SEC Connect
PROSPECTUS
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Filed Pursuant to
Rule 424(b)(4)
Registration No. 333-212511
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960,000
Shares
Common
Stock
AZURRX
BIOPHARMA, INC.
This
is our initial public offering of common stock. No
public market currently exists for our common stock. The
initial public offering price will be $5.50 per
share.
We are selling
960,000 shares of common stock.
Our common stock is listed on
The NASDAQ Capital Market, or NASDAQ, under the symbol
“AZRX.”
We
are an “emerging growth company” as defined in the
Jumpstart Our Business Startups Act of 2012 and, as such, may elect
to comply with certain reduced reporting requirements after this
offering. See “Prospectus Summary—Emerging Growth
Company Status.”
Investing
in our securities involves a high degree of risk. You
should carefully consider the risk factors beginning on page 6 of
this prospectus before purchasing shares of our common
stock.
_______________________
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Underwriting Discounts and
Commissions(1)
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Per
Share
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$ 5.50
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$ 0.495
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$ 5.005
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Total
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$5,280,000
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$475,200
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$4,804,800
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_______________________________________
(1) See
“Underwriting” for additional information regarding
underwriting compensation.
We have granted the
underwriters the right to purchase an additional 144,000 shares of
our common stock to cover over-allotments.
Neither
the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
_______________________
The underwriters
expect to deliver the shares of common stock to purchasers on
October 14, 2016.
WallachBeth Capital, LLC
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Network 1 Financial Securities, Inc.
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ViewTrade Securities Inc.
The date of this prospectus is October 11,
2016
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F-1
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This summary highlights certain information appearing elsewhere in
this prospectus. For a more complete understanding of this
offering, you should read the entire prospectus carefully,
including the information under “Risk Factors” and our
financial statements and the related notes included elsewhere in
this prospectus before investing in our common stock.
In this prospectus, 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.
Our
Company
We are engaged
in the research and development of non-systemic biologics for the
treatment of patients with gastrointestinal disorders. Non-systemic
biologics are non-absorbable drugs that act locally 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 (from the same organism) yeast recombinant lipase
for exocrine pancreatic insufficiency (EPI) associated with chronic
pancreatitis (CP) and cystic fibrosis (CF). A recombinant lipase is
an enzyme that breaks up fat molecules, which is created from new
combinations of genetic material in
yeast.
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AZX1101 - a
recombinant β-lactamase combination of bacterial origin for
the prevention of hospital-acquired infections by resistant
bacterial strains induced by parenteral administration of
β-lactam antibiotics, as well as prevention of
antibiotic-associated diarrhea (AAD). A recombinant
β-lactamase is an enzyme that breaks up molecules with a
beta-lactam ring as is often seen in antibiotics, which is created
from new combinations of genetic material in
yeast.
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 I/IIa testing
of MS1819 was completed in March 2011 and we anticipate initiating
a phase IIa clinical trial near the end of 2016. We
expect to use a substantial portion of the proceeds of this
offering to conduct the necessary formulation work and validation
and stabilization testing on the MS1819 capsules that will be used
in future clinical studies, as well as to conduct the
trial. While enrollment criteria and statistical
considerations for the phase IIa clinical trial will be dependent
on the outcome of discussions we expect to have with the U.S. Food
and Drug Administration ("FDA"), we expect enrollment in this trial
to last for up to 18 months depending on a number of factors,
including but not limited to the number of clinical trial sites and
local patient demographics. The trial is expected to have both an
open-label and randomized component and we anticipate having
initial results from the open-label, dose-escalation arm of the
trial available approximately six months following the initiation
of the trial.
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, according to IMS
Health and CDM Hospital 2012 databases, represented by U.S.
hospitals’ purchases of approximately 118 million doses of IV
beta-lactam antibiotics annually, which are administered to
approximately 14 million patients. Currently there are no approved
treatments designed to protect the gut microbiome from the damaging
effects of IV antibiotics.
We intend to use a
portion of the proceeds of this offering to fund the manufacturing
scale-up of material needed to prepare an Investigational New Drug
Application, or IND, with the FDA.
Emerging
Growth Company Status
We qualify as an
“emerging growth company” as defined in the Jumpstart
Our Business Startups Act of 2012, which we refer to as the JOBS
Act. As a result, we are permitted to, and intend to, rely on
exemptions from certain disclosure requirements that are applicable
to other companies that are not emerging growth companies.
Accordingly, we have included detailed compensation information for
only our three most highly compensated executive officers and have
not included a compensation discussion and analysis, or CD&A,
of our executive compensation programs in this prospectus. In
addition, for so long as we are an “emerging growth
company,” we will not be required to:
engage an auditor
to report on our internal controls over financial reporting
pursuant to Section 404(b) of the Sarbanes–Oxley Act of
2002, or the Sarbanes–Oxley Act;
comply with any
requirement that may be adopted by the Public Company Accounting
Oversight Board, or the PCAOB, regarding mandatory audit firm
rotation or a supplement to the auditor’s report providing
additional information about the audit and the financial statements
(i.e., an auditor discussion and
analysis);
submit certain
executive compensation matters to shareholder advisory votes, such
as “say-on-pay,” “say-on-frequency,” and
“say-on-golden parachutes;”
or
disclose certain
executive compensation related items such as the correlation
between executive compensation and performance and comparison of
the chief executive officer’s compensation to median employee
compensation.
In addition, the
JOBS Act provides that an “emerging growth company” can
use the extended transition period for complying with new or
revised accounting standards.
We will remain an
“emerging growth company” until the earliest to occur
of:
our reporting $1
billion or more in annual gross revenues;
our issuance, in a
three -year period, of more than $1 billion in non-convertible
debt;
the end of the
fiscal year in which the market value of our common stock held by
non-affiliates exceeds $700 million on the last business day of our
second fiscal quarter; and
Our
Corporate Information
We were
incorporated on January 30, 2014 in the State of Delaware. In June
2014, we acquired 100% of the issued and outstanding capital stock
of AzurRx BioPharma SAS (formerly ProteaBio Europe
SAS), a company incorporated in October 2008 under the laws of
France that had been a wholly-owned subsidiary of Protea
Biosciences, Inc., or Protea Sub, in turn a wholly-owned subsidiary
of Protea Biosciences Group, Inc., a publicly-traded
company. Our principal executive offices are located at
760 Parkside Avenue, Downstate Biotechnology Incubator, Suite 217,
Brooklyn, NY 11226. Our telephone number is 646-699-7855. We
maintain a website at www.azurrx.com. The information contained on
our website is not, and should not be interpreted to be, a part of
this prospectus.
Common stock being
offered by
us.............................................................
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960,000
shares
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Common stock to be
outstanding immediately after this offering...........
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9,631,088 shares
(1)
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Over-allotment
option..............................................................................
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144,000
shares
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Use of
proceeds........................................................................................
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We intend to use
the net proceeds from this offering to continue clinical
development and testing of MS1819, to advance our preclinical
AZX1101 program, to repay convertible notes not converted in
this offering, and for working capital and other general
corporate purposes.
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NASDAQ trading
symbol........................................................................
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“AZRX”
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Risk
factors...............................................................................................
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The securities
offered by this prospectus are speculative and involve a high
degree of risk and investors purchasing securities should not
purchase the securities unless they can afford the loss of their
entire investment. See “Risk Factors” beginning on page
6.
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(1)
The number of shares of our common stock to be outstanding
immediately after this offering excludes:
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1,092,800
shares of common stock issuable upon the exercise of outstanding
options and warrants at a weighted average exercise price of $5.75
per share;
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717,540
shares issuable upon exercise of warrants to be issued on the
closing of this offering at an exercise price equal to the initial
public offering price; and
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963,109
shares reserved for issuance under our equity incentive
plans.
Unless
otherwise stated, all information in this prospectus
assumes:
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the
conversion of our outstanding convertible notes into 2,642,160
shares of common stock immediately prior to the closing of this
offering based on the assumed initial public offering price of
$5.50 per share, the price set forth on the cover page of this
prospectus; and
●
no
exercise of the underwriters’ over-allotment option to
purchase additional shares.
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The following table
presents our summary consolidated historical financial data for the
periods presented and should be read in conjunction with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the financial
statements and notes thereto included elsewhere in this prospectus.
The consolidated statements of operations data for the fiscal years
ended December 31, 2014 and 2015 are
derived from our audited consolidated financial statements
included elsewhere in this prospectus. The summary
consolidated statements of operations data for the six months
ended June 30, 2016 and 2015 and the consolidated balance sheet
data as of June 30, 2016 have been derived from our unaudited
interim consolidated financial statements included elsewhere in
this prospectus.
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Six Months
Ended June 30,
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01/30/14
(Date of Inception) through 12/31/14
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01/01/15
through 12/31/15
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Statements
of Operations Data:
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$2,329,106
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$4,728,808
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$3,072,188
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$2,951,033
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(2,329,106)
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(4,728,808)
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(3,072,188)
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(2,951,033)
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(36,042)
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(1,201,428)
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$(2,689,783)
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(439,066)
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$(2,365,148)
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$(5,930,236)
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$(5,761,971)
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$(3,390,099)
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Net loss per share,
basic and diluted
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$(0.67)
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$(1.63)
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$(1.07)
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$(0.95)
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Pro
Forma
As
Adjusted (2)
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Balance
Sheet Data:
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Cash
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$94,836
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$581,668
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$1,504,635
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$5,170,267
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Total
assets
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$6,575,753
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$6,685,682
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$6,576,958
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$ 9,719,585
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Total current
liabilities
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$2,430,855
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$8,815,512
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$2,500,429
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$2,170,930
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Total
liabilities
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$3,930,855
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$10,315,512
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$4,000,429
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$3,670,930
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Total
stockholders’ equity (deficit)
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$2,644,898
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$(3,629,830)
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$2,576,529
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$6,048,655
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(1)
The pro forma balance sheet data as of June 30, 2016 reflects (i)
the settlement in cash of other receivable for OID convertible debt
of $150,000 that increases Cash by that amount but has no effect on
Total assets; (ii) the conversion of $135,000 of convertible
promissory notes into OID convertible notes that has no effect on
Total current liabilities; and (iii) the issuance of 2,642,160
shares of common stock immediately prior to the closing of this
offering upon the mandatory conversion portion of OID convertible
notes, based
on the assumed initial public offering price of $5.50 per share,
the price set forth on the cover page of this prospectus that
decreases Total current liabilities and Total liabilities by
$11,841,074 and increases Total stockholders’ equity
(deficit) by that same amount.
(2)
The pro forma as adjusted balance sheet data as of June 30, 2016
reflects the pro forma adjustments described in footnote (1) above
as adjusted to give effect to (i) the receipt by us of the
estimated net proceeds from this offering, based on an assumed
initial public offering price of $5.50 per share, the price set
forth on the cover page of this prospectus, after deducting
underwriting discounts and commissions and estimated offering
expenses payable by us of $1,780,800 that increases Cash by
$4,022,205, increases Total assets by $3,499,200 and increases
Total stockholders’ equity (deficit) by $3,499,200; (ii) the
grant of 48,000 warrants with a five-year life to the underwriters
at 120% of the IPO price with an estimated value of $196,752 with
no effect on Total stockholders’ equity; (iii) the grant of
717,540 warrants with a five-year life to certain OID noteholders
with a strike price of the IPO price with an estimated value of
$3,028,019 with no effect on Total stockholders’ equity; and
(iv) retiring in cash $356,573 of OID convertible debt and accreted
interest not mandatorily converted at time of the IPO that
decreases cash by $356,573, decreases Total current liabilities and
Total liabilities by $329,499 and decreases Total
stockholders’ equity (deficit) by
$27,074.
You should
carefully consider the risks described below and elsewhere in this
report, which could materially and adversely affect our business,
results of operations or financial condition. Our business faces
significant risks and the risks described below may not be the only
risks we face. Additional risks not presently known to us or that
we currently believe are immaterial may materially affect our
business, results of operations, or financial condition. If any of
these risks occur, the trading price of our common stock could
decline and you may lose all or part of your
investment.
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. As of June 30, 2016, we had an accumulated
deficit of approximately $14 million. 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 our company,
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.
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;
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 intend
to use the proceeds of this offering to commence a Phase II
clinical trial for MS1819 in the second half of 2016 and to
complete the preclinical work necessary to file an IND for AZX1101
by the first quarter 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
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 in-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
in-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.
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 September 30,
2016, we had twelve employees. As our development and
commercialization plans and strategies develop, and as we
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 $2,365,000, and $5,930,000 for the years ended
December 31, 2014 and 2015, respectively, and $5,762,000 in
the six months ended June 30, 2016. At June 30, 2016, we had
an accumulated deficit of approximately $14,057,000. 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 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, 2014 and 2015 and the six months ended
June 30, 2016, we incurred research and development expenses of
approximately $670,000, $1,398,000 and $1,526,000, 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 and the net proceeds
from this offering will sustain our operations until January 2018
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. Our current financial condition raises
substantial doubt about our ability to continue as a going
concern.
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. Other than this offering, 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.
We received a report from our independent registered public
accounting firm with an explanatory paragraph for the year ended
December 31, 2015 and 2014 with respect to our ability to continue
as a going concern. The existence of such a report may
adversely affect our stock price and our ability to raise
capital.
In their report
dated June 15, 2016, our independent registered public accounting
firm expressed substantial doubt about our ability to continue as a
going concern. We have incurred losses and negative cash
flows from operations since inception, have an accumulated deficit
as of June 30, 2016 and require additional financing to fund future
operations. Our ability to continue as a going concern is subject
to our ability to obtain necessary funding from outside sources,
including obtaining additional funding from the sale of our
securities.
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 and this Offering
We do not know whether an active, liquid and orderly trading market
will develop for our common stock in the U.S.
Prior to this offering, there has been no public market for our
common stock. Our common stock is listed on The NASDAQ Capital
Market, an active trading market for our shares may never develop
or be sustained. The lack of an active or liquid market may impair
your ability to sell your shares at the time you wish to sell them
or at a price that you consider reasonable.
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.
Upon the closing of
this offering, we will have an aggregate of 9,631,088 outstanding
shares of common stock. The shares sold in this offering will be
immediately tradable without
restriction. 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 180 days following the date of this
Prospectus, subject to certain exceptions and also to potential
extensions under certain circumstances, and will be subject to
volume and other sale restrictions. The representative of the
underwriters may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to
lock-up agreements.
Also, 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. See “Shares
Eligible for Future Sale” for a more detailed description of
sales that may occur in the future.
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 have broad discretion in the use of the net proceeds of this
offering and may not use them effectively.
We intend to use
the net proceeds from this offering for general corporate purposes
and to continue preclinical and clinical development of our product
candidates. However, our management will have broad discretion in
the application of the net proceeds from this offering and could
spend the proceeds in ways that do not improve our results of
operations or enhance the value of our common stock. The failure by
management to utilize these funds effectively could result in
financial losses that could have a material adverse effect on our
business, cause the price of our common stock to decline and delay
the development of our product candidates. Pending their use, we
may invest the net proceeds from this offering in a manner that
does not produce income or that loses value.
You will experience immediate and substantial dilution in the net
tangible book value per share of the common stock you
purchase.
Because the public
offering price per share of our common stock is substantially
higher than the net tangible book value per share of our common
stock, you will suffer substantial dilution in the net tangible
book value of the common stock you purchase in this offering. Based
on an assumed public offering price of $5.50 per share, if you
purchase shares of common stock in this offering, you will suffer
immediate and substantial dilution of approximately $5.30 per share
in the net tangible book value of the common stock. See the section
entitled “Dilution” in this prospectus for a more
detailed discussion of the dilution you will incur if you purchase
common stock in this offering.
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 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 (1) not being required to comply with
the auditor attestation requirements of Section 404 of the
Sarbanes-Oxley Act, (2) reduced disclosure obligations regarding
executive compensation in this prospectus and our periodic reports
and proxy statements and (3) exemptions from the requirements of
holding a nonbinding advisory vote on executive compensation and
stockholder approval of any golden parachute payments not
previously approved. In addition, as an emerging growth company, we
are only required to provide two years of audited financial
statements and two years of selected financial data in this
prospectus. 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 will be 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.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING
STATEMENTS
Some of the
information in this prospectus contains forward-looking statements
within the meaning of the federal securities laws. These statements
include, among others, the following:
the results of
research and development activities;
uncertainties
relating to preclinical and clinical testing, financing and
strategic agreements and relationships;
the early stage of
products under development;
our need for
substantial additional funds;
patent and
intellectual property matters;
dependence on third
party manufacturers;
foreign currency
fluctuations.
