases cash
and current liabilities by $362,786.
Basis
of Presentation and Principles of Consolidation
The
accompanying consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”).
The
financial statements for the years ended December 31, 2016 and 2015
include the accounts of AzurRx and its wholly-owned subsidiary,
AzurRx Europe SAS. Intercompany transactions and balances have been
eliminated upon consolidation.
The accompanying consolidated financial statements
have been prepared as if the Company will continue as a going
concern. The Company has incurred significant operating losses and
negative cash flows from operations since inception, had working
capital at December 31, 2016 of approximately $623,000 and had an
accumulated deficit at December 31, 2016 of approximately
$22,887,000. The Company believes that its cash on hand will
sustain its operations until July 2017. The Company is dependent on
obtaining, and continues to pursue, the necessary funding from
outside sources, including obtaining additional funding from the
sale of securities in order to continue their operations. Without
adequate funding, the Company may not be able to meet its
obligations. Management believes these conditions raise substantial
doubt about its ability to continue as a going concern through
March 2018. The financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
Note 2 - Significant Accounting Policies
Use of Estimates
The
accompanying consolidated financial statements are prepared in
conformity with accounting principles generally accepted in the
United States of America, and include certain estimates and
assumptions which affect the reported amounts of assets and
liabilities at the date of the financial statements (including
goodwill, intangible assets and contingent consideration), and the
reported amounts of revenues and expenses during the reporting
period, including contingencies. Accordingly, actual results may
differ from those estimates.
Concentrations
Financial
instruments that potentially expose the Company to concentrations
of credit risk consist primarily of cash and, at December 31, 2015,
available for sale marketable securities. The Company primarily
maintains its cash balances with financial institutions in
federally-insured accounts in the U.S. The Company may from time to
time have cash in banks in excess of FDIC insurance limits. At
December 31, 2016 and 2015, the Company had approximately
$1,279,000 and $56,000, respectively, in one account in the U.S. in
excess of these limits. The Company has not experienced any losses
to date resulting from this practice.
The
Company also has exposure to currency risk as its subsidiary in
France has a functional currency in Euros.
At
December 31, 2015, the Company’s investments in Marketable
Securities were comprised of a single investment in a publicly
traded stock received as payment from an investor for his $150,000
investment in the Company's Original Issue Convertible Debt. The
investor agreed to make up any shortfall from sales of these
securities while any gain is for the account of the Company. As of
December 31, 2015, the market value of these Marketable Securities
was $56,850 and an associated Other Receivables of $93,150 was
recorded. On July 28, 2016, the investor paid $150,000 in cash and
the securities were returned to the investor.
Prepaid Expenses
At
December 31, 2015, Prepaid Expenses consisted of direct costs of
the IPO Offering which were then offset against the proceeds from
the IPO.
Property, Equipment, and Leasehold Improvements
Property,
equipment and leasehold improvements are carried on the cost basis
and depreciated over the estimated useful lives of the related
assets using the straight-line method. For financial statement
purposes, depreciation expense is provided using the straight-line
method over the estimated useful lives of the assets as
follows:
Laboratory
Equipment 5 years
Computer
Equipment 5 years
Office
Equipment 7-8
years
Leasehold
Improvements Term of lease or estimated useful life of the assets;
whichever is shorter
Expenditures for
maintenance and repairs are charged to operations as incurred while
renewals and betterments are capitalized. At December 31, 2016 and
2015, there are no restrictions on the Company’s title of
property, equipment, and leasehold improvements and no amounts have
been pledged as security for liabilities.
Goodwill and Intangible Assets
Goodwill represents
the excess of the purchase price of the acquired business over the
fair value of amounts assigned to assets acquired and liabilities
assumed. Goodwill and other intangible assets with indefinite
useful lives are reviewed for impairment annually or more
frequently if events or circumstances indicate impairment may be
present. Any excess in carrying value over the estimated fair value
is charged to results of operations. The Company has not recognized
any impairment charges through December 31, 2016.
Intangible
assets subject to amortization consist of in process research and
development and license agreements 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:
In Process Research
& Development 12 years
License
Agreements
5 years
Research and Development
Research and
development costs are charged to operations when incurred and are
included in operating expenses. Research and development costs
consist principally of compensation of employees and consultants
that perform the Company’s research activities, the fees paid
to maintain the Company’s licenses, and the payments to third
parties for clinical trial and additional product development and
testing.
Fair Value Measurements
The
Company follows Accounting Standards Codification
(“ASC”) Topic 820-10, Fair Value Measurements and
Disclosures (“ASC 820”), which among other things,
defines fair value, establishes a consistent framework for
measuring fair value and expands disclosure for each major asset
and liability category measured at fair value on either a recurring
or nonrecurring basis. Fair value is an exit price, representing
the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants. As such, fair value is a market-based measurement
that should be determined based on assumptions that market
participants would use in pricing an asset or
liability.
As a
basis for considering such assumptions, a three-tier fair value
hierarchy has been established, which prioritizes the inputs used
in measuring fair value as follows:
Level
1: Observable inputs such as quoted prices (unadjusted) in active
markets for identical assets or liabilities;
Level
2: Inputs, other than the quoted prices in active markets, that are
observable either directly or indirectly; and
Level
3: Unobservable inputs in which there is little or no market data,
which require the reporting entity to develop its own assumptions,
which reflect those that a market participant would
use.
At
December 31, 2015, the Company had Level 2 instruments consisting
of marketable securities of common stock in a thinly-traded public
company received as payment from an investor for $150,000 of the
Company’s original issue discounted convertible notes, see
Notes 3 and 11. At December 31, 2015, the Company had Level 3
instruments consisting of the Company’s common stock warrant
liability related to the Company’s convertible debt, see Note
11.
At
December 31, 2016 and 2015, the Company had Level 3 instruments
consisting of contingent consideration in connection with the
Protea Europe SAS acquisition, see Note 7.
The
carrying amounts of the Company’s financial instruments,
including accounts payable and accrued liabilities approximate fair
value due to their short maturities.
