Note 1 - The Company and Basis of
Presentation
Description of Business
AzurRx BioPharma, Inc. (“AzurRx” or “Parent”) was incorporated on January 30, 2014 in
the State of Delaware. In June 2014, AzurRx acquired 100% of the
issued and outstanding capital stock of AzurRx SAS (formerly,
ProteaBio Europe SAS), a company incorporated in October 2008 under
the laws of France. AzurRx and its wholly-owned subsidiary, AzurRx
SAS (“ABS”), are collectively referred to as the
“Company.”
The
Company is engaged in the research and development of non-systemic
biologics for the treatment of patients with gastrointestinal
disorders. Non-systemic biologics are non-absorbable drugs that act
locally, i.e. the intestinal lumen, skin or mucosa, without
reaching an individual’s systemic circulation.
The Company is currently focused on developing its
lead drug candidate, MS1819, a yeast derived recombinant
lipase for the treatment of exocrine pancreatic insufficiency
(“EPI”)
associated with cystic fibrosis (“CF”) and chronic pancreatitis
(“CP”).
MS1819, supplied as an oral
non-systemic biologic capsule, is derived from
the Yarrowia
lipolytica yeast lipase
and breaks up fat molecules in the digestive tract of EPI patients
so that they can be absorbed as nutrients. Unlike the standard of
care, the MS1819 synthetic lipase does not contain any animal
products.
The Company is currently conducting two Phase 2
clinical trials of MS1819: the OPTION 2 monotherapy trial in the
U.S. and Europe, and the Combination therapy trial in Europe,
consisting of MS1819 in conjunction with porcine-derived pancreatic
enzyme replacement therapy, the current standard of
care.
Basis
of Presentation and Principles of Consolidation
The accompanying unaudited interim consolidated
financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America (“U.S. GAAP”). In our opinion, the accompanying
unaudited interim consolidated financial statements include all
adjustments, consisting of normal recurring adjustments, which are
necessary to present fairly our financial position, results of
operations, and cash flows. The consolidated balance sheet at
December 31, 2019, has been derived from audited financial
statements of that date. The unaudited interim consolidated results
of operations are not necessarily indicative of the results that
may occur for the full fiscal year. Certain information and
footnote disclosure normally included in financial statements
prepared in accordance with U.S. GAAP have been omitted pursuant to
instructions, rules, and regulations prescribed by the Securities
and Exchange Commission (“SEC”).
The Company believes that the disclosures provided herein are
adequate to make the information presented not misleading when
these unaudited interim consolidated financial statements are read
in conjunction with the audited financial statements and notes
previously distributed in our Annual Report Form 10-K for the year
ended December 31, 2019, filed with the SEC on March 30,
2020.
The unaudited
interim consolidated financial statements include the accounts of
AzurRx and its wholly-owned subsidiary, AzurRx SAS. Intercompany
transactions and balances have been eliminated upon
consolidation.
Going Concern Uncertainty
The accompanying unaudited interim consolidated
financial statements have been prepared as if the Company will
continue as a going concern. The Company has incurred significant
operating losses and negative cash flows from operations since
inception and had an accumulated deficit of approximately $78.0
million at September 30, 2020. The Company is dependent on
obtaining, and continues to pursue, additional working capital
funding from the sale of securities and debt in order to continue
to execute its development plan and continue operations. Without
adequate working capital, the Company may not be able to meet its
obligations and continue as a going concern. These conditions raise
substantial doubt about our ability to continue as a going concern.
The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Our primary sources of liquidity come from
capital raises through additional equity and/or debt financings.
This may be impacted by the
novel coronavirus ("COVID-19") pandemic, which is evolving and could negatively impact
our ability to raise additional capital in the
future.
Note 2 - Significant Accounting Policies and Recent Accounting
Pronouncements
Use of Estimates
The accompanying
unaudited consolidated financial statements are prepared in
conformity with U.S. GAAP and include certain estimates and
assumptions which affect the reported amounts of assets and
liabilities at the date of the financial statements (including
goodwill, intangible assets and contingent consideration), and the
reported amounts of revenues and expenses during the reporting
period, including contingencies. Accordingly, actual results may
differ from those estimates.
Cash and Cash Equivalents
The Company
considers all highly liquid investments with maturities of three
months or less from date of purchase to be cash equivalents. All
cash balances were highly liquid at September 30, 2020 and December
31, 2019, respectively.
Concentrations of Credit Risk
Financial
instruments that potentially expose the Company to concentrations
of credit risk consist of cash. The Company primarily maintains its
cash balances with financial institutions in federally insured
accounts in the U.S. The Company may from time to time have cash in
banks in excess of FDIC insurance limits. At September 30, 2020 and
December 31, 2019, the Company had approximately $11.1 million and
$0, respectively, in one account in the U.S. in excess of these
limits. The Company has not experienced any losses to date
resulting from this practice. The Company mitigates its risk by
maintaining the majority of its cash and cash equivalents with high
quality financial institutions.
The Company also
has exposure to foreign currency risk as its subsidiary in France
has a functional currency in Euros.
Debt Instruments
Detachable
warrants issued in conjunction with debt are measured at their
relative fair value, if they are determined to be equity
instrument, or their fair value, if they are determined to be
liability instruments, and recorded as a debt
discount. Conversion features that are in the money at
the commitment date constitute a beneficial conversion feature that
is measured at its intrinsic value and recognized as debt discount.
Debt discount is amortized as interest expense over the maturity
period of the debt using the effective interest method. Contingent
beneficial conversion features are recognized when the contingency
has been resolved.
Debt Issuance Costs
Debt
issuance costs are recorded as a direct reduction of the carrying
amount of the related debt. Debt issuance costs are amortized over
the maturity period of the related debt instrument using the
effective interest method.
Equity-Based Payments to Non-Employees
Equity-based
payments to non-employees are measured at fair value on the grant
date per ASU No. 2018-07, Improvements to Nonemployee Share-Based
Payment Accounting.
Fair Value Measurements
The Company follows
Accounting Standards Codification (“ASC”) Topic 820-10, Fair
Value Measurements and Disclosures (“ASC 820”), which among
other things, defines fair value, establishes a consistent
framework for measuring fair value and expands disclosure for each
major asset and liability category measured at fair value on either
a recurring or nonrecurring basis. Fair value is an exit price,
representing the amount that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants. As such, fair value is a market-based
measurement that should be determined based on assumptions that
market participants would use in pricing an asset or
liability.
As a basis for
considering such assumptions, a three-tier fair value hierarchy has
been established, which prioritizes the inputs used in measuring
fair value as follows:
Level 1: Observable
inputs such as quoted prices (unadjusted) in active markets for
identical assets or liabilities;
Level 2: Inputs,
other than the quoted prices in active markets, that are observable
either directly or indirectly; and
Level 3:
Unobservable inputs in which there is little or no market data,
which require the reporting entity to develop its own assumptions,
which reflect those that a market participant would
use.
In certain cases,
the inputs used to measure fair value may fall into different
levels of the fair value hierarchy. In such cases, an
instrument’s level within the fair value hierarchy is based
on the lowest level of input that is significant to the overall
fair value measurement. The Company’s assessment of the
significance of a particular input to the fair value measurement in
its entirety requires judgment and considers factors specific to
the financial instrument.
The Company
recognizes transfers between levels as if the transfers occurred on
the last day of the reporting period.
Foreign Currency Translation
For foreign
subsidiaries with operations denominated in a foreign currency,
assets and liabilities are translated to U.S. dollars, which is the
functional currency, at period end exchange rates. Income and
expense items are translated at average rates of exchange
prevailing during the periods presented. Gains and losses from
translation adjustments are accumulated in a separate component of
stockholders’ equity.
Goodwill and Intangible Assets
Goodwill represents
the excess of the purchase price of the acquired business over the
fair value of amounts assigned to assets acquired and liabilities
assumed. Goodwill and other intangible assets with indefinite
useful lives are reviewed for impairment annually or more
frequently if events or circumstances indicate impairment may be
present. Any excess in carrying value over the estimated fair value
is charged to results of operations. The Company has not recognized
any impairment charges through September 30, 2020.
Intangible
assets subject to amortization consist of in process research and
development, license agreements, and patents reported at the fair
value at date of the acquisition less accumulated amortization.
Amortization expense is provided using the straight-line method
over the estimated useful lives of the assets as
follows:
Patents
7.2 years
In Process Research
&
Development
12 years
License
Agreements
5 years
Impairment of Long-Lived Assets
The Company
periodically evaluates its long-lived assets for potential
impairment in accordance with ASC Topic 360, Property, Plant and
Equipment (“ASC
360”). Potential impairment is assessed when there is
evidence that events or changes in circumstances indicate that the
carrying amount of an asset may not be recovered. Recoverability of
these assets is assessed based on undiscounted expected future cash
flows from the assets, considering a number of factors, including
past operating results, budgets and economic projections, market
trends and product development cycles. If impairments are
identified, assets are written down to their estimated fair value.
The Company has not recognized any impairment charges through
September 30, 2020.
Income Taxes
Income taxes are
recorded in accordance with ASC 740, Accounting for Income Taxes
(“ASC 740”),
which provides for deferred taxes using an asset and liability
approach. The Company recognizes deferred tax assets and
liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns. The
Company determines its deferred tax assets and liabilities based on
differences between financial reporting and tax bases of assets and
liabilities, which are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to
reverse. Valuation allowances are provided if, based upon the
weight of available evidence, it is more likely than not that some
or all of the deferred tax assets will not be
realized.
The Company
accounts for uncertain tax positions in accordance with the
provisions of ASC 740. When uncertain tax positions exist, the
Company recognizes the tax benefit of tax positions to the extent
that the benefit will more likely than not be realized. The
determination as to whether the tax benefit will more likely than
not be realized is based upon the technical merits of the tax
position as well as consideration of the available facts and
circumstances. At September 30, 2020 and December 31, 2019, the
Company does not have any significant uncertain tax positions. All
tax years are still open for audit.
Leases
Effective January
1, 2019, the Company adopted Accounting Standards Update
(“ASU”) No.
2016-02, “Leases.” This ASU requires substantially all
leases be recorded on the balance sheet as right of use assets and
lease obligations. The Company adopted the ASU using a modified
retrospective adoption method at January 1, 2019, as outlined in
ASU No. 2018-11, “Leases - Targeted Improvements.”
Under this method of adoption, there is no impact to the
comparative condensed consolidated statements of operations and
condensed consolidated balance sheets. The Company determined that
there was no cumulative-effect adjustment to beginning retained
earnings on the consolidated balance sheet. In addition, the
Company elected the package of practical expedients permitted under
the transition guidance within the new standard, which among other
things, allowed carryforward of historical lease classifications.
Adoption of this standard did not materially impact the
Company’s results of operations and had no impact on the
consolidated statements of cash flows.
Research and Development
Research and
development (“R&D”) costs are charged to
operations when incurred and are included in operating expense.
R&D costs consist principally of compensation of employees and
consultants that perform the Company’s research and
development and clinical activities, the fees paid to maintain the
Company’s licenses, and the payments to third parties for
manufacturing drug supply and clinical trials, laboratory and other
supply expenses and amortization of intangible assets.
Stock-Based Compensation
The Company’s
board of directors (the “Board”) and stockholders have
adopted and approved the Amended and Restated 2014 Omnibus Equity
Incentive Plan (the “2014
Plan”) which took effect on May 12, 2014, and the 2020
Omnibus Equity Incentive Plan, which took effect on September 11,
2020 (the “2020
Plan”). From the effective date of the 2020 Plan, no
new awards have been or will be made under the 2014 Plan. The
Company accounts for its stock-based compensation awards to
employees and Board members in accordance with ASC Topic 718,
Compensation—Stock Compensation (“ASC 718”). ASC 718 requires all
stock-based payments to employees and Board members, including
grants of employee stock options, to be recognized in the
statements of operations by measuring the fair value of the award
on the date of grant and recognizing this fair value as stock-based
compensation using a straight-line method over the requisite
service period, generally the vesting period.