These statements
may be found under “Prospectus Summary,” “Risk
Factors,” “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and
“Business.” Forward-looking statements
typically are identified by the use of terms such as
“anticipates,” “believes,”
“can,” “continue,” “could,”
“estimates,” “expects,”
“intends,” “may,” “plans,”
“potential,” “predicts,”
“should,” or “will” or the negative of
these terms, although some forward-looking statements are expressed
differently. You should be aware that our actual results could
differ materially from those contained in the forward-looking
statements due to the factors referenced above.
You should also
consider carefully the statements under “Risk Factors”
and other sections of this prospectus, which address additional
factors that could cause our actual results to differ from those
set forth in the forward-looking statements. We
expressly disclaim any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements
contained herein to reflect any change in our expectations or any
changes in events, conditions or circumstances on which any such
statement is based, except as required by law.
We
estimate that we will receive net proceeds from this offering of
approximately $4,022,000, based on an assumed initial public
offering price of $5.50 per share, which is the price set
forth on the cover of this prospectus, and after deducting the
underwriting discounts and commissions and estimated offering
expenses payable by us. If the underwriters exercise their option
to purchase additional shares, we estimate that we will receive an
additional $720,720 in net proceeds.
A
$1.00 increase (decrease) in the assumed initial public offering
price of $5.50 would increase (decrease) the net proceeds to us
from this offering by $854,400.
We currently intend
to use the net proceeds from this offering as follows:
●
●
●
●
|
approximately
$2,200,000 to continue clinical development and testing of
MS1819;
approximately
$200,000 to advance our preclinical AZX1101 program;
approximately
$356,000 to repay convertible debt not being converted into
shares of common stock in connection with this offering;
and
the balance, if
any, for working capital and other general corporate
purposes.
|
We believe that the
proceeds allocated to the MS1819 program will be sufficient to
enable us to conduct the necessary drug product formulation work,
validation and stabilization testing and conduct the
program. We expect that the proceeds allocated to
AZX1101 will enable us to fund the additional preclinical studies
and prepare the safety and toxicology data necessary to file an IND
with the FDA; however, we will need to seek additional financing in
order to pursue any clinical program.
The foregoing
represents our best estimate of the allocation of the net proceeds
of the offering during the next 12 to 18 months. This
estimate is based on certain assumptions, including that no events
occur which would cause us to abandon any particular efforts, that
our research, development and testing activities will occur as
projected, and that we do not enter into collaborations to fund a
project separately. The amounts actually expended for
each purpose may vary significantly in the event any of these
assumptions prove inaccurate. We reserve the right to
change our use of proceeds as unanticipated events may cause us to
redirect our priorities and reallocate the proceeds accordingly.
Pending specific utilization of the net proceeds as described
above, we intend to invest the net proceeds of the offering in
short-term investment grade and U.S. government
securities.
We have never paid
cash dividends on any of our capital stock and currently intend to
retain our future earnings, if any, to fund the development and
growth of our business.
The following table
sets forth our capitalization as of June 30, 2016:
●
(i)
the issuance of 2,642,160 shares of common stock immediately prior
to the closing of this offering upon the mandatory conversion
portion of OID convertible notes (based on the assumed initial
public offering price of $5.50 per share, the price set forth on
the cover page of this prospectus) that decreases Notes payable by
$8,881,428, increases Common stock by $264, increases Additional
paid-in capital by $9,828,572 and increases Accumulated deficit by
$947,408; and (ii) the OID convertible debt beneficial
conversion amount of $9,828,836
that increases Additional paid-in capital and Accumulated deficit
by that amount.
●
(i) the receipt by us of the estimated net proceeds from this
offering, based on an assumed initial public offering price of
$5.50 per share, the price set forth on the cover page of this
prospectus, after deducting underwriting discounts and commissions
and estimated offering expenses payable by us of $1,780,800 that
increases Common stock by $96 and increases Additional paid-in
capital by $3,499,104, (ii) the grant of 48,000 warrants with a
five-year life to the underwriters at 120% of the price per share
in this offering with an estimated value of $196,752 that has no
effect on Total stockholders’ (deficit) equity; (iii) the
grant of 717,540 warrants with a five-year life to certain OID
noteholders with a strike price of the IPO price with an estimated
value of $3,028,019 that increases Additional paid-in capital and
Accumulated deficit by that amount with no effect on Total
stockholders’ equity; and (iv) retiring in cash $356,573 of
OID convertible debt and accrued interest not mandatorily converted
at time of this offering which decreases Notes payable by $329,499
and increases Accumulated deficit by $27,074.
You should read
this table in conjunction with “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations” and the financial statements and related notes
included elsewhere in this prospectus.
|
June 30, 2016 (unaudited)
|
|
|
|
|
|
|
|
|
Notes payable
(inclusive of current portion)
|
$9,242,642
|
$329,499
|
$-
|
|
|
|
|
Preferred stock,
$.0001 par value, 1,000,000 shares authorized; 36 shares issued and
outstanding; 0; and 0
|
-
|
-
|
-
|
Common
stock,
$.0001 par value, 9,000,000 shares authorized; 6,028,928 shares
issued and outstanding; 8,671,088 shares issued and outstanding,
proforma; 9,631,088 shares issued and outstanding, as adjusted
(1)
|
603
|
867
|
963
|
Additional paid-in
capital
|
6,099,469
|
25,280,291
|
31,807,414
|
|
(14,057,354)
|
(21,427,309)
|
(24,482,402)
|
Other comprehensive
income
|
(1,277,320)
|
(1,277,320)
|
(1,277,320)
|
Total
stockholders’ (deficit) equity
|
(9,234,602)
|
2,576,529
|
6,048,655
|
|
|
|
|
|
$8,040
|
$2,906,028
|
$6,048,655
|
(1) The number of
shares to be outstanding immediately after this offering is based
on 6,028,928 shares outstanding on September 30, 2016,
which excludes:
1,092,800 shares of
common stock issuable upon the exercise of outstanding options and
warrants at a weighted average exercise price of $5.75 per
share;
717,540 shares
issuable upon exercise of warrants to be issued on the closing of
this offering at an exercise price equal to the initial public
offering price; and
963,109 shares
reserved for issuance under our equity incentive
plans.
“Net tangible
book value” is total assets minus the sum of liabilities and
intangible assets. “Net tangible book value per share”
is net tangible book value divided by the total number of shares
outstanding on June 30, 2016. After giving pro forma
effect to (i) the issuance of 2,642,160 shares of common stock
immediately prior to the closing of this offering upon the
conversion of OID convertible notes (based on the price set forth
on the cover page of this prospectus), our pro forma net tangible
book value on June 30, 2016 was approximately ($1,547,000), or
($0.18) per share.
After giving effect to our issuance and sale
of 960,000 shares of common stock in this offering at an
assumed initial public offering price of $5.50 per share, the price
shown on the cover of this prospectus, after deducting the
estimated underwriting discounts and offering expenses payable by
us, the pro forma as adjusted net tangible book value as of June
30, 2016 would have been approximately $1.9 million, or $0.20 per
share. This represents an immediate increase in pro forma net
tangible book value of $0.38 per share to our existing stockholders
and an immediate dilution in pro forma net tangible book value of
$5.30 per share to investors purchasing shares of common
stock in this offering at the assumed public offering
price.
The following table
illustrates this dilution:
Assumed public
offering price per share
|
|
$ 5.50
|
Pro forma net
tangible book value per share as of June 30, 2016
|
$(0.18)
|
|
Increase in pro
forma net tangible book value per share attributable to the
offering
|
0.38
|
|
Pro forma as
adjusted net tangible book value per share as of June 30, 2016
after the offering
|
|
0.20
|
Dilution per share
to new investors in the offering
|
|
$ 5.30
|
A
$1.00 increase (decrease) in the assumed initial public offering
price of $5.50 per share would increase (decrease) the pro forma
net tangible book value by approximately $854,000, the pro forma
net tangible book value per share after this offering by $0.09 per
share and the dilution in pro forma net tangible book value per
share to investors in this offering by $0.09 per share, assuming
that the number of shares offered by us, as set forth on the cover
page of this prospectus, remains the same and after deducting the
estimated underwriting discount and offering expenses payable by
us. If the underwriters exercise their over-allotment
option in full, the pro forma as adjusted net tangible book value
will increase to $0.36 per share, representing an immediate
increase to existing stockholders of $0.54 per share and an
immediate dilution of $5.14 per share to new investors. If any
shares are issued in connection with outstanding options or
warrants, you will experience further dilution.
The following table
presents, on a pro forma basis as of June 30, 2016, the differences
between the existing stockholders and the new investors purchasing
our common stock in this offering with respect to the number of
shares purchased from us, the total consideration paid or to be
paid to us, which includes net proceeds received from the issuance
of common stock, and the average price per share paid or to be paid
to us at the public offering price of $5.50 per share, the price
set forth on the cover page of this prospectus, before deducting
estimated underwriting discounts and commissions and estimated
offering expenses:
|
|
|
|
|
|
|
|
|
|
Existing
stockholders
|
8,671,088
|
90%
|
$15,847,502
|
75%
|
$1.83
|
New
investors
|
960,000
|
10%
|
$5,280,000
|
25%
|
$5.50
|
Total
|
9,631,088
|
100%
|
$21,127,502
|
100%
|
|
Assuming the
underwriters’ option to purchase additional shares is
exercised in full, sales in this offering will reduce the
percentage of shares held by existing stockholders to 89% and will
increase the number of shares held by our new investors to
1,104,000 shares, or 1%, assuming no purchases of our common stock
by existing stockholders in this offering.
SELECTED
HISTORICAL FINANCIAL AND OPERATING DATA
The following table
presents our selected historical financial data for the periods
presented and should be read in conjunction with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the financial
statement and notes thereto included elsewhere in this
prospectus. The statements of operations data for the
fiscal years ended December 31, 2014 and 2015 and the statements of
financial condition data as of December 31, 2014 and 2015 are
derived from our audited financial statements included elsewhere in
this prospectus. The statements of operations data for
the six months ended June 30, 2015 and 2016 and the statements
of financial condition data as of June 30, 2016 is derived from our
unaudited financial statements included elsewhere in this
prospectus.
|
January
30, 2014 (Date of Inception) through
December
31, 2014
|
Year
Ending December 31, 2015
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
Statements
of Operations Data:
|
|
|
|
|
|
$2,329,106
|
$4,728,808
|
$2,951,033
|
$3,072,188
|
|
$(2,329,106)
|
$(4,728,808)
|
$(2,951,033)
|
$(3,072,188)
|
|
$(36,042)
|
$(1,201,428)
|
$(439,066)
|
$(2,689,783)
|
|
$(2,365,148)
|
$(5,930,236)
|
$(3,390,099)
|
$(5,761,971)
|
Net loss per share,
basic and diluted
|
$(0.67)
|
$(1.63)
|
$(0.95)
|
$(1.07)
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data:
|
|
|
|
|
$94,836
|
$581,668
|
$1,354,635
|
|
$6,575,753
|
$6,685,682
|
$6,576,958
|
Total current
liabilities
|
$2,430,855
|
$8,815,512
|
$14,311,560
|
|
$3,930,855
|
$10,315,512
|
$15,811,560
|
Total
stockholders’ equity (deficit)
|
$2,644,898
|
$(3,629,830)
|
$(9,234,602)
|
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following
discussion of our financial condition and results of operations
should be read in conjunction with our audited financial statements
and the related notes thereto and other financial information
appearing elsewhere in this prospectus.
Critical
Accounting Policies 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, 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
$2,270,000, $2,584,000, and $3,638,000 as of June 30, 2016,
December 31, 2015 and 2014, 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 five 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 six months ended June 30, 2016 and the years ended
December 31, 2015 and 2014 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 June 30, 2016, December 31, 2015 and 2014 was
approximately $1,854,000, $1,833,000, and $2,042,000,
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 Jumpstart Our Business Startups Act of 2012 was enacted.
Section 107 of 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 June 30, 2016, we
had an accumulated deficit of approximately $14,057,000, 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
Expenses
Conducting R&D
is central to our business. R&D expenses consist primarily
of:
employee-related
expenses, 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 expenses 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 expenses 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
Expenses
G&A expenses
consist 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 expenses 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, June 30, 2016 and 2015
We have experienced
net losses and negative cash flows from operations since our
inception. As of June 30, 2016, we had sustained cumulative losses
attributable to common stockholders of approximately
$14,057,000. At June 30, 2016, we had cash
and marketable securities of approximately
$1,389,000.
We have funded our
operations to date primarily through the issuance of debt and
convertible debt securities. During the years ended
December 31, 2015 and 2014 and the six months ended June 30, 2016,
we funded our working capital requirements with the proceeds of
short-term 8% convertible promissory notes and original issuance
discount convertible notes (the “OID
Notes”).
Through June 30,
2016, we had received aggregate gross proceeds of $896,000 from the
issuance of convertible promissory notes, $761,000 of which had
been repaid, leaving a principal balance of $135,000 outstanding.
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. On
July 22, 2016, the balance of $135,000 of convertible promissory
notes were exchanged into OID Notes.
Through June 30,
2016, we had received aggregate gross proceeds of $9,162,529 from
the issuance of $9,982,097 principal amount of OID
Notes.
We expect to incur
substantial expenditures in the foreseeable future for the
development of our product candidates. We will require additional
financing to develop, prepare regulatory filings and obtain
regulatory approvals, fund operating losses, and, if deemed
appropriate, establish manufacturing, sales and marketing
capabilities. We believe that our current cash and marketable
securities are sufficient to fund
operations until September 2016 without giving
consideration to the proceeds of this offering based on our current
business plan. 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 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.
Cash Flows for the Six
Months Ended June 30, 2016 and 2015
Net cash used in
operating activities for the six months ended June 30, 2016 was
$1,291,907, which primarily reflected our net loss of
$5,761,971 plus non-cash depreciation and amortization expense
of $370,177, non-cash fair value adjustment of the warrants
liability of $1,588,040, non-cash warrant expense of $55,097,
non-cash accreted interest on OID convertible debt and debt
discount - warrants of $1,096,358, a decrease in other receivables
of $777,663 due to the collection of the French R & D tax
credit, and an increase in accounts payable and accrued expenses of
$746,501 due to our cash position, offset by an increase in
prepaid expenses of $169,157 consisting primarily of finance and
legal costs associated with the filing of the S-1. Net cash used in
operating activities for the six months ended June 30, 2015 was
$1,705,836, which primarily reflected our net loss of $3,390,099
plus non-cash depreciation and amortization expense of $368,177,
non-cash accreted interest on OID convertible debt and debt
discount - warrants of $401,393, an increase in accounts payable
and accrued expenses of $1,098,197 due to our cash position offset
by an increase in other receivables of $217,073 due to amounts due
from our research partners.
Net cash used in
investing activities for the six months ended June 30, 2016 was
$11,629 which consisted of the purchase of property and equipment.
Net cash used in investing activities for the six months ended June
30, 2015 was $13,098, which consisted of the purchase of property
and equipment.
Net cash provided
by financing activities for the six months ended June 30, 2016 was
$2,094,000, which consisted of the gross proceeds in connection
with the issuance of OID convertible debt. Net cash provided by
financing activities for the six months ended June 30, 2015 was
$1,804,000, which consisted of the issuance of promissory notes of
$445,000 and the gross proceeds in connection with the issuance of
OID convertible debt of $1,720,000 offset by the repayment of
promissory notes of $361,000.
Consolidated
Results of Operations for the Six Months Ended June 30, 2016
and 2015
R&D expenses
were $1,526,237 and $1,370,488, respectively, for the six months
ended June 30, 2016 and 2015, an increase of $155,749. The increase
in R&D is primarily due to costs associated with
manufacturing additional batches of MS1819. We expect R&D
expenses to increase in future periods as our product candidates
continue through clinical trials and we seek strategic
collaborations.
G&A expenses
were $1,545,951 and $1,580,545, respectively, for the six months
ended June 30, 2016 and 2015, a decrease of $34,594. The decrease
was due primarily to a decrease in consulting fees. We expect
G&A expenses to increase going forward as we proceed to advance
our product candidates through the development and regulatory
process.
Interest expense
was $1,101,743 and $422,121, respectively, for the six months ended
June 30, 2016 and 2015, an increase of $679,622 due to the higher
level of outstanding OID convertible debt. Fair value adjustment of
our warrants was ($1,588,040) and ($16,945), respectively, for the
six months ended June 30, 2016 and 2015, an increase of $1,571,095.