The
following tables summarize the Company’s financial
instruments measured at fair value on a recurring
basis:
|
|
Fair Value Measurements at Reporting Date Using
|
|||
|
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|
As
of December 31, 2016:
|
|
|
|
|
|
Marketable
Securities
|
$-
|
$-
|
$-
|
$-
|
|
Warrant
Liability
|
$-
|
$-
|
$-
|
$-
|
|
Contingent
Consideration
|
$1,200,000
|
$-
|
$-
|
$1,200,000
|
|
|
|
|
|
|
|
As
of December 31, 2015:
|
|
|
|
|
|
Marketable
Securities
|
$56,850
|
$-
|
$56,850
|
$-
|
|
Warrant
Liability
|
$818,216
|
$-
|
$-
|
$818,216
|
|
Contingent
Consideration
|
$1,500,000
|
$-
|
$-
|
$1,500,000
|
The
following table provides a reconciliation of the fair value of
liabilities using Level 3 significant unobservable
inputs:
|
|
Warrant
|
Contingent
|
|
|
Liability
|
Consideration
|
|
Balance
at January 1, 2015
|
$146,376
|
$1,500,000
|
|
Issuance
of warrants
|
1,057,943
|
-
|
|
Change
in fair value
|
(386,103)
|
-
|
|
Balance
at December 31, 2015
|
818,216
|
1,500,000
|
|
Issuance
of warrants
|
523,446
|
-
|
|
Change
in fair value
|
2,329,018
|
(300,000)
|
|
Reclassified
to equity at IPO Date
|
(3,670,680)
|
|
|
Balance
at December 31, 2016
|
$-
|
$1,200,000
|
The
warrant liability above relates to the Company’s original
issued discounted convertible notes, see Note 11
below.
The
fair values of the outstanding warrants were measured using a
Binomial Option Pricing model. Inputs used to determine estimated
fair value of the warrant liabilities reclassified to equity at the
IPO Date and warrant liabilities at December 31, 2015 include the
estimated fair value of the underlying stock at the valuation date
($5.50 and $2.16, respectively), the estimated term in years of the
warrants (ranging from 3.87 to 4.58 years and 4.90 years,
respectively), risk-free interest rate (1.24% and 1.72%,
respectively), expected dividends (zero and zero, respectively) and
the expected volatility (90% and 98%, respectively) of the
underlying stock. The significant unobservable inputs used in the
fair value measurement of the warrant liabilities are the fair
value of the underlying stock at the valuation date and the
estimated term of the warrants. Generally, increases (decreases) in
the fair value of the underlying stock and estimated term would
result in a directionally similar impact to the fair value
measurement.
The
contingent consideration was valued by incorporating a series of
Black-Scholes Option Pricing Models (“BSM”) into a
discounted cash flow framework. Significant unobservable inputs
used in this calculation at December 31, 2016 and 2015 included
projected net sales over a period of patent exclusivity (8 years
and 9 years, respectively), discounted by the Company’s
weighted average cost of capital (30.2% and 33.7%, respectively),
the contractual hurdle amount of $100 million that replaces the
strike price input in the traditional BSM, asset volatility (71%
and 90%, respectively), that replaces the equity volatility in the
traditional BSM, risk-free rates (ranging from 1.6% to 2.4% and
1.5% to 2.7%, respectively), and an option-adjusted spread (1.3%
and 0.5%, respectively) that is applied to these payments to
account for the payer’s risk and arrive at a fair value of
the expected payment.
The
fair value of the Company's other receivables, notes payable,
convertible debt, and convertible promissory notes are as
follows:
|
|
|
Fair Value Measured at Reporting Date Using
|
|
||
|
|
Carrying Amount
|
Level 1
|
Level 2
|
Level 3
|
Fair Value
|
|
As
of December 31, 2016:
|
|
|
|
|
|
|
Other
Receivables
|
$961,038
|
$-
|
$-
|
$961,038
|
$961,038
|
|
Notes
Payable
|
$155,187
|
$-
|
$-
|
$155,187
|
$155,187
|
|
Convertible
Debt
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
Convertible
Promissory Notes
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
|
|
As
of December 31, 2015:
|
|
|
|
|
|
|
Other
Receivables
|
$1,074,858
|
$-
|
$-
|
$1,074,858
|
$1,074,858
|
|
Convertible
Debt
|
$6,442,372
|
$-
|
$-
|
$6,442,372
|
$6,442,372
|
|
Convertible
Promissory Notes
|
$135,000
|
$-
|
$-
|
$135,000
|
$135,000
|
The
fair value of Other Receivables approximates carrying value as
these consist primarily of French R&D tax credits that are
normally received within 9 months of year end and amounts due from
collaboration partner Mayoly, see Note 15.
The
fair value of Notes Payable, Convertible Debt, and Convertible
Promissory Notes approximates carrying value due to the terms of
such instruments and applicable interest rates.
Stock-Based Compensation
The
Company’s board of directors and stockholders have adopted
and approved the Amended and Restated 2014 Omnibus Equity Incentive
Plan which took effect on May 12, 2014. Although the Company did
not grant any stock options under the Plan during the years ended
December 31, 2016 and 2015, the Company will account for its
stock-based compensation awards to employees and directors in
accordance with ASC Topic 718, Compensation—Stock
Compensation ("ASC 718"). ASC 718 requires all stock-based payments
to employees, including grants of employee stock options, to be
recognized in the statements of operations based on their grant
date fair values. For stock options granted to employees and to
members of the board of directors for their services on the board
of directors, the Company estimates the grant date fair value of
each option award 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. For awards subject to
service-based vesting conditions, the Company recognizes
stock-based compensation expense, net of estimated forfeitures,
equal to the grant date fair value of stock options on a
straight-line basis over the requisite service period. The Company
will account for any stock-based payments to non-employees in
accordance with ASC Topic 505-50, Equity-Based Payments to
Non-Employees ("ASC 505-50").
Income Taxes
Income
taxes are recorded in accordance with ASC 740, Accounting for
Income Taxes ("ASC 740"), which provides for deferred taxes using
an asset and liability approach. The Company recognizes deferred
tax assets and liabilities for the expected future tax consequences
of events that have been included in the financial statements or
tax returns. The Company determines its deferred tax assets and
liabilities based on differences between financial reporting and
tax bases of assets and liabilities, which are measured using the
enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Valuation allowances are
provided if, based upon the weight of available evidence, it is
more likely than not that some or all of the deferred tax assets
will not be realized.
The
Company accounts for uncertain tax positions in accordance with the
provisions of ASC 740. When uncertain tax positions exist, the
Company recognizes the tax benefit of tax positions to the extent
that the benefit will more likely than not be realized. The
determination as to whether the tax benefit will more likely than
not be realized is based upon the technical merits of the tax
position as well as consideration of the available facts and
circumstances. As of December 31, 2016 and 2015, the Company does
not have any significant uncertain tax positions. All tax years are
still open for audit.