For awards with
performance conditions that affect their vesting, such as the
occurrence of certain transactions or the achievement of certain
operating or financial milestones, recognition of fair value of the
award occurs when vesting becomes probable.
The Company
estimates the grant date fair value of stock option awards using
the Black-Scholes option-pricing model. The use of the
Black-Scholes option-pricing model requires management to make
assumptions with respect to the expected term of the option, the
expected volatility of the Common Stock consistent with the
expected life of the option, risk-free interest rates and expected
dividend yields of the Common Stock.
Sublicense Agreement
As more fully
discussed in Note 14, the Company entered into a sublicense
agreement with TransChem, Inc. (“TransChem”), pursuant to which
TransChem granted the Company an exclusive license to certain
patents and patent applications. Any payments made to TransChem in
connection with this sublicense agreement are recorded as R&D
expense.
Subsequent Events
The Company
considered events or transactions occurring after the balance sheet
date but prior to the date the consolidated financial statements
are available to be issued for potential recognition or disclosure
in its consolidated financial statements.
Recent Accounting Pronouncements
In January 2017,
the FASB issued ASU 2017-04, Intangibles - Goodwill and Other,
Simplifying the Accounting for Goodwill Impairment. ASU 2017-04
removes Step 2 of the goodwill impairment test, which requires a
hypothetical purchase price allocation. A goodwill impairment will
now be the amount by which a reporting unit’s carrying value
exceeds its fair value, not to exceed the carrying amount of
goodwill. All other goodwill impairment guidance will remain
largely unchanged. Entities will continue to have the option to
perform a qualitative assessment to determine if a quantitative
impairment test is necessary. This new guidance will be applied
prospectively and is effective for annual or any interim goodwill
impairment tests in fiscal years beginning after December 15, 2019.
This ASU, which the Company adopted as of January 1, 2020, did not
have a material effect on the Company’s consolidated
financial statements.
In August 2020, the
Financial Accounting Standards Board (“FASB”) issued an
accounting pronouncement (ASU 2020-06) related to the measurement
and disclosure requirements for convertible instruments and
contracts in an entity's own equity. The pronouncement simplifies
and adds disclosure requirements for the accounting and measurement
of convertible instruments and the settlement assessment for
contracts in an entity's own equity. As a smaller reporting
company, as defined by the SEC, this pronouncement is effective for
fiscal years, and for interim periods within those fiscal years,
beginning after December 15, 2023. The Company is currently
evaluating the impact of this ASU on the financial
statements.
Note
3 - Fair Value
Disclosures
Fair value is the
price that would be received from the sale of an asset or paid to
transfer a liability assuming an orderly transaction in the most
advantageous market at the measurement date. U.S. GAAP establishes
a hierarchical disclosure framework that prioritizes and ranks the
level of observability of inputs used in measuring fair
value.
The fair value of
the Company's financial instruments are as follows:
|
|
Fair Value Measured at
Reporting Date Using
|
|
|
|
|
|
|
|
At
September 30, 2020:
|
|
|
|
|
|
Cash
|
$11,368,680
|
|
$11,368,680
|
|
$11,368,680
|
Other
receivables
|
$20,688
|
|
$
|
$20,688
|
$20,688
|
|
|
|
|
|
|
At
December 31, 2019:
|
|
|
|
|
|
Cash
|
$175,796
|
$-
|
$175,796
|
$-
|
$175,796
|
Other
receivables
|
$2,637,303
|
$-
|
$-
|
$2,637,303
|
$2,637,303
|
Note
payable
|
$444,364
|
$-
|
$-
|
$444,364
|
$444,364
|
Convertible
debt
|
$1,076,938
|
$-
|
$-
|
$1,076,938
|
$1,076,938
|
At September 30, 2020, the fair value of other
receivables approximates carrying value as these consist primarily
of refundable tax credits.
At December 31,
2019, the fair value of other receivables approximates carrying
value as these consist primarily of French R&D tax credits that
are normally received the following year.
The fair value of
the note payable in connection with the financing of directors and
officer’s liability insurance approximates carrying value due
to the terms of such instruments and applicable interest
rates.
The convertible
debt is based on its fair value less unamortized debt discount plus
accrued interest through the date of reporting (see Note
9).
Note
4 - Other Receivables
Other receivables
consisted of the following:
|
|
|
|
|
|
R&D
tax credits
|
$-
|
$2,566,281
|
Other
|
20,688
|
71,022
|
Total
other receivables
|
$20,688
|
$2,637,303
|
At September 30, 2020, the R&D tax credits
were comprised of a portion of the 2019 refundable tax credits for
research conducted in France.
At December 31,
2019, the R&D tax credits were comprised of the 2017, 2018, and
2019 refundable tax credits for research conducted in France. In
the nine months ended September
30, 2020, the Company received both the 2017 and 2018 and partial
2019 refundable tax credits totaling approximately $2,289,096. At
December 31, 2019, Other consisted of amounts due from U.S. R&D
tax credits.
Note
5 - Property, Equipment and Leasehold Improvements
Property, equipment
and leasehold improvements consisted of the following:
|
|
|
|
|
|
Laboratory
equipment
|
$193,661
|
$193,661
|
Computer
equipment
|
77,850
|
74,836
|
Office
equipment
|
36,703
|
36,703
|
Leasehold
improvements
|
29,162
|
35,711
|
Total
property, plant and equipment
|
337,376
|
340,911
|
Less
accumulated depreciation
|
(283,306)
|
(263,520)
|
Property,
plant and equipment, net
|
$54,070
|
$77,391
|
Depreciation
expense for the three months ended September 30, 2020 and 2019 was
$8,188 and $17,220, respectively. Depreciation expense for the nine
months ended September 30, 2020
and 2019 was $26,556 and $51,261, respectively.
For the three
months ended September 30, 2020, $4,881 of depreciation is included
in R&D expense and $3,307 of depreciation is included in
G&A expense. For the nine months ended September 30, 2020,
$14,372 of depreciation is included in R&D expense and $12,184
of depreciation is included in G&A expense.
For the three
months ended September 30, 2019, $11,842 of depreciation has been
reclassified to R&D expense and $5,149 of depreciation remains
in G&A expense. For the nine months ended September 30, 2019,
$35,442 of depreciation is included in R&D expense and $15,343
of depreciation is included in G&A expense.
Note
6 - Intangible Assets and Goodwill
Patents
Pursuant to the
Mayoly APA entered into on March 27, 2019, in which the Company
purchased all rights, title and interest in and to MS1819 (see Note
14), the Company recorded Patents in the amount of $3,802,745 as
follows:
Common
stock issued at signing to Mayoly
|
$1,740,959
|
Due
to Mayoly at 12/31/19 - €400,000
|
449,280
|
Due
to Mayoly at 12/31/20 - €350,000
|
393,120
|
Assumed
Mayoly liabilities and forgiveness of Mayoly debt
|
1,219,386
|
|
$3,802,745
|
Intangible assets
are as follows:
|
|
|
|
|
|
Patents
|
$3,802,745
|
$3,802,745
|
Less
accumulated amortization
|
(791,322)
|
(395,661)
|
Patents,
net
|
$3,011,423
|
$3,407,084
|
Amortization
expense for the three months ended September 30, 2020 and 2019 was
$131,887 and $131,887, respectively. Amortization expense for the
nine months ended September 30, 2020 and 2019 was $395,661 and
$825,063, respectively.
Amortization
expense for the nine months ended September 30, 2019 included
$384,234 from In process
research and development and License agreements written off as a
result of the Mayoly APA.
As of September 30,
2020, amortization expense related to patents is expected to be as
follows for the next five years (2020 through 2025):
2020
(balance of year)
|
$395,661
|
2021
|
527,548
|
2022
|
527,548
|
2023
|
527,548
|
2024
|
527,548
|
2025
|
527,548
|
Goodwill
is as follows:
|
|
Balance
at January 1, 2019
|
$1,924,830
|
Foreign
currency translation
|
(38,144)
|
Balance
at December 31, 2019
|
1,886,686
|
Foreign
currency translation
|
81,833
|
Balance
at September 30, 2020
|
$1,968,519
|
Note 7 - Accounts Payable and Accrued Expenses
Accounts payable
and accrued expenses consisted of the following:
|
|
|
|
|
|
Trade
payables
|
$1,422,066
|
$1,683,505
|
Accrued
expenses
|
263,937
|
71,177
|
Total
accounts payable and accrued expenses
|
$1,686,003
|
$1,754,682
|
At September 30,
2020, and December 31, 2019, trade payables included $0, and
$1,683,505, respectively, due to related parties.
Note
8 - Notes Payable
Directors and Officer’s Liability Insurance
On December 5,
2019, the Company entered into a 9-month financing agreement for
its directors and officer’s liability insurance in the amount
of $498,783 that bears interest at an annual rate of 5.461%.
Monthly payments, including principal and interest, are $56,689 per
month. The balance due under this financing agreement at September
30, 2020 was $0.
CARES ACT PPP Loan
In April 2020, the
Company applied for and received a
CARES Act Paycheck Protection Program (“PPP”) loan of
$179,418 through the Small Business Administration (SBA). In May
2020, the Company returned the loan of $179,418 after analysis of
the updated guidance from the U.S. Department of Treasury
and the SBA regarding the eligibility for such loans.
Note
9 – Convertible Notes
ADEC Notes
On February 14,
2019, the Company entered into a Note Purchase Agreement (the
“ADEC NPA”)
with ADEC Private Equity Investments, LLC (“ADEC”), pursuant to which
the Company issued to ADEC two Senior Convertible Notes
(“Note A” and
“Note B,”
respectively, each an “ADEC
Note,” and together, the “ADEC Notes”), in the
principal amount of $1,000,000 per ADEC Note, resulting in gross
proceeds to the Company of $2,000,000 (the “ADEC Note Offering”). ADEC is
controlled by a significant stockholder of the
Company.
The ADEC Notes
accrued interest at a rate of 10% per annum; provided, however,
that in the event the Company should elect to repay the full
balance due under the terms of both ADEC Notes prior to December
31, 2019, then the interest rate would be reduced to 6% per annum.
Interest would be payable at the time all outstanding principal
amounts owed under each ADEC Note were repaid. The ADEC Notes were
scheduled to mature on the earlier to occur of (i) the tenth
business day following the receipt by ABS of certain tax credits
that the Company expects to receive prior to July 2019 in the case
of Note A (the “2019 Tax
Credit”) and July 2020 in the case of Note B (the
“2020 Tax
Credit”), respectively, or (ii) December 31, 2019 in
the case of Note A and December 31, 2020 in the Case of Note B (the
“Maturity
Dates”). As a condition to entering into the ADEC NPA,
ABS and ADEC also entered into a Pledge Agreement, pursuant to
which ABS agreed to pledge an interest in each of the 2019 Tax
Credit and 2020 Tax Credit to ADEC in order to guarantee payment of
all amounts due under the terms of the ADEC Notes.
Each of the ADEC
Notes was convertible, at ADEC’s option, into shares of
Common Stock, at a conversion price equal to $2.50 per share;
provided, however, that pursuant to the term of the ADEC Notes,
ADEC could not convert all or a portion of the ADEC Notes if such
conversion would result in the significant stockholder and/or
entities affiliated with him beneficially owning in excess of
19.99% of the shares of Common Stock issued and outstanding
immediately after giving effect to the issuance of the shares
issuable upon conversion of the ADEC Notes (the “ADEC Note Conversion
Shares”).