This increase was due to the higher level of warrant liability as a
result of the higher level of outstanding OID convertible debt as
well as the warrants having a greater value at June 30, 2016 than
at June 30, 2015.
Net loss was
$5,761,971 and $3,390,099, respectively, for the six months ended
June 30, 2016 and 2015. The higher net loss for the six months
ended June 30, 2016 versus the same period in 2015 is due to the
higher expenses noted above.
Liquidity
and Capital Resources, December 31, 2015 and 2014
We have experienced
net losses and negative cash flows from operations since our
inception. We have cumulative losses attributable to common
stockholders of approximately $8,295,000 and $2,365,000,
respectively, as of December 31, 2015 and 2014. We have financed
our operations through issuances of equity and the proceeds of debt
instruments. From the date of inception through December 31, 2014,
we received gross proceeds of $859,491 from the sale of our common
stock to private investors. From the date of inception through
December 31, 2015, we received gross proceeds of $896,000 from the
issuance of convertible promissory notes. During this same period,
we also repaid $761,000 of these convertible promissory notes. From
the date of inception through December 31, 2015, we received cash
proceeds of $5,995,000 plus Marketable Securities from a noteholder
with a fair value of $150,000 at date of issuance for total
proceeds of $6,145,000 from the issuance of original issue
discounted convertible debt.
At December 31,
2015 and 2014, we had cash and marketable securities of
approximately $639,000 and $220,000, respectively. We have funded
our operations to date primarily through the issuance of debt and
convertible debt securities. During the years ended December 31,
2015 and 2014, we funded our working capital requirements with the
proceeds of convertible promissory notes and OID
Notes.
We expect to incur
substantial expenditures in the foreseeable future for the
development of our product candidates. We will require additional
financing to develop, prepare regulatory filings and obtain
regulatory approvals, fund operating losses, and, if deemed
appropriate, establish manufacturing, sales and marketing
capabilities. We believe that our current cash and marketable
securities are sufficient to fund operations until September
2016 without giving consideration to the proceeds of this offering
based on our current business plan. 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 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.
Cash Flows for
the Year Ended December 31, 2015 and the
Period January 30, 2014 (Date of Inception) through
December 31, 2014
Net cash used in
operating activities for the year ended December 31, 2015 was
$4,510,778, which primarily reflected our net loss of $5,930,236,
plus non-cash expenses of $733,599 for depreciation and
amortization, non-cash accreted interest expense due to the OID
convertible debt and debt discount - warrants of $1,561,677,
non-cash warrant expense of $218,337, and an increase of accounts
payable and accrued expenses of $251,608 due to our limited cash
position, offset by a non-cash fair value gain on warrant liability
of $386,103, an increase in other receivables of $638,092 due to a
higher French R & D tax credit in 2015 versus 2014 and an
increase in prepaid expenses of $340,524 consisting primarily of
finance and legal costs associated with the filing of the S-1. Net
cash used in operating activities from January 30, 2014 (Date of
Inception) through December 31, 2014 was $1,005,993, which
primarily reflected our net loss of $2,365,148, offset by a
non-cash fair value gain on the warrant liability of $1,368,
non-cash expenses of $429,935 for depreciation and amortization,
non-cash accreted interest expense due to the OID convertible debt
and debt discount - warrants of $59,029, and a decrease of working
capital of $871,559 due primarily to a decrease in accounts
receivable of $356,252 as cash was collected from our European
subsidiary’s prior billings, an increase of accounts payable
and accrued expenses of $563,089 due to our limited cash position,
offset by an increase in other receivables of
$50,595.
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
used in investing activities from January 30, 2014 (Date of
Inception) through December 31, 2014 was $751,955 consisting of
$191,003 in purchases of property and equipment and $560,952 of the
cash portion of the purchase of Protea Europe SAS.
Net cash provided
by financing activities for the year ended December 31, 2015 was
$5,021,353 consisting of 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.
Net cash provided
by financing activities from January 30, 2014 (Date of Inception)
through December 31, 2014 was $1,850,491 consisting of gross
proceeds of $859,491 for the sale of our common stock, gross
proceeds of $600,000 in connection with the issuance of OID
convertible debt, issuance of promissory notes of $451,000 offset
by the repayments of promissory notes of $60,000.
Consolidated
Results of Operations for the Year Ended December 31, 2015 and the
Period January 30, 2014 (Date of Inception) through December 31,
2014 (“2014”)
R&D expenses
were $1,398,056 and $670,491, respectively, for the year ended
December 31, 2015 and 2014, an increase of $727,565. The increase
in R&D is primarily due to costs associated with manufacturing
additional batches of MS1819 as well as increased R&D
activities in France. We expect R&D expenses to increase in
future periods as our product candidates continue through clinical
trials and we seek strategic collaborations.
G&A expenses
were $3,330,752 and $1,658,615, respectively, for the year ended
December 31, 2015 and 2014, an increase of $1,672,137. The increase
is primarily due to increased G&A expenses in the U.S. such as
an increase in legal/investment banking/other professional
consulting of $720,555, payroll expenses of $43,307, travel of
$121,565, and warrant expense of $218,337 as well as an increase in
amortization of $272,993. We expect G&A expenses to increase
going forward as we proceed to advance our product candidates
through the development and regulatory process.
Interest expense
was $1,587,533 and $68,149, respectively, for the year ended
December 31, 2015 and 2014, an increase of $1,519,384. The increase
was due to the higher level of outstanding OID convertible debt.
Fair value adjustment of our warrants was $386,103 and $1,368,
respectively, for the year ended December 31, 2015 and 2014, an
increase of $384,735. This increase was due to the valuation of the
warrants liability at the end of each respective period as well as
a higher level of warrant liability a result of the higher level of
outstanding OID convertible debt.
Other income was $0
and $30,739, respectively, for the year ended December 31, 2015 and
2014. The other income in 2014 was primarily from Mayoly, our
lipase development partner.
Net loss for the
year ended December 31, 2015 was $5,930,236 compared to a
net loss of $2,365,148 for 2014 as a result of the
above.
Off-Balance
Sheet Arrangements
We have no
significant off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or
capital resources that are material to our
stockholders.
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).
AZX1101- a
recombinant β-lactamase combination of bacterial origin for
the prevention of hospital-acquired infections by resistant
bacterial strains induced by parenteral administration of
β-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 expect
to initiate a Phase II clinical trial during the middle 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
million doses of IV beta-lactam antibiotics which are administered
to approximately 14 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. We intend to
use a portion of the proceeds of this offering to fund the
additional preclinical studies needed to file an Investigational
New Drug Application, or IND, with the FDA.
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 (the “Series A Preferred”) 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.
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 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 5 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: (1) adult patients with CP or
post-pancreatectomy and (2) 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 (2 patients out of 8 with MS1819) and
hypoglycemia (2 patients out of 8 with MS1819, and 1 patient out of
4 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 are currently in
the final stages of developing a protocol for 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. We have allocated a substantial portion of the
proceeds of this offering to conduct the necessary formulation work
and validation and stabilization testing on the MS1819 capsules
that will be used in the Phase II study, as well as to sponsor
and conduct the trial. We have identified a
principal investigator and have identified CRO and clinical sites
for the study. We expect to file an IND for the study as a
result of interactions with the FDA. We expect to submit a
U.S. IND in the fourth quarter of 2016. 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
β-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
billion.
Our AZX1101 product
candidate is at an early stage of preclinical development and will
consist of a combination of two β-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. We
intend to use a portion of the proceeds of this offering to conduct
the first animal study and primary toxicology assessment of AZX1101
during the fourth quarter of 2016. The offering proceeds
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 (the “Series A
Preferred”) 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 $2,000,000 due within (10) 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 $100,000,000
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.
Under the terms of
the SPA, Protea has the right to designate one member of our board
of directors, which right terminates upon the completion of this
offering. Protea has exercised this right and Mr. Maged Shenouda
sits on our Board.
Mayoly Agreement
Effective March 22,
2010, Protea and AzurRx SAS entered into a joint research and
development agreement (the “2010 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 (1) French patent application no. FR9810900 (INRA CNRS patent
application), (2) international patent application no.
WO2000FR0001148 (Mayoly patent application) and (3) 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
(a) use of lipase as an enzymatic catalyst throughout this field,
including the production of pharmaceuticals, and (b) 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 a
Yarrowia 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; 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, US patent 8,334,130 expires September
11, 2028, and US 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
following completion of this offering.
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 Abvie, Johnson & Johnson and Actavis plc. There are
currently six PPE products that have been approved by the FDA for
sale in the U.S. 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 US 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 3 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 2 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 2 evaluations, Phase 3 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 US 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 takeinto 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 4 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 September 30, 2016, we had twelve full-time employees, of
whom nine were employed by AzurRx SAS and located in France and
three were employed by us and located in our office in Brooklyn,
New York.
Properties
Our executive
offices are located in approximately 687 square feet of office
space at 760 Parkside Avenue, Downstate Biotechnology Incubator,
Suite 217, Brooklyn, NY 11226 that we occupy under a lease expiring
on December 31, 2016 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 9-year lease expiring in December
24, 2020.
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.
Emerging Growth Company Status
We qualify as an
“emerging growth company” as defined in the Jumpstart
Our Business Startups Act of 2012, which we refer to as the JOBS
Act. As a result, we are permitted to, and intend to, rely on
exemptions from certain disclosure requirements that are applicable
to other companies that are not emerging growth companies.
Accordingly, we have included detailed compensation information for
only our three most highly compensated executive officers and have
not included a compensation discussion and analysis (CD&A) of
our executive compensation programs in this prospectus. In
addition, for so long as we are an “emerging growth
company,” we will not be required to:
engage an auditor
to report on our internal controls over financial reporting
pursuant to Section 404(b) of the Sarbanes–Oxley Act of
2002 (the “Sarbanes–Oxley
Act”);
comply with any
requirement that may be adopted by the Public Company Accounting
Oversight Board (the “PCAOB”) regarding mandatory audit
firm rotation or a supplement to the auditor’s report
providing additional information about the audit and the financial
statements (i.e., an auditor discussion and
analysis);
submit certain
executive compensation matters to shareholder advisory votes, such
as “say-on-pay,” “say-on-frequency,” and
“say-on-golden parachutes;”
or
disclose certain
executive compensation related items such as the correlation
between executive compensation and performance and comparison of
the chief executive officer’s compensation to median employee
compensation.
In addition, the
JOBS Act provides that an “emerging growth company” can
use the extended transition period for complying with new or
revised accounting standards.
We will remain an
“emerging growth company” until the earliest to occur
of:
our reporting $1
billion or more in annual gross revenues;
our issuance, in a
three year period, of more than $1 billion in non-convertible
debt;
the end of the
fiscal year in which the market value of our common stock held by
non-affiliates exceeds $700 million on the last business day of our
second fiscal quarter; and
The following table
sets forth certain information about our executive officers, key
employees and directors as of the date of this Registration
Statement.
|
|
|
Johan M. (Thijs)
Spoor
|
44
|
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
|
_____________
(1)
Member of the Audit
Committee, Compensation Committee and Nominating and Corporate
Governance Committee
Johan M. (Thijs)
Spoor is 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, and still serves as a member of its
board of directors. 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 Chief Scientific Officer of our company 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 is
the CFO of Concordia International and joined our board of
directors in May 2015. Mr. Borkowski is a healthcare executive who
previously was the CFO of Amerigen Pharmaceuticals, a generic
pharmaceutical company with a focus on oral controlled release
products. Prior to working with Amerigen, he was the CFO and
Executive Vice President of Mylan N.V. In addition, Mr. Borkowski
previously held the position of CFO with Convatec, a global medical
device company focused on wound care and ostomy, 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 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) and was appointed to
our board as Protea’s designee pursuant to the terms of the
SPA. 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.
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 and Riddell 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, or nominating committee. Our board
of directors has adopted written charters for each of these
committees. Upon completion of this offering, copies of the
charters will be 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 one independent audit committee member upon the listing of our
common stock, a majority of independent directors within 90 days of
the date of this prospectus and all independent audit committee
members within one year of the date of this prospectus. Our board
of directors has affirmatively determined that Messrs. Borkowski
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
Committee
The purpose of the
nominating 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. Our nominating 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. Upon completion
of this offering, a copy of this code will be 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.
Summary Compensation Table
The following table
provides information regarding the compensation paid during the
years ended December 31, 2015 and 2014 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
prospectus.
Name
and Principal Position
|
Year
|
|
|
|
|
|
Johan M. (Thijs)
Spoor, President and Chief Operating Officer
|
2015
|
$478,400
|
-0-
|
-0-
|
-0-
|
$478,400
|
|
2014
|
$139,100
|
-0-
|
-0-
|
-0-
|
$139,100
|
|
|
|
|
|
|
Daniel Dupret,
Chief Scientific Officer
|
2015
|
$204,675
|
-0-
|
-0-
|
-0-
|
$204,675
|
|
2014
|
$229,174
|
-0-
|
-0-
|
-0-
|
$229,174
|
Potential Payments Upon Termination or Change in
Control
If we terminate Mr.
Spoor’s employment other than for cause, we will pay him
twelve (12) 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, the Company will pay
him eighteen (18) months of his base salary as
severance.
If we terminate Dr.
Dupret’s employment other than for cause, the Company will
pay him twelve (12) months of his base salary as
severance.
Overview
of Our Fiscal 2015 Executive Compensation
Elements of Compensation
Our executive
compensation program consisted of the following components of
compensation in 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 2015 is listed in
the 2015 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, increasing to
$425,000 upon completion of this offering and listing of our common
stock on The NASDAQ Stock Market or NYSE MKT, and 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 (12)
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 (18) months’
severance.
Subject to any
required consents from third parties, on or as promptly as
practicable following the effective date, Mr. Spoor shall be issued
100,000 shares of restricted stock that vest 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
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, on or as
promptly as practicable following the effective date, Mr. Spoor
shall also be granted ten-year options to be governed by the terms
of the 2014 Incentive Plan to purchase 380,000 shares of common
stock, which options will vest as follows: (i) 100,000 upon
consummation of this offering, (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.
Outstanding Equity Incentive Awards At Fiscal Year-End
There were no
outstanding equity awards held by our named executive officers as
of December 31, 2015 and 2014.
Warrant Exercises and Stock Vested
No officers or directors exercised warrants and no stock vested
during the years ended December 31, 2015 and 2014.
Non-Executive Director Compensation
Edward Borkowski
was paid $90,000 in 2015 as a financial consultant. 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 billion
dollars for 20 consecutive trading days, in each case subject to
the earlier determination of a majority of the Board.
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 board, and upon consummation of this offering
will be administered by the compensation committee of the board,
which shall consist 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 ten percent (10%) of the issued and outstanding shares
of common stock on an as converted basis (the “As Converted
Shares”) on a rolling basis. For calculation purposes, the As
Converted Shares shall include all shares of common stock and all
shares of common stock issuable upon the conversion of outstanding
preferred stock and other convertible securities, but shall not
include any shares of common stock issuable upon the exercise of
options, 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).
CERTAIN
RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS
We were party to an
agreement with JIST Consulting (“JIST”), a company
controlled by Johan M. Spoor, our CEO, President and member of
our board of directors, to provide Mr. Spoor’s services as a
consultant for business strategy, financial modeling, and
fundraising. During the years ended December 31, 2015 and 2014, we
incurred $478,400 and $139,100, respectively, of expenses to JIST.
As of June 30, 2016, we had $508,300 in accounts payable to JIST.
Mr. Spoor received no other compensation from us other than
reimbursement of related travel expenses.
We were party to an
agreement with Rigby-Hutton Management Services
(“RHMS”) to provide compensation to our former
President, Christine Rigby-Hutton. During the years ended December
31, 2015 and 2014, we incurred $27,750 and $99,142, respectively,
of expenses to RHMS. As of June 30, 2016, we had $38,453 in
accounts payable to RHMS. Ms. Rigby-Hutton resigned effective April
20, 2015.
On May 21, 2014, we
entered into the SPA with Protea in connection with the
Acquisition. Pursuant to the SPA, we issued to Protea
100 shares of our Series A Preferred convertible into 33% of our
outstanding common stock. See the section entitled
“Description of the Business, Agreements”
above.
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 35%, 47%, and 64%, respectively, of our
outstanding common stock as of June 30, 2016 and December 31, 2015
and 2014.