Impairment of Long-Lived Assets
The
Company periodically evaluates its long-lived assets for potential
impairment in accordance with ASC Topic 360, Property, Plant and
Equipment (“ASC 360”). Potential impairment is assessed
when there is evidence that events or changes in circumstances
indicate that the carrying amount of an asset may not be recovered.
Recoverability of these assets is assessed based on undiscounted
expected future cash flows from the assets, considering a number of
factors, including past operating results, budgets and economic
projections, market trends and product development cycles. If
impairments are identified, assets are written down to their
estimated fair value. The Company has not recognized any impairment
charges through December 31, 2016.
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 year-end exchange rates.
Income and expense items are translated at average rates of
exchange prevailing during the year. Gains and losses from
translation adjustments are accumulated in a separate component of
shareholders’ equity (deficit).
Collaboration Agreements
As more
fully discussed in Note 15, the Company has joint research
collaboration agreements with Laboratoires Mayoly Spindler SAS and
INRA TRANSFERT. Any payments due from our collaboration partners is
recorded as a reduction in research and development
expenses.
Operating Leases
The
Company recognizes rent expense from operating leases with various
escalation clauses on a straight-line basis over the applicable
lease term. The Company considers lease renewals in the useful life
of its leasehold improvements when such renewals are reasonably
assured.
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
March 2016, the Financial Accounting Standards Board
(“FASB”) issued an Accounting Standards Update
(“ASU”) which simplifies several aspects of the
accounting for share based payments, including the income tax
consequences and classification on the statement of cash flows.
Under the new standard, all excess tax benefits and deficiencies
will be recognized as income tax expense or benefit in the income
statement. Additionally, excess tax benefits will be classified as
an operating activity on the statement of cash flows. This ASU is
effective for annual and interim periods beginning after December
15, 2016 and early adoption is permitted. The amendments requiring
recognition of excess tax benefits and tax deficiencies in the
income statement must be applied prospectively, and entities can
elect to apply the amendments related to the presentation of excess
tax benefits on the statement of cash flows using either a
prospective or retrospective transition method. The Company is
currently evaluating the standard to determine the impact of its
adoption on its consolidated financial statements.
In
February 2016, the FASB issued an ASU which requires lessees to
recognize lease assets and lease liabilities arising from operating
leases on the balance sheet. This ASU is effective for annual and
interim reporting periods beginning after December 15, 2018 using a
modified retrospective approach, with early adoption permitted. The
Company is currently evaluating the standard to determine the
impact of its adoption on its consolidated financial statements.
The Company would have to capitalize its operating leases on its
balance sheet.
In
November 2015, the FASB issued an ASU that requires all deferred
tax liabilities and assets to be classified as noncurrent on the
balance sheet. This ASU is effective for annual and interim
reporting periods beginning after December 15, 2016, with early
adoption permitted. In addition, this guidance can be applied
either prospectively or retrospectively to all periods presented.
The Company is currently evaluating the standard to determine the
impact of its adoption on our consolidated financial
statements.
In May
2014, the FASB issued an ASU which supersedes the most current
revenue recognition requirements. The new revenue recognition
standard requires entities to recognize revenue in a way that
depicts the transfer of goods or services to customers in an amount
that reflects the consideration which the entity expects to be
entitled to in exchange for those goods or services. This guidance
is effective for annual and interim reporting periods beginning
after December 15, 2017, with early adoption permitted for annual
periods after December 31, 2016. The Company is still in
its startup phase and is not generating revenues at this time;
therefore, this standard will have no impact on its consolidated
financial statements until such time as revenues are generated.
When revenues are generated, the Company will evaluate the standard
to determine the impact of its adoption on its consolidated
financial statements.
Note
3 - Marketable Securities
At
December 31, 2015, the Company had $56,850 of common stock in a
public company. These available for sale securities are recorded at
fair value and were received as payment from an investor for
$150,000 of the Company’s OID convertible notes. The investor
agreed to make up any shortfall between the value of the Marketable
Securities when converted to cash and the face amount of his
Convertible Note. On July 28, 2016, the investor paid $150,000 in
cash and the securities were returned to the investor.
Note
4 - Other Receivables
Other
Receivables consisted of the following:
|
|
December 31,
|
December 31,
|
|
|
2016
|
2015
|
|
Research
& development tax credits
|
$758,305
|
$912,818
|
|
Investor
subscription
|
-
|
93,150
|
|
Other
|
202,733
|
68,880
|
|
|
$961,038
|
$1,074,848
|
The
research & development tax credits are refundable tax credits
for research conducted in France. The $912,818 of refundable tax
credits at December 31, 2015 was received by the Company in the
July 2016. At December 31, 2015, investor subscription was related
to an investor’s agreement to make up any shortfall between
the Marketable Securities given for his Convertible Debt, see Note
3. The make-whole provision was a deemed “put” measured
at fair value due to its relationship in connection with the
marketable securities. The Company followed the guidance in ASC
815-25-35-6 and recorded the change in fair values of both the
marketable securities and the “put” in earnings. Other
is primarily amounts due from collaboration partner Mayoly, see
Note 15, and non-income tax related items from French government
entities.
Note
5 - Property, Equipment, and Leasehold Improvements
Property, equipment
and leasehold improvements consisted of the following:
|
|
December 31,
|
December 31,
|
|
|
2016
|
2015
|
|
Laboratory
Equipment
|
$165,611
|
$148,578
|
|
Computer
Equipment
|
19,718
|
16,733
|
|
Office
Equipment
|
29,006
|
29,057
|
|
Leasehold
Improvements
|
29,163
|
28,008
|
|
|
243,498
|
222,376
|
|
Less
accumulated depreciation
|
(91,876)
|
(46,057)
|
|
|
$151,622
|
$176,319
|
Depreciation
expense for the years ended December 31, 2016 and 2015 was $44,305
and $41,784, respectively. Depreciation expense is included in
General and Administrative (“G&A”)
expenses.
Note
6 - Intangible Assets and Goodwill
Intangible assets
are as follows:
|
|
December 31,
|
December 31,
|
|
|
2016
|
2015
|
|
In
Process Research & Development
|
$382,560
|
$396,634
|
|
Less
accumulated amortization
|
(81,029)
|
(50,956)
|
|
|
$301,531
|
$345,678
|
|
|
|
|
|
License
Agreements
|
$3,120,991
|
$3,235,814
|
|
Less
accumulated amortization
|
(1,586,504)
|
(997,709)
|
|
|
$1,534,487
|
$2,238,105
|
Amortization
expense for the years ended December 31, 2016 and 2015 was $690,195
and $691,815, respectively. Amortization expense is included in
G&A expenses.