As additional
consideration for entering into the ADEC NPA, the Company entered
into a warrant amendment agreement, whereby the Company agreed to
reduce the exercise price of 1,009,565 outstanding warrants
previously issued by the Company to ADEC and its affiliates (the
“ADEC
Warrants”) to $1.50 per share (the “ADEC Warrant Amendment”). The
ADEC Warrant Amendment did not alter any other terms of the ADEC
Warrants. The ADEC Warrant Amendment resulted in a debt discount of
$325,320 that was accreted to additional interest expense over the
lives of the ADEC Notes.
In December 2019,
the Company repaid $1,550,000 principal amount of the ADEC Notes
and on January 2, 2020 repaid the remaining principal balance of
$450,000 plus outstanding accrued interest of $104,153. As of
September 30, 2020, no ADEC Notes were outstanding.
Senior Convertible Promissory Note Offering
On December 20,
2019, the Company began an offering of (i) Senior Convertible
Promissory Notes (each a “Promissory Note,” and together,
the “Promissory
Notes”) in the principal amount of up to $8.0 million
to certain accredited investors (the “Note Investors”), and (ii)
warrants (“Note
Warrants”) to purchase shares of Common Stock, each
pursuant to Note Purchase Agreements entered into by and between
the Company and each of the Note Investors (the “Promissory NPAs”) (the
“Promissory Note
Offering”).
In December 2019,
the Company issued Promissory Notes to the Note Investors in the
aggregate principal amount of $3,386,300. The Promissory Notes were
scheduled to mature on September 20, 2020, accrue interest at a
rate of 9% per annum, and were convertible, at the sole option of
the holder, into shares of Common Stock (the “Promissory Note Conversion
Shares”) at a price of $0.97 per share (the
“Conversion
Option”). The Promissory Notes could be prepaid by the
Company at any time prior to the maturity date in cash without
penalty or premium (the “Prepayment Option”).
On January 2, 2020,
January 3, 2020, and January 9, 2020, the Company issued Promissory
Notes to the Note Investors in the aggregate principal amount of
$3,517,700.
As additional
consideration for the execution of the Promissory NPA, each Note
Investor also received Note Warrants to purchase that number of
shares of Common Stock equal to one-half (50%) of the Promissory
Note Conversion Shares issuable upon conversion of the Promissory
Notes (the “Note
Warrant Shares”). The
Note Warrants have an exercise price of $1.07 per share and expire
five years from the date of issuance. In addition, all of the Note
Warrants, other than those issued in the December 20, 2019 closing
(covering an aggregate of 2,374,345 shares of Common Stock) contain
a provision prohibiting exercise until the expiration of six months
from the date of issuance. The Company and each Note Investor
executed a Registration Rights Agreement (the “RRA”), pursuant to which the
Company agreed to file a registration statement. The Company filed
a registration statement with the SEC on February 7, 2020 covering
the Promissory Note Conversion Shares and Note Warrant Shares, but
that registration statement was not declared effective and was
subsequently withdrawn by the Company. On July 27, 2020, the
Company filed a separate registration statement in connection with
the Series B Private Placement and the Exchange described in Note
11, which also covers the Note Warrant Shares. That registration
statement was declared effective on September 21,
2020.
In connection with
the four closings in December 2019 of the Promissory Note Offering, the Company paid
aggregate placement agent fees of $338,630, which fees were based
on (i) 9% of the aggregate principal amount of the Promissory Notes
issued to the Note Investors introduced by the placement agent, and
(ii) a non-accountable expense allowance of 1% of the gross
proceeds from the Promissory Note Offering. In addition, the
placement agent was issued warrants, containing substantially the
same terms and conditions as the Note Warrants, to purchase an
aggregate of 244,372 shares of Common Stock (the
“January Placement Agent
Warrants”), representing 7% of the Promissory Note
Conversion Shares issuable upon conversion of the Promissory Notes
issued to the Note Investors. The January Placement Agent Warrants
expire five years from the date of issuance. The January Placement
Agent Warrants in connection with the December 2019 closings have
an exercise price of $1.21 per share.
In connection with
the three closings in January 2020 of the Promissory Note Offering, the Company paid
aggregate placement agent fees of $276,770, which fees were based
on (i) 9% of the aggregate principal amount of the Promissory Notes
issued to the Note Investors introduced by the placement agent, and
(ii) a non-accountable expense allowance of 1% of the gross
proceeds from the Promissory Note Offering. In addition, the
placement agent was issued January Placement Agent Warrants, to
purchase an aggregate of 199,732 shares of Common Stock. 41,495 of
these January Placement Agent Warrants have an exercise price of
$1.21 per share and 158,237 of these January Placement Agent
Warrants have an exercise price of $1.42 per share.
The Company
determined the Prepayment Option feature represents a contingent
call option. The Company evaluated the Prepayment Option in
accordance with ASC 815-15-25. The Company determined that the
Prepayment Option feature is clearly and closely related to the
debt host instrument and is not an embedded derivative requiring
bifurcation. Additionally, the Company determined the Conversion
Option represents an embedded call option. The Company evaluated
the Conversion Option in accordance with ASC 815-15-25. The Company
determined that the Conversion Option feature meets the scope
exception from ASC 815 and is not an embedded derivative requiring
bifurcation.
The Company
evaluated the Promissory Notes for a beneficial conversion feature
in accordance with ASC 470-20. The Company determined that at each
commitment date the effective conversion price was below the
closing stock price (market value), and the Convertible Notes
contained a beneficial conversion feature.
Pursuant to the
December 2019 closings of the Promissory Note Offering, the
principal amount of $3,386,300 was first allocated based on the
relative fair value of the Promissory Notes and the Note Warrants.
The fair value of the Note Warrants amounted to $912,648. Then the
beneficial conversion feature was calculated, which amounted to
$1,359,284. The Company incurred debt issuance costs of $588,017
related to the offering. The initial carrying value of the
Promissory Notes issued amounted to $526,351.
Pursuant to the
January 2020 closings of the Promissory Note Offering, the
principal amount of $3,517,700 was first allocated based on the
relative fair value of the Promissory Notes and the Note Warrants.
The fair value of the Note Warrants amounted to $2,439,272. Then
the beneficial conversion feature was calculated, which amounted to
$1,838,422. The Company incurred debt issuance costs of $472,326
related to the offering. The initial carrying value of the
Promissory Notes issued amounted to $128,524.
On June 1, 2020,
the Company entered into an amendment to a certain Promissory Note
in the principal amount of $100,000 issued on December 20, 2019 to
Edward J. Borkowski, the chairman of the Board, to increase the
Conversion Price to $1.07 per share (the “Note Amendment”). The Company evaluated the Note Amendment
transaction in accordance with ASC 470-50 and determined the Note
Amendment did not constitute a substantive modification of the
Promissory Note and that the transaction should be accounted for as
a debt modification with no accounting treatment
required.
During the three
months ended September 30, 2020, the Company recognized $404,222 of
interest expense related to these Promissory Notes, including
amortization of debt discount related to the value of the Note
Warrants of $120,165, amortization of the beneficial conversion
feature of $193,555, amortization of debt discount related to debt
issuance costs of $63,264, and accrued interest expense of
$27,238.
During the nine
months ended September 30, 2020, the Company recognized $4,912,396
of interest expense related to these Promissory Notes, including
amortization of debt discount related to the value of the Note
Warrants of $1,461,728, amortization of the beneficial conversion
feature of $2,347,763, amortization of debt discount related to
debt issuance costs of $771,675, and accrued interest expense of
$332,230.
Exchange of Promissory Notes into Series B Convertible Preferred
Stock
As more fully
discussed in Note 11, on July 16, 2020, in connection with the
Series B Private Placement, 937.004177 shares of Series B Preferred
Stock, Series B Warrants to purchase 4,684,991 shares of Common
Stock, and Exchange Warrants to purchase 1,772,937 shares of Common
Stock were issued to certain holders of the Promissory Notes in
exchange for such Promissory Notes for aggregate consideration of
approximately $7.2 million consisting of approximately $6.9 million
aggregate outstanding principal amount, together with accrued and
unpaid interest thereon through the date of the Series B Private
Placement of approximately $0.3 million.
The Company prepaid
the remaining outstanding balance of $25,000 aggregate principal
amount of Promissory Notes, together with accrued and unpaid
interest thereon through the prepayment date of $1,307, held by
those holders who did not participate in the Exchange. Following
these transactions, no Promissory Notes remain
outstanding.
Accounting for the Exchange of Promissory Notes into Series B
Private Placement
The Company determined
the Exchange of the Promissory Notes into Series B Preferred Stock
and related warrants should be recognized as an extinguishment of
the Promissory Notes,
which
resulted in a loss on extinguishment of approximately $0.6
million. Additionally, the Company recorded interest expense
of approximately $0.8 million related to the remaining unamortized
discount resulting from initial beneficial conversion feature of
the Promissory Notes on closing date of the
Exchange.
Convertible Debt
consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
debt
|
$-
|
$-
|
$-
|
$3,836,300
|
Unamortized
debt discount - revalued warrants
|
-
|
-
|
-
|
(118,356)
|
Unamortized
debt discount - warrants
|
-
|
-
|
-
|
(878,979)
|
Unamortized
debt discount - BCF
|
-
|
-
|
-
|
(1,307,755)
|
Unamortized
debt discount - debt issuance costs
|
-
|
-
|
-
|
(566,815)
|
Accrued
interest
|
-
|
-
|
-
|
112,543
|
Total
convertible debt
|
$-
|
$-
|
$-
|
$1,076,938
|
Note
10 – Other Liabilities
Other liabilities
consisted of the following:
|
|
|
Current
|
|
|
Due
to Mayoly
|
$410,026
|
$392,989
|
Lease
liabilities
|
74,156
|
83,235
|
Other
liabilities
|
8,633
|
-
|
|
$492,815
|
$476,224
|
|
|
|
|
|
|
Long-term
|
|
|
Lease
liabilities
|
31,469
|
-
|
|
$31,469
|
$-
|
Note 11 – Equity
Our certificate
of incorporation, as amended and restated on December 20, 2019 (the
“Charter”)
authorizes the issuance of up to 150,000,000 shares of Common
Stock, par value $0.0001 per share, and 10,000,000 shares of
preferred stock, par value $0.0001 per share.
On December 19,
2019, the Company held its Annual Meeting of Stockholders (the
“2019 Annual
Meeting”), whereby, the shareholders approved, among
others, amending the Company’s Charter to authorize the Board
to effect a reverse stock split of both the issued and outstanding
and authorized shares of Common Stock, at a specific ratio, ranging
from one-for-two (1:2) to one-for-five (1:5), any time prior to the
one-year anniversary date of the 2019 Annual Meeting, with the
exact ratio to be determined by the Board (the “Reverse Split”). As of September
30, 2020, the Board had not elected to effect a Reverse Split. The
authorization for the Reverse Split will expire on December 19,
2020.
Common
Stock
The Company had
28,881,984 and 26,800,519 shares of its Common Stock issued and
outstanding at September 30, 2020 and December 31, 2019,
respectively.
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. Our Charter and Amended and Restated
Bylaws (the “Bylaws”) do not provide for cumulative voting
rights.
In addition, the
holders of our Common Stock will be entitled to receive ratably
such dividends, if any, as may be declared by the Board out of
legally available funds; however, the current policy of our Board
is to retain earnings, if any, for operations and growth. Upon
liquidation, dissolution or winding-up, the holders of our Common
Stock will be entitled to share ratably in all assets that are
legally available for distribution.
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 we may designate and issue
in the future.
Preferred Stock
We
have 10,000,000 shares of preferred stock, par value $0.0001 per
share, authorized and available for issuance in one or more series.
The Board is authorized to divide the preferred stock into any
number of series, fix the designation and number of each such
series, and determine or change the designation, relative rights,
preferences, and limitations of any series of preferred stock. The
Board of may increase or decrease the number of shares initially
fixed for any series, but no decrease may reduce the number below
the shares then outstanding and duly reserved for
issuance.