In July 2014, we
issued promissory notes to Johan M. (Thijs) Spoor, our president
and chief executive officer, in the aggregate principal amount of
$10,000. These notes were repaid in full as to $5,000 on October
17, 2014 and $5,000 on November 10, 2014.
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 issued in this
offering. 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 out 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. The notes will automatically convert into shares of our
common stock upon the consummation of this offering at a conversion
price equal to the principal amount of the notes plus any accrued
interest, multiplied by 1.25, divided by the lesser of $4.65 or the
price per share in this offering. Mr. Borkowski has 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.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table
sets forth certain information regarding the beneficial ownership
of our common stock as of September 30, 2016, and as adjusted
to reflect the sale of common stock being offered in this offering
by:
each person, or
group of affiliated persons, known to us to own beneficially more
than 5% of our common stock;
each of our current
directors;
each of our named
executive officers; and
all of our current
directors and executive officers as a group.
The information in
the following table has been presented in accordance with the rules
of the SEC. Under such rules, beneficial ownership of a
class of capital stock includes any shares of such class as to
which a person, directly or indirectly, has or shares voting power
or investment power and also any shares as to which a person has
the right to acquire such voting or investment power within 60 days
through the exercise of any stock option, warrant or other
right. If two or more persons share voting power or
investment power with respect to specific securities, each such
person is deemed to be the beneficial owner of such
securities. Except as we otherwise indicate below and
under applicable community property laws, we believe that the
beneficial owners of the common stock listed below, based on
information they have furnished to us, have sole voting and
investment power with respect to the shares
shown. Except as otherwise indicated, each stockholder
named in the table is assumed to have sole voting and investment
power with respect to the number of shares listed opposite the
stockholder’s name.
The calculations of
beneficial ownership in this table are based on 6,028,928
shares of common stock outstanding at September 30,
2016.
Name
and Address of Beneficial Owner (1)
|
Shares Beneficially
Owned
|
Percentage Total
Voting Power
Prior to Offering
|
Percentage Total
Voting Power
After
This Offering
|
|
0
|
*
|
*
|
Johan M. (Thijs)
Spoor (2)
|
339,885
|
6%
|
3%
|
|
10,000
|
*
|
*
|
|
280,486
|
5%
|
3%
|
Maged Shenouda
|
20,000
|
*
|
*
|
Pelican Partners
LLC (4)
|
1,803,146
|
30%
|
19%
|
Richard Melnick
(5)
|
871,962
|
14%
|
9%
|
Jason Adelman
(6)
|
600,243
|
10%
|
6%
|
Burke Ross (7)
|
1,804,866
|
25%
|
18%
|
ADEC Private Equity
Investment, LLC (8)
|
1,304,866
|
18%
|
12%
|
EBR Ventures, LLC
(9)
|
500,000
|
8%
|
5%
|
All directors and
executive officers as a group (5 persons)
|
650,371
|
11%
|
7%
|
___________________________
* 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) Includes
300,000 shares issuable 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.
(3) Includes
103,126 shares issuable upon conversion of OID notes and 27,360
shares issuable upon the exercise of warrants.
(4) The address of
such entity is P.O. Box 2422, Westport, CT
06880.
(5) The address of
such individual is 28 Gothic Ave., Crested Butte, CO
81224.
(6) The address of
such individual is 30 E. 72nd St., 5th Floor,
New York, NY 10021. Includes 51,563
shares issuable upon conversion of OID notes and 13,680 shares
issuable upon the exercise of warrants.
(7) Includes
1,031,268 shares issuable upon conversion of OID notes and 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.
(8) Includes
1,031,268 shares issuable upon conversion of OID notes and 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.
(9)
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.
General
Our amended
and restated certificate of incorporation authorizes the
issuance of up to 100,000,000 shares of common stock, par value
$0.0001 per share, and 10,000,000 shares of preferred stock, par
value $0.0001 per share.
Common
Stock
As
of September 30, 2016, there were 6,028,928 shares of
common stock outstanding and 1,092,800 shares of common stock
subject to outstanding warrants. An additional 2,642,160 shares of
common stock will be issued immediately prior to the closing of
this offering upon the conversion of outstanding convertible notes.
Each holder of common stock is entitled to one vote for each share
of common stock held on all matters submitted to a vote of the
stockholders, including the election of directors. Our certificate
of incorporation and bylaws do not provide for cumulative voting
rights.
Subject to
preferences that may be applicable to any then outstanding
preferred stock, the holders of our outstanding shares of common
stock are entitled to receive dividends, if any, as may be declared
from time to time by our board of directors out of legally
available funds. In the event of our liquidation, dissolution or
winding up, holders of common stock will be entitled to share
ratably in the net assets legally available for distribution to
stockholders after the payment of all of our debts and other
liabilities, subject to the satisfaction of any liquidation
preference granted to the holders of any outstanding shares of
preferred stock.
Holders of our
common stock have no preemptive, conversion or subscription rights,
and there are no redemption or sinking fund provisions applicable
to the common stock. The rights, preferences and privileges of the
holders of common stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of
our preferred stock that are outstanding or that we may designate
and issue in the future.
Preferred
Stock
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.
Convertible
Notes
Commencing on
October 10, 2014, through a series of transactions, we issued
original issue 15% discounted convertible notes to various
investors. On March 31, 2016, the holders of all but $300,000 in
principal signed exchange agreements exchanging the principal
amount into new original issue 8% discounted convertible notes due
on November 4, 2016, modifying the conversion price to $4.65 per
share. The aggregate gross proceeds received in connection with
these notes as of September 30, 2016 was $9,042,529. The notes will
automatically convert into shares of our common stock upon the
consummation of this offering equal to the quotient obtained by
dividing the principal amount, multiplied by 1.25, by the lesser of
$4.65 or the price per share or price per unit issued in this
offering (2,642,160 shares).
Options
We currently do not
have any outstanding options to purchase shares of our common stock
or other securities.
Warrants
In connection
with our private placement of our original issue discounted
convertible notes, we issued five-year warrants to purchase an
aggregate of 950,360 shares of our common stock at exercise prices
ranging from $5.58 to $7.37 per share. In addition, we issued
warrants to purchase an aggregate of 142,440 shares of our common
stock to placement agents in connection with these original issue
discounted convertible notes. In September 2016, we agreed to issue
warrants to purchase an aggregate of 717,540 shares of common stock
to certain holders of our original issue discounted convertible
notes in connection with their execution of an amendment to their
securities purchase agreement.
Transfer
Agent
The transfer agent
for our common stock is Transhare Corporation, 4626 South Broadway,
Englewood, Colorado 80113, Tel: (303) 662-1112.
Listing
Our common stock is
listed on The NASDAQ Capital Market under the symbol
“AZRX.”
Holders
As of September 30,
2016, there were 6,028,928 shares of common stock outstanding,
which were held by approximately 46 stockholders of
record.
Registration
Rights
Pursuant to the SPA
with Protea, we granted registration rights to Protea to include
the shares of common stock issuable upon conversion of the Series A
Preferred in registration statements that we may file for ourselves
or other stockholders in the future. We also agreed with
the holders of our outstanding OID notes and warrants issued in
connection therewith that we file a registration statement
providing for the resale of the shares of common stock underlying
such notes and warrants no later than sixty (60) days following the
effective date of this offering (subject to any underwriter
lock-ups). In addition, we granted certain registration
rights in connection with the issuance of the warrants issued to
our placement agent in connection with a previous private
placement. We will pay all of the expenses associated
with each of such registrations.
Delaware
Anti-Takeover Law
We are subject to
the provisions of Section 203 of the DGCL regulating corporate
takeovers upon consummation of this offering. This statute prevents
certain Delaware corporations, under certain circumstances, from
engaging in a “business combination” with:
a stockholder who
owns 15% or more of our outstanding voting stock (otherwise known
as an “interested
stockholder”);
an affiliate of an
interested stockholder; or
an associate of an
interested stockholder, for three years following the date that the
stockholder became an interested stockholder.
A “business
combination” includes a merger or sale of more than 10% of
our assets. However, the above provisions of Section 203 do not
apply if:
our board of
directors approves the transaction that made the stockholder an
“interested stockholder,” prior to the date of the
transaction;
after the
completion of the transaction that resulted in the stockholder
becoming an interested stockholder, that stockholder owned at least
85% of our voting stock outstanding at the time the transaction
commenced, other than statutorily excluded shares of common stock;
or
on or subsequent to
the date of the transaction, the business combination is approved
by our board of directors and authorized at a meeting of our
stockholders, and not by written consent, by an affirmative vote of
at least two-thirds of the outstanding voting stock not owned by
the interested stockholder.
Prior to this
offering, no public market for our common stock existed, and a
liquid trading market for our common stock may not develop or be
sustained after this offering. Future sales of substantial amounts
of our common stock in the public market could adversely affect
prevailing market prices of our common stock from time to time and
could impair our future ability to raise equity capital in the
future. Furthermore, because only a limited number of shares of our
common stock will be available for sale shortly after this offering
due to certain contractual and legal restrictions on resale
described below, sales of substantial amounts of our common stock
in the public market after such restrictions lapse, or the
anticipation of such sales, could adversely affect the prevailing
market price of our common stock and our ability to raise equity
capital in the future.
Based upon the
number of shares outstanding as of September 30, 2016, upon the
closing of this offering, we will have outstanding an aggregate of
9,631,088 shares of common stock, assuming no exercise of the
underwriters’ over-allotment option and no exercise of
outstanding options, after giving effect to the issuance of
2,642,160 shares of common stock upon the conversion of outstanding
convertible notes immediately prior to the closing of this
offering. All of the shares sold in this offering by us will be
freely tradable without restrictions or further registration under
the Securities Act, unless held by our affiliates, as that term is
defined under Rule 144 under the Securities Act, or subject to
lock-up agreements. The remaining shares of common stock
outstanding upon the closing of this offering are restricted
securities as defined in Rule 144. Restricted securities may be
sold in the U.S. public market only if registered or if they
qualify for an exemption from registration, including by reason of
Rule 144 or Rule 701 under the Securities Act, which rules are
summarized below. These remaining shares will generally become
available for sale in the public market as follows:
no shares will be
eligible for sale in the public market on the date of this
prospectus; and
approximately
9,631,088 shares will be eligible for sale in the public market
upon expiration of lock-up agreements 181 days after the date of
this prospectus, subject in certain circumstances to the volume,
manner of sale and other limitations of Rule 144 and Rule
701.
As of September 30,
2016, all of the 1,092,800 shares of common stock issuable upon
exercise of outstanding options and warrants will be vested and
eligible for sale 181 days after the date of this
prospectus.
We may issue shares
of common stock from time to time as consideration for future
acquisitions, investments or other corporate purposes. In the event
that any such acquisition, investment or other transaction is
significant, the number of shares of common stock that we may issue
may in turn be significant. We may also grant registration rights
covering those shares of common stock issued in connection with any
such acquisition and investment.
In addition, the
shares of common stock reserved for future issuance under our 2014
Plan will become eligible for sale in the public market to the
extent permitted by the provisions of various vesting schedules,
the lock-up agreements, a registration statement under the
Securities Act or an exemption from registration, including Rule
144 and Rule 701.
Rule
144
In general, persons
who have beneficially owned restricted shares of our common stock
for at least six months, and any affiliate of the company who owns
either restricted or unrestricted shares of our common stock, are
entitled to sell their securities without registration with the SEC
under an exemption from registration provided by Rule 144 under the
Securities Act.
In general, a
person who has beneficially owned restricted shares of our common
stock for at least six months would be entitled to sell their
securities provided that (1) such person is not deemed to have been
one of our affiliates at the time of, or at any time during the 90
days preceding, a sale, (2) we have been subject to the Exchange
Act periodic reporting requirements for at least 90 days before the
sale and (3) we are current in our Exchange Act reporting at the
time of sale.
Persons who have
beneficially owned restricted shares of our common stock for at
least six months, but who are our affiliates at the time of, or any
time during the 90 days preceding, a sale, would be subject to
additional restrictions, by which such person would be entitled to
sell within any three-month period only a number of securities that
does not exceed the greater of either of the
following:
1% of the number of
shares of our common stock then outstanding, which will equal
approximately 96,311 shares immediately after the closing of this
offering based on the number of common shares outstanding as
of September 30, 2016.
the average weekly
trading volume of our common stock during the four calendar
weeks preceding the filing of a notice on Form 144 with respect to
the sale.
Such sales by
affiliates must also comply with the manner of sale, current public
information and notice provisions of Rule 144.
Rule
701
In general, under
Rule 701, a person who purchased shares of our common stock
pursuant to a written compensatory plan or contract and who is not
deemed to have been one of our affiliates during the immediately
preceding 90 days may sell these shares in reliance upon Rule 144,
but without being required to comply with the notice, manner of
sale, public information requirements or volume limitation
provisions of Rule 144. Rule 701 also permits affiliates to sell
their Rule 701 shares under Rule 144 without complying with the
holding period requirements of Rule 144. All holders of Rule 701
shares, however, are required to wait until 90 days after the date
of this prospectus before selling such shares pursuant to Rule 701.
As of September 30, 2016, no shares of our outstanding common
stock had been issued in reliance on Rule 701 as a result of
exercises of stock options and issuance of restricted stock.
However, substantially all Rule 701 shares are subject to lock-up
agreements as described below and will become eligible for sale
upon the expiration of the restrictions set forth in those
agreements.
Form
S-8 Registration Statements
Following this
offering, we intend to file with the SEC a registration statement
on Form S-8 under the Securities Act to register the offer and sale
of shares of our common stock that are issuable pursuant to our
2014 Plan. Shares covered by this registration statement will then
be eligible for sale in the public markets, subject to vesting
restrictions, any applicable lock-up agreements described below and
Rule 144 limitations applicable to affiliates.
Lock-Up
Arrangements
We, all of our
directors and executive officers and holders of substantially all
of our common stock and securities exercisable for or
convertible into our common stock outstanding immediately upon the
closing of this offering, have agreed with the underwriters that,
for a period of 180 days following the date of this prospectus,
subject to certain exceptions, we and they will not, directly or
indirectly, offer, sell, contract to sell, pledge, grant any option
to purchase, make any short sale, or otherwise dispose of or hedge
any of our shares of common stock, any options, or any securities
convertible into, or exchangeable for or that represent the right
to receive shares of our common stock. These agreements are
described in the section of this prospectus titled
“Underwriting.”
Registration
Rights
Pursuant to the SPA
with Protea, we granted registration rights to Protea to include
the shares of common stock issuable upon conversion of the Series A
Preferred in registration statements that we may file for ourselves
or other stockholders in the future. We also agreed with the
holders of our outstanding OID notes and warrants issued in
connection therewith that we file a registration statement
providing for the resale of the shares of common stock underlying
such notes and warrants no later than sixty (60) days following the
effective date of this offering (subject to any underwriter
lock-ups). In addition, we granted certain registration rights in
connection with the issuance of the warrants issued to our
placement agent in connection with a previous private placement. We
will pay all of the expenses associated with each of such
registrations. See the section titled “Description of
Capital Stock—Registration Rights” for additional
information.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
Our Restated
Certificate of Incorporation and Amended and Restated Bylaws,
subject to the provisions of Delaware Law, contain provisions
which allow the corporation to indemnify any person against
liabilities and other expenses incurred as the result of defending
or administering any pending or anticipated legal issue in
connection with service to us if it is determined that person acted
in good faith and in a manner which he reasonably believed was in
the best interest of the corporation. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted
to our directors, officers and controlling persons, we have been
advised that in the opinion of the SEC, such indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable.
WallachBeth
Capital, LLC and Network 1 Securities, Inc. are acting as the
co-book-running managers of the offering, and we have entered into
an underwriting agreement on the date of this prospectus, with them
as underwriters. Subject to the terms and conditions of
the underwriting agreement, we have agreed to sell to the
underwriters and the underwriters have agreed to purchase from us,
at the public offering price per share less the underwriting
discounts set forth on the cover page of this
prospectus.
The underwriters
are committed to purchase all the shares of common stock offered by
us other than those covered by the option to purchase additional
shares described below, if they purchase any shares. The
obligations of the underwriters may be terminated upon the
occurrence of certain events specified in the underwriting
agreement. Furthermore, pursuant to the underwriting
agreement, the underwriters’ obligations are subject to
customary conditions, representations and warranties contained in
the underwriting agreement, such as receipt by the underwriters of
officers’ certificates and legal opinions.