As of
December 31, 2016, amortization expense is expected to be as
follows for the next 5 years:
|
2017
|
$656,078
|
|
2018
|
656,078
|
|
2019
|
317,971
|
|
2020
|
31,880
|
|
2021
|
31,880
|
Goodwill
is as follows:
|
|
Goodwill
|
|
Balance
at January 1, 2015
|
$2,042,454
|
|
Foreign
currency translation
|
(209,875)
|
|
Balance
at December 31, 2015
|
1,832,579
|
|
Foreign
currency translation
|
(65,029)
|
|
Balance
at December 31, 2016
|
$1,767,550
|
Note
7 - Contingent Consideration
On June
13, 2014, the Company completed a stock purchase agreement (the
“SPA”) with Protea Biosciences Group, Inc.
(“Protea Group”). Pursuant to the SPA, the Company is
obligated to pay Protea certain contingent consideration in U.S.
dollars upon the satisfaction of certain events, including (a) a
onetime milestone payment of $2,000,000 due within (10) days of
receipt of the first approval by the Food and Drug Administration
(“FDA”) of a New Drug Application (“NDA”)
or Biologic License Application (“BLA”) for a Business
Product (as such term is defined in the SPA). (b) royalty payments
equal to 2.5% of net sales of Business Product up to $100,000,000
and 1.5% of net sales of Business Product in excess of $100,000,000
and (c) ten percent (10%) of the Transaction Value (as defined in
the SPA) received in connection with a sale or transfer of the
pharmaceutical development business of Protea Europe. See Note
1.
Note 8 - Accounts Payable
Accounts payable
and accrued expenses consisted of the following:
|
|
December 31,
|
December 31,
|
|
|
2016
|
2015
|
|
Trade
payables
|
$1,072,358
|
$409,407
|
|
Accrued
expenses
|
73,750
|
174,210
|
|
Accrued
payroll
|
325,172
|
198,368
|
|
|
$1,471,280
|
$781,985
|
Note
9 – Notes Payable
On
October 11, 2016, the Company entered into a 9-month financing
agreement for its Directors and Officers Liability insurance in the
amount of $232,000 that bears interest at an annual rate of 2.7%.
Monthly payments including principal and interest are $26,069 per
month. Included in Notes Payable at December 31, 2016 and 2015 is
$155,187 and $0, respectively, related to this
agreement.
Note
10 - Convertible Promissory Notes
Commencing on July
22, 2014, and through April 3, 2015, the Company, through a series
of transactions with various investors, raised $896,000 through the
sale of its convertible promissory notes with various maturity
dates that can be extended by the Company. The maturity dates
ranged from August 31, 2014 through May 31, 2015. All maturity
dates were extended by the Company. Through December 31, 2015, the
Company entered into transactions in which noteholders were
voluntarily repaid $761,000 and shares were issued to such
noteholders in lieu of interest payments. The notes bore interest
at 8% per annum and were convertible into common stock of the
Company at $6.45 per share at the investors’ discretion as
long as the notes are outstanding. Notes outstanding at December
31, 2015, of $135,000 were converted on July 22, 2016 into original
issue discounted convertible notes. See Note 11,
below.
Interest expense
for the years ended December 31, 2016 and 2015 incurred in
connection with the promissory notes was $6,007 and $25,856,
respectively. On August 7, 2015, 5,242 shares of common stock were
issued in payment of $33,790 of accrued interest payable on these
notes. Interest payable at December 31, 2016 and 2015 in connection
with these notes was $7,192 and $1,186, respectively.
Note
11 - Original Issue Discounted Convertible Notes
Originally Issued Discounted Convertible Notes
Commencing on
October 10, 2014, the Company, through a series of transactions,
issued original issue discounted convertible notes to several
investors at 85% of the principal amount of the notes. The notes
did not otherwise bear interest. The notes were voluntarily
convertible into shares of the Company’s common stock at the
principal amount divided by the conversion price, which was the
lesser of $6.45 per share or the per share price of the common
stock representing the pre-money valuation immediately prior to any
shares sold in the IPO, multiplied by 80% (the “Convertible
Shares”).
Under
the voluntary and mandatory features, the Company did not recognize
any amounts associated with the beneficial conversion feature at
the dates of issuances of these notes due to the unsatisfied
condition associated with the pre-money valuation.
Additionally,
separate warrants to purchase shares of common stock equal to 50%
of the number of Convertible Shares at the lesser of $7.37 per
share or at a 20% discount to the pre-money IPO valuation of the
Company were issued in conjunction with these notes. These warrants
are exercisable for five years beginning six months after the issue
date. If the pre-money IPO valuation of the Company was less than
$43,750,000, then the number of Warrant Shares (herein defined as
the underlying common stock) would have been recalculated as
follows: New Number of Warrant Shares = Existing Warrant Shares *
[43,750,000/(IPO valuation*80%)].
The
notes had nine-month terms with principal and interest due starting
July 10, 2015. The holders of the notes could have demanded payment
in cash before the maturity date within thirty (30) trading days of
the Company’s initial public offering. If, on the maturity
date, the principal amount of any note remained unpaid, the Company
would pay to the note holder a one-time default penalty of 5% of
the total amount unpaid on the maturity date. The Company, however,
was still required to repay the note holder the principal balance
and interest on the principal balance, which should accrue at the
default interest rate equal to the lesser of 18% per annum or the
maximum rate permitted under applicable law. As of December 31,
2015, $2,105,882 in principal amount of these notes were in default
due to being past their maturity dates.
The
terms of these notes were revised on March 31, 2016 as per
below.
New Issued Discounted Convertible Notes
On
March 31, 2016, the holders of all but $300,000 in principal of the
above notes signed exchange agreements nullifying the default
provisions and rolling the principal amount into new original issue
discounted convertible notes at 92% of the principal amount of the
notes due on November 4, 2016, modifying the conversion price to
$4.65 per share, and modifying the strike price of the warrants
down to $5.58 per share. The notes were voluntarily convertible
into that number of shares of common stock as is equal to the
aggregate principal amount of the notes plus any accrued but unpaid
interest divided by $4.65. $2,094,000 in gross proceeds were
received during 2016 in additional original issue discounted notes
under the same terms. On July 22, 2016, $135,000 of convertible
promissory notes were converted into original issue discounted
convertible notes under the same terms.