On July 16, 2020, we authorized 5,194.805195
shares as Series B Preferred Stock and issued 2,912.583005
shares of Series B Preferred
Stock, with 2,282.222190 shares of Series B Preferred Stock
remaining authorized but unissued. Following such transactions, we
currently have 2,912.583005 shares of preferred stock issued and
outstanding with 9,997,087.416995 shares of preferred stock
remaining authorized but unissued.
Series B Convertible Preferred Stock
Pursuant to the Certificate of Designation of
Rights and Preferences of the Series B Preferred Stock (the
“Series B Certificate of
Designation”), the terms
of the Series B Preferred Stock are as follows:
Ranking
The
Series B Preferred Stock will rank senior to the Common Stock with
respect to distributions of assets upon the liquidation,
dissolution or winding up of the Company.
Stated Value
Each share of Series B Preferred Stock has a
stated value of $7,700, subject to adjustment for stock splits,
combinations and similar events (the “Series B Stated
Value”).
Dividends
Each
holder of shares of Series B Preferred Stock, in preference and
priority to the holders of all other classes or series of stock of
the Company, is entitled to receive dividends, commencing from the
date of issuance. Such dividends may be paid by the Company only
when, as and if declared by the Board, out of assets legally
available therefor, semiannually in arrears on the last day of June
and December in each year, commencing December 31, 2020, at the
dividend rate of 9.0% per year, which is cumulative and continues
to accrue on a daily basis whether or not declared and whether or
not the Company has assets legally available therefor. The Company
may pay such dividends at its option either in cash or in kind in
additional shares of Series B Preferred Stock (rounded down to the
nearest whole share), provided the Company must pay in cash the
fair value of any such fractional shares in excess of $100.00. At
September 30, 2020 the dividend payable to the holders of the
Series B Preferred Stock aggregated to approximately
$408,043.
Liquidation Preference; Liquidation Rights
Under the Certificate of Designations, each
share of Series B Preferred Stock carries a liquidation preference
equal to the Series B Stated Value (as adjusted thereunder) plus
accrued and unpaid dividends thereon (the
“Liquidation
Preference”).
If
the Company voluntarily or involuntarily liquidates, dissolves or
winds up its affairs, each holder of the Series B Preferred Stock
will be entitled to receive out of the Company’s assets
available for distribution to stockholders, after satisfaction of
liabilities to creditors, if any, but before any distribution of
assets is made on the Common Stock or any of the Company’s
shares of stock ranking junior as to such a distribution to the
Series B Preferred Stock, a liquidating distribution in the amount
of the Stated Value of all such holder’s Series B Preferred
Stock plus all accrued and unpaid dividends thereon. At September
30, 2020, the value of the liquidation preference of the Series B
Preferred stocks aggregated to approximately $22.6
million.
Conversion
Each share of Series B Preferred Stock will be
convertible at the holder’s option at any time, into Common
Stock at a conversion rate equal to the quotient of (i) the Series
B Stated Value divided by (ii) the initial conversion price of
$0.77, subject to specified adjustments for stock splits, cash or
stock dividends, reorganizations, reclassifications other similar
events as set forth in the Series B Certificate of
Designations. In addition, at any time after the six month
anniversary of the Series B Closing Date, if the closing sale price
per share of Common Stock exceeds 250% of the initial conversion
price, or $1.925, for 20 consecutive trading days, then all of the
outstanding shares of Series B Preferred Stock will automatically
convert (the “Automatic
Conversion”) into such
number of shares of Common Stock as is obtained by multiplying the
number of shares of Series B Preferred Stock to be so converted,
plus the amount of any accrued and unpaid dividends thereon, by the
Series B Stated Value per share and dividing the result by the then
applicable conversion price. The Series B Preferred Stock contains
limitations that prevent the holder thereof from acquiring shares
of Common Stock upon conversion (including pursuant to the
Automatic Conversion) that would result in the number of shares
beneficially owned by such holder and its affiliates exceeding
9.99% of the total number of shares of Common Stock outstanding
immediately after giving effect to the conversion, which percentage
may be increased or decreased at the holder’s election not to
exceed 19.99%.
Most Favored Nations Exchange Right
In the event the Company effects any issuance by
the Company or any of its subsidiaries of Common Stock or Common
Stock equivalents for cash consideration, or a combination of units
thereof (a “Subsequent
Financing”), each holder
of the Series B Preferred Stock has the right, subject to certain
exceptions set forth in the Series B Certificate of Designations,
at its option, to exchange (in lieu of cash subscription payments)
all or some of the Series B Preferred Stock then held (with a value
per share of Series B Preferred Stock equal to the Liquidation
Preference) for any securities or units issued in a Subsequent
Financing on dollar-for-dollar basis.
Voting
The
holders of the Series B Preferred Stock, voting as a separate
class, will have customary consent rights with respect to certain
corporate actions of the Company. The Company may not take the
following actions without the prior consent of the holders of at
least a majority of the Series B Preferred Stock then outstanding:
(a) authorize, create, designate, establish, issue or sell an
increased number of shares of Series B Preferred Stock or any other
class or series of capital stock ranking senior to or on parity
with the Series B Preferred Stock as to dividends or upon
liquidation; (b) reclassify any shares of Common Stock or any other
class or series of capital stock into shares having any preference
or priority as to dividends or upon liquidation superior to or on
parity with any such preference or priority of Series B Preferred
Stock; (c) amend, alter or repeal the Certificate of Incorporation
or Bylaws of the Company and the powers, preferences, privileges,
relative, participating, optional and other special rights and
qualifications, limitations and restrictions thereof, which would
adversely affect any right, preference, privilege or voting power
of the Series B Preferred Stock; (d) issue any indebtedness or debt
security, other than trade accounts payable, insurance premium
financings and/or letters of credit, performance bonds or other
similar credit support incurred in the ordinary course of business,
or amend, renew, increase, or otherwise alter in any material
respect the terms of any such indebtedness existing as of the date
of first issuance of shares of Series B Preferred Stock; (e)
redeem, purchase, or otherwise acquire or pay or declare any
dividend or other distribution on (or pay into or set aside for a
sinking fund for any such purpose) any capital stock of the
Company; (f) declare bankruptcy, dissolve, liquidate, or wind up
the affairs of the Company; (g) effect, or enter into any agreement
to effect, a Change of Control (as defined in the Certificate of
Designations); or (h) materially modify or change the nature of the
Company’s business.
2014 Equity Incentive Plan
The Company’s
Board and stockholders adopted and approved the Amended and
Restated 2014 Omnibus Equity Incentive Plan (the
“2014 Plan”),
which took effect on May 12, 2014. From the adoption and approval
of the 2020 Plan on September 11, 2020, no new awards have been or
will be made under the 2014 Plan.
The 2014 Plan
allowed for the issuance of securities, including stock options to
employees, Board members and consultants. The number of shares of
Common Stock reserved for issuance under the 2014 Plan could 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
included all shares of Common Stock and all shares of Common Stock
issuable upon the conversion of outstanding preferred stock and
other convertible securities but did not include any shares of
Common Stock issuable upon the exercise of options, or other
convertible securities issued pursuant to the 2014 Plan. The number
of authorized shares of Common Stock reserved for issuance under
the 2014 Plan was automatically be increased concurrently with the
Company’s issuance of fully paid and non- assessable shares
of As Converted Shares. Shares were deemed to have been issued
under the 2014 Plan solely to the extent actually issued and
delivered pursuant to an award.
On
July 16, 2020, the Board approved an amendment to the 2014 Plan.
The amendment eliminates individual grant limits under the 2014
Plan that were intended to comply with the exemption for
“performance-based compensation” under
Section 162(m) of the Internal Revenue Code, which section has
been repealed.
The Company issued
an aggregate of 795,006 and 0 stock options, during the nine months
ended September 30, 2020 and 2019, respectively, under the 2014
Plan (see Note 13). Upon adoption of the 2020 Omnibus Equity
Incentive Plan on September 11, 2020, the Company will no longer
make grants under the 2014 Plan.
2020 Equity Incentive Plan
The Company’s
Board and stockholders adopted and approved the 2020 Omnibus Equity
Incentive Plan (the “2020
Plan”), which took effect on September 11 ,2020. The
2020 Plan allows for the issuance of securities, including stock
options to employees, Board members and consultants. The
initial number of shares of Common
Stock available for issuance under the 2020 Plan is 10,000,000
shares, which will, on January 1 of each calendar year, unless the
Board decides otherwise, automatically increase to equal ten
percent (10%) of the total number of shares of Common Stock
outstanding on December 31 of the immediately preceding calendar
year, calculated on an As Converted Basis. As Converted Shares
include all outstanding shares of Common Stock and all shares of
Common Stock issuable upon the conversion of outstanding preferred
stock, warrants and other convertible securities, but will not
include any shares of Common Stock issuable upon the exercise of
options and other convertible securities issued pursuant to either
the 2014 Plan or the 2020 Plan. The number of shares permitted to
be issued as “incentive stock options”
(“ISOs”) from is 15,000,000 under the 2020
Plan.
As of September 30,
2020, no grants were issued under the 2020 Plan and an aggregate of
10,000,000 total shares are available under the 2020
Plan.
Equity Line with Lincoln Park
On November 13,
2019, the Company entered into a purchase agreement (the
“Equity Line
Agreement”), together with a registration rights
agreement (the “Lincoln Park
Registration Rights Agreement”), with Lincoln Park.
Under the terms of the Equity Line Agreement, Lincoln Park has
committed to purchase up to $15,000,000 of our Common Stock (the
“Equity Line”).
Upon execution of the Equity Line Agreement, the Company issued
Lincoln Park 487,168 shares of Common Stock (the
“Commitment
Shares”) as a fee for its commitment to purchase
shares of our Common Stock under the Equity Line Agreement. The
remaining shares of our Common Stock that may be issued under the
Equity Line Agreement may be sold by the Company to Lincoln Park at
our discretion from time-to-time over a 30-month period commencing
after the satisfaction of certain conditions set forth in the
Equity Line Agreement, subject to the continued effectiveness of a
registration statement covering such shares of Common Stock sold to
Lincoln Park by the Company. The registration statement was filed
with the SEC on December 31, 2019 and was declared effective on
January 14, 2020.