We have agreed to
indemnify the underwriters against specified liabilities, including
liabilities under the Securities Act of 1933, and to contribute to
payments the underwriters may be required to make in respect
thereof.
The underwriters
are offering the shares, subject to prior sale, when, as and if
issued to and accepted by them, subject to approval of legal
matters by their counsel and other conditions specified in the
underwriting agreement. The underwriters reserve the
right to withdraw, cancel or modify offers to the public and to
reject orders in whole or in part.
Over-allotment Option
We
have granted the underwriters an over-allotment
option. This option, which is exercisable for up to 45
days after the date of this prospectus, permits the underwriters to
purchase a maximum of 144,000 additional shares (15% of the shares
sold in this offering) from us to cover over-allotments, if
any. If the underwriters exercise all or part of this
option, it will purchase shares covered by the option at the public
offering price per share that appears on the cover page of this
prospectus, less the underwriting discount. If this
option is exercised in full, the total offering price to the public
will be $6,072,000 and the total net proceeds, before expenses, to
us will be $5,525,520.
Discount
The following table
shows the public offering price, underwriting discount and
proceeds, before expenses, to us. The information
assumes either no exercise or full exercise by the underwriters of
their over-allotment option.
|
|
Total Without Over-Allotment Option
|
Total With Over-Allotment Option
|
Public
offering price
|
$5.50
|
$5,280,000
|
$6,072,000
|
Underwriting
discount (9%)
|
$0.495
|
$475,200
|
$546,480
|
Proceeds,
before expenses, to us
|
$5.005
|
$4,804,800
|
$5,525,520
|
The underwriters
propose to offer the shares offered by us to the public at the
public offering price per share set forth on the cover of this
prospectus. In addition, the underwriters may offer some
of the shares to other securities dealers at such price less a
concession of $0.275 per share. If all of the shares
offered by us are not sold at the public offering price per share,
the underwriters may change the offering price per share and other
selling terms by means of a supplement to this
prospectus.
We will pay the
out-of-pocket accountable expenses of the underwriters in
connection with this offering. The underwriting
agreement, however, provides that in the event the offering is
terminated, any advance expense deposits paid to the underwriters
will be returned to the extent that offering expenses are not
actually incurred in accordance with FINRA Rule
5110(f)(2)(C).
We have agreed to
pay the underwriters’ non-accountable expenses allowance
equal to 2% of the public offering price of the shares (excluding
shares that we may sell to the underwriters to cover
over-allotments). We have also agreed to pay the
underwriters’ expenses relating to the offering, including
(a) all filing fees incurred in clearing this offering with FINRA;
(b) up to $5,000 of fees, expenses and disbursements relating to
background checks of our officers and directors; (c) all fees,
expenses and disbursements relating to the registration,
qualification or exemption of securities offered under the
securities laws of foreign jurisdictions designated by the
underwriters; (d) stock transfer and/or stamp taxes, if any,
payable upon the transfer of shares of our common stock to the
underwriters; (e) up to $5,000 for the costs associated with bound
volumes of the public offering materials as well
as commemorative mementos and lucite tombstones; (f) $25,000
for the underwriters’ use of Ipreo’s book-building,
prospectus tracking and compliance software for this offering; (g)
up to $21,775 of the underwriters’ actual accountable road
show expenses for the offering; and (h) up to $100,000 for the fees of the
underwriters’ counsel.
We estimate that
the total expenses of the offering payable by us, excluding
underwriting discounts and commissions, will be approximately
$1,000,000.
Discretionary
Accounts
The underwriters do
not intend to confirm sales of the securities offered hereby to any
accounts over which they have discretionary authority.
Lock-Up
Agreements
Pursuant to certain
“lock-up” agreements, we, our executive officers,
directors and holders of substantially all of our common stock and
securities exercisable for or convertible into our common stock
outstanding immediately upon the closing of this offering,
have agreed, subject to certain exceptions, not to offer,
sell, assign, transfer, pledge, contract to sell, or otherwise
dispose of or announce the intention to otherwise dispose of, or
enter into any swap, hedge or similar agreement or arrangement that
transfers, in whole or in part, the economic risk of ownership of,
directly or indirectly, engage in any short selling of any common
stock or securities convertible into or exchangeable or exercisable
for any common stock, whether currently owned or subsequently
acquired, without the prior written consent of the underwriters,
for a period of 180 days from the date of effectiveness of the
offering.
The lock-up period
described in the preceding paragraph will be automatically extended
if: (1) during the last 17 days of the restricted period, we issue
an earnings release or announce material news or a material event;
or (2) prior to the expiration of the lock-up period, we announce
that we will release earnings results during the 16-day period
beginning on the last day of the lock-up period, in which case the
restrictions described in the preceding paragraph will continue to
apply until the expiration of the 18-day period beginning on the
date of the earnings release, unless the underwriters waive this
extension in writing; provided, however, that this lock-up period
extension shall not apply to the extent that FINRA has amended or
repealed NASD Rule 2711(f)(4), or has otherwise provided written
interpretive guidance regarding such rule, in each case, so as to
eliminate the prohibition of any broker, dealer, or member of a
national securities association from publishing or distributing any
research report, with respect to the securities of an emerging
growth company (as defined in the JOBS Act) prior to or after the
expiration of any agreement between the broker, dealer, or member
of a national securities association and the emerging growth
company or its stockholders that restricts or prohibits the sale of
securities held by the emerging growth company or its stockholders
after the initial public offering date.
Underwriter
Warrants
We have agreed to
issue to the underwriters warrants to purchase up to a total of 5%
of the shares of common stock sold in this offering (excluding the
shares sold through the exercise of the over-allotment
option). The warrants are exercisable at $6.60 per share
(120% of the public offering price) commencing on a date which is
one year from the effective date of the offering under this
prospectus supplement and expiring on a date which is no more than
five (5) years from the effective date of the offering in
compliance with FINRA Rule 5110(f)(2)(G). The warrants
have been deemed compensation by FINRA and are therefore subject to
a 180-day lock-up pursuant to Rule 5110(g)(1) of
FINRA. The underwriters (or their permitted assignees
under the Rule) will not sell, transfer, assign, pledge, or
hypothecate these warrants or the securities underlying these
warrants, nor will it engage in any hedging, short sale,
derivative, put, or call transaction that would result in the
effective economic disposition of the warrants or the underlying
securities for a period of 180 days from
effectiveness. In addition, the warrants provide for
registration rights upon request, in certain cases. We
will bear all fees and expenses attendant to registering the
securities issuable on exercise of the warrants other than
underwriting commissions incurred and payable by the
holders. The exercise price and number of shares
issuable upon exercise of the warrants may be adjusted in certain
circumstances including in the event of a stock dividend,
extraordinary cash dividend or our recapitalization,
reorganization, merger or consolidation. However, the
warrant exercise price or underlying shares will not be adjusted
for issuances of shares of common stock at a price below the
warrant exercise price.
Electronic
Offer, Sale and Distribution of Shares
A prospectus in
electronic format may be made available on the websites maintained
by the underwriters, if any, participating in this offering and the
underwriters participating in this offering may distribute
prospectuses electronically. The underwriters may agree
to allocate a number of shares for sale to its online brokerage
account holders. Internet distributions will be
allocated by the underwriters that will make internet distributions
on the same basis as other allocations. Other than the
prospectus in electronic format, the information on these websites
is not part of, nor incorporated by reference into, this prospectus
or the registration statement of which this prospectus forms a
part, has not been approved or endorsed by us or the underwriters
in their capacity as underwriters, and should not be relied upon by
investors.
Stabilization
In connection with
this offering, the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate-covering
transactions, penalty bids and purchases to cover positions created
by short sales.
●
|
Stabilizing
transactions permit bids to purchase shares so long as the
stabilizing bids do not exceed a specified maximum, and are engaged
in for the purpose of preventing or retarding a decline in the
market price of the shares while the offering is in
progress.
|
●
|
Over-allotment
transactions involve sales by the underwriters of shares in excess
of the number of shares the underwriters are obligated to
purchase. This creates a syndicate short position which
may be either a covered short position or a naked short
position. In a covered short position, the number of
shares over-allotted by the underwriters is not greater than the
number of shares that they may purchase in the over-allotment
option. In a naked short position, the number of shares
involved is greater than the number of shares in the over-allotment
option. The underwriters may close out any short
position by exercising their over-allotment option and/or
purchasing shares in the open market.
|
●
|
Syndicate covering
transactions involve purchases of shares in the open market after
the distribution has been completed in order to cover syndicate
short positions. In determining the source of shares to
close out the short position, the underwriters will consider, among
other things, the price of shares available for purchase in the
open market as compared with the price at which they may purchase
shares through exercise of the over- allotment
option. If the underwriters sell more shares than could
be covered by exercise of the over-allotment option and, therefore,
have a naked short position, the position can be closed out only by
buying shares in the open market. A naked short position
is more likely to be created if the underwriters are concerned that
after pricing there could be downward pressure on the price of the
shares in the open market that could adversely affect investors who
purchase in the offering.
|
●
|
Penalty bids
permits the underwriters to reclaim a selling concession from a
syndicate member when the shares originally sold by that syndicate
member are purchased in stabilizing or syndicate covering
transactions to cover syndicate short positions.
|
These stabilizing
transactions, syndicate covering transactions and penalty bids may
have the effect of raising or maintaining the market price of our
shares of common stock or preventing or retarding a decline in the
market price of our shares of common stock. As a result,
the price of our common stock or warrants in the open market may be
higher than it would otherwise be in the absence of these
transactions. Neither we nor the underwriters make any
representation or prediction as to the effect that the transactions
described above may have on the price of our common
stock. These transactions may be effected on The NASDAQ
Capital Market, in the over-the-counter market or otherwise and, if
commenced, may be discontinued at any time.
Passive
Market Making
In connection with
this offering, the underwriters may engage in passive market making
transactions in our common stock on The NASDAQ Capital Market in
accordance with Rule 103 of Regulation M under the Exchange Act,
during a period before the commencement of offers or sales of the
shares and extending through the completion of the
distribution. A passive market maker must display its
bid at a price not in excess of the highest independent bid of that
security. However, if all independent bids are lowered
below the passive market maker’s bid, then that bid must then
be lowered when specified purchase limits are
exceeded.
Other
Relationships
The underwriters
and their respective affiliates may, in the future provide various
investment banking, commercial banking and other financial services
for us and our affiliates for which they have received, and may in
the future receive, customary fees. However, except as
disclosed in this prospectus, we have no present arrangements with
the underwriters for any further services.
Offer
Restrictions Outside the United States
Other than in the
United States, no action has been taken by us or the underwriters
that would permit a public offering of the securities offered by
this prospectus in any jurisdiction where action for that purpose
is required. The securities offered by this prospectus
may not be offered or sold, directly or indirectly, nor may this
prospectus or any other offering material or advertisements in
connection with the offer and sale of any such securities be
distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable
rules and regulations of that jurisdiction. Persons into
whose possession this prospectus comes are advised to inform
themselves about and to observe any restrictions relating to the
offering and the distribution of this prospectus. This
prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any securities offered by this prospectus in any
jurisdiction in which such an offer or a solicitation is
unlawful.
LEGAL
MATTERS
The validity of the
shares of our common stock offered hereby has been passed upon for
us by Loeb & Loeb LLP, New York, NY. Cozen
O’Connor, New York, NY, is acting as counsel to the
underwriters.
EXPERTS
WeiserMazars, LLP,
an independent registered public accounting firm, has audited the
financial statements of AzurRx BioPharma, Inc. as of December 31,
2015 and 2014 and for the year ended December 31, 2015
and the period from January 30, 2014 (date of inception)
through December 31, 2014 and the statements of operations and
comprehensive loss and cash flows for the period from January
1, 2014 through May 31, 2014 for Protea Europe SAS (predecessor)
included in this prospectus and registration statement as set forth
in its reports, which are included in this prospectus and
registration statement. The report for AzurRx BioPharma,
Inc. includes an explanatory paragraph about the existence of
substantial doubt concerning its ability to continue as a going
concern. Such financial statements have been so included
in reliance on the reports of WeiserMazars, LLP upon the authority
of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE
INFORMATION
We have filed with
the SEC a registration statement on Form S-1, which includes
amendments and exhibits, under the Securities Act and the rules and
regulations under the Securities Act for the registration of common
stock being offered by this prospectus. This prospectus,
which constitutes a part of the registration statement, does not
contain all the information that is in the registration statement
and its exhibits and schedules. Certain portions of the
registration statement have been omitted as allowed by the rules
and regulations of the SEC. Statements in this
prospectus that summarize documents are not necessarily complete,
and in each case you should refer to the copy of the document filed
as an exhibit to the registration statement. You may
read and copy the registration statement, including exhibits and
schedules filed with it, and reports or other information we may
file with the SEC at the public reference facilities of the SEC at
100 F Street, N.E., Room 1580, Washington, D.C.
20549. You may call the SEC at 1-800-SEC-0330 for
further information on the operation of the public reference
rooms. In addition, the registration statement and other
public filings can be obtained from the SEC’s internet site
at www.sec.gov.
Upon completion of
this offering, we will become subject to information and periodic
reporting requirements of the Exchange Act and we will file annual,
quarterly and current reports, proxy statements, and other
information with the SEC.
AzurRx
BioPharma, Inc.
Index
to Consolidated Financial Statements
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2015 and 2014, and
the related consolidated statements of operations and comprehensive
loss, changes in stockholders’ equity (deficit), and cash
flows for the year ended December 31, 2015 and for the period
January 30, 2014 (date of inception) through December 31, 2014.
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, 2015 and 2014, and the consolidated
results of their operations and their consolidated cash flows for
the year ended December 31, 2015 and for the period January 30,
2014 (date of inception) through December 31, 2014, in conformity
with U.S. generally accepted accounting principles.
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 a working
capital deficiency of $6,748,152 and an accumulated deficit of
$8,295,384 at December 31, 2015. 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.
Our opinion is not modified with respect to that
matter.
As described in
Note 1, the consolidated balance sheet as of December 31, 2014 and
the related consolidated statements of operations and comprehensive
loss, changes in stockholders' equity, and cash flows for the
period January 30, 2014 (date of inception) through December 31,
2014 have been restated to correct a misstatement.
/s/ WeiserMazars LLP
Edison, New
Jersey
June 15, 2016
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of
Directors and
Stockholders of
AzurRx BioPharma, Inc.
We have audited the
accompanying statements of operations and comprehensive loss and
cash flows of Protea Europe SAS (the “Company”)
(Predecessor to AzurRx BioPharma SAS) for the period from January
1, 2014 through May 31, 2014. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our
audit 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 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
audit 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 audit provides a reasonable basis for our
opinion.
In our opinion, the
financial statements of the Company referred to above present
fairly, in all material respects, the results of its operations and
its cash flows for the period from January 1, 2014 through May 31,
2014, in conformity with U.S. generally accepted accounting
principles.