Under
the mandatory conversion feature, the aggregate principal amounts
of the notes plus any accrued but unpaid interest automatically
converted into that number of shares of common stock equal to the
aggregate principal amount of the notes plus any accrued but unpaid
interest multiplied by 1.25 divided by $4.65 per share. As a result
of these exchange agreements, as of December 31, 2015, the Company
has not recorded any of the default provisions for all but $300,000
in principal of these notes.
The
Company determined that there was a beneficial conversion feature
on the voluntary conversion feature in the amount of $36,670 at the
dates of issuances on certain of these notes issued through the IPO
Date. The Company determined that there was a beneficial conversion
feature on the mandatory conversion feature in the amount of
$1,108,194 at the IPO Date. Under the mandatory conversion feature,
all of the unamortized discount remaining at the date of conversion
was recognized immediately at that date as interest
expense.
On the
IPO Date, these notes converted into 2,642,160 shares of common
stock.
The
Company accounted for the warrant feature of the notes by recording
a warrant liability based upon the fair value of the warrants on
the dates of issuance. The warrant liability was adjusted to the
fair value at the IPO Date of $3,670,680 by recording a fair value
adjustment of $2,329,018. Upon the satisfaction of conditions
related to the number of Warrant Shares to be issued, the fair
value of the warrant liability at the IPO Date of $3,670,680 was
reclassified into equity at that date. The warrant liability was
adjusted to the fair value at December 31, 2015 of $818,216 by
recording a fair value adjustment of $386,103.
For the
years ended December 31, 2016 and 2015, the Company recorded
$2,043,696 and $1,561,677, respectively, of interest expense
related to the original issue discount and warrant features of
these notes. For the years ended December 31, 2016 and 2015,
$1,160,267 and $749,262, respectively, of these amounts were
accreted interest expense related to the original issue discount
feature of the notes that also increased the outstanding balance of
the convertible debt by the same amount. For the years ended
December 31, 2016 and 2015, $883,429 and $812,415, respectively, of
these amounts were amortization of the debt discount related to the
warrant features of the convertible debt.
Convertible Debt
consisted of:
|
|
December 31,
|
December 31,
|
|
|
2016
|
2015
|
|
Convertible
Debt
|
$-
|
$6,145,000
|
|
Accreted
Interest
|
-
|
659,508
|
|
Debt
Discount - Warrants
|
-
|
(362,136)
|
|
|
$-
|
$6,442,372
|
Note 12 - Equity
On July
13, 2016, the Company amended its Certificate of Incorporation to
increase the authorized shares of its common stock, $0.0001 par
value, to 100,000,000 shares from 9,000,000 shares and increase the
authorized shares of its preferred stock, $0.0001 par value, to
10,000,000 shares from 1,000,000 shares.
Common Stock
At
December 31, 2016 and 2015, the Company had issued and outstanding
9,631,088 and 4,296,979 shares, respectively, of its common
stock.
Voting
Each
holder of common stock has one vote for each share
held.
Stock Option Plan
The
Company’s board of directors and stockholders have adopted
and approved the Amended and Restated 2014 Omnibus Equity Incentive
Plan (the “2014 Plan”), which took effect on May 12,
2014. The 2014 Plan permits the Company to award stock options
(both incentive stock options and non-qualified stock options),
stock appreciation rights, restricted stock, restricted stock
units, performance stock awards, performance unit awards,
unrestricted stock awards, distribution equivalent rights to the
Company’s officers, employees, directors, consultants and
advisers. The maximum number of shares of common stock that may be
issued pursuant to awards under the 2014 Plan is ten percent (10%)
of the issued and outstanding shares of the Company’s common
stock on an “as converted” basis on a rolling basis.
The “as converted” shares include all shares of the
Company’s common stock and all shares of the Company’s
common stock issuable upon the conversion of outstanding preferred
stock and other convertible securities, but do not include any
shares of common stock issuable upon the exercise of options and
other convertible securities issued pursuant to the Plan. During
the years ended December 31, 2016 and 2015, the Company did not
grant any stock options under the 2014 Plan.
Series A Convertible Preferred Stock
Pursuant to the SPA
with the Protea Group, on June 13, 2014, the Company issued 100
shares of Series A Convertible Preferred Stock (“Series
A”). As of December 31, 2016, there were no Series A
outstanding and all terms of the Series A are still in
effect.
The
terms of the Series A are described below:
Voting
The
Series A holders are entitled to vote, together with the holders of
common stock as one class, on all matters to which holders of
common stock shall be entitled to vote, in the same manner and with
the same effect as the common stock holders with the same number of
votes per share that equals the number of shares of common stock
into which the Series A is convertible at the time of such
vote.
Dividends
The
holders of the Series A shall be entitled to receive dividends,
when, as, and if declared by the board of directors, ratably with
any declaration or payment of any dividend on common stock. To date
there have been no dividends declared or paid by the board of
directors.
Liquidation
The
holders of the Series A shall be entitled to receive, before and in
preference to, any distribution of any assets of the Company to the
holders of common stock, an amount equal to $0.0001 per share, plus
any declared but unpaid dividends. The liquidation preference as of
December 31, 2016 and 2015 approximates par value.
Conversion
The
Series A was convertible into 33% of the issued and outstanding
shares of common stock on a fully diluted basis, assuming the
conversion, exercise, or exchange for shares of common stock of all
convertible securities issued and outstanding immediately prior to
such conversion, including the Series A, all outstanding warrants
and options, and all outstanding convertible debt, notes,
debentures, or any other securities which are convertible,
exercisable, or exchangeable for shares of common stock. The Series
A was convertible at the holder’s option any time commencing
on the one-year anniversary of the initial issuance date. The
Series A was subject to mandatory conversion at any time commencing
on the one-year anniversary of the initial issuance date upon the
vote or written consent by the holders of a majority of the Series
A then outstanding or upon the occurrence of certain triggering
events, including a public offering coupled with an equity-linked
financing with an offering price that values the Company prior to
consummation of such financing at not less than $12,000,000 and the
aggregate gross proceeds to the Company (before deduction of
underwriting discounts and registration expenses) are not less than
$6,000,000. On November 11, 2015, the Company and the Protea Group
agreed that the Series A would be convertible into 2,439,365 shares
of common stock. As of December 31, 2016, all Series A has been
converted into common stock.