Under the Equity Line Agreement, on any business day over
the term of the Equity Line
Agreement, the Company has the right, in its sole discretion, to
present Lincoln Park with a
purchase notice (each, a “Purchase
Notice”) directing
Lincoln Park to purchase up to 150,000
shares of Common Stock per business day (the
“Regular
Purchase”). In each
case, Lincoln Park’s
maximum commitment in any single Regular Purchase may not exceed
$1,000,000. The Equity Line
Agreement provides for a purchase price per Purchase Share (the
“Purchase
Price”) equal to the
lesser of:
●
|
the
lowest sale price of Common Stock on the purchase date;
and;
|
|
|
●
|
the
average of the three lowest closing sale prices for the Common
Stock during the ten consecutive business days ending on the
business day immediately preceding the purchase date of such
shares;
|
In addition, on any date on which the Company
submits a Purchase Notice to Lincoln Park, the Company also has the right, in
its sole discretion, to present Lincoln Park with an accelerated purchase notice
(each, an “Accelerated Purchase
Notice”) directing
Lincoln Park to purchase an amount of
stock (the “Accelerated
Purchase”) equal to up to
the lesser of (i) three times the number of shares purchased
pursuant to such Regular Purchase; and (ii) 30% of the aggregate
shares of Common Stock traded during all or, if certain trading
volume or market price thresholds specified in the
Equity Line Agreement are crossed on
the applicable Accelerated Purchase date, the portion of the normal
trading hours on the applicable Accelerated Purchase date prior to
such time that any one of such thresholds is crossed (such period
of time on the applicable Accelerated Purchase Date, the
“Accelerated Purchase
Measurement Period”),
provided that Lincoln Park will
not be required to buy shares pursuant to an Accelerated Purchase
Notice that was received by Lincoln Park on any business day on which the last
closing trade price of Common Stock on the Nasdaq Capital Market
(or alternative national exchange) is below $0.25 per share. The
purchase price per share for each such Accelerated Purchase will be
equal to the lesser of:
●
|
97%
of the volume weighted average price of the Company’s common
stock during the applicable Accelerated Purchase Measurement Period
on the applicable Accelerated Purchase date; and
|
|
|
●
|
the
closing sale price of Common Stock on the applicable Accelerated
Purchase Date.
|
The Company may also direct Lincoln Park on any business day on which an
Accelerated Purchase has been completed and all of the shares to be
purchased thereunder have been properly delivered to
Lincoln Park in accordance with
the Equity Line Agreement, to
purchase an amount of stock (the “Additional Accelerated
Purchase”) equal to up to
the lesser of (i) three times the number of shares purchased
pursuant to such Regular Purchase; and (ii) 30% of the aggregate
number of shares of Common Stock traded during a certain portion of
the normal trading hours on the applicable Additional Accelerated
Purchase date as determined in accordance with the Purchase
Agreement (such period of time on the applicable Additional
Accelerated Purchase date, the “Additional Accelerated
Purchase Measurement Period”), provided that the closing price of the
Company’s common stock on the business day immediately
preceding such business day is not below $0.25 per share.
Additional Accelerated Purchases will be equal to the lower
of:
●
|
97%
of the volume weighted average price of the Company’s common
stock during the applicable Additional Accelerated Purchase
Measurement Period on the applicable Additional Accelerated
Purchase date; and
|
|
|
●
|
the
closing sale price of Common Stock on the applicable Additional
Accelerated Purchase.
|
During the three and nine months ended September
30, 2020, the Company issued an aggregate of 0, and
1,495,199 shares of Common Stock, respectively, in connection with
the Equity Line Agreement, resulting in net proceeds to the Company
of approximately $0, and $988,348, respectively.
Pursuant to the
terms of the Equity Line Agreement, without first obtaining
stockholder approval, the aggregate number of shares that the
Company is permitted to sell to Lincoln Park thereunder, when
aggregated with certain other private offerings of Common Stock, as
applicable, may not exceed 19.99% of the Common Stock outstanding
immediately prior to the execution of the Equity Line Agreement on
November 13, 2019, unless the average price of all applicable sales
thereunder exceeds $0.70 per share calculated by reference to the
“Minimum Price” under Nasdaq Listing Rule 5635(d). On
September 11, 2020, the Company received stockholder approval for
the issuances of the full $15 million available under the Equity
Line Agreement. Generally, there is approximately $14 million of
availability left for issuance pursuant to the Equity Line
Agreement.
Common Stock Issuances
During the three
months ended September 30, 2020,
holders of shares of Series B Preferred Stock converted 34.127448
shares of Series B Preferred Stock into an aggregate of 341,274
shares of Common Stock at the stated conversion price of $0.77 per
share, plus the issuance of 4,610 shares of Common Stock for
accrued dividends of $3,551 through such conversion
dates.
During the three
months ended September 30, 2020, the Company issued an aggregate of
31,646 shares of its
Common Stock to consultants with a total grant date fair value of
approximately
$25,000 for investor
relations services provided, which was
recorded as stock-based compensation and included as part of
general and administrative expense.
During the
nine months ended September
30, 2020, the Company issued an
aggregate of 132,841 shares of its Common Stock to
consultants with a total grant date fair value of approximately $112,105 for investor relations services
provided, which was recorded was
recorded as stock-based compensation and included as part of
general and administrative expense.
During the nine
months ended September
30, 2020, the Company issued an
aggregate of 105,937 shares of its Common Stock to outside Board
members as payment of Board fees with an aggregate grant date fair
value of approximately $131,137 that was recorded as stock-based
compensation, included as part of general and administrative
expense. The aggregate effective settlement price was $1.24 per
share, and each individual stock issuance was based on the closing
stock price of the Common Stock on the initial date the payable was
accrued.
During the three and nine months ended September
30, 2019, the Company issued 21,677
and 62,518 shares of Common Stock, respectively, to a consultant as
payment of $22,500 and
$112,500, respectively, of accounts payable related to
investor relations services.
During the three
and nine months ended September 30, 2019, the Company issued an
aggregate of 0 and
60,000 shares of its
Common Stock, respectively, to outside Board members as payment of
Board fees with an aggregate grant date fair value of approximately $0 and $123,000, respectively that was
recorded as stock-based compensation,
included as part of general and administrative
expense.
During the period
from April 6, 2020 through May 22, 2020, the Company sold an
aggregate of 1,345,199 shares of Common Stock pursuant to the
Equity Line, from which the Company derived approximately $869,000
in net proceeds. The sales of these shares were exempt from
registration under the Securities Act of 1933, as amended, in
reliance upon Section 4(a)(2) (or Regulation D promulgated
thereunder).
Restricted Stock and Restricted Stock Units
Restricted stock
refers to shares of Common Stock subject to vesting based on
certain service, performance, and market conditions. Restricted
stock unit awards (“RSUs”) refer to an award under
the 2014 Plan, which constitutes a promise to grant shares of
Common Stock at the end of a specified restriction
period.
During the three months ended September
30, 2020, an aggregate of 1,746
unvested restricted shares of Common Stock, subject to
service conditions, vested with a
total grant date fair value of approximately $6,289 and was
recorded as stock-based compensation, included as part of general
and administrative expense.
During the nine months ended September
30, 2020, an aggregate of 10,080
unvested restricted shares of Common Stock, subject to
service conditions, vested with a
total grant date fair value of approximately $36,289 and was
recorded as stock-based compensation, included as part of general
and administrative expense.
During the three and nine months ended
September 30, 2020, an aggregate of 0,
and 4,000 unvested restricted shares of Common Stock were
forfeited, respectively.
During
the three months ended September 30, 2019, the Company issued
21,677 restricted shares of Common Stock to a consultant as payment
of $22,500 of accounts payable for investor relations services.
During the nine months ended September 30, 2019, the Company issued
62,518 shares of Common Stock to a consultant as payment of
$112,500 of accounts payable for investor relations
services.
During the three months ended September
30, 2019, an aggregate of 43,750
unvested restricted shares of Common Stock vested with a total grant date fair value of
approximately $63,434. 13,750 of these restricted shares vested
during the three months ended September 30, 2019 due to the terms
of such grants with a total grant date fair value of approximately
$44,834. 30,000 of these restricted shares were issued during the
three months ended September 30, 2019 to our directors as a part of
Board compensation with a total grant date fair value of
approximately $18,600.
During the nine months ended September
30, 2019, an aggregate of 223,417
unvested restricted shares of Common Stock vested with a total grant date fair value of
approximately $556,888. 33,334 of these restricted shares with a
total grant date fair value of approximately $101,335 vested during
the nine months ended September 30, 2019 due to the Company achieving certain
clinical milestones. 41,250 of these restricted shares with a total
grant date fair value of approximately $134,501 vested during the
nine months ended September 30, 2019 due to the satisfaction of
service conditions 30,000 of these restricted shares were issued
during the three months ended September 30, 2019 to our directors
as a part of Board compensation with a total grant date fair value
of approximately $142,200.
As of September 30, 2020, the Company had unrecognized restricted
common stock expense of approximately $393,250. Approximately
$196,625 of this unrecognized expense vests upon the first
commercial sale in the United States of MS1819 and approximately
$196,625 of this unrecognized expense vests upon the total market
capitalization of the Company exceeding $1.0 billion for 20
consecutive trading days. These milestones were not considered
probable at September 30, 2020.
Series B Private Placement
The Series B Private Placement and the Exchange
On July 16, 2020 (the “Series B Closing
Date”), the
Company consummated a private placement offering (the
“Series B Private
Placement”) whereby the
Company entered into a Convertible Preferred Stock and Warrant
Securities Purchase Agreement (the “Series B Purchase
Agreement”) with certain
accredited and institutional investors (the
“Series B
Investors”). Pursuant to
the Series B Purchase Agreement, the Company issued an aggregate of
2,912.583005 shares of Series B Convertible Preferred Stock, par
value $0.0001 per share (the “Series B Preferred
Stock”), at a price of
$7,700.00 per share, initially convertible into an aggregate of
29,125,756 shares of Common Stock at $0.77 per share, together with
warrants (the “Series B
Warrants”) to purchase an
aggregate of 14,562,826 shares of Common Stock at an exercise price
of $0.85 per share. The amount of the Series B Warrants is equal to
50% of the shares of Common Stock into which the Series B Preferred
Stock is initially convertible.
In connection with the Series B Private Placement,
an aggregate of 1,975.578828 shares of Series B Preferred Stock
initially convertible into 19,755,748 shares of Common Stock and
related 9,877,835 Series B Warrants were issued for cash
consideration, resulting in aggregate gross proceeds of approximately $15.2 million and
aggregate net proceeds to the
Company of approximately $13.2 million after deducting placement
agent compensation and offering expenses.
An aggregate of 937.004177 shares of Series B
Preferred Stock initially convertible into 9,370,008 shares of
Common Stock and related Series B Warrants to purchase 4,684,991
shares of Common Stock were issued to certain Series B Investors
(the “Exchange
Investors”) in exchange
for consideration consisting of approximately $6.9 million
aggregate outstanding principal amount, together with accrued and
unpaid interest thereon through the Series B Closing Date of
approximately $0.3 million, of certain Senior Convertible
Promissory Notes (the “Promissory
Notes”) issued between
December 20, 2019 and January 9, 2020 (the
“Exchange”), pursuant to an Exchange Addendum (the
“Exchange
Addendum”) executed by
the Company and the Exchange Investors. As additional consideration
to the Exchange Investors, the Company also issued certain
additional warrants (the “Exchange
Warrants”) to purchase an
aggregate of 1,772,937 shares of Common Stock at an exercise price
of $0.85 per share. The amount of the Exchange Warrants is equal to
25% of the shares of Common Stock into which such Promissory Notes
were originally convertible upon the initial issuance
thereof.
Pursuant to the Series B Private Placement and the
Series B Purchase Agreement, for purposes of complying with Nasdaq
Listing Rule 5635(c) and 5635(d), the Company was required to hold
a meeting of its stockholders not later than 60 days following the
Series B Closing Date to seek approval (the
“Stockholder
Approval”) for, among
other things, the issuance of shares of Common Stock upon (i) full
conversion of the Series B Preferred Stock; and (ii) full exercise
of the Series B Warrants and the Exchange Warrants. In the event
the Stockholder Approval was not received on or prior to the 90th
day following the Series B Closing Date, subject to extension upon
the prior written approval of the holders of at least a majority of
the Series B Preferred Stock then outstanding, the Company would
have been required to repurchase all of the then outstanding shares
of Series B Preferred Stock at a price equal to 150% of the stated
value thereof plus accrued and
unpaid dividends thereon, in cash. On September 11, 2020, the
Company received Stockholder Approval.
The Company prepaid
the remaining outstanding balance of $25,000 aggregate principal
amount of Promissory Notes, together with accrued and unpaid
interest thereon through the prepayment date of $1,307, held by
those holders who did not participate in the Exchange. Following
these transactions, no Promissory Notes remain
outstanding.