/s/ WeiserMazars LLP
Edison, New
Jersey
June 15, 2016
AZURRX
BIOPHARMA, INC.
|
|
|
|
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
Cash
|
$94,836
|
$581,668
|
$1,354,635
|
Marketable
securities
|
125,070
|
56,850
|
34,110
|
Other
receivables
|
428,752
|
1,074,858
|
341,625
|
Prepaid
expenses
|
14,796
|
353,984
|
523,005
|
Total Current
Assets
|
663,454
|
2,067,360
|
2,253,375
|
|
|
|
|
Property,
equipment, and leasehold improvements, net
|
211,725
|
176,319
|
174,435
|
|
|
|
|
Other
Assets:
|
|
|
|
In process
research & development, net
|
422,104
|
345,678
|
332,954
|
License
agreements, net
|
3,215,701
|
2,238,105
|
1,936,642
|
Goodwill
|
2,042,454
|
1,832,579
|
1,853,752
|
Deposits
|
20,315
|
25,641
|
25,800
|
Total Other
Assets
|
5,700,574
|
4,442,003
|
4,149,148
|
Total
Assets
|
$6,575,753
|
$6,685,682
|
$6,576,958
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
Accounts payable
and accrued expenses
|
$1,003,544
|
$781,985
|
$1,527,606
|
Accounts payable
and accrued expenses - related party
|
219,530
|
636,753
|
636,753
|
Convertible
promissory notes
|
391,000
|
135,000
|
135,000
|
Convertible
debt
|
661,285
|
6,442,372
|
9,107,642
|
Warrant
liability
|
146,376
|
818,216
|
2,897,988
|
Interest
payable
|
9,120
|
1,186
|
6,571
|
Total Current
Liabilities
|
2,430,855
|
8,815,512
|
14,311,560
|
|
|
|
|
Contingent
consideration
|
1,500,000
|
1,500,000
|
1,500,000
|
Total
Liabilities
|
3,930,855
|
10,315,512
|
15,811,560
|
|
|
|
|
Stockholders'
Equity (Deficit):
|
|
|
|
Convertible
preferred stock - Par value $0.0001 per share; 1,000,000 shares
authorized; 0 shares outstanding as of June 30, 2016; 71 shares
outstanding as of December 31, 2015; 100 shares outstanding as of
December 31, 2014; liquidation preference approximates par value at
June 30, 2016, December 31, 2015 and 2014
|
4,900,000
|
3,479,000
|
-
|
Common stock - Par
value $0.0001 per share; 9,000,000 shares authorized; 6,028,928
shares outstanding as of June 30, 2016; 4,296,979 shares
outstanding as of December 31, 2015; 3,584,321 shares outstanding
as of December 31, 2014
|
358
|
430
|
603
|
Additional paid in
capital
|
859,133
|
2,532,188
|
6,099,469
|
Accumulated
deficit
|
(2,365,148)
|
(8,295,384)
|
(14,057,354)
|
Accumulated other
comprehensive (loss) income
|
(749,445)
|
(1,346,064)
|
(1,277,320)
|
Total Stockholders'
Equity (Deficit)
|
2,644,898
|
(3,629,830)
|
(9,234,602)
|
Total Liabilities
and Stockholders' Equity (Deficit)
|
$6,575,753
|
$6,685,682
|
$6,576,958
|
|
|
|
|
See accompanying
notes to consolidated financial statements
AZURRX
BIOPHARMA, INC.
|
Consolidated
Statements of Operations and Comprehensive Loss
|
|
|
01/01/14
through 05/31/14 Protea Europe SAS (Predecessor)
|
01/30/14
(Date of Inception) through 12/31/14 (1) Consolidated
(Restated)
|
Year
Ended 12/31/15 Consolidated
|
Six
Months Ended 06/30/16 Consolidated
(Unaudited)
|
Six
Months Ended 06/30/15 Consolidated
(Unaudited)
|
|
|
|
|
|
|
Research and
development expenses
|
$380,132
|
$670,491
|
$1,398,056
|
$1,526,237
|
$1,370,488
|
General &
administrative expenses
|
207,074
|
1,658,615
|
3,330,752
|
1,545,951
|
1,580,545
|
|
|
|
|
|
|
Loss from
operations
|
(587,206)
|
(2,329,106)
|
(4,728,808)
|
(3,072,188)
|
(2,951,033)
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
Interest
expense
|
-
|
(68,149)
|
(1,587,533)
|
(1,101,743)
|
(422,121)
|
Fair
value adjustment, warrants
|
-
|
1,368
|
386,103
|
(1,588,040)
|
(16,945)
|
Other
income
|
-
|
30,739
|
2
|
-
|
-
|
Total
other
|
-
|
(36,042)
|
(1,201,428)
|
(2,689,783)
|
(439,066)
|
|
|
|
|
|
|
Loss before income
taxes
|
(587,206)
|
(2,365,148)
|
(5,930,236)
|
(5,761,971)
|
(3,390,099)
|
|
|
|
|
|
|
Income
taxes
|
-
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
Net
loss
|
$(587,206)
|
$(2,365,148)
|
$(5,930,236)
|
$(5,761,971)
|
$(3,390,099)
|
|
|
|
|
|
|
Other comprehensive
income (loss):
|
|
|
|
|
|
Foreign
currency translation adjustment
|
$2,179
|
$(749,445)
|
$(596,619)
|
$68,744
|
$(520,598)
|
Total comprehensive
loss
|
$(585,027)
|
$(3,114,593)
|
$(6,526,855)
|
$(5,693,227)
|
$(3,910,697)
|
|
|
|
|
|
|
Basic and diluted
weighted average shares outstanding
|
4,000(2)
|
3,540,196
|
3,627,133
|
5,362,928
|
3,584,321
|
|
|
|
|
|
|
Loss per share -
basic and diluted
|
$(146.80)
|
$(0.67)
|
$(1.63)
|
$(1.07)
|
$(0.95)
|
|
|
|
|
|
|
(1) - Includes
Protea Europe SAS from date of acquisition, see Note 2
|
|
|
|
|
(2) - All
shares owned by former parent
|
|
|
|
|
|
See accompanying
notes to consolidated financial statements
AZURRX
BIOPHARMA, INC.
Consolidated
Statements of Changes in Stockholders' Equity
(Deficit)
|
Convertible
Preferred
Stock
|
|
|
|
Accumulated
Other
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 30, 2014 (Date of Inception), AzurRx
|
-
|
$-
|
-
|
$-
|
$-
|
$-
|
$-
|
$-
|
Common stock
issued
|
|
|
3,584,321
|
358
|
859,133
|
|
|
859,491
|
Acquisition of
Protea Europe SAS
|
100
|
4,900,000
|
|
|
|
|
|
4,900,000
|
Foreign currency
translation adjustment
|
|
|
|
|
|
|
(749,445)
|
(749,445)
|
Net
loss
|
|
|
|
|
|
(2,365,148)
|
|
(2,365,148)
|
Balance,
December 31, 2014 (Restated)
|
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)
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Preferred stock
converted into common stock
|
(71)
|
(3,479,000)
|
1,731,949
|
173
|
3,478,827
|
|
|
-
|
Warrants issued to
investment bankers
|
|
|
|
|
55,097
|
|
|
55,097
|
Beneficial
conversion feature on convertible debt issuances
|
|
|
|
|
33,357
|
|
|
33,357
|
Foreign currency
translation adjustment
|
|
|
|
|
|
|
68,744
|
68,744
|
Net
loss
|
|
|
|
|
|
(5,761,971)
|
|
(5,761,971)
|
Balance,
June 30, 2016
|
-
|
$-
|
6,028,928
|
$603
|
$6,099,469
|
$(14,057,354)
|
$(1,277,320)
|
$(9,234,602)
|
See accompanying
notes to consolidated financial statements
AZURRX
BIOPHARMA, INC.
|
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
01/01/14
through 05/31/14 Protea Europe SAS (Predecessor)
|
01/30/14
(Date of Inception) through 12/31/14 (1) Consolidated
(Restated)
|
Year
Ended 12/31/15 Consolidated
|
Six
Months Ended 06/30/16 Consolidated
(Unaudited)
|
Six
Months Ended 06/30/15 Consolidated
(Unaudited)
|
Cash flows from
operating activities:
|
|
|
|
|
|
Net
loss
|
$(587,206)
|
$(2,365,148)
|
$(5,930,236)
|
$(5,761,971)
|
$(3,390,099)
|
Adjustments
to reconcile net loss to net cash used in
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
Depreciation
|
4,153
|
11,113
|
41,784
|
21,930
|
19,773
|
Amortization
|
-
|
418,822
|
691,815
|
348,247
|
348,404
|
Fair
value adjustment, warrants
|
-
|
(1,368)
|
(386,103)
|
1,588,040
|
16,945
|
Warrant
expense
|
-
|
-
|
218,337
|
55,097
|
-
|
Interest
expense settled with issuances of common stock
|
-
|
-
|
33,790
|
-
|
-
|
Accreted
interest on convertible debt
|
-
|
27,893
|
749,262
|
640,912
|
190,772
|
Accreted
interest on debt discount - warrants
|
-
|
31,136
|
812,415
|
455,446
|
210,621
|
Changes
in assets and liabilities, net of effects of
acquisition:
|
|
|
|
|
|
Accounts
receivable
|
-
|
356,252
|
-
|
-
|
-
|
Other
receivables
|
6,204
|
(50,595)
|
(638,092)
|
777,663
|
(217,073)
|
Prepaid
expenses
|
(10,696)
|
(1,307)
|
(340,524)
|
(169,157)
|
2,794
|
Deposits
|
-
|
(5,000)
|
(6,900)
|
-
|
(6,900)
|
Accounts
payable and accrued expenses
|
31,839
|
563,089
|
251,608
|
746,501
|
1,098,197
|
Interest
payable
|
-
|
9,120
|
(7,934)
|
5,385
|
20,730
|
Due
to related party
|
549,307
|
-
|
-
|
-
|
-
|
Net cash used in
operating activities
|
(6,399)
|
(1,005,993)
|
(4,510,778)
|
(1,291,907)
|
(1,705,836)
|
|
|
|
|
|
|
Cash flows from
investing activities:
|
|
|
|
|
|
Purchase of property and equipment
|
-
|
(191,003)
|
(24,380)
|
(11,629)
|
(13,098)
|
Acquisition of Protea Europe SAS, net of cash
acquired
|
-
|
(560,952)
|
-
|
-
|
-
|
Net cash used in
investing activities
|
-
|
(751,955)
|
(24,380)
|
(11,629)
|
(13,098)
|
|
|
|
|
|
|
Cash flows from
financing activities:
|
|
|
|
|
|
Issuances of common stock
|
-
|
859,491
|
-
|
-
|
-
|
Issuances of convertible promissory notes
|
-
|
451,000
|
445,000
|
-
|
445,000
|
Repayments of convertible promissory notes
|
-
|
(60,000)
|
(701,000)
|
-
|
(361,000)
|
Issuances of convertible debt
|
-
|
600,000
|
5,395,000
|
2,094,000
|
1,720,000
|
Repayments of convertible debt
|
-
|
-
|
(117,647)
|
-
|
-
|
Net cash provided
by financing activities
|
-
|
1,850,491
|
5,021,353
|
2,094,000
|
1,804,000
|
|
|
|
|
|
|
Effect of exchange
rate changes on cash
|
(2,788)
|
2,293
|
637
|
(17,497)
|
(28,963)
|
|
|
|
|
|
|
(Decrease) increase
in cash
|
(6,399)
|
92,543
|
486,195
|
790,464
|
85,066
|
|
|
|
|
|
|
Cash, beginning
balance
|
48,235
|
-
|
94,836
|
581,668
|
94,836
|
|
|
|
|
|
|
Cash, ending
balance
|
$39,048
|
$94,836
|
$581,668
|
$1,354,635
|
$150,939
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
Cash paid for interest
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
Cash paid for income taxes
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
Non-cash investing
and financing activities:
|
|
|
|
|
|
Shares issued for purchase of Protea Europe SAS
|
$-
|
$4,900,000
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
Contingent
consideration related to purchase of Protea Europe SAS
acquisition
|
$-
|
$1,500,000
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
Receipt
of marketable securities in exchange for issuance of convertible
debt to investor
|
$-
|
$150,000
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
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
|
$-
|
$-
|
$1,421,000
|
$3,479,000
|
$-
|
|
|
|
|
|
|
(1) - Includes
Protea Europe SAS from date of acquisition, see Note 2
|
|
|
|
|
See accompanying
notes to consolidated financial statements
Notes
to Consolidated Financial Statements, AzurRx Biopharma Inc., June
30, 2016, December 31, 2015 and 2014 (Information pertaining to the
six month periods ended June 30, 2016 and 2015 are
unaudited)
Note
1 - The Company and Basis of Presentation
The
Company
AzurRx Biopharma,
Inc. (“AzurRx”, the “Company”, or
“Parent”) was incorporated on January 30, 2014 in the
State of Delaware. In June 2014, the Company acquired 100% of the
issued and outstanding capital stock of AzurRx BioPharma SAS
(formerly ProteaBio Europe SAS), a company incorporated in October
2008 under the laws of France that had been a wholly-owned
subsidiary of Protea Biosciences, Inc., or Protea Sub, in turn a
wholly-owned subsidiary of Protea Biosciences Group, Inc., a
publicly-traded company.
AzurRx, 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
β-lactam antibiotics, as well as prevention of
antibiotic-associated diarrhea (AAD).
Basis
of Presentation and Principles of Consolidation
The financial
statements for the period January 1, 2014 through May 31, 2014
include only the accounts of Protea Europe SAS
(“Predecessor”). There were no material transactions
between June 1, 2014 and June 13, 2014 on the accounts of the
Predecessor so the Company assumed May 31, 2014 as the acquisition
date for financial statement presentation purposes. For the period
January 30, 2014 (date of inception) through May 31, 2014, general
& administrative expenses and net loss for the U.S. parent
company were $176,456. The financial statements for the periods
January 30, 2014 (date of inception) through December 31, 2014;
January 1 through December 31, 2015; and January 1, 2016 through
June 30, 2016 and 2015 include the accounts of AzurRx and its
wholly-owned subsidiary, AzurRx Europe SAS (collectively, the
“Company”). Intercompany transactions and balances have
been eliminated upon consolidation.
At December 31,
2014 and the year then ended, the Company has recorded a prior
period adjustment relating to their property, equipment and
leasehold improvements, intangible assets, and goodwill in regards
to its consolidation of its French acquired subsidiary. The impact
of these adjustments are as follows:
Financial
Statement Item
|
|
|
|
|
|
|
|
Consolidated
Balance Sheet
|
|
|
|
Property,
equipment, and leasehold improvements, net
|
$222,662
|
$211,725
|
$10,937
|
Total Other
assets
|
$6,391,503
|
$5,700,574
|
$690,929
|
Total
Assets
|
$7,277,619
|
$6,575,753
|
$701,866
|
Accumulated
deficit
|
$(2,406,922)
|
$(2,365,148)
|
$(41,774)
|
Accumulated other
comprehensive loss
|
$(5,805)
|
$(749,445)
|
$743,640
|
Total
Stockholders’ Equity (Deficit)
|
$3,346,764
|
$2,644,898
|
$701,866
|
|
|
|
|
Consolidated Statement of Operations and
Comprehensive Loss
|
|
|
|
|
|
|
|
Loss from
operations
|
$(2,370,880)
|
$(2,329,106)
|
$(41,774)
|
Net
loss
|
$(2,406,922)
|
$(2,365,148)
|
$(41,774)
|
Foreign currency
translation adjustment
|
$(9,343)
|
$(749,445)
|
$740,102
|
Total comprehensive
loss
|
$(2,416,265)
|
$(3,114,593)
|
$698,328
|
Loss per share -
basic and diluted
|
$(0.68)
|
$(0.67)
|
$(0.01)
|
|
|
|
|
Consolidated
Statement of Cash Flows
|
|
|
|
Net
loss
|
$(2,406,922)
|
$(2,365,148)
|
$(41,774)
|
Amortization
|
$460,596
|
$418,822
|
$41,774
|
Notes
to Consolidated Financial Statements, AzurRx Biopharma Inc., June
30, 2016, December 31, 2015 and 2014 (Information pertaining to
the six month periods ended June 30, 2016 and 2015 are
unaudited)
The accompanying
consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has
incurred significant operating losses and negative cash flows from
operations since inception, had a working capital deficiency at
June 30, 2016 and December 31, 2015 of approximately $12,058,000
and $6,748,000, respectively, and had an accumulated deficit at
June 30, 2016 and December 31, 2015 of approximately $14,057,000
and $8,295,000, respectively. 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. 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.
Concentration of Risks
Financial
instruments that potentially expose the Company to concentrations
of credit risk consist primarily of cash and available for sale
marketable securities. The Company primarily maintains its cash
balances with financial institutions in federally-insured accounts.
The Company may from time to time have cash in banks in excess of
FDIC insurance limits. The Company has not experienced any losses
to date resulting from this practice. The Company’s
investments in Marketable Securities are 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 has agreed to make up any
shortfall from sales of these securities while any gain is for the
account of the Company. As of June 30, 2016, the market value of
these Marketable Securities are $34,110 and an associated Other
Receivable of $115,890 was recorded. As of December 31, 2015, the
market value of these Marketable Securities are $56,850 and an
associated Other Receivable of $93,150 was recorded. As of December
31, 2014, the market value of these Marketable Securities are
$125,070 and an associated
Other Receivable of $24,930 was recorded. See Note 3 below. On July
28, 2016, the investor paid $150,000 in cash and the securities
were returned to the investor.
Prepaid Expenses
All direct costs of
the proposed IPO Offering are being capitalized and included in
Prepaid Expenses at June 30, 2016 and December 31, 2015 in the
amount of $504,982 and $345,968, respectively, to be offset against
additional paid-in capital at the time of closing of the IPO. No
such costs were incurred as of December 31, 2014.
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.
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.
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.