During
the year ended December 31, 2016, Protea Group converted 71 shares
of Series A into 1,731,949 shares of common stock. During the year
ended December 31, 2015, Protea Group converted 29 shares of Series
A into 707,416 shares of common stock.
Beneficial Conversion
The
Series A was recorded at fair value when issued under purchase
accounting for the purchase of the Company’s French
subsidiary. As such, there was no intrinsic value that would result
in a beneficial conversion feature at date of issuance. The Series
A was voluntarily converted and there was no associated beneficial
conversion.
Note
13 – Warrants
Stock
warrant transactions for the period January 1, 2015 through
December 31, 2016 were as follows:
|
|
Warrants
|
Exercise Price
Per Share
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
Warrants outstanding and exercisable at January 1,
2015
|
68,400
|
$7.37
|
$7.37
|
|
|
|
|
|
|
Granted
during the period
|
594,074
|
$7.37
|
$7.37
|
|
Expired
during the period
|
-
|
-
|
-
|
|
Exercised
during the period
|
-
|
-
|
-
|
|
Warrants outstanding and exercisable at December 31,
2015
|
662,474
|
$7.37
|
$7.37
|
|
|
|
|
|
|
Granted
during the period
|
1,195,866
|
$4.76 - $6.60
|
$5.57
|
|
Expired
during the period
|
-
|
-
|
-
|
|
Exercised
during the period
|
-
|
-
|
-
|
|
Warrants outstanding and exercisable at December 31,
2016
|
1,858,340
|
$4.76 - $7.37
|
$5.66
|
|
|
|
|
|
|
|
Number of Shares
|
Weighted Average
Remaining Contract
|
Weighted Average
|
|
Exercise Price
|
Under Warrants
|
Life in Years
|
Exercise Price
|
|
$4.76
|
32,376
|
3.65
|
|
|
$5.50
|
717,540
|
4.79
|
|
|
$5.58
|
959,101
|
4.36
|
|
|
$6.60
|
48,000
|
4.79
|
|
|
$7.37
|
101,323
|
3.94
|
|
|
Total warrants
|
1,858,340
|
4.50
|
$5.66
|
Per
the terms of exchange agreements executed on March 31, 2016 with
certain holders of the Company’s original issue discounted
convertible notes, the associated warrants had their exercise price
adjusted to $5.58 per share with no other adjustments made to the
warrants, see Note 11 above.
During the year ended December 31, 2016, 41,118
immediately vesting warrants were issued to placement agents in
connection with the private placement of original issue discounted
convertible notes with a value of $55,097, using the same
valuation used to value the warrants issued in connection with the
original issue discounted convertible notes, see Note 11 above.
This amount was included in G&A expenses.
During the year ended December 31, 2016, 717,540
warrants exercisable in 180 days were issued to certain original
issue discounted convertible noteholders in exchange for 180-day lockup
provisions with a value of $2,741,003. This amount was included in
interest expense.
During
the year ended December 31, 2016, 48,000 immediately vesting
warrants were issued to investment bankers in connection with the
consummation of the IPO with a value of $196,752 that had no effect
on expenses or stockholders’ equity.
During the year ended December 31, 2015, 102,052
immediately vesting warrants were issued to placement agents in
connection with the private placement of original issue discounted
convertible notes with a value of $218,337, using the same valuation
used to value the warrants issued in connection with the original
issue discounted convertible notes, see Note 11 above. This amount
was included in G&A expenses.
Note 14 - Interest Expense
During
the years ended December 31, 2016 and 2015, the Company incurred
$5,937,487 and $1,587,533, respectively, of interest expense.
During the years ended December 31, 2016 and 2015, $2,044,220 and
$1,561,677, respectively, of this amount was in connection with the
convertible notes issued by the Company in the form of accretion of
original issue debt discount and amortization of debt discount
related to the warrants. During the years ended December 31, 2016
and 2015, $1,144,865 and $0, respectively, of this amount was in
connection with the convertible notes issued by the Company in the
form of a beneficial conversion feature of the OID Debt. During the
years ended December 31, 2016 and 2015, $2,741,003 and $0,
respectively, of this amount was in connection with the convertible
notes issued by the Company in the form of additional warrants
issued for 6-month lockup provisions on the common stock received
from the conversion of OID Debt at the IPO Date. During the years
ended December 31, 2016 and 2015, the Company incurred $6,007 and
$25,856, respectively, of interest expense in connection with the
promissory notes issued by the Company. During the years ended
December 31, 2016 and 2015, the Company also incurred $1,392 and
$0, respectively, of miscellaneous interest expense.
Note
15 – Agreements
Mayoly Agreement
On
March 22, 2010, the Predecessor entered into a joint research and
development agreement (the “2010 Agreement”) with
Laboratoires Mayoly Spindler SAS (“Mayoly”) with no
consideration exchanged, pursuant to which Mayoly sublicensed
certain of its exclusive rights to a genetically engineered yeast
strain cell line on which MS1819 is based that derive from a Usage
and Cross-Licensing Agreement dated February 2, 2006 (the
“INRA Agreement”) between Mayoly and INRA TRANSFERT, a
subsidiary of the National Institute for Agricultural Research
(“INRA”) in charge of patent management acting for and
on behalf of the National Centre of Scientific Research
(“CNRS”) and INRA.
Effective January
1, 2014, the Predecessor entered into an amended and restated joint
research and development agreement with Mayoly (the “Mayoly
Agreement”) with no consideration exchanged, pursuant to
which the Predecessor acquired the exclusive right, with the right
to sublicense, to commercialize human pharmaceuticals based on the
MS1819 lipase within the following territories: U.S. and Canada,
South America (excluding Brazil), Asia (excluding China and Japan),
Australia, New Zealand and Israel. Rights to the following
territories are held jointly with Mayoly: Brazil, Italy, Portugal,
Spain, China and Japan. The Mayoly Agreement requires the
Predecessor to pay 70% of all development costs and requires each
of the parties to use reasonable efforts to:
●
devote sufficient
personnel and facilities required for the performance of its
assigned tasks;
●
make available
appropriately qualified personnel to supervise, analyze and report
on the results obtained in the furtherance of the development
program; and
●
deploy such
scientific, technical, financial and other resources as is
necessary to conduct the development program.
During
the years ended December 31, 2016 and 2015, the Company was
reimbursed $601,575 and $338,570, respectively, from Mayoly under
the Mayoly Agreement.