In connection with
the Series B Private Placement, the Company paid the placement
agent 9.0% of the gross cash proceeds received by the Company from
investors introduced by the placement agent and 4.0% of the gross
cash proceeds received by the Company for all other investors, or
approximately $1.3 million. The Company also paid the placement
agent a non-accountable cash fee equal to 1.0% of the gross cash
proceeds and a cash financial advisory fee equal to 3.0% of the
outstanding principal balance of the Promissory Notes that were
submitted in the Exchange, or approximately $0.3 million in
additional cash fees in the aggregate. In addition, the Company
issued to the placement agent warrants to purchase up to 1,377,458
shares of Common Stock (the “July Placement Agent Warrants”). The
July Placement Agent Warrants have substantially the same terms as
the Series B Warrants, except the July Placement Agent Warrants
have an exercise price of $0.96 per share, are not callable,
provide for cashless exercise and are not exercisable until the
earlier of stockholder approval of the Series B Private Placement
and the date that is six months following the issuance
thereof.
Accounting for the Series B Private Placement
Upon
receiving Shareholder Approval on September 11, 2020, the Company
classified the Series B Preferred Stock as permanent equity because
no features provide for redemption by the holders of the Series B
Preferred Stock or conditional redemption, which is not solely
within the Company’s control, and there are no unconditional
obligations in that (1) the Company must or may settle in a
variable number of its equity shares and (2) the monetary value is
predominantly fixed, varying with something other than the fair
value of the Company’s equity shares or varying inversely in
relation to the Company’s equity shares.
Because
the Series B Preferred Stock contain certain embedded features that
could affect the ultimate settlement of the Series B Preferred
Stock, the Company analyzed the instrument for embedded derivatives
that require bifurcation. The Company’s analysis began with
determining whether the Series B Preferred Stock is more akin to
equity or debt. The Company evaluated the following
criteria/features in this determination: redemption, voting rights,
collateral requirements, covenant provisions, creditor and
liquidation rights, dividends, conversion rights and exchange
rights. The Company determined that the Series B Preferred Stock
was more akin to equity than to debt when evaluating the economic
characteristics and risks of the entire Series B Preferred Stock,
including the embedded features. The Company then evaluated the
embedded features to determine whether their economic
characteristics and risks were clearly and closely related to the
economic characteristics and risks of the Series B Preferred Stock.
Since the Series B Preferred Stock was determined to be more akin
to equity than debt, and the underlying that causes the value of
the embedded features to fluctuate would be the value of the
Company’s common stock, the embedded features were considered
clearly and closely related to the Series B Preferred Stock. As a
result, the embedded features would not need to be bifurcated from
the Series B Preferred Stock.
Any
beneficial conversion features related to the exercise of the Most
Favored Nation exchange right or the application of the Mandatory
Conversion provision will be recognized upon the occurrence of
the contingent events based on its intrinsic value at the
commitment date.
The Company concluded the freestanding Series B Warrants did not
contain any provision that would require liability classification
and therefore should be classified in stockholder’s equity,
based on their relative fair value.
The proceeds from the
Series B Private Placement were allocated to the Series B Preferred
Stock and Series B Warrants based on their relative fair values.
The total proceeds of
approximately $22,426,890 were allocated as follows: $16,474,374 to
the Series B Preferred Stock, and $5,952,515 to the Series B
Warrants. After allocation of the
proceeds, the effective conversion price of the Series B Preferred
Stock was determined to be beneficial and, as a result, the Company
recorded a deemed dividend of $8,155,212 equal to the intrinsic
value of the beneficial conversion feature and recognized on the
closing date and recorded as a reduction of income available to
common stockholders in computing basic and diluted loss per
share.
The total offering costs of approximately $2,014,218 were
recognized in equity.
Note
12 – Warrants
For the nine months ended September 30,
2020, in connection with the January
2020 closings of the Promissory Note Offering, the Company issued
Note Warrants to investors to purchase an aggregate of 1,813,257
shares of Common Stock with the issuance of the Promissory Notes as
referenced in Note 9. These Note Warrants were issued between
January 2, 2020 and January 9, 2020, are exercisable commencing six
(6) months following the issuance date at $1.07 per share and
expire five years from issuance. The total grant date fair value of
these warrants was determined to be approximately $1,574,886, as
calculated using the Black-Scholes model, and were recorded as a
debt discount based on their relative fair
value.
For the nine months ended September 30,
2020, in connection with the January
2020 closings of the Promissory Note Offering, the Company issued
the January Placement Agent Warrants to purchase an aggregate of
199,732 shares of Common Stock to the placement agent and/or their
designees. The January Placement Agent Warrants were issued between
January 2, 2020 and January 9, 2020, vested immediately, and expire
five years from issuance. 41,495 of these January Placement Agent
Warrants are exercisable at $1.21 per share and 158,237 are
exercisable at $1.42 per share. The total grant date fair value of
the January Placement Agent Warrants was determined to be
approximately $174,130, as calculated using the Black-Scholes
model, and was charged to debt discount that will be amortized over
the life of the debt.
For the three and nine months ended
September 30, 2020, in connection with
the closing of the Series B Private Placement, the Company issued
Series B Warrants to investors to purchase an aggregate of
14,562,826 shares of Common Stock with the issuance of the Series B
Preferred Stock as referenced in Note 11. These Series B Warrants
were issued on July 16, 2020, are exercisable commencing six (6)
months following the issuance date at $0.85 per share and expire
five years from issuance. The total grant date fair value of the
Series B Warrants was determined to be approximately $8,103,277, as
calculated using the Black-Scholes model, and were recorded as
equity based on their relative fair value (See Note
11).
For the three and nine months ended
September 30, 2020, in connection with
the closing of the Exchange (See Note 11), the Company issued
Exchange Warrants to certain investors to purchase an aggregate of
1,772,937 shares of Common Stock with the issuance of the Series B
Preferred Stock as referenced in Note 11. These Exchange Warrants
were issued on July 16, 2020, are exercisable commencing six (6)
months following the issuance date at $0.85 per share and expire
five years from issuance. The total grant date fair value of the
Exchange warrants was determined to be approximately $986,526, as
calculated using the Black-Scholes model, and were recorded as part
of the loss on extinguishment (See Note 9).
For the three and nine months ended
September 30, 2020, in connection with
the closing of the Series B Private Placement, the Company issued
the July Placement Agent Warrants to purchase an aggregate
of 1,377,458 shares of Common
Stock to the placement agent and/or their designees as referenced
in Note 11. The July Placement Agent Warrants were issued on July
16, 2020, are exercisable commencing six (6) months following the
issuance date at $0.96 per share and expire five years from
issuance. The total grant date fair value of the July Placement
Agent Warrants was determined to be approximately $744,378, as
calculated using the Black-Scholes model, and were recorded as
equity (See Note 11).
For the three and nine months ended
September 30, 2020, in connection with
the Spoor Settlement and Release (See Note 18), on July 14, 2020
the Company granted Mr. Spoor warrants to purchase an aggregate of
150,000 shares of Common Stock. The warrants were immediately
exercisable, have an exercise price equal to $1.00 per share, a
five-year term and may be exercised pursuant to a cashless exercise
provision commencing six months from the issuance date. The total
grant date fair value of these warrants was determined to be
approximately $85,770, as calculated using the Black-Scholes model,
and were included in the gain on settlement (See Note
18).
During the nine months ended September
30, 2020, warrants to purchase an
aggregate of 59,774 shares of Common Stock expired with exercise
prices ranging between $3.25 and $7.37 per
share.
Warrant
transactions for the nine months ended September 30, 2020 and 2019
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding and exercisable at January 1,
2019
|
3,112,715
|
$2.55 - 7.37
|
$4.83
|
|
|
|
|
Granted
during the period
|
275,663
|
$2.55 – 2.82
|
$2.68
|
Expired
during the period
|
-
|
-
|
-
|
Exercised
during the period
|
-
|
-
|
-
|
Warrants outstanding and exercisable at September 30,
2019
|
3,388,378
|
$1.50 - 7.37
|
$3.51
|
|
|
|
|
|
|
|
|
Warrants outstanding and exercisable at January 1,
2020
|
5,378,288
|
$1.07 - 7.37
|
$2.53
|
|
|
|
|
Granted
during the period
|
19,881,654
|
$0.85 - 1.42
|
$0.88
|
Expired
during the period
|
(59,774)
|
$3.25 - 7.37
|
$5.15
|
Exercised
during the period
|
-
|
-
|
-
|
Warrants outstanding and exercisable at September 30,
2020
|
25,200,168
|
$0.85 - 7.37
|
$1.22
|
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
|
|
|
$0.00
- 0.99
|
17,718,665
|
4.79
|
|
|
$1.00
- 1.99
|
5,362,464
|
3.65
|
|
|
$2.00
- 2.99
|
320,063
|
2.82
|
|
|
$3.00
- 3.99
|
635,019
|
1.57
|
|
|
$4.00
- 4.99
|
164,256
|
1.53
|
|
|
$5.00
- 5.99
|
783,132
|
1.42
|
|
|
$6.00
- 6.99
|
187,750
|
1.01
|
|
|
$7.00
- 7.37
|
28,819
|
0.28
|
|
Totals
|
|
25,200,168
|
4.28
|
$1.22
|
The weighted average fair value of warrants
granted during the nine months ended September 30, 2020 was $0.88 per share. The fair value was
estimated on the grant dates using the Black-Scholes option-pricing
model with the following weighted average
assumptions:
|
|
|
|
Expected
life (in years)
|
5
|
Volatility
|
84.7%
|
Risk-free
interest rate
|
0.28-1.67%
|
Dividend
yield
|
-%
|
Note
13 - Stock Options
Under
the 2014 Plan and the 2020 Plan, the fair value of options granted
is estimated on the grant date using the Black-Scholes option
valuation model. This valuation model for stock-based compensation
expense requires the Company to make assumptions and judgments
about the variables used in the calculation, including the expected
term (weighted-average period of time that the options granted are
expected to be outstanding), the volatility of the common stock
price and the assumed risk-free interest rate. The Company
recognizes stock-based compensation expense for only those shares
expected to vest over the requisite service period of the award. No
compensation cost is recorded for options that do not vest and the
compensation cost from vested options, whether forfeited or not, is
not reversed.
During
the three months ended September 30, 2020, the Company issued stock
options to purchase an aggregate of 2,040,000 shares of Common
Stock with a strike price of $0.85 per share and a term of ten
years to its employees. These options had a total grant date fair
value of approximately $1,449,130, as calculated using the
Black-Scholes model.
During
the three months ended September 30, 2020, the Board approved an
amended and restated option grant to its chief financial officer,
amending and restating a grant previously made on January 2, 2020,
to reduce the amount of shares issuable upon exercise of such
option to be the maximum number of shares Mr. Schneiderman was
eligible to receive under the 2014 Incentive Plan on the original
grant date, or 300,000 shares, due to the 2014 Incentive Plan
provisions relating to the Section 162(m) limitations
described above. The Board also approved the issuance of a
replacement option covering the balance of shares intended to be
issued at that time, or 35,006 shares. The original stock option
has an exercise price of $1.03, the closing sale price of Common
Stock on January 2, 2020, which was the date of its original grant,
and the replacement stock option has an exercise price of $0.85,
the closing sale price of the Common Stock on its date of grant.
Both the original stock option and the replacement stock option
vest over a term of three years, in 36 equal monthly installments
on each monthly anniversary of January 2, 2020. On the issuance
date, 6,336 shares had vested, and 28,670 shares were unvested with
$24,102 of unrecognized expense. The Company determined the
cancellation and reissue of these stock options resulted in an
effective repricing of the stock options and modification
accounting should be applied under ASC 718. The fair value of the
original stock options immediately prior to the modification was
$23,454 and the grant date fair value of the replacement stock
options was $24,154. The Company will recognize a total of $24,802
over the remaining requisite service period through January 1,
2023.
During the nine months ended September 30, 2020,
the Company issued stock
options to purchase an aggregate of 335,006 shares of Common Stock with a strike price of
$1.03 per share and a term of ten years to its chief financial
officer that vest quarterly over three years. These options had a
total grant date fair value of approximately $281,405, as
calculated using the Black-Scholes model.