Notes
to Consolidated Financial Statements, AzurRx Biopharma Inc., June
30, 2016, December 31, 2015 and 2014 (Information pertaining to the
six month periods ended June 30, 2016 and 2015 are
unaudited)
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 June 30, 2016,
December 31, 2015 and 2014, 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 Note, see Notes 3 and 10 below.
At June 30, 2016,
December 31, 2015 and 2014, the Company had Level 3 instruments
consisting of the Company’s common stock warrant liability
related to the Company’s convertible debt, see Note 10 and
contingent consideration in connection with the Protea Europe SAS
acquisition, see Note 6.
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
|
|
|
|
|
|
As of June 30, 2016
(Unaudited):
|
|
|
|
|
Marketable
Securities
|
$34,110
|
$-
|
$34,110
|
$-
|
Warrant
Liability
|
$2,897,988
|
$-
|
$-
|
$2,897,988
|
Contingent
Consideration
|
$1,500,000
|
$-
|
$-
|
$1,500,000
|
|
|
|
|
|
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
|
|
|
|
|
|
As of December 31,
2014:
|
|
|
|
|
Marketable
Securities
|
$125,070
|
$-
|
$125,070
|
$-
|
Warrant
Liability
|
$146,376
|
$-
|
$-
|
$146,376
|
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:
|
|
|
|
|
|
Date of Inception
(January 30, 2014)
|
$-
|
$-
|
Protea Europe SAS
acquisition
|
-
|
1,500,000
|
Issuance of
warrants
|
147,744
|
-
|
Change in fair
value
|
(1,368)
|
-
|
Balance at December
31, 2014
|
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
|
491,732
|
-
|
Change in fair
value
|
1,588,040
|
-
|
Balance at June 30,
2016 (unaudited)
|
$2,897,988
|
$1,500,000
|
The warrant
liability above relates to the Company’s original issued
discounted convertible notes, see Note 10 below.
Notes
to Consolidated Financial Statements, AzurRx Biopharma Inc., June
30, 2016, December 31, 2015 and 2014 (Information pertaining to the
six month periods ended June 30, 2016 and 2015 are
unaudited)
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 at June 30, 2016, December 31, 2015 and 2014
include the estimated fair value of the underlying stock at the
valuation date ($3.75, $2.16 and $3.09, respectively), the
estimated term in years of the warrants (5.35, 4.90 and 5.34,
respectively), risk-free interest rates (1.22%, 1.72% and 1.69%,
respectively), expected dividends (zero) and the expected
volatility (118%, 98% and 93%, 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 using a Black-Scholes Option Pricing Model
(“BSM”). Significant unobservable inputs used in this
calculation included projected net sales over a 9-year period
discounted by the Company’s weighted average cost of capital
of 33.7%, the contractual hurdle amount of $100 million that
replaces the strike price input in the traditional BSM, an asset
volatility of 90% that replaces the equity volatility in the
traditional BSM, risk-free rates ranging from 1.5% to 2.7%, and an
option-adjusted spread of 0.5% that is applied to these payments to
account for the payer’s risk and arrive at a present value of
the expected payment. As the net sales forecast becomes less
uncertain, the liability may lower in value. If the volatility
increases, then the liability value may increase.
The fair value of
the Company's other receivables, convertible debt, and loans
payable are as follows:
|
|
Fair
Value Measured at Reporting Date Using
|
|
|
|
|
|
|
|
As of June 30, 2016
(Unaudited):
|
|
|
|
|
Other
Receivables
|
$341,625
|
$-
|
$-
|
$341,625
|
$341,625
|
Convertible
Debt
|
$9,107,642
|
$-
|
$-
|
$9,107,642
|
$9,107,642
|
Convertible
Promissory Notes
|
$135,000
|
$-
|
$-
|
$135,000
|
$135,000
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
As of December 31,
2014:
|
|
|
|
|
|
Other
Receivables
|
$428,752
|
$-
|
$-
|
$428,752
|
$428,752
|
Convertible
Debt
|
$661,285
|
$-
|
$-
|
$661,285
|
$661,285
|
Convertible
Promissory Notes
|
$391,000
|
$-
|
$-
|
$391,000
|
$391,000
|
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 14.
The fair value of
Convertible Debt and Loans Payable 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 six months ended June 30,
2016 and the years ended December 31, 2015 and 2014, 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").
Notes
to Consolidated Financial Statements, AzurRx Biopharma Inc., June
30, 2016, December 31, 2015 and 2014 (Information pertaining to the
six month periods ended June 30, 2016 and 2015 are
unaudited)
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 June 30, 2016, December 31, 2015 and 2014, 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 June 30, 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 14, 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.
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.
Note 3 - Marketable
Securities
At June 30, 2016,
December 31, 2015 and 2014, the Company had $34,110, $56,850 and
$125,070, respectively, 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 Original Issue Discounted Convertible Notes. The
investor has 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.
The Marketable
Securities fair value was based on Level 2 inputs.
Note 4 - Other
Receivables
Other Receivables
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Research &
development tax credits
|
$-
|
$912,818
|
$380,247
|
Investor
subscription
|
115,890
|
93,150
|
24,930
|
Other
|
225,735
|
68,880
|
23,575
|
|
$341,625
|
$1,074,848
|
$428,752
|
Notes
to Consolidated Financial Statements, AzurRx Biopharma Inc., June
30, 2016, December 31, 2015 and 2014 (Information pertaining to the
six month periods ended June 30, 2016 and 2015 are
unaudited)
The research &
development tax credits are refundable tax credits for research
conducted in France. $912,818 of these refundable tax credits were
received by the Company in the first six months of 2016. The
Investor subscription is 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 is a
deemed “put” measured at fair value due to its
relationship in connection with the Marketable Securities. The
Company follows the guidance in ASC 815-25-35-6 and records the
change in fair values of both the Marketable Securities and the
“put” in earnings. Due to the correlation of these
instruments, the change in fair values completely offset and net to
zero. Other is primarily amounts due from collaboration partner
Mayoly, see Note 14.
Note 5 - Property,
Equipment, and Leasehold Improvements
Property, equipment
and leasehold improvements consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Laboratory
Equipment
|
$165,611
|
$148,578
|
$155,703
|
Computer
Equipment
|
17,986
|
16,733
|
11,105
|
Office
Equipment
|
29,906
|
29,057
|
22,048
|
Leasehold
Improvements
|
29,163
|
28,008
|
31,215
|
|
242,666
|
222,376
|
220,071
|
Less accumulated
depreciation
|
(68,231)
|
(46,057)
|
(8,346)
|
|
|
|
|
|
$174,435
|
$176,319
|
$211,725
|
Depreciation
expense for the six months ended June 30, 2016 and 2015 was $21,930
and $19,773, respectively. Depreciation expense for the years ended
December 31, 2015 and 2014 was $41,784 and $11,113, respectively.
Depreciation expense is included in General and Administrative
(“G & A”) expenses.
Note 6 -
Acquisition
On March 19, 2014,
AzurRx entered into a Memo of Understanding 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, a
company engaged in the research and development of non-systemic
biologics for the treatment of patients with gastrointestinal
disorders in exchange for a non-refundable deposit of $300,000. On
May 21, 2014, the Company entered into a stock purchase agreement
(the “SPA”) with Protea for this acquisition. On June
13, 2014, the Company completed the acquisition in exchange for a
payment of $300,000 and the issuance of shares of its Series A
convertible preferred stock (the “Series A Preferred”).
Pursuant to the SPA, the Company is obligated to pay Protea certain
other Contingent Consideration in U.S. dollars upon the
satisfaction of certain events, including (a) a one-time 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. The total
consideration was $7,000,000, which consisted of $600,000 cash, the
fair value of the 100 shares of Class A Preferred stock issued to
Protea, and the fair value of the Contingent Consideration
described above.
The estimated
useful lives of the intangible assets acquired are described in
Note 2, “Significant Accounting Policies, Goodwill and Intangible
Assets”.
Goodwill related to
this acquisition is 100% deductible for U.S. federal income tax
purposes.
Acquisition costs
in connection with this acquisition were approximately $118,000 and
are included in operating expenses.
The acquisition was
accounted for as a business combination and, accordingly, the
purchase price was allocated to the identified tangible and
intangible assets acquired less the liabilities assumed, based on
fair value.
The purchase price
was determined as following:
Purchase
price:
|
|
|
|
Fair
value of Class A preferred stock issued to seller
|
|
$
|
4,900,000
|
|
Cash
|
|
|
600,000
|
|
Fair
value of the contingent consideration
|
|
|
1,500,000
|
|
Total
purchase price
|
|
$
|
7,000,000
|
|
Notes
to Consolidated Financial Statements, AzurRx Biopharma Inc., June
30, 2016, December 31, 2015 and 2014 (Information pertaining to the
six month periods ended June 30, 2016 and 2015 are
unaudited)
The Class A
Preferred Stock was valued using the Option Pricing Method.
Significant unobservable inputs used in this calculation included
the Company’s total equity value at June 13, 2014 of $34.8
million, the exercise price of $0.01 for the first breakpoint, for
each closed form option model an expected term of four years,
volatility of 90%, and an interpolated risk-free rate of
1.32%.
See Note 2,
Fair Value
Measurements above for the explanation of the valuation
method and significant inputs used to value the Contingent
Consideration.
The following table
summarizes the allocation of the purchase price to the estimated
fair value of the assets acquired and the liabilities assumed as of
the date of the acquisition:
Net assets acquired
were allocated as follows:
|
|
Cash
|
$39,045
|
Accounts
receivable
|
291,740
|
Other
receivable
|
424,384
|
Prepaid expenses
and other current assets
|
15,202
|
Property and
equipment
|
45,381
|
Other long-term
assets
|
17,157
|
In process research
and development
|
495,829
|
License
agreements
|
4,045,064
|
Goodwill
|
2,290,892
|
Accounts payable
and accrued expenses
|
(664,694)
|
|
|
Total purchase
price
|
$7,000,000
|
The Company
believes the in-process research and development and license
agreement have definite lives and should be amortized over their
estimated useful lives in accordance with ASC Topic 350, Intangibles – Goodwill
and Other.
The following is
the proforma income statement as if both companies had been
consolidated for the full applicable periods presented
(unaudited):
|
|
|
|
Research and
development expenses
|
$1,050,623
|
General &
administrative expenses
|
1,865,689
|
|
|
Loss from
operations
|
(2,916,312)
|
|
|
Interest
expense
|
(68,149)
|
Fair value
adjustment, warrants
|
1,368
|
Other
income
|
30,739
|
Total
other
|
(36,042)
|
|
|
Loss before income
taxes
|
(2,952,354)
|
|
|
Income
taxes
|
-
|
|
|
Net
loss
|
$(2,952,354)
|
|
|
Basic and diluted
weighted average shares outstanding
|
3,540,196
|
|
|
Loss per share -
basic and diluted
|
$(0.83)
|
Notes
to Consolidated Financial Statements, AzurRx Biopharma Inc., June
30, 2016, December 31, 2015 and 2014 (Information pertaining to the
six month periods ended June 30, 2016 and 2015 are
unaudited)
Note
7 - Intangible Assets and Goodwill
Intangible assets
are as follows:
|
|
|
|
|
|
|
|
In Process Research
& Development
|
$401,217
|
$396,634
|
$442,058
|
Less accumulated
amortization
|
(68,263)
|
(50,956)
|
(19,954)
|
|
|
|
|
|
$332,954
|
$345,678
|
$422,104
|
|
|
|
|
License
Agreements
|
$3,273,198
|
$3,235,814
|
$3,606,394
|
Less accumulated
amortization
|
(1,336,556)
|
(997,709)
|
(390,693)
|
|
|
|
|
|
$1,936,642
|
$2,238,105
|
$3,215,701
|
Amortization
expense for the six months ended June 30, 2016 and 2015 was
$348,247 and $348,404, respectively. Amortization expense for the
years ended December 31, 2015 and 2014 was $691,815 and $418,822,
respectively. Amortization expense is included in G & A
expenses.
As of June 30,
2016, amortization expense is expected to be $708,282 per year for
the next two years and eleven months and $34,417
per year for the next year and 10 months after that.
Goodwill is as
follows:
|
|
Date of Inception
(January 30, 2014)
|
$-
|
Protea Europe SAS
acquisition
|
2,290,892
|
Foreign currency
translation
|
(248,438)
|
Balance at December
31, 2014
|
2,042,454
|
Foreign currency
translation
|
(209,875)
|
Balance at December
31, 2015
|
1,832,579
|
Foreign currency
translation
|
21,173
|
Balance at June 30,
2016 (unaudited)
|
$1,853,752
|
Note
8 - Accounts Payable
Accounts payable and accrued
expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Trade
payables
|
$1,270,530
|
$409,407
|
$825,574
|
Accrued
expenses
|
-
|
174,210
|
4,197
|
Accrued
payroll
|
257,076
|
198,368
|
173,773
|
|
$1,527,606
|
$781,985
|
$1,003,544
|
Note
9 - 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 have been 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. As of December 31, 2014,
the Company raised $451,000 through the sale of these convertible
promissory notes and repaid $60,000 of these notes. The notes bear
interest at 8% per annum and are convertible into Common Stock of
the Company at $6.45 per share at the investors’ discretion
as long as the notes are outstanding. As of June 30, 2016, December
31, 2015 and 2014, the Company had $135,000, $135,000 and $391,000,
respectively, of these notes outstanding. On July 22, 2016, these
notes in the amount of $135,000 was converted into original issue
discounted convertible notes as per Note 10, below.
Notes
to Consolidated Financial Statements, AzurRx Biopharma Inc., June
30, 2016, December 31, 2015 and 2014 (Information pertaining to the
six month periods ended June 30, 2016 and 2015 are
unaudited)
Interest expense
for the six months ended June 30, 2016 and 2015 incurred in
connection with the promissory notes was $5,385 and $20,730,
respectively. Interest expense for the years ended December 31,
2015 and 2014 incurred in connection with the promissory notes was
$25,856 and $9,120, respectively. On August 7, 2015, 5,242 shares
of the Company’s common stock were issued in payment of
$33,790 of accrued interest payable on these notes. Interest
payable at June 30, 2016, December 31, 2015 and 2014 in connection
with these notes was $6,571, $1,186 and $9,120,
respectively.
Note
10 - Original Issue 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 do
not otherwise bear interest. The notes are voluntarily convertible
into shares of the Company’s Common Stock at the principal
amount divided by the Conversion Price, which is 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 Company’s initial public offering
(“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 the Company’s 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. The warrants are exercisable for five years beginning six
months after the issue date. If the pre-money IPO valuation of the
Company is less than $43,750,000, then the number of Warrant Shares
(herein defined as the underlying common stock shares) will be
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 may demand 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 remains unpaid, the Company shall
pay to the note holder a one-time default penalty of 5% of the
total amount unpaid on the maturity date. The Company, however,
shall still be required to repay the note holder the principal
balance and interest on the principal balance, which shall 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 are in
default due to being past their maturity dates.
On March 31, 2016,
the holders of all but $300,000 in principal 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 the lesser of
(i) $5.58 or (ii) a 15% premium to the price per share or unit
issued in the IPO or in connection with a public listing. The notes
are 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. In
addition, $1,859,000 in gross proceeds were received in the second
quarter of 2016 in additional original issue discounted notes under
the same terms.
Under the mandatory
conversion feature, upon the consummation of the Company’s
IPO at a pre-money valuation of at least $50,000,000 immediately
prior to the IPO or the date the Company obtains a public listing
(through a reverse merger, self-listing or other alternative
means), the aggregate principal amounts of the notes plus any
accrued but unpaid interest shall be 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 the lesser of $4.65 or the price per
share issued in the IPO, or in the event of a public listing, the
price per share issued by the Company in connection with such
transaction. In the event the Company (i) pays a stock dividend or
otherwise makes a distribution or distributions payable in shares
of Common Stock on shares of Common Stock or any Common Stock
Equivalents, (ii) subdivides outstanding shares of Common Stock
into a larger number of shares, (iii) combines (including by way of
a reverse stock split) outstanding shares of Common Stock into a
smaller number of shares or (iv) issues, in the event of a
reclassification of shares of the Common Stock, any shares of
capital stock of the Company, then the conversion price shall be
adjusted by multiplying the conversion price by a fraction of which
the numerator shall be the number of shares of Common Stock
(excluding any treasury shares of the Company) outstanding
immediately before such event, and of which the denominator shall
be the number of shares of Common Stock outstanding immediately
after such event. As long as at least 33% of the aggregate
principal amount of the notes issued remains outstanding, the
Company shall not, and shall not permit any of the Subsidiaries to,
directly or indirectly: a) amend its charter documents, including,
without limitation, its certificate of incorporation and bylaws, in
any manner that materially and adversely affects any rights of the
holders; b) pay cash dividends or distributions on any equity
securities of the Company; c) enter into any transaction with any
Affiliate of the Company which would be required to be disclosed in
any public filing with the Commission, unless such transaction is
made on an arm’s-length basis and expressly approved by a
majority of the disinterested directors of the Company (even if
less than a quorum otherwise required for board approval); or d)
enter into any agreement with respect to any of the foregoing. 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 aggregate gross proceeds
received in connection with these notes through June 30, 2016,
December 31, 2015 and 2014 was $9,162,529, $6,145,000 and $750,000,
respectively. On July 22, 2016, $135,000 of convertible promissory
notes were converted into these original issue discounted
convertible notes.