The
Mayoly Agreement grants the Predecessor the right to cure any
breach by Mayoly of its obligations under the INRA agreement. In
connection with the acquisition of ProteaBio Europe, the
Predecessor, with the consent of INRA and CNRS, assigned all of it
rights, title and interest in and to the Mayoly Agreement to the
AzurRx Europe SAS.
The
Mayoly Agreement includes a €1,000,000 payment due to Mayoly
upon the U.S. FDA approval of MS1819. At this time, based on
management’s assessment of ASC Topic 450, Contingencies, the
Company has not recorded any contingent liability related to this
payment.
INRA Agreement
In
February 2006, Mayoly and INRA TRANSFERT, on behalf of INRA and
CNRS, entered into a Usage and Cross-Licensing Agreement granting
Mayoly exclusive worldwide rights to exploit Yarrowia lipolytica
and other lipase proteins based on their patents for use in humans.
The INRA Agreement provides for the payment by Mayoly of royalties
on net sales, subject to Mayoly’s right to terminate such
obligation upon the payment of a lump sum specified in the
agreement.
Employment Agreement
On
January 3, 2016, the Company entered into an employment agreement
with its President and Chief Executive Officer, Johan Spoor. The
employment agreement provides for a term expiring January 2, 2019.
Either party may terminate Mr. Spoor’s employment at any time
and for any reason, or for no reason. During the term and for a
period of twelve (12) months thereafter, Mr. Spoor shall not engage
in competition with the Company either directly or indirectly, in
any manner or capacity.
The
Company will pay Mr. Spoor a base salary of $350,000 per year,
which shall automatically increase to $425,000 upon (i)
consummation of the IPO which results in the listing of the
Company’s common stock on The NASDAQ Stock Market or NYSE MKT
(which occurred on October 11, 2016), or (ii) consummation of a
merger or consolidation of the Company with or into any other
corporation or corporations, or a sale of all or substantially all
of the assets of the Company, or the effectuation by the Company of
a transaction or series of related transactions in which more than
50% of the voting shares of the Company is disposed of or conveyed,
and in each such case the Company becomes a public reporting
company which results in the listing of the Company’s shares
(or shares of the Company’s parent company) on The NASDAQ
Stock Market or NYSE MKT (the “Public Event”) (which
occurred on October 11, 2016). At the sole discretion of the board
of directors or the compensation committee of the board, following
each calendar year of employment, Mr. Spoor shall be 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 of directors or the compensation
committee.
In
addition, subject to any required consents from third parties, Mr.
Spoor shall be granted 100,000 shares of restricted common stock,
which are to be issued as follows: (i) 50,000 restricted shares
upon the first commercial sale in the United States of MS1819, and
(ii) 50,000 restricted shares upon the total market capitalization
of the Company exceeding $1 billion dollars for 20 consecutive
trading days, in each case subject to the earlier determination of
a majority of the board of directors. In the event of a Change of
Control (as defined in the agreement), all of the restricted shares
shall vest in full. The estimated fair value at the date of grant
was $210,000 and this amount was expensed in 2016.
Subject
to any required consents from third parties, Mr. Spoor shall also
be entitled to 380,000 10-year stock options pursuant to the 2014
Plan, which options shall vest as follows so long as Mr. Spoor is
serving as Chief Executive Officer or President at such time: (i)
100,000 of such stock options shall vest upon consummation of the
IPO, (ii) 50,000 of such stock options shall vest upon the Company
initiating a Phase II clinical trial in the United States for
MS1819 (i.e., upon the first individual enrolled in the trial),
(iii) 50,000 of such stock options shall vest upon the Company
completing a Phase II clinical trial in the United States for
MS1819, (iv) 100,000 of such stock options shall vest upon the
Company initiating a Phase III clinical trial in the United States
for MS1819, (v) 50,000 of such stock options shall vest upon the
Company initiating a Phase I clinical trial in the United States
for any product other than MS1819, and (vi) 30,000 of such stock
options shall vest upon the determination of a majority of the
board of directors.
On June
8, 2016, the board of directors clarified Mr. Spoor’s
agreement as follows: the 380,000 options described have neither
been granted nor priced since certain key provisions, particularly
the underlying exercise price, have not been determined. The
options will be granted at a future date to be determined by the
board of directors, and the options will be priced at that future
date when they are granted. As of December 31, 2016, no options
have been granted.
If the
Company terminates Mr. Spoor’s employment other than for
cause, or he terminates for good reason, as both terms are defined
in the agreement, the Company will pay him twelve (12) months of
his base salary as severance. If the Company terminates Mr.
Spoor’s employment other than for cause, or he terminates for
good reason, in connection with a Change of Control, the Company
will pay him eighteen (18) months of his base salary in lump sum as
severance.
Note
16 – Leases
The
Company leases its office and research facilities under operating
leases which are subject to various rent provisions and escalation
clauses expiring at various dates through 2020. The escalation
clauses are indeterminable and considered not material and have
been excluded from minimum future annual rental payments. Rental
expense, which is calculated on a straight-line basis, amounted to
$147,254 and $112,560 in 2016 and 2015, respectively.
Minimum
future annual rental payments are as follows:
|
2017
|
$106,450
|
|
2018
|
$71,468
|
|
2019
|
$71,468
|
|
2020
|
$71,468
|
|
2021
|
$-
|
Note
17 - Income Taxes
The
Company is subject to taxation at the federal level in both the
United States and France and at the state level in the United
States. At December 31, 2015 and 2016, the Company had no tax
provision for both jurisdictions.
At
December 31, 2016 and 2015, the Company had gross deferred tax
assets of approximately $7,875,000 and $3,907,000, 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 $7,875,000 and $3,907,000,
respectively, has been established at December 31, 2016 and
2015.
The
significant components of the Company’s net deferred tax
assets (liabilities) consisted of:
|
|
December 31,
|
December 31,
|
|
|
2016
|
2015
|
|
Gross
deferred tax assets:
|
|
|
|
Net
operating loss carry-forwards
|
$6,962,000
|
$4,080,000
|
|
Temporary
differences
|
913,000
|
(173,000)
|
|
Deferred
tax asset valuation allowance
|
(7,875,000)
|
(3,907,000)
|
|
Net
deferred tax asset
|
$-
|
$-
|
Income
taxes computed using the federal statutory income tax rate differs
from the Company’s effective tax rate primarily due to the
following:
|
|
December 31,
|
December 31,
|
|
|
2016
|
2015
|
|
Income
taxes benefit (expense) at statutory rate
|
34%
|
34%
|
|
State
income tax, net of federal benefit
|
11%
|
11%
|
|
Non-deductible
expenses
|
(24%)
|
0%
|
|
Change
in valuation allowance
|
(21%)
|
(45%)
|
|
|
0%
|
0%
|
At
December 31, 2016, the Company has gross net operating loss
carry-forwards for U.S. federal and state income tax purposes of
approximately $9,240,000 and $9,349,000, respectively, which expire
in the years 2034 through 2036.