During
the nine months ended September 30, 2020, the Company issued stock
options to purchase an aggregate of 460,000 shares of Common Stock
with a strike price of $0.97 per share and a term of ten years to
its non-executive directors. These options had a total grant date
fair value of approximately $210,284, as calculated using the
Black-Scholes model.
During
the nine months ended September 30, 2020, stock options to purchase
an aggregate of 235,006 shares of Common Stock were cancelled with
strike prices ranging between $0.97 and $3.60 per
share.
During the three months ended September 30, 2020,
stock options to purchase an aggregate of 234,252 shares of Common
Stock, subject to service conditions, vested with a total grant date fair value of
approximately $139,392 and recorded as stock-based compensation, of
which $119,514 was included as part of general and administrative
expense and $19,878 was included as part of research and
development expense.
During the nine months ended September 30, 2020,
stock options to purchase an aggregate of 600,086 shares of Common
Stock, subject to service conditions, vested with a total grant date fair value of
approximately $360,519 and recorded as stock-based compensation, of
which $340,640 was included as part of general and administrative
expense and $19,878 was included as part of research and
development expense.
During
the nine months ended September 30, 2020, stock options to purchase
an aggregate of 50,000 shares of Common Stock, subject to
performance conditions vesting, vested with a total grant date fair
value of approximately $20,150 and were recorded as stock-based
compensation, and included as part of general and administrative
expense due to the Company initiating the Option 2 Clinical
Trial.
During
the three and nine months ended September 30, 2020, stock options
to purchase an aggregate of 35,006, and 235,006 shares of Common
Stock were cancelled, respectively, with strike prices ranging
between $0.97 and $3.60 per share.
During
the three and nine months ended September 30, 2019, stock options
to purchase an aggregate of 893,500 shares of Common Stock were
granted with an exercise price of $1.75 and a term of five years.
During the three months ended September 30, 2019, no options
vested. During the nine months ended September 30, 2019, stock
options to purchase an aggregate 244,500 shares of Common Stock
vested with a total grant date fair value of approximately
$511,335. stock options to purchase an aggregate 242,000 shares of
Common Stock with a total grant date fair value of approximately
$501,666 vested due to the Company achieving certain clinical
milestones.
The
fair values were estimated on the grant dates using the
Black-Scholes option-pricing model with the following
weighted-average assumptions:
|
|
|
|
Expected
life (in years)
|
10
|
Volatility
|
84.0%
|
Risk-free
interest rate
|
0.62- 1.88%
|
Dividend
yield
|
-%
|
The expected term
of the options is based on expected future employee exercise
behavior. Volatility is based on the historical volatility of the
Company’s Common Stock if available or of several public
entities that are similar to the Company. The Company bases
volatility this way because it may not have sufficient historical
transactions in its own shares on which to solely base expected
volatility. The risk-free interest rate is based on the U.S.
Treasury rates at the date of grant with maturity dates
approximately equal to the expected term at the grant date. The
Company has not historically declared any dividends and does not
expect to in the future.
Since
the adoption of the 2020 Plan on September 11, 2020, no awards have
yet been made thereunder. During the nine months ended September
30, 2020 and 2019, stock option activity under the 2014 Plan was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding at January 1, 2019
|
994,000
|
$3.58
|
5.42
|
$-
|
|
|
|
|
|
Granted
during the period
|
893,500
|
$1.70
|
4.96
|
-
|
Expired
during the period
|
-
|
-
|
-
|
-
|
Canceled
during the period
|
-
|
-
|
-
|
-
|
Exercised
during the period
|
-
|
-
|
-
|
-
|
Stock options outstanding at September 30, 2019
|
1,887,500
|
$2.58
|
4.69
|
$-
|
|
|
|
|
|
Exercisable at September 30, 2019
|
994,000
|
$3.58
|
5.17
|
$-
|
|
|
|
|
|
Non-vested stock options outstanding at January 1,
2019
|
244,500
|
$3.05
|
4.53
|
$-
|
|
|
|
|
|
Granted
during the period
|
893,500
|
$1.70
|
4.96
|
-
|
Vested
during the period
|
(274,500)
|
$2.91
|
3.88
|
-
|
Expired
during the period
|
-
|
-
|
-
|
-
|
Canceled
during the period
|
-
|
-
|
-
|
-
|
Exercised
during the period
|
-
|
-
|
-
|
-
|
Non-vested stock options outstanding at September 30,
2019
|
863,500
|
$1.70
|
4.77
|
$-
|
Stock options outstanding at January 1, 2020
|
1,677,5000
|
$2.17
|
5.37
|
$-
|
|
|
|
|
|
Granted
during the period
|
2,870,012
|
$0.89
|
9.79
|
$-
|
Expired
during the period
|
-
|
-
|
|
|
Canceled
during the period
|
(235,006)
|
$1.94
|
3.28
|
$-
|
Exercised
during the period
|
-
|
-
|
|
|
Stock options outstanding at September 30, 2020
|
4,312,506
|
$1.38
|
7.94
|
$-
|
|
|
|
|
|
Exercisable at September 30, 2020
|
1,084,834
|
$2.59
|
5.60
|
$-
|
Non-vested stock options outstanding at January 1,
2020
|
883,500
|
$1.33
|
6.26
|
$-
|
|
|
|
|
|
Granted
during the period
|
2,870,012
|
$0.98
|
10.00
|
$-
|
Vested
during the period
|
(593,750)
|
$2.59
|
6.88
|
$-
|
Expired
during the period
|
-
|
-
|
-
|
|
Canceled
during the period
|
(160,006)
|
$1.30
|
7.10
|
$-
|
Exercised
during the period
|
-
|
-
|
-
|
|
Non-vested stock options outstanding at September 30,
2020
|
2,999,756
|
$0.98
|
8.75
|
$-
|
As of September 30, 2020, the Company had
unrecognized stock-based compensation expense of approximately
$2,190,131. Approximately $1,189,036 of this unrecognized expense
will be recognized over the average remaining vesting term of the
options of.8.75 years. Approximately $440,213 of this unrecognized
expense will vest upon enrollment completion of the
next MS1819 Phase II clinical trial in
the U.S. for CF (the OPTION 2 Trial). Approximately $41,213 of this
unrecognized expense will vest upon enrollment completion of the
ongoing Combination Trial in Europe. Approximately $20,150 of this
unrecognized expense will vest upon trial completion of the
next MS1819 Phase II clinical trial in
the U.S. for CF (the OPTION 2 Trial). Approximately $40,300 of this
unrecognized expense vests upon the Company initiating a Phase III
clinical trial in the U.S. for
MS1819.
Approximately
$40,300 of this unrecognized expense vests upon initiating a U.S.
Phase I clinical trial for any product other than MS1819.
Approximately, $139,640 of this unrecognized expense vests upon the
public release of topline data of the complete Combination Trial
results. Approximately, $139,640 of this unrecognized expense vests
upon the public release of topline data of the complete OPTION 2
Trial results. Approximately, $139,640 of this unrecognized expense
vests upon signing of a definitive term sheet with Board approval
for either (i) a strategic licensing, distribution or
commercialization agreement for MS1819 with a bona fide partner, or
(ii) the substantial sale of the Company or the MS1819 asset, on or
before December 31, 2021. The Company will recognize the expense
related to these milestones when the milestones become
probable.
Note
14 - Agreements
Mayoly Agreement
On March 27, 2019, the Company and
Laboratories Mayoly Spinder (“Mayoly”) entered into an Asset Purchase Agreement
(the “Mayoly APA”), pursuant
to which the Company purchased all rights, title and interest in
and to MS1819. Upon execution of the Mayoly APA, the Joint
Development and License Agreement (the “JDLA”) previously executed by AzurRx SAS and
Mayoly was terminated. In addition, the Company granted to Mayoly
an exclusive, royalty-bearing right to revenue received from
commercialization of MS1819 within certain
territories.
During
the three and nine months ended September 30, 2019, the Company
charged $0 and $403,020, respectively, to Mayoly under the JDLA
that was in effect during both periods.
TransChem Sublicense
On August 7, 2017, the Company and TransChem
entered into the TransChem Sublicense Agreement pursuant to which
TransChem granted to us an exclusive license to certain patents
(the “TransChem Licensed
Patents”) relating to H.
pylori 5’methylthioadenosine nucleosidase inhibitors. We may
terminate the Sublicense Agreement and the licenses granted therein
for any reason and without further liability on 60 days’
notice. Unless terminated earlier, the Sublicense Agreement will
expire upon the expiration of the last Licensed Patents. Upon
execution, we paid an upfront fee to TransChem and agreed to
reimburse TransChem for certain expenses previously incurred in
connection with the preparation, filing, and maintenance of the
Licensed Patents. We also agreed to pay TransChem certain future
periodic sublicense maintenance fees, which fees may be credited
against future royalties. We may also be required to pay TransChem
additional payments and royalties in the event certain
performance-based milestones and commercial sales involving the
Licensed Patents are achieved. The TransChem Licensed Patents will
allow us to develop compounds for treating gastrointestinal, lung
and other infections that are specific to individual bacterial
species. H. pylori
bacterial infections are a major cause
of chronic gastritis, peptic ulcer disease, gastric cancer and
other diseases.
On
March 11, 2020, the Company provided TransChem with sixty (60) days
prior written notice of its intent to terminate the TransChem
Sublicense Agreement.
No payments were made under this Sublicense
Agreement during in the three and nine
months ended September 30, 2020 and 2019,
respectively.
Employment Agreements
James Sapirstein
Effective October
8, 2019, the Company entered into an employment agreement with Mr.
Sapirstein to serve as its President and Chief Executive Officer
for a term of three years, subject to further renewal upon
agreement of the parties. The employment agreement with Mr.
Sapirstein provides for a base salary of $450,000 per year. In
addition to the base salary, Mr. Sapirstein is eligible to receive
(i) a cash bonus of up to 40% of his base salary on an annual
basis, based on certain milestones that are yet to be determined;
(ii) 1% of net fees received by the Company upon entering into
license agreements with any third-party with respect to any product
current in development or upon the sale of all or substantially all
assets of the Company; (iii) an award grant of 200,000 restricted
stock units (“RSUs”) which are scheduled to
vest as follows (a) 100,000 shares upon the first commercial sale
of MS1819 in the U.S. and (b) 100,000 shares upon the total market
capitalization of the Company exceeding $1.0 billion for 20
consecutive trading days; (iv) a grant of 300,000 10-year stock
options to purchase shares of common stock with an exercise price
equal to $0.56 per share, which are scheduled to vest as follows
(a) 50,000 shares upon the Company initiating its next Phase II
clinical trial in the U.S. for MS1819, (b) 50,000 shares upon the
Company completing its next or subsequent Phase II clinical trial
in the U.S. for MS1819, (c) 100,000 shares upon the Company
initiating a Phase III clinical trial in the U.S. for MS1819, and
(d) 100,000 shares upon the Company initiating a Phase I clinical
trial in the U.S. for any product other than MS1819. Mr. Sapirstein
is entitled to receive 20 days of paid vacation, participate in
full employee health benefits and receive reimbursement for all
reasonable expenses incurred in connection with his services to the
Company.
In the event that
Mr. Sapirstein’s employment is terminated by the Company for
Cause, as defined in his employment agreement, or by Mr. Sapirstein
voluntarily, then he will not be entitled to receive any payments
beyond amounts already earned, and any unvested equity awards will
terminate. In the event that Mr. Sapirstein’s employment is
terminated as a result of an Involuntary Termination Other than for
Cause, as defined in his employment agreement, Mr. Sapirstein will
be entitled to receive the following compensation: (i) severance in
the form of continuation of his salary (at the base salary rate in
effect at the time of termination, but prior to any reduction
triggering Good Reason (as such term is defined in Mr.