Notes
to Consolidated Financial Statements, AzurRx Biopharma Inc., June
30, 2016, December 31, 2015 and 2014 (Information pertaining to the
six month periods ended June 30, 2016 and 2015 are
unaudited)
The Company
determined that there was a beneficial conversion feature
on the voluntary conversion feature in the amount of $33,357
at the dates of issuances on certain of these notes issued in
the second quarter of 2016. Under the mandatory conversion feature,
all of the unamortized discount remaining at the date of conversion
shall be recognized immediately at that date as interest
expense.
The Company
accounted for the warrant feature of the notes based upon the fair
value of the warrants on the date of issuance. The effect of the
warrant modifications is reflected in the fair value adjustment at
June 30, 2016 noted below. The Company recorded a warrant liability
related to the warrants at June 30, 2016, December 31, 2015 and
December 31, 2014 of $1,687,788, $1,205,687, and $147,744,
respectively, at the dates of issuance. The warrant liability was
adjusted to the fair value at June 30, 2016 of $2,897,988 by
recording a fair value adjustment of $1,588,040 at June 30, 2016.
The warrant liability was adjusted to the fair value at December
31, 2015 of $818,216 by recording a fair value adjustment of
$386,105 at December 31, 2015 and the warrant liability was
adjusted to the fair value at December 31, 2014 of $146,376 by
recording a fair value adjustment of $1,368 at December 31,
2014.
For the six months
ended June 30, 2016 and 2015, the Company recorded $1,096,358 and
$401,391, respectively, of interest expense related to the original
issue discount and warrant features of these notes. For the six
months ended June 30, 2016 and 2015, $640,912 and $190,772,
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 six months ended June 30, 2016 and 2015,
$455,446 and $210,619, respectively, of these amounts were
amortization of the debt discount related to the warrant features
of the convertible debt.
For the years ended
December 31, 2015 and 2014, the Company recorded $1,561,677 and
$59,029, respectively, of interest expense related to the original
issue discount and warrant features of these notes. For the years
ended December 31, 2015 and 2014, $749,262 and $27,893,
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, 2015 and 2014,
$812,415 and $31,136, respectively, of these amounts were
amortization of the debt discount related to the warrant features
of the convertible debt.
Convertible Debt
consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Debt
|
$9,223,565
|
$6,145,000
|
$750,000
|
Accreted
Interest
|
310,289
|
659,508
|
27,893
|
Debt Discount -
Warrants
|
(396,269)
|
(362,136)
|
(116,608)
|
Debt Discount - Beneficial Conversion
Feature
|
(29,943)
|
-
|
-
|
|
|
|
|
|
$9,107,642
|
$6,442,372
|
$661,285
|
The Company has
authorized 9,000,000 shares of its common stock, $0.0001 par value
and 1,000,000 shares of preferred stock, $0.0001 par
value.
Common Stock
At June 30, 2016,
December 31, 2015 and 2014, the Company had issued and outstanding
6,028,928, 4,296,979 and 3,584,321, respectively, shares 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 six months ended June 30, 2016 and the years ended December 31,
2015 and 2014, the Company did not grant any stock options under
the 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”).
The terms of the
Series A are described below:
Voting
The Series A
preferred stock 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 preferred stock is
convertible at the time of such vote.
Notes
to Consolidated Financial Statements, AzurRx Biopharma Inc., June
30, 2016, December 31, 2015 and 2014 (Information pertaining to the
six month periods ended June 30, 2016 and 2015 are
unaudited)
Dividends
The holders of the Series A Preferred shall
be entitled to receive dividends, when, as, and if declared by the
Board, 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 June 30, 2016, December 31, 2015
and 2014 approximates par value.
Conversion
The Series A is
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 Preferred stock, 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 Convertible Preferred Stock is convertible at the
holder’s option any time commencing on the one-year
anniversary of the initial issuance date. The Series A Convertible
Preferred Stock is 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 Preferred Stock 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
Convertible Preferred Stock would be convertible into 2,439,365
shares of common stock. As of June 30, 2016, all Series A
Convertible Preferred Stock has been converted into common
stock.
During the six
months ended June 30, 2016, Protea Group converted 71 shares of
Series A Convertible Preferred Stock into 1,731,949 shares of
common stock. During the year ended December 31, 2015, Protea Group
converted 29 shares of Series A Convertible Preferred Stock into
707,416 shares of common stock. During the year ended December 31,
2014, no shares were converted.
Beneficial Conversion
The Series A
Convertible Preferred Stock was recorded at fair value when issued
under purchase accounting as described in Note 6 –
Acquisition. As such, there was no intrinsic value that would
result in a beneficial conversion feature at date of issuance. The
Preferred Stock was voluntarily converted and there was no
associated beneficial conversion.
Note
12 - Warrants
Stock warrant
transactions for the period from January 30, 2014 (date of
inception) through June 30, 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued and exercisable at January 30, 2014
|
-
|
-
|
-
|
|
|
|
|
Granted during the
year
|
68,400
|
$7.37
|
$7.37
|
Expired during the
year
|
-
|
-
|
-
|
Exercised during
the year
|
-
|
-
|
-
|
Warrants
issued and exercisable at December 31, 2014
|
68,400
|
$7.37
|
$7.37
|
|
|
|
|
Granted during the
year
|
594,074
|
$7.37
|
$7.37
|
Expired during the
year
|
-
|
-
|
-
|
Exercised during
the year
|
-
|
-
|
-
|
Warrants
issued and exercisable at December 31, 2015
|
662,474
|
$7.37
|
$7.37
|
|
|
|
|
Granted during the
year
|
407,570
|
$5.58
|
$5.58
|
Expired during the
year
|
-
|
-
|
-
|
Exercised during
the year
|
-
|
-
|
-
|
Warrants
issued and exercisable at June 30, 2016 (unaudited)
|
1,070,044
|
$5.58
- 7.37
|
$5.75
|
|
|
|
|
|
|
|
|
|
|
|
|
$5.58
|
967,809
|
4.83
|
$5.58
|
$7.37
|
102,235
|
4.45
|
$7.37
|
|
|
|
|
|
1,070,044
|
4.79
|
$5.75
|
Notes
to Consolidated Financial Statements, AzurRx Biopharma Inc., June
30, 2016, December 31, 2015 and 2014 (Information pertaining to the
six month periods ended June 30, 2016 and 2015 are
unaudited)
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
10 above.
During the six
months ended June 30, 2016, 41,118 immediately vesting warrants
were issued to investment bankers in association with the 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 10 above. This amount was included in G & A
expenses.
During the year
ended December 31, 2015, 102,052 immediately vesting warrants were
issued to investment bankers in association with the 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 10 above. This amount was included in G & A
expenses.
During the year
ended December 31, 2014, no such warrants were issued.
Note
13 - Interest Expense
During the six
months ended June 30, 2016 and 2015, the Company incurred
$1,101,743 and $422,121, respectively, of interest expense. During
the six months ended June 30, 2016 and 2015, $1,096,358 and
$401,391, 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 the debt discount
related to the warrants. During the six months ended June 30, 2016
and 2015, the Company also incurred $5,385 and $20,730,
respectively, of interest expense in connection with the promissory
notes issued by the Company.
During the years
ended December 31, 2015 and 2014, the Company incurred $1,587,533
and $68,149, respectively, of interest expense. During the years
ended December 31, 2015 and 2014, $1,561,677 and $59,029,
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 the debt discount related
to the warrants. During the years ended December 31, 2015 and 2014,
the Company also incurred $25,856 and $9,120, respectively, of
interest expense in connection with the promissory notes issued by
the Company.
Note
14 - 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.
The Agreement
grants the Predecessor the right to cure any breach by Mayoly of
its obligations under the INRA agreement. In connection with the
Acquisition, the Predecessor, with the consent of INRA and CNRS,
assigned all of it rights, title and interest in and to the 2014
Agreement to the AzurRx Europe SAS.
The Agreement
includes a €1,000,000 payment due to Mayoly upon the U.S. FDA
approval of MS1819.
Notes
to Consolidated Financial Statements, AzurRx Biopharma Inc., June
30, 2016, December 31, 2015 and 2014 (Information pertaining to the
six month periods ended June 30, 2016 and 2015 are
unaudited)
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. The Company may
terminate Mr. Spoor’s employment at any time and for any
reason, or for no reason. Mr. Spoor may terminate his 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 Company’s initial public
offering which results in the listing of the Company’s common
stock on The NASDAQ Stock Market or NYSE MKT, 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”).
At the sole discretion of the Board 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 or the
Compensation Committee.
In addition, Mr.
Spoor shall be issued 100,000 shares of common stock, which vest 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. In the event of a Change of Control (defined),
all of the Restricted Shares shall vest in full. The estimated fair
value at the date of grant was $216,000.
Mr. Spoor shall
also be issued 380,000 10-year stock options pursuant to the
Company’s Amended and Restated Stock Option Plan, which
options shall vest as follows so long as the Executive is serving
as Chief Executive Officer or President at such time:
(i) 100,000 of such stock options shall vest upon consummation of
the Public Event, (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.
On June 8, 2016,
the Board 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 strike
price, have not been determined. 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.
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.
Upon termination of Mr. Spoor’s employment, the Company may
impose a restrictive covenant on him for up to twelve (12) months,
provided that the Company must continue his severance payments to
continue the covenant beyond nine (9) months.
Note
15 - 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 June 30,
2016, December 31, 2015 and 2014, the Company had gross deferred
tax assets of approximately $3,334,000, $2,412,000 and $645,000,
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
$3,334,000, $2,412,000 and $645,000, respectively, has been
established at June 30, 2016, December 31, 2015 and
2014.
The significant
components of the Company’s net deferred tax assets
(liabilities) consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax
assets:
|
|
|
|
Net
operating loss carry-forwards
|
$3,334,000
|
$2,412,000
|
$645,000
|
Deferred
tax asset valuation allowance
|
(3,334,000)
|
(2,412,000)
|
(645,000)
|
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:
|
|
|
|
|
|
|
|
Income taxes
benefit (expense) at statutory rate
|
34%
|
34%
|
34%
|
State income tax,
net of federal benefit
|
11%
|
11%
|
11%
|
Change in valuation
allowance
|
(45%)
|
(45%)
|
(45%)
|
|
0%
|
0%
|
0%
|
At June 30, 2016,
the Company has gross net operating loss carry-forwards for U.S.
federal and state income tax purposes of approximately $7,361,000
and $7,358,000, respectively, which expire in the year 2036. The
net increase in the valuation allowance for the six months ended
June 30, 2016 was approximately $922,000.
At December 31,
2015, the Company had gross net operating loss carry-forwards for
U.S. federal and state income tax purposes of approximately
$5,325,000 and $5,322,000, respectively, which expire in the year
2035. The net increase in the valuation allowance for the year
ended December 31, 2015 was approximately $1,767,000.
At December 31,
2014, the Company had gross net operating loss carry-forwards for
U.S. federal and state income tax purposes of approximately
$1,425,000 and $1,422,000, respectively, which expire in the year
2034. The net increase in the valuation allowance for the year
ended December 31, 2014 was approximately $645,000.
The Company
acquired a French subsidiary during 2014. The operations of the
subsidiary are not taxed in the United States and this is not
considered in the tax provision. At December 31, 2015 and 2014, the
Company has approximately $5,052,000 and $2,722,000, respectively,
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 June 30, 2016, December 31, 2015 and 2014, the
Company had taken no uncertain tax positions that would require
disclosure under ASC 740.
Note
16 - 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.
For the six months
ended June 30, 2016, diluted net loss per share did not include the
effect of 1,070,044 shares of common stock issuable upon the
exercise of outstanding warrants and 2,642,160 shares of common
stock issuable upon the conversion of promissory notes and
convertible debt as their effect would be
anti-dilutive.
Notes
to Consolidated Financial Statements, AzurRx Biopharma Inc., June
30, 2016, December 31, 2015 and 2014 (Information pertaining to the
six month periods ended June 30, 2016 and 2015 are
unaudited)
For the six months
ended June 30, 2015, diluted net loss per share did not include the
effect of 260,285 shares of common stock issuable upon the exercise
of outstanding warrants; 524,170 shares of common stock issuable
upon the conversion of promissory notes and convertible debt; and
2,439,365 shares of common stock issuable upon the conversion of
the Series A preferred stock, as their effect would be
anti-dilutive.
For the year ended
December 31, 2015, diluted net loss per share did not include the
effect of 662,474 shares 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 preferred stock, as their effect would
be anti-dilutive.
For the period of
inception (January 30, 2014) through December 31, 2014, diluted net
loss per share did not include the effect of 68,400 shares of
common stock issuable upon the exercise of outstanding warrants,
197,419 shares of common stock issuable upon the conversion of
promissory notes and convertible debt, and 1,896,620 shares of
common stock issuable upon the conversion of the Series A preferred
stock, as their effect would be anti-dilutive.
Note
17 - Related Party Transactions
During the years
ended December 31, 2015 and 2014, the Company employed the services
of JIST Consulting (“JIST”), a company controlled by
Johan M. Spoor, the Company’s President and a Director, 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, 2015 and 2014 was $478,400 and
$139,100, respectively. Included in accounts payable at June 30,
2016, December 31, 2015 and 2014 is $508,300, $508,300, and
$139,100, respectively, for JIST relating to Mr. Spoor’s
services. Mr. Spoor received no other compensation from the Company
other than reimbursement of related travel expenses.
During the years
ended December 31, 2015 and 2014, 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, 2015
and 2014 was $27,750 and $99,142, respectively. Included in
accounts payable at June 30, 2016, December 31, 2015 and 2014 is
$38,453, $38,453 and $80,430, respectively, for RHMS for Ms.
Rigby-Hutton’s services. Ms. Rigby-Hutton received no other
compensation from the Company other than reimbursement of related
travel expenses. Ms. Rigby-Hutton resigned from the Company
effective April 20, 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.
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. Included in accounts
payable at June 30, 2016 and December 31, 2015 is $90,000 for Mr.
Borkowski’s services. Mr. Borkowski received no other
compensation from the Company other than reimbursement of related
travel expenses. On October 14, 2014 and March 12, 2015, the
Company issued original issue discounted convertible notes to
Edward Borkowski, a director and the Company’s audit
committee chair, in the aggregate principal amount of $300,000. The
notes will automatically convert into shares of the Company’s
common stock upon the consummation of this offering 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 this offering, multiplied by 80%. Mr. Borkowski has signed
an exchange agreement related to these notes as detailed in Note 10
above.
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 35%, 47%, and 64%, respectively, of the
outstanding common stock of the Company as of June 30, 2016 and
December 31, 2015 and 2014.
In July 2014, the
Company issued promissory notes to Johan M. (Thijs) Spoor, the
Company’s President, Chief Operating Officer and Chairman of
the Board, in the aggregate principal amount of $10,000. These
notes were repaid in full as to $5,000 on October 17, 2014 and
$5,000 on November 10, 2014.
In July 2016, the
Company issued 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 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.
AZURRX
BIOPHARMA, INC.
960,000
Shares
Common
Stock
WallachBeth Capital,
LLC
|
Network 1 Financial
Securities, Inc.
|
ViewTrade
Securities Inc.
Through and
including November 5, 2016 (the 25th day after the date
of this prospectus), all dealers effecting transactions in these
securities, whether or not participating in this offering, may be
required to deliver a prospectus. This requirement is in addition
to a dealers’ obligation to deliver a prospectus when acting
as an underwriter and with respect to an unsold allotment or
membership.