At
December 31, 2016, the Company has approximately $8,374,000 in net
operating losses which it can carryforward indefinitely to offset
against future French income.
ASC 740
prescribes recognition threshold and measurement attributes for the
financial statement recognition and measurement of uncertain tax
positions taken or expected to be taken in a tax return. ASC 740
also provides guidance on de-recognition, classification, interest
and penalties, accounting in interim periods, disclosure and
transition. At December 31, 2016 and 2015, the Company had taken no
uncertain tax positions that would require disclosure under ASC
740.
Note
18 - Net Loss per Common Share
Basic
net loss per share is computed by dividing net loss available to
common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflect,
in periods in which they have a dilutive effect, the impact of
common shares issuable upon exercise of stock options and warrants
and conversion of convertible debt that are not deemed to be
anti-dilutive. The dilutive effect of the outstanding stock options
and warrants is computed using the treasury stock
method.
At
December 31, 2016, diluted net loss per share did not include the
effect of 1,858,340 shares of common stock issuable upon the
exercise of outstanding warrants, as their effect would be
antidilutive during the periods prior to conversion.
At
December 31, 2015, diluted net loss per share did not include the
effect of 662,474 res of common stock issuable upon the exercise of
outstanding warrants. 1,141,769 shares of common stock issuable
upon the conversion of promissory notes and convertible debt. and
1,731,949 shares of common stock issuable upon the conversion of
the Series A, as their effect would be antidilutive. At the IPO
Date, the 1,141,769 shares of common stock issuable upon the
conversion of promissory notes and convertible debt became equal to
2,033,231 shares.
Note
19 - Related Party Transactions
During
the year ended December 31, 2015, the Company employed the services
of JIST Consulting (“JIST”), a company controlled by
Johan M. Spoor, the Company’s current chief executive officer
and president, as a consultant for business strategy, financial
modeling, and fundraising. Expense recorded in general and
administrative expense in the accompanying statements of operations
related to JIST for the years ended December 31, 2016 and 2015 was
$0 and $478,400, respectively. Included in accounts payable at both
December 31, 2016 and 2015 is $508,300 for JIST relating to Mr.
Spoor’s services. Mr. Spoor received no other compensation
from the Company other than as specified in his employment
agreement.
During
the year ended December 31, 2015, the Company's President,
Christine Rigby-Hutton, was employed through Rigby-Hutton
Management Services (“RHMS”). Expense recorded in
general and administrative expense in the accompanying statements
of operations related to RHMS for the years ended December 31, 2016
and 2015 was $0 and $27,750, respectively. Included in accounts
payable at both December 31, 2016 and 2015 is $38,453 for RHMS for
Ms. Rigby-Hutton’s services. Ms. Rigby-Hutton resigned from
the Company effective April 20, 2015.
On
August 31, 2014, January 31, 2015, February 28, 2015 and May 31,
2015, the Company issued promissory notes to Matthew Balk and his
affiliates in the aggregate principal amount of $236,000. These
notes have been repaid in full as to $50,000 on November 11, 2014,
$111,000 on April 3, 2015, and $75,000 on August 7, 2015. Mr. Balk
holds voting and dispositive power over the shares held by Pelican
Partners LLC, which owns approximately 9% and 47%, respectively, of
the outstanding common stock of the Company as of December 31, 2016
and 2015.
From
October 1, 2015 through December 31, 2015, the Company used the
services of Edward Borkowski, a member of the Board of Directors
and the Company’s audit committee chair, as a financial
consultant. Included in accounts payable at December 31, 2016 and
2015 is $90,000 for Mr. Borkowski’s services. On October 14,
2014 and March 12, 2015, the Company issued original issue
discounted convertible notes to Mr. Borkowski in the aggregate
principal amount of $300,000. The notes automatically converted
into shares of the Company’s common stock upon the
consummation of the IPO at a conversion price equal to the
principal amount divided by the lesser of $6.45 per share or the
per share price of the Company’s common stock in the IPO,
multiplied by 80%. Mr. Borkowski has signed an exchange agreement
related to these notes as detailed in Note 11 above. The notes
converted into 103,126 shares of the Company’s common stock
on the IPO Date.
In July
2016, the Company granted 45,000 shares of restricted stock to
Board member Mr. Borkowski and 30,000 shares of restricted stock to
each of Board members Messrs. Shenouda and Riddell. The shares of
restricted stock will be issued as follows: (i) 50% upon the first
commercial sale in the United States of MS1819, and (ii) 50% upon
our total market capitalization exceeding $1 billion dollars for 20
consecutive trading days, in each case subject to the earlier
determination of a majority of the Board. The estimated fair value
at the date of grant was $393,750 and this amount was expensed in
2016.
From
October 1, 2016 through December 31, 2016, the Company used the
services of Maged Shenouda, a member of the Board of Directors as a
financial consultant. Included in accounts payable at December 31,
2016 is $70,000 for Mr. Shenouda’s services.
Note
20 - Employee Benefit Plans
401(k) Plan
The
Company sponsors a multiple employer defined
contribution benefit plan, which complies with Section 401(k) of
the Internal Revenue Code covering substantially all employees of
the Company.
All
employees are eligible to participate in the plan. Employees may
contribute from 1% to 100% of their compensation and the Company
matches an amount equal to 100% on the first 6% of the employee
contribution and may also make discretionary profit sharing
contributions.
Employer
contributions under this plan amounted to $16,867 and $0 for the
years ended December 31, 2016 and 2015, respectively.
Note
21 - Subsequent Events
In
February 2017, the Company issued 30,000 options with a ten-year
term at an exercise price of $4.48 to each of directors Borkowski,
Shenouda, and Riddell that vest 10,000 immediately and the balance
monthly over 24 months.
In
February 2017, the Company issued 100,000 options with a ten-year
term at an exercise price of $4.48 to Mr. Spoor that vest
immediately pursuant to his employment agreement.
F-23