Sapirstein’s employment agreement) for a period of twelve
months following the termination date; (ii) payment of Mr.
Sapirstein’s premiums to cover COBRA for a period of twelve
months following the termination date; and (iii) a prorated annual
bonus.
Daniel Schneiderman
Effective January
2, 2020, the Company entered into an employment agreement with Mr.
Schneiderman to serve as the Company’s Chief Financial
Officer for a term of three years, subject to further renewal upon
agreement of the parties. The employment agreement with Mr.
Schneiderman provides for a base salary of $285,000 per year. In
addition to the base salary, Mr. Schneiderman is eligible to
receive (a) an annual milestone cash bonus based on certain
milestones that will be established by the Company’s Board or
the Compensation Committee, and (b) a grant of stock options to
purchase 335,006 shares of common stock with an exercise price of
$1.03 per share, which shall vest in three equal portions on each
anniversary date of the execution of Mr. Schneiderman’s
employment agreement, commencing on January 2, 2021, the first
anniversary date of the agreement. Mr. Schneiderman is
entitled to receive 20 days of paid vacation, participate in full
employee health benefits and receive reimbursement for all
reasonable expenses incurred in connection with his service to the
Company. The Company may terminate Mr. Schneiderman’s
employment agreement at any time, with or without Cause, as such
term is defined in his employment agreement.
In the event that
Mr. Schneiderman’s employment is terminated by the Company
for Cause, as defined in Mr. Schneiderman’s employment
agreement, or by Mr. Schneiderman voluntarily, then he will not be
entitled to receive any payments beyond amounts already earned, and
any unvested equity awards will terminate. If the Company
terminates his employment agreement without Cause, not in
connection with a Change of Control, as such term is defined in Mr.
Schneiderman’s employment agreement, he will be entitled to
(i) all salary owed through the date of termination; (ii) any
unpaid annual milestone bonus; (iii) severance in the form of
continuation of his salary for the greater of a period of six
months following the termination date or the remaining term of the
employment agreement; (iv) payment of premiums to cover COBRA for a
period of six months following the termination date; (v) a prorated
annual bonus equal to the target annual milestone bonus, if any,
for the year of termination multiplied by the formula set forth in
the agreement. If the Company terminates Mr. Schneiderman’s
employment agreement without Cause, in connection with a Change of
Control, he will be entitled to the above and immediate accelerated
vesting of any unvested options or other unvested
awards.
Dr. James E. Pennington
Effective May 28,
2018, the Company entered into an employment agreement with Dr.
Pennington to serve as its Chief Medical Officer. The employment
agreement with Dr. Pennington provides for a base annual salary of
$250,000. In addition to his salary, Dr. Pennington is eligible to
receive an annual milestone bonus, awarded at the sole discretion
of the Board based on his attainment of certain financial, clinical
development, and/or business milestones established annually by the
Board or Compensation Committee. The Company may terminate Dr.
Pennington’s employment agreement at any time, with or
without Cause, as such term is defined in Dr. Pennington’s
employment agreement. In the event of termination by the Company
other than for Cause, Dr. Pennington is entitled to three
months’ severance payable over such period. In the event of
termination by the Company other than for Cause in connection with
a Change of Control as such term is defined in Dr.
Pennington’s employment agreement, Dr. Pennington will
receive six months’ severance payable over such
period.
Note
15 - Leases
The Company adopted
ASU 2016-02, Leases, as of January 1, 2019, using the modified
retrospective approach. Prior year financial statements were not
recast under the new standard.
The Company leases
its office and research facilities under operating leases which are
subject to various rent provisions and escalation
clauses.
During
the three months ended September 30, 2020, the Company entered into
a month-to-month lease for office space in Delray Beach, FL and
one-year residential lease in Delray Beach, FL.
During
the nine months ended September 30, 2020, the Company entered into
a two-year lease extension (amendment) to is Hayward, CA office.
The Company determined that the lease modification did not grant an
additional right of use and concluded that the modification was not
a separate new lease, but rather that it should reassess and
remeasure the entire modified lease on the effective date of the
modification. The Company accounted for the lease amendment
prospectively.
The Company’s
leases expire at various dates through 2022. The escalation clauses
are indeterminable and considered not material and have been
excluded from minimum future annual rental payments.
Lease
expense amounted to $55,418 and $52,057, respectively, in the
three months ended September 30, 2020 and 2019.
Lease
expense amounted to $128,663 and $153,723, respectively, in
the nine months ended September 30, 2020 and 2019.
The
weighted-average remaining lease term and weighted-average discount
rate under operating leases at September 30, 2020 are:
|
|
|
|
Lease term and discount rate
|
|
Weighted-average
remaining lease term
|
1.16 years
|
Weighted-average
discount rate
|
6.0%
|
Maturities of
operating lease liabilities at September 30, 2020 are as
follows:
2020
|
$30,565
|
2021
|
55,420
|
2022
|
23,375
|
Total
lease payments
|
109,360
|
Less
imputed interest
|
(3,736)
|
Present
value of lease liabilities
|
$105,624
|
Note
16 - Income Taxes
The Company is
subject to taxation at the federal level in both the United States
and France and at the state level in the United States. At
September 30, 2020 and December 31, 2019, the Company had no tax
provision for either jurisdiction.
At September 30,
2020 and December 31, 2019, the Company had gross deferred tax
assets of approximately $20,059,000 and $16,372,000, respectively.
As the Company cannot determine that it is more likely than not
that the Company will realize the benefit of the deferred tax
asset, a valuation allowance of approximately $20,059,000 and
$16,372,000, respectively, has been established at September 30,
2020 and December 31, 2019. The change in the valuation allowance
in the nine months ended September 30, 2020 and 2019 was $3,687,000
and $2,108,000, respectively.
At September 30,
2020, the Company has gross net operating loss (“NOL”) carryforwards for U.S.
federal and state income tax purposes of approximately $35,077,000
and $26,572,000, respectively. The Company’s ability to use
its NOL carryforwards may be limited if it experiences an
“ownership change” as defined in Section 382
(“Section 382”)
of the Internal Revenue Code of 1986, as amended. An ownership
change generally occurs if certain stockholders increase their
aggregate percentage ownership of a corporation’s stock by
more than 50 percentage points over their lowest percentage
ownership at any time during the testing period, which is generally
the three-year period preceding any potential ownership
change.
At September 30,
2020 and December 31, 2019, the Company had approximately
$22,120,000 and $19,425,000,
respectively, in net operating losses which it can carryforward
indefinitely to offset against future French income.
At September 30,
2020 and December 31, 2019, the Company had taken no uncertain tax
positions that would require disclosure under ASC 740, Accounting
for Income Taxes.
Note
17 - Net Loss per Common Share
Basic net loss per
share is computed by dividing net loss available to common
stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflect,
in periods in which they have a dilutive effect, the impact of
common shares issuable upon exercise of stock options and warrants
and conversion of convertible debt that are not deemed to be
anti-dilutive. The dilutive effect of the outstanding stock options
and warrants is computed using the treasury stock
method.
At September 30,
2020, diluted net loss per share did not include the effect of
29,314,408 shares of Common Stock issuable upon the conversion of
Series B Preferred Stock including accrued and unpaid dividends,
25,200,168 shares of Common Stock issuable upon the exercise of
outstanding warrants, 387,000 shares of Common Stock pursuant to
unearned and unissued restricted stock and RSUs, and 4,312,506
shares of Common Stock issuable upon the exercise of outstanding
options as their effect would be antidilutive during the periods
prior to conversion.
At September 30,
2019, diluted net loss per share did not include the effect of
3,388,378 shares of Common Stock issuable upon the exercise of
outstanding warrants, 416,000 shares of restricted Common Stock not
yet issued, and 1,887,500 shares of Common Stock issuable upon the
exercise of outstanding options as their effect would be
antidilutive during the periods prior to conversion.
Note
18 - Related Party Transactions
Johan (Thijs) Spoor
During the year
ended December 31, 2015, the Company employed the services of JIST
Consulting (“JIST”), a company controlled by
Johan (Thijs) Spoor, the Company’s former Chief Executive
Officer and President, as a consultant for business strategy,
financial modeling, and fundraising. Included in accounts payable
at December 31, 2019 and 2018, is $348,400 and $478,400,
respectively, for JIST relating to Mr. Spoor’s services. Mr.
Spoor received no other compensation from the Company other than as
specified in his employment agreement. On October 8, 2019, Mr.
Spoor resigned as Chief Executive Officer and President of the
Company. In addition, Mr. Spoor
resigned as a member of the Board on April 29,
2020.
On June 29, 2019,
the Company accrued an incentive bonus in the amount of $255,000
payable to Mr. Spoor. Subsequent to Mr. Spoor’s resignation,
the Compensation Committee reviewed the accrued bonus and
determined that such amount was not owed by the Company, which
determination is being challenged by Mr. Spoor. As a result of
management’s determination, the Company reversed the accrual
in the quarter ended December 31, 2019.
All
unvested shares of restricted stock and stock options subject to
time and other performance-based vesting conditions have been
forfeited in connection with Mr. Spoor's resignation as the
Company’s President and Chief Executive Officer. Mr.
Spoor also declined the right to receive 241,667 earned, but
unissued shares of restricted stock on April 29, 2020 in connection
with his resignation from the Board.
On July 9,
2020, the Company and Johan (Thijs) Spoor, its former Chief Executive Officer,
entered into a settlement and general
release (the “Spoor Settlement and
Release”), effective July
9, 2020 (the “Spoor Settlement
Date”), of certain claims
relating to Mr. Spoor's separation from the Company on October 8,
2019. In connection with the Spoor Settlement and Release, on July
14, 2020 the Company granted Mr. Spoor warrants to purchase an
aggregate of 150,000 shares of Common Stock, which had a grant date
fair value of $85,770 (See Note 12). In addition, Mr. Spoor legally
released all claims to a discretionary bonus in the amount of
$255,000, which was originally accrued by the Company in June 2019
but was subsequently reversed during the quarter ended December 31,
2019, legally released all claims to $348,400 due to JIST
Consulting, a company controlled by Mr. Spoor and the
Company also paid Mr. Spoor's
legal expenses in the amount of $51,200. During the three
and nine months ended September 30, 2020, the Company recognized a
gain on settlement of $211,430 in connection with the Spoor
Settlement and Release.
Maged Shenouda
From
October 1, 2016 until his appointment as the Company’s Chief
Financial Officer on September 25, 2017, the Company employed the
services of Maged Shenouda as a financial consultant. Included in
accounts payable at September 30, 2020 and 2019 is $10,000 and
$50,000, respectively, for Mr. Shenouda’s services. On
November 1, 2019, Mr. Shenouda submitted his resignation as Chief
Financial Officer of the Company, effective November 30,
2019.
On
June 29, 2019, the Company accrued an incentive bonus in the amount
of $100,000 payable to Mr. Shenouda. Subsequent to Mr.
Shenouda’s resignation, the Compensation Committee reviewed
the accrued bonus and determined that such amount should not be
paid, and the Company reversed the accrual in the quarter ended
December 31, 2019.
On July 2, 2020,
the Company and Maged Shenouda, its former Chief Financial Officer
also entered into a settlement and general release (the
“Shenouda Settlement and
Release”), of certain claims relating to Mr.
Shenouda’s s separation from the Company effective November
30, 2019. In connection with the Shenouda Settlement and Release,
the Company paid a total of $15,000 to Mr. Shenouda, which amount
includes $10,000 of accounts payable of the Company due to Mr.
Shenouda for services provided and $5,000 for legal expenses, and
Mr. Shenouda legally released
all claims to a discretionary
bonus in the amount of $100,000 originally accrued by the Company
in June 2019, but was subsequently
reversed during the quarter ended December 31,
2